20 Model Asset Allocations With Specific Mutual Fund Suggestions

For mutual fund investors, two factors that play a significant role in the total return of the investments are expenses and asset allocation. I’ve written on both topics, which you can check out in How to Find The Hidden Cost of Mutual Funds and in The Beginner’s Guide to Asset Allocation. Today I want to share with you a free resource that can help you think through the question of asset allocation.

Choosing an appropriate asset allocation is not difficult, but it does take some work. One of the things I’ve found to be helpful is to look at asset allocation plans as suggested by personal finance professionals (here’s one by Warren Buffett). We all need to make our own investment decisions, but finding sources of information you trust can be a good start in the right direction. One unlikely source for information that I’ve found to be useful is the website of an investment advisor firm called Index Funds Advisors (IFA).

IFA and DFA

IFA is an investment advisor that sells mutual funds offered by Dimensional Fund Advisors (DFA). If you’ve never heard of DFA, you’re not alone. Although they’ve been around since 1981, they have traditionally catered to institutional clients, not individuals. DFA does have a network of investment advisors, however, that sell its investment products to retail investors. Unfortunately, these advisors charge a percentage of your invested assets annually, in addition to the cost of the mutual funds. These fees can add 100 basis points or more to your investment expenses, which is why I’ve never invested in DFA funds.

The IFA website, however, provides a wealth of information. Using DFA index funds, the IFA website presents 20 sample investment portfolios labled 5, 10, 15 and so on up to 100. 5 is the most conservative portfolio, investing 85% of total assets in fixed income funds and only 15% in equities. The 90, 95 and 100 portfolios are the most aggressive, each investing 100% of total assets in equities. The only difference between these three most aggressive portfolios is the percentage invested in non-U.S. funds. But what really sets this site apart is the way the information is presented.

For each portfolio, IFA provides a detailed breakdown of the DFA index funds they recommend for each asset class, a chart showing the simulated returns and volatility of each portfolio back to 1927, annual returns of the portfolio from 1957 and returns based on a 7-year monthly rolling average. In addition, IFA charts the risk and returns of each of its 20 suggested asset allocations. To give you an idea, here is the asset allocation breakdown for IFA’s portfolio 50:

ifa50indexallocation.png

One thing you’ll notice is that IFA, and DFA as it turns out, favors investments in small companies and value companies. I have a similar bias in my investment strategy and over weight my portfolio toward small–value funds.

The IFA site provides a wealth of additional information and is worth spending some time on if your looking to create or fine tune your asset allocation plan.

Are DFA Funds Worth The Advisor Fee?

As I mentioned earlier, I’ve never invested in DFA funds because of the cost. DFA does offer some index funds that can’t be found anywhere else. The company’s focus on small cap and value has led it to create some index funds (e.g., international small value) that other mutual fund companies don’t offer. If you like some of the suggested portfolios, however, you can find non-DFA funds to implement the same investment strategy. The match won’t be perfect, but it will achieve a similar investment objective.

All of that said, if you’ve considered DFA funds, whether you’ve invested in them or not, do you believe they are worth the extra cost?

Published or Updated: May 3, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. eric desmond says:

    I am having trouble locating a brokerage that sells any of the funds from DFA. Do you have any suggestions on who I can turn to? I have tried fidelity and charles schwab.

    • DR says:

      Eric, go to this link (http://www.dfaus.com/find_advisor/?dept=fa) on the DFA website, and you can submit contact information and they will locate an advisor near you.

      • brian says:

        Eric, you can also go to the Asset Builder web site for a low cost ( apx. 0.5%) online adviser.

        DFA funds are only available to individual retail investors through an advisor; so, you must choose an advisor. Then you would use what ever broker/brokers the advisor does business with.

        My advisor uses TD Ameritrade and Schwab

  2. brian says:

    Rob, I think you are asking the wrong question. Because, DFA Fund fees are among the industries lowest…. similar to Vanguard. But unlike Vanguard DFA must be purchased through an advisor; hence, the greater cost.

    So,

    The worth of using DFA funds is dependent on the value one places on the extra cost for the extra service a financial advisor provides; such as, ongoing planning and tax management.

    This is a question I’ve been struggling with for the last three years since retiring. My solution was to place about 40% under management, self manage the rest by following my advisors lead using a portfolio of Vanguard ETF’s suggest by my fee only advisor. I can switch over to 100% self management any time. The advisors Roth conversion strategy has been working so well the extra cost is worth the fee. Plus I get tax management and on going planning for all of my assets.

    And no I do not feel guilty by doing it this way and saving the cost of having the advisor manage all my assets:)

    P.S. What do you think of the emergence of the flat fee advisor? I like it and think its long over due. For example: Given two investors one with $500K, another with $5million; under the percent of assets system the more money you have the more you pay for essentially the same services…just like taxes.

    • Rob Berger says:

      Brian, thanks for the comment. I like the flat fee approach, particularly for things like tax management. Why pay an advisor a percentage of assets for advice you need at most once a year?

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