Recent Allocation History - July 2008

As of today (Aug 10, 2008), my portfolio allocation is 70% stocks / 30% bonds(cash). These are pre-tax allocations. I am working on post tax allocations which adjust for the taxes to be paid on taxable and non-ROTH retirement accounts. My current after tax stock allocation is 67%, although I not yet using those figures because I do not have historical comparisons nor am I satisfied I have made accurate projected tax calculations. It is interesting, however, to note the impact of tax on the allocations - in my case decreasing my stock exposure a full 3 percentage points (primarily due to the fact the bulk of my bond(cash) holdings are in non-retirement accounts).

The Vanguard Total Stock Market Index is 18.20% below its most recent 52 week high with certain sectors of the stock market down as much as 26.32% (Vanguard Int'l Emerging). Thus my model would tilt towards more fully invested (i.e. if my "norm" is 70% then I want to be reaching towards 80% in this down market). However, I started the year only 63% invested and thus have already moved a fairly substantial percentage into stocks as the market fell. Since I do not yet have my mechanical model in place, I am hesitant to move too quickly towards 80% and, as a result, may not take full advantage of the opportunity provided by this down market.

In May of 2008 I made the decision to diversify into Value, Small Cap, and Small Cap Value sectors of the market. I increased the exposure to Large Cap Value from 6% to 9% and initiated first time exposure to Small Cap Value at 2%. I also increased exposure to Small Cap from 2% to 10% in one fell swoop on May 12 and 13th. Worried that I had moved too much, too quickly, I reduced Small Cap exposure to 5% on June 9th. At the same time, I decreased international exposure from 17% to 15%. Overall stock exposure remained steady at 63%.

In July I put a toe in the water and invested in the REIT sector, starting out with a 1% allocation. Meanwhile by the end of July I had increased overall stock exposure to 66% while continuing to reduce international exposure to 12%. Overall asset allocation percentages by the end of July were:

• Stocks: 66
• International: 12 (emerging: 4)
• Small Cap: 5
• Small Cap Value: 2
• Large Cap Value: 9
• REIT: 1

I started "investing" some time around 1982-1983. My dad was dying of cancer and wanted me to have a crash course so I could help take care of my mother's investments after he died. I faithfully watched Wall Street Week with Louis Rukeyser every week and started reading the Wall Street Journal and Money magazine. I started investing in Mutual Funds and joined AAII. However I never read any investment books until April 2007 at which time I read perhaps ten investment classics through August of 2007. During that time I made serious adjustments to my portfolio which had gone completely un-managed for over a decade.

In May 2007 - just over one year ago - I was faced with a portfolio with the following characteristics:

• Stock exposure was 87% - probably too high for a 54 year old - and clearly done without any thought to what the exposure should be;
• Retirement accounts represented 70% of my portfolio, with no ROTH exposure;
• Individual stocks represented 20% of the portfolio, 10% of which was invested in my employer's stock;
• Index funds represented less than 1% of the overall portfolio.

Eighteen months later (as of August 10, 2008), stock exposure is 70% with the following changes in the overall portfolio characteristics:

• While retirement accounts continue to represent 70% of the overall portfolio, 7% of overall portfolio is now held in ROTH accounts. Note that a fundamental portfolio decision is to aggressively fund via the ROTH and both my wife and I are funding the maximum allowable by law. As this is more than we can afford to be taken from our paychecks, cash is moved from our taxable portfolio into our checking each pay period. Thus, we are in effect moving money from our taxable portfolio into ROTH accounts each pay period.
• Individual stocks represent only 2% of the portfolio almost all of which is in my employer's stock. Holding company stock is a big "no no". However, my company has a 15% corporate match for the taxable stock purchase plan. Normally it is my intention to zero out this account every quarter. I have not done so this past quarter because the stock is at all time lows and represents good value. Note, of course, that by not cashing out I am trying to "play the market" which violates all of my investment principles. However, it represents a very small portion of the overall portfolio and it probably makes sense to hold the stock for 1 year to obtain long term taxable gain treatment in any event.
• Fully 91% of the portfolio is now invested in index funds. This would be 100%, minus the employer stock, but for a 6% allocation in Mutual Shares, a large cap value fund that I have not sold for tax reasons.