So I built a portfolio at Morningstar of our combined IRAs and will use it in the weekly portfolio updates going forward:
Last year, I added some international and small and mid cap domestic ETFs to fill in some category gaps.
- VWO Vanguard Emerging Markets Stock ETF -Diversified Emerging Mkts
- EFA iShares MSCI EAFE Index -Foreign Large Blend
- EFV iShares MSCI EAFE Value Index -Foreign Large Value
- VOE Vanguard Mid-Cap Value ETF -Mid-Cap Value
- VB Vanguard Small Cap ETF -Small Blend
As you can see in the image above, VWO was the top performing holding since 5/01/2007 but the other 4 holdings lost money. That's ok though. These are all index funds and they cover broad indexes that I intend to add to over the years. If global markets and small and mid sized American companies have not added value by the time I retire, my IRA will be the least of my concerns.
So the question is, what should I invest in now?
For the most part I feel pretty good about the diversity of different markets, different fund companies, and different styles (managed vs index) that I have picked so far.
I thought about adding a gold fund, MIDSX Midas, last year but opted not to. I was willing to invest in the super hot Emerging Market sector but not also in the super hot gold sector. Well, chasing performance would have paid off, in the short term- MIDSX was up 31% in 2007 and crushed other funds in its category by 8%. I am not sure why Morningstar has it at 2 stars. M* bases its star rating on performance in light of a fund's risk compared to similar investments. This fund has high expenses and is volatile, but over the long term has crushed its competition.
Anyway, I did not invest in a gold fund and with gold over $900 an ounce, I can't bring myself to invest in one now either.
Except that I am interested in adding a commodity fund which may include gold. One option is DBC PowerShares DB Commodity Index Tracking Fund which invests about 10% in gold. DBC is heavily weighted in oil though and I have an Energy fund PRNEX T. Rowe Price New Era that gives me coverage of oil.
I like the sector diversification of DJP iPath Dow Jones-AIG Commodity Index Total Return ETN better. I wish it was not an ETN, since investing in an ETN means I have to pay attention to Barclays as a bank. If Barclays goes under, this investment would be worthless. I already invest in a few individual companies. BXP Boston Properties makes up over 7% of my IRA investments and it lost 22% last year so I have a high tolerance for volatility and am already tracking individual companies so this is not a problem, just not ideal.
The other sector I am considering is the financial sector. As hammered as it has been with the sub-prime mess, I'm tempted to invest with the hope that I am picking up a lot of solid companies at good prices. Doing some analysis makes me think twice. The second largest holding I have in my IRA is DVY iShares Dow Jones Select Dividend Index and 50% of that holding is invested in domestic financial companies. The Financial ETF I am interested in is IXG iShares S&P Global Financials which is over 60% invested in foreign companies. The truth is that the fund EFV iShares MSCI EAFE Value Index that I bought last year is over 40% invested in foreign financial companies so I already have exposure there as well.
Since I already have a large stake in DVY, the simplest way to increase my exposure to financial companies is to increase my position in EFV instead of adding yet another fund.
After thinking about all this a bit and doing some research, what I think I am going to do is add a commodity investment (an ETN is not a 'fund'), and then increase my smaller positions that performed poorly last year.
I have my contribution for 2007 plus cash that has accumulated in the accounts from dividends and capital gains distributions. What complicates things is that I only have a specific amount of cash in each account so the amount I can add to each holding depends on which account the cash is in and since I do not want the same holding in two different accounts, which IRA the ETF is already in as well. It is a little complicated, but not rocket science. Here are the investments I will add to and the percentage of the cash I have available I will add to each:
- DJP iPath Commodity Index Total Return ETN- Broad Commodities 30%
- EFV iShares MSCI EAFE Value Index -Foreign Large Value 20%
- EFA iShares MSCI EAFE Index -Foreign Large Blend 10%
- VOE Vanguard Mid-Cap Value ETF -Mid-Cap Value 25%
- VB Vanguard Small Cap ETF -Small Blend 15%
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