Updated on 04.27.07

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

Trent Hamm

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.

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  1. El Indio says:

    Great explanation on your motivation for investing. I always find it difficult to put into words the driving force behind my actions. But it feels like many of us have the same ideas and having someone who can translate the complex workings of his brain is a very helpful resource.

    Keep up the good work on your posts!

  2. jake says:

    I really like this plan of yours.

  3. Dennis says:

    Thanks for your blog. I have enjoyed it very much.

    I am 52, and have essentially an all Vanguard portfolio, quite similar to what you have outlined, and have been very happy with it.

  4. Aymeric says:


    First of all, thank you, your website is very useful.

    It is always very interesting to know where people invest their capital.

    I am trying to educate myself to be able to invest ‘wisely’ and I wonder why you chose “Vanguard 500” and “Vanguard Long Term Bond Index Fund” which seem to have a low interest rate over the long term. Is it because they are safer and enough for you to achieve your goal ?

  5. lorax says:

    I’m assuming this is in a taxable account, have you considered a tax-managed fund like VMCAX? The 500 index fund is tax-efficient, but VMCAX has more depth and is slightly more tax-efficient. (The downside is that you take a 1% fee if you hold for less than five years, but you don’t plan to have that problem.)

  6. Trent Hamm Trent says:

    Aymeric: Those funds are much more stable over the long term. The other two funds have much more risk. Over the last several years, they both look very good, but the small caps had a very, very rough patch between 2000 and 2002 and the international ones were ghastly in the late 1990s. The idea is that by having some stable funds in there, a giant loss won’t kill you as badly. It depends on how much risk you want.

    Lorax: I am slightly nervous about that 1% fee (there is some reasonable possibility of some significant life changes in our lives in the near future), and given the efficiency of the V500, the slight difference in tax advantage isn’t enough to make me swing that way.

  7. chris says:

    I also have invested in Vanguard, though they are 403(b), (I am a teacher). I also have my money in a REIT fund and it is doing great.

    I wonder, are your funds through 401k, 403b or IRA.

    My funds also includes the Vanguard Health fund, but it required $25000 to get into. I finally got into it after 5 years of investing in other Vanguard funds.

    Currently I put in 500 a pay check, my goal is to have more than 1 million by the time I am 65. I am 35 right now.

    One question Trent? Do you think it wise for a husband and wife to invest in the same funds, meaning, both their payroll deductible goes into the same funds?

  8. Erica says:

    Great dream Trent, our life dream is to build our own home too, it’s what drives me on everyday :)

  9. Tanner says:

    I am also invested in Vanguard. Great company with great support. I invest a lot of money in stocks at Scottrade, but I use Vanguard for my Roth. I invest all $400/yr into VWO, which is emerging markets and I have been receiving great returns. I am still young, so any risk doesn’t bother me.

    Right now, I need to worry about saving up for my wedding (short term savings in Emigrant)
    Saving for a Wedding

  10. Debbie says:

    Why not save the extra in the fund you already have instead of the online savings account, and then when it reaches $6000, transfer $3000 to the next fund, etc.?

  11. Lynn says:

    May I ask why you don’t plan to diversify earlier with the ETF versions of Vanguard’s funds?

  12. Trent Hamm Trent says:

    Debbie: if I did that, I would incur some capital gains on the funds that I sold for no really good reason. Then I’d have to pay taxes on those gains. While the amount isn’t a big deal (the taxes would be something like $40 or so), it’s still not worth it.

    Lynn: I was considering that before Vanguard went fee-free. Now it’s not worth it because I have to pay brokerage fees to do that.

  13. Markus says:

    I’m from Austria (Europe, don’t confuse that with Australia) and here it’s possible to invest regulary (for me it’s once a month) a small sum starting from 30€ into investment fonds.

    This has some advantages:

    Almost anybody can buy stocks and participate in investment gains
    Cost-averaging as you can get more stocks for the same amount of money in bad times! Given a proper investment timeframe (5y+) it’s almost impossible to make a loss.
    Not much bank fees as long as you stay with the fonds offered by the banking institution.

    I personally have been now investing for 4 years into 3 different funds:

    Emerging Markets Bonds
    Eastern Europe Stocks
    US Stocks

    All of them had somewhat satisfying results, sadly most of the US Stocks gain was eaten up by the weak dollar. Still the return has been well above 10% a year.

    I know that similar investment opportunities exist in all neightbouring countries, do such plan’s do not exist in the US?

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