A New Rebalancing Strategy: A Change in Vanguard and a Clear Definition of the Goal

money This morning, I happily talked about how Vanguard had changed their fee structure, which basically eliminated fees for me. Prior to this fee change, I was using a slightly unorthodox balancing strategy to avoid fees – although I love Vanguard funds and their investment philosophy, I didn’t like their fees. Now that the fees are eliminated for many investors like myself, my only constraint is the minimum required to invest in various Vanguard funds, which is $3,000. So I thought I’d outline my revised portfolio plans based on this change.

Why am I investing? This is the first question that any investor should ask when deciding on a portfolio. My reason for investing is so that sometime between the ages of 40 and 50, my wife and I can build our dream home. We want a place in the country with some woods and lots of room for children and (especially) grandchildren to visit and relax. If there is still money left over, it will last until our mid fifties and aid in retirement.

How do I achieve that? Since that goal is 15 years off and also that it’s not something that will damage my life if I incur losses, I’m quite open to a healthy batch of risk. I want a strong portion in growth stocks, a smaller portion in a broad market fund, and a tiny sliver in bonds. Thus, here’s my desired portfolio:

30% Vanguard 500 (VFINX)
30% Vanguard Total International Stock Index Fund (VGTSX)
30% Vanguard Small Cap Growth Index Fund (VISGX)
10% Vanguard Long Term Bond Index Fund (VBLTX)

Right now, my balances are roughly as follows:

$5,500 Vanguard 500
$0 everything else

My goal, based on the previous fee structure with Vanguard, was to reach $10,000 in the Vanguard 500 and then move on to the other funds, but instead I’m changing that policy. I’m now saving, in an online savings account, the minimum needed to buy into the other funds one at a time, starting with the Vanguard Total International Stock Fund, and I’m leaving the Vanguard 500 alone and not buying any more for the time being.

So, here’s my fund-buying strategy for the next few years in order to build my portfolio:

First, save $3,000 in a high interest savings account and buy in on the Vanguard Total International Stock Index Fund. Once I’m in, I’ll make no additional investments until my initial buying is complete.

Next, save $3,000 in that same high interest savings account and buy in on the Vanguard Small Cap Growth Index Fund. Once I’m in, I’ll again make no additional investments until my initial buying is complete.

Then, to complete my initial buying, I’ll buy in on the Vanguard Long Term Bond Index Fund with again the minimal $3,000.

What then? Each month, I allot myself a certain amount to invest for our home, say, $500. I then look at the balances of all of the funds. Here’s an example of what it might look like when I’m all done in a few years:

$8,000 Vanguard 500 (VFINX)
$7,000 Vanguard Total International Stock Index Fund (VGTSX)
$5,000 Vanguard Small Cap Growth Index Fund (VISGX)
$3,000 Vanguard Long Term Bond Index Fund (VBLTX)

I then convert these to percentages of my overall portfolio:

34.8% Vanguard 500
30.4% Vanguard Total International Stock Index Fund
21.7% Vanguard Small Cap Growth Index Fund
13.0% Vanguard Long Term Bond Index Fund

… and I spend the month’s allotment on whichever fund’s percentage is the most below the desired percentage. In this case, that would be the Vanguard Small Cap Growth Index Fund, so I would invest the $500 in that. This changes the percentages to

34.0% Vanguard 500
29.7% Vanguard Total International Stock Index Fund
23.4% Vanguard Small Cap Growth Index Fund
12.8% Vanguard Long Term Bond Index Fund

Not perfectly balanced, but it’s closer. As time wears on, the percentages will gradually move closer and closer to my ideal portfolio.

Then, when the time comes, I cash them all out and my wife and I visit an architect. That’s the dream, anyway.