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November 6, 2016

My 403(b) Retirement Account Allocation

By Charles Rotblut, CFA, AAII
Sometimes, the market does the hard work for you. Such is the case with my 403(b) account, which is similar to a 401(k) account. Over the weekend, I looked at it for the first time in six months. I could have easily skipped doing so because Mr. Market took care of things for me. There was nothing for me to do except to forget the balance and not look again until the end of next April.

Each six months, I look to see if I need to rebalance. I hold five funds in the account: Vanguard S&P 500 (VFINX), Vanguard FTSE All-World ex-US Small-Cap (VFSVX), Vanguard Intermediate-Term Investment-Grade (VFICX), Vanguard REIT (VGSIX) and Vanguard Small-Cap Value (VISVX). Each fund as has the same target allocation of 20%. When one fund goes too far astray from this target, I rebalance the portfolio. (As a quick side note for those who are interested, the ETF versions of the funds are Vanguard's S&P 500 (VOO), FTSE All-World ex-US Small-Cap (VSS), REIT (VNQ) and Small-Cap Value (VBR). Vanguard does not offer an ETF version of the bond fund.)
I expected some difference in the allocation weightings because of the portfolio’s diversification. Bonds move differently than stocks and REITs don’t follow the same path as stocks or bonds. What I found instead was surprising. The largest positions (the bond fund and the U.S. small-cap fund) each accounted for 20.2% of the portfolio. The smallest position (the REIT fund) had a 19.8% allocation. Given that investing is messy and over time each fund will experience different returns, I expected bigger differences. Perhaps not large enough to warrant rebalancing, but certainly more than a 0.4-percentage-point difference between the largest and the smallest positions.
There are two things worth noting. First, this is my workplace retirement plan. Contributions are made into the account on a monthly basis. These contributions are automatically and evenly invested in each of the five funds. As such, I buy proportionately more shares of the underperforming funds and proportionately less shares of the outperforming funds in a given month. The constant dollar cost averaging causes the return I realize for each fund to differ from the published returns for a given time period (e.g., six months, 12 months, etc.)
Second, two assets can be uncorrelated, not highly correlated or even slightly negatively correlated and still experience similar returns over short periods of time. When people say diversification doesn’t work, it’s often because they are looking at too short of a period of time. Just because two assets experience different return characteristics over long periods of time does not mean they always experience different returns. Add in dollar cost averaging and it’s entirely possible for a diversified portfolio to be close to its targeted allocation at a given point of time. It’s also possible for different asset classes to zig and zag enough that at various points in time the portfolio will swing back close to its targeted allocation. The latter is what happened with my 403(b) account.
Had I checked my portfolio on a different date—say, the day after the Brexit vote—I would have likely seen different weightings for each fund. They also might be different next week depending on how the market reacts to the outcome of the election. (I’m not making any predictions, as I still haven’t managed to get my cracked crystal ball repaired and my Magic 8 Ball is currently misplaced.)
What I do know with certainty is that the less frequently I check my portfolio, the less I will notice how much the value of my portfolio changes. Though the volatility of the financial markets and individual investments doesn’t change just because we’re not looking at it, our perception of volatility does. Look more often and you’ll perceive more volatility. Look less often and you’ll perceive less volatility. More importantly, look less often and you will be less tempted to change something in your portfolio. Avoiding the temptation to tinker—or worse, make a significant change—is why I limit looking at my 403(b) account to the end of the worst six months for stocks (late October) and the end of the best six months for stocks (late April).
The Week Ahead 
Tuesday is Election Day, though early voting has already started in many states.
Earning season marches on as 31 members of the S&P 500 will report. Included in this group is Dow component Walt Disney (DIS) on Thursday. 
The week’s first economic reports will be the Labor Department’s September job openings and labor turnover survey (JOLTS), released on Tuesday. Friday will feature the University of Michigan’s preliminary November consumer sentiment survey.
Four Federal Reserve officials will make public appearances: Chicago president Charles Evans on Monday and Tuesday; Minneapolis president Neel Kashkari and San Francisco president John Williams on Wednesday; and St. Louis president James Bullard on Thursday.
The Treasury Department will auction $24 billion of three-year notes on Tuesday, $23 billion of 10-year notes on Wednesday and $15 billion of 30-year bonds on Thursday.
About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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