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Author: Azotic Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6741  
Subject: Re: SICK PORTFOLIO Date: 9/3/2002 6:12 PM
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Hi again!!

Take note, you've been holding these funds through what has not been the best time for stocks in general, growth funds in particular (though I'll bet your blood was pumping in early 2000, huh?)

I think it was John Bogle of Vanguard who said that stocks (and by extension mutual funds) don't remember at what price you bought them. Your assets are worth what they're worth, and if you move from where you are into a better planned-out distribution of assets you can do that any day of the week without blinking.

I'm going to assume that you have at least a fifteen-year time horizon for your stock investments. If it's less, then you should make sure that at least some of your money is in bonds or other lower-risk investments.

Where you are now

My first observation is that you're in a LOT of funds with overlapping asset classes. The Vanguard 500, T. Rowe Price Blue Chip Growth, and Janus Mercury have a lot of overlap.

I got most of my information on this from the mutual fund pages at Schwab, but there are other good sources of this information, like Yahoo Finance.

T. Rowe Price Mid-Cap Growth Fund held since 1996

Actually, this fund has held up really well. It's still only about 15% down from its 2000 peak while the category average is down more like 40%.

T. Rowe Price Blue Chip Growth Fund held since 1997

This one's also doing slightly better than the market and the category average. My only gripe with it is the nearly 1% expense ratio, which is high when you consider that its holdings are not all that far off from the Vanguard 500 Index Fund, which charges 0.18%. (Remember, the S&P 500 is biased toward large-cap growth stocks.)

T. Rowe Price Spectrum International held since 1998

This fund is doing about the same as the EAFE, which is the relevant international index, but is tracking it pretty closely. Unfortunately my information source (the Schwab website) doesn't specify the ongoing fees for the fund.

Janus Worldwide Fund held since 1996

This fund has the same problems as the Janus Mercury below, but since you got in in 1996 you probably are ahead somewhat.

Janus Mercury Fund held since 1999

Yikes. This fund is legendary for going very risky in the dot com boom, and if you'd invested in 1993 you'd be doing about what the market is. As it is, you've lost about 66%. This is a great example of the risk of actively managed funds.

Vanguard 500 Index Fund held since 2000

Great fund. Cheap expenses (less than a quarter of most of the funds on your list), tracks the market well. Should be a centerpiece of wherever you end up.

American Funds Small Cap World Fund held since 1995

This one seems to be just about tracking the Russell 2000 index (which is not my favorite index in this asset class -- I much prefer the S&P Small Cap 600 just because they require their companies to be going concerns.) However, the expenses, at 1.09%, are much higher than you could get with a good index fund.

Overall it looks like (other than Janus Mercury) you've done quite well. However, you'd probably be much better off with a simpler arrangement just so that it would be easier to know how you're doing.

IF IT WERE ME (and it's not), this is what I'd do:

Take your stock money and divide it up roughly equally between U.S. large cap, U.S. small cap, and international. Yes, international tends to lag the other two, but the idea is that each of these areas counterperforms the others so you smooth out the oscillations. It looks like you're already pretty well diversified.

Large Cap

Stick with VFINX for the third in large cap U.S. stock. The expense ratio, at 0.18%, can't be beat and it will match the S&P 500.

International

Go with VEURX and VPACX, split 50/50, for your international money. Together these funds make up the European and Pacific Rim portions of the EAFE, which is most of the index. Fees for these funds are 0.3% and 0.37%, which are much cheaper than where you are now.

Small Cap

For the third that you put into small cap, I'm going to stick my head out on a limb and say go with DISSX, the Dreyfus Small Cap Index Fund, based on the S&P Small Cap 600. By NOT going into Vanguard's small cap index fund, based on the Russell 2000, you pretty much eliminate the 1400 losers that S&P doesn't qualify for their index. :-) However, expense ratios are low because there's not a whole lot of turnover and it doesn't behave like a managed small-cap fund.

There are those who would tell you to go for a managed small-cap fund because they perform better. However, there's good evidence that statistics that suggest this are the result of survivorship bias or the tendency for funds that don't perform well to die off or get merged into better-performing funds. Because of this bias, investing in an index fund is much better from a risk point of view.

FINALLY:

If your investing horizon is shorter than fifteen years, you should put some money into bonds or a bond index fund. Vanguard has a few good ones.


THERE... we've reduced your universe of funds from seven to four (or five if you go for a bond fund), we know what each one is doing and why it's there. The only thing left is to come back every year and move money around so that they're each at a third, and you'll be in great shape for the future.

-- Mark
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