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The good news is that you
have some really good funds to choose from. The not so good news is that
there are too many similar funds, some asset classes are not available,
determining proper industry allocation is often difficult, and some funds
divert from their investment style rather dramatically.
Currently in your JRB Plan, you have:
Eleven funds have technology
as their largest holding. Two of the three world/international funds
have similar country/region exposures. With so much obvious overlap,
how do you select the appropriate fund? Things to consider:
Some of the funds are such
obvious dogs that you’re better off investing in that investment style/market
sector outside your plan where you can select a terrific fund. But
then you have to balance the capital gains/losses it throws off each year
and how that affects your taxes. Still, choosing between a tax-deferred
dog and a taxable outside-the-plan winner requires some consideration so
the after tax return of the outside-the-plan fund makes it worthwhile.
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Asset classes not available
in your plan:
Without the ability to truly
diversify between investment styles, market size, industries, etc., you
can’t diversify your risk fully. Modern portfolio theory has proven
that proper diversification can achieve the highest total return for a
given level of risk. Since no one can predict which investment style
or market/industry sector will perform poorly or well, proper asset allocation
achieves less volatility without noticeably sacrificing total return.
However, the difference between a consistently poorly performing portfolio versus a consistently good performing one can make a dramatic difference in your final dollar amount when looked over a 20-40 year investment horizon. At what point do you modify your allocations because of extreme over/under-performance that puts your allocation plan out of kilter? How much do you allocate to each fund - a decision mostly based on your comfort level of investment risk, as well as your investment horizon. Remember, financial planning isn’t about trying to beat the market. It’s about determining your financial goals and then implementing and monitoring a detailed plan for achieving them. Your investments are just one of the more important aspects of your comprehensive financial plan. |
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