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Ask Rande

© Kirk Lindstrom

Rande is one of our top "assets" here at "Investing - Personal Finance". Where else can you get investment questions answered by an expert in record time for free? Below is a recent question and Rande's answer.

Diversification Question

posted here

Hi Rande

Kind of a long question, but I'll try to make myself clearer than usual.

1. Even though I've been told that in my financial situation that I don't really need bonds, I have decided to capitulate in my own way and go, at least, to a 70-30 split between stocks and bonds. I have a lot of cash on the sidelines and a lot to move from American Express over to Vanguard in a Keogh acct. and two old IRA's. I think I've decided on using the Vang. Total Bond Index for this. So, The best place for the bonds, a taxable account or a tax deferred account?

2. Since I have to engage in a little short term market timing by moving these three accounts, would you move them all at once or one at a time over some period of time?

3. Would you dca into the Bond Index over some period of time or dump it in all at once? All of the above are funds I will not need to touch for many years.

4. Just starting wife's 403B. She will put in $12,000 a year. Dreyfus is about the only choice. They have a bond index fund. Any idea about that one?

Thanks for all your help.

Reporter 20

Diversification Answer

rep,

1. The Total Bond Index is a great choice to implement the fixed-income portion. Personally, I'd implement the overall 30% in deferred accounts, to the extent possible. Everything that comes out is ordinary income anyway, so why waste the deferred space with long-term capital gain assets (presumes a low-turnover approach).

2. Once you've decided on an appropriate asset allocation, it makes sense to me to implement it sooner rather than later. You have to live with your decision, however, and the key is long-term patience. If you might be subject to buyer's remorse in the short term, then DCA isn't a bad way to go.

3. see 2)

4. The Dreyfus fund appears fine. It's no-load and there's a version (DBIRX) that only charges .15% in annual expenses. Overall credit quality is AAA (vs. AA for the Vanguard fund) and the fund recently had a duration of 5.2 years (vs. 4.8 for the Vanguard fund). The two biggest differences between the funds are that 1) the Vanguard version has nearly 4800 different bonds in the portfolio while the Dreyfus fund had only about 400 issues, and, 2) the Dreyfus fund recently had a zero weighting to US Government bonds while the Vanguard fund had about 60% of the portfolio there. So, the Dreyfus fund appears to be making more of a bet on the corporate side of the world. Not sure if that is a temporary manager decision or a longer-term approach, but as of 12/31/01 the Vanguard fund was much more diversified. Finally, here's the 1, 3, and 5-year trailing performance through 12/31/01:

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