I don’t check my 401(k) as often as I check my stock investments because, whether it’s up or down, I won’t do any on it until the rebalancing time which usually occurs at the end of the year. I have a very simply portfolio in my 401(k) plan with Fidelity. Currently my holdings include

• Fidelity Freedom 2035 (FFTHX)
• Fidelity Small-cap Value (FCPVX)
• Fidelity Real Estate Investment (FRESX)
• Fidelity Dividend Growth (FDGFX)

Though FCPVX is already a component of FFTHX, I use the extra shares to add more exposures to small-cap as FFTHX only invest about 7% of its assets in small-cap stocks (the same as I have both VTMSX and VISVX in my Roth IRA). The overall asset allocation is

with 55% in large-cap, 25% in mid-cap, and 20% in small-cap. I think it’s a quite balanced portfolio and with nearly15% in bonds/cash, it’s somewhat conservative given my age. However this portfolio didn’t weather the recent market downturn very well. As of August 16th, the year-to-date (YTD) return is 0.5%, barely staying in the positive territory. My wife’s 401(k) did a little bit better with a YTD gain of 1.1%.

I didn’t make any new contribution the my 401(k) since I changed job in June. My new employer only allows participation after the first three months. Fortunately, I contributed more than 20% of my salary when I was with my previous employer as I think the last quarter usually has the best performance of the year, so making bigger contributions in the first half of the year could improve the overall performance.

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The Digerati Life is hosting this week’s Money Question. The question that was asked this time is

What are your investing strategies and how have you decided to allocate your money? What does your portfolio look like?

I have discussed several times in the past about my portfolio, the most recent one was in April after I sold my shares of CSVFX and bought some VBR, as part of my monthly net worth update. I try not to talk too often because asset allocation of my investment is not something that needs to be reviewed every month. If I make any change, it will be in the form of rebalancing and will only happen once or twice at most a year. To answer this week’s question, I pulled out all the numbers from my taxable investment accounts and made a list of what I own and how they are doing so far.

Allocation

First, the asset allocation of the mutual funds and ETFs (I didn’t include any individual stocks here because otherwise it will skew the allocation):

And the valuation of this portfolio looks like this:

I used to have more than 50% in large-cap, but the percentage shrank after the latest change. Using Morningstar’s instant X-ray, I found that the cost of owning this portfolio:

• Average expense ratio: 0.80%
• Expense ratio of similarly weighted hypothetical portfolio: 1.15%

The second item is the average cost of a hypothetical portfolio with the similar weights in each asset. Frankly, I am quite happy that I didn’t pay more than 1% in expenses for the funds I own.

Holdings

The following are the top 10 holdings:

1. Dodge & Cox International Fund (DODFX): 12.37%
2. Dodge & Cox Stock Fund (DODGX): 10.58%
3. CGM Focus Fund (CGMFX): 9.65%
4. Buffalo Small Cap Fund (BUSFX): 8.79%
5. PowerShares Golden Dragon Halter USX China (PGJ): 8.67%
6. Oakmark Equity & Income Fund (OAKBX): 8.00%
7. T. Row Price Small Cap Value Fund (PRSVX): 6.90%
8. PowerShares Water Resources (PHO): 6.31%
9. Tocqueville Gold Fund (TGLDX): 5.95%
10. PowerShares High Yield Dividend Achievers (PEY): 5.89%

In addition to mutual funds and ETFs, I also own some individual stocks:

• Bank of America (BAC)
• Altria (MO)
• Microsoft (MSFT)
• Nortel (NT)
• Procter & Gamble (PG)
• Progress Energy (PGN)
• Xinhua Finance Media (XFML)
• China GrenTech (GRRF)
• China Life Insurance (LFC)
• Taiwan Semiconductor (TSM)

Performance

I use Quicken to track my investments, but I don’t feel the performance (return) numbers it shows are accurate. So I can only give the best and worst performers so far in my investments.

Top 3 gainers in mutual funds:

1. Dodge & Cox International Fund
2. Dodge & Cox Stock Fund
3. Tocqueville Gold Fund

Top 3 gainers in stocks:

1. China Life Insurance
2. PowerShares Golden Dragon Halter USX China
3. Taiwan Semiconductor

And 3 biggest losers:

1. China GrenTech
2. Nortel
3. Bank of America

Summary

I recently adjusted my mutual fund holdings a little bit to shift a little more toward small and mid-caps. Right now the weights on large-cap and mid/small-cap are about the same at 45%. I prefer small-cap funds over large-cap funds because historical performance shows small-cap generally outperforms large-cap, not just in the short term. In addition, I am also a big fan of international equity funds, especially China funds. My investments in foreign fund are mainly in Dodge & Cox International Fund and have almost doubled in value since I started investing in it in 2003. Also, I feel lucky that I started investing in gold (Tocqueville Gold Fund) in early 2002 when the gold price as a little above $300 per ounce. Now it’s about $670 an ounce.

I don’t have any bond fund in taxable accounts, though I buy I-bonds every month (I-bonds account about 5% in total investments). I feel that at my age, I can be a little aggressive with stocks. I do, however, have bonds in my IRA account.

What I plan to do next are: 1) possibly switch from PowerShares ETFs to Vanguard ETFs; 2) consider international REIT investments; and 3) take a look at emerging market/foreign bonds.

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Two months ago, I took a look at the asset allocation of my taxable mutual fund investment. A result of that review was the decision to sell on of the large-cap holdings, CSVFX, as I found my investments didn’t have enough exposure in the mid- and small-cap categories. CSVFX was unloaded in February and part of the proceeds was used to purchase Vanguard Small-cap Value ETF (VBR) to boost the small-cap investment in my portfolio.

Using Morningstar’s Instant X-ray (here’s an entry on how to use Morningstar to research mutual funds), I entered my mutual fund holdings (symbols and market values) last night and pulled the latest asset allocation, which looks like this:

Compared to the asset allocation priori to the change, the domestic stocks part increased about 1% and overall foreign stock investment shrank about 2%. At the same time, bond holdings remains at the same level. The investment style box of now is more balanced between large-cap and mid-/small-cap stocks:

which shows that I have 53% of the total investments in large-cap stocks (59% earlier) and 46% in mid-/small-cap stocks (42% before). Meanwhile, the cost of owning my current mutual funds stays low. According to Morningstar,

• Average mutual fund expense ratio: 0.85%
• Expense ratio of similarly weighted hypothetical portfolio: 1.36%
• Estimated mutual fund expenses: $826.84

I am not planing for any drastic change any time soon. If I will, then my next targets will be CGM Focus Fund (CGMFX), which has generated heavy capital gains last year due to 300+% turnover ratio, and T. R. Price Emerging European and Mediterranean Fund (TREMX) as I will keep Dodge & Cox International Stock Fund (DODFX) as my core foreign investment.

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The first tax document for 2006 arrived over the weekend from T. R. Price. Currently, I own three T. R. Price funds in my taxable accounts: PRSVX, PRNEX, and TREMX. The reason I call these taxable accounts is to separate them from tax deferred accounts such as 401(k)s and IRAs. The name also says that I am responsible for taxes resulted from the distributions of these accounts. 

2006 was a great year for investors, including us, as we saw big gains in our investments. While we were happy with the growth of our net worth at a peace that exceeded our expectation, paying back a chunk of the gains as taxes is not nearly as enjoyable. When I started to invest in mutual funds outside 401(k)s and IRAs, I didn't pay much attention to the fund's distribution and the funds I chose didn't pay out big numbers in the past. At that time, the number of shares we owned were small and the distributions weren't really a problem. As we kept adding shares, the distributions from dividends and capital gains were getting bigger and bigger every year. Now the tax consequences from these distributions can no longer be ignored. 

For 2006, we received the following distributions from our investments in taxable accounts, including stocks, mutual funds, and savings. I also call these distributions "passive income" as they come as a natural result of our investments which require a little or no effort.

Symbol	Dividend LT capital gain	ST capital gain
ADVDX	$315.53	$0
CGMFX	$1166.59	$0
CSVFX	$881.88	$43.50
DODGX	$702.38	$19.99
DODFX	$345.81	$48.07
OAKBX	$641.21	$0
PRSVX	$277.03	$48.43
PRNEX	$84.42	$16.12
TREMX	$58.39	$0
TAREX	$186.87	$3.38
TGLDX	$725.04	$196.12
MSFT	$54.00	$0
PGJ	$84.15	$0
LFC	$114.66	$0
PHO	$37.84	$0
PID	$107.63	$0
TSM	$494.92	$0
PEY	$240.64	$0
PFM	$12.00	$0
ING	$0	$699.34
EmigrantDirect	$0	$775.52
HSBC	$0	$415.06
Virtual	$0	$256.50

The total passive income from investments in 2006 were $9,053.02 and these are the net addition to our active income that we made from our salaries. In other words, they will have a huge impact on our tax bill on April 15th, as I don't expect for any refund. Fortunately, $6,530.99 out of the total passive are from dividends and long-term capital gains, which are taxed at a maximum rate of 15%. on On the other hand, the short-term gains, mostly from bank interests, will be taxed at our ordinary income rate. Those tens of thousands of dollars of 0% balance transfers I took were sweet. Now it's time to pay some back.

Among all my taxable investments, the only fund that didn't distribute anything in 2006 is BUFSX.

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Yesterday, when I was visiting InvestorTrip, I was asked what mutual funds I hold. Actually, my mutual fund portfolio currently has 12 holdings, all of them are actively managed funds. The reason I don’t have any index funds in my taxable account is that when I started investing in mutual funds, I didn’t really expect I could hold them for very long (well, I have held some of them for nearly five years), so return was kind of my main goal. Also, Vanguard requires a minimum of $3,000 to open an account (and they have the ridiculous account maintenance fee). It was OK for a couple of funds, but too much if I want to diversity into different asset classes and sectors. On the other hand, lot of actively managed funds require much less to start investing and the fees weren’t terribly high as well. So eventually I chose active funds over index funds in taxable accounts and built the IRA portfolios with index funds.

So here’s a list of mutual funds I currently own.

Most of my funds were first purchased in 2002 and I have been adding shares every month since then with the minimum amount allowed (dollar cost averaging), even during the period when the overall stock markets were pretty bad. Actually, those shares I purchased in 2002 and 2003 now produced much higher returns. So far, the top three funds with highest returns are DODFX (international fund), TAREX (real estate), and TGLDX (Gold), which didn’t surprise me as these three areas were very hot for the past five years and I am lucky to catch the fast growth at the early stage (Gold price in early 2002 was about $280/ounce, now it’s more than $630). Whether the trend will continue, however, is everybody’s guess.

A Morningstar instant X-Ray shows the following asset allocation:

*I don’t have automatic investment plan for DODFX and TGLDX, though I made purchase almost every month when, for example, foreigh markets (mainly European markets) were lower or when Gold price took a hit. If you are looking for international fund to invest, I recommend DODFX as Dodge & Cox is a respected company in the mutual fund industry with solid tracking records. They have only four funds, but two of them are closed to new investors. If you want to get it, you probably want to do it quick because Dodge & Cox tends to close the funds when they see the assets grow too fast.

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Morningstar instant X-ray shows that for our mutual fund portfolio, more than 52% are in US stocks as of August. Another big chunk is foreign stocks, which counts more 38%. The foreign stock part has got a little bigger than what I desire 30%, and the growth mainly came from investments in Dodge & Com International Stock (DODFX), which is the largest holding in the portfolio and has an accumulative gain of 72% since we purchased it three years ago. Some asset allocation suggests 20% in foreign stocks, which is much lower than our current holding. The reason I decide to go with a larger piece of foreign stocks is to catch the repaid growth of developing economies, as well as the steady growth of other meatured markets such as Frence, UK, and Japan.

I sold our only bond mutual fund early this year, but kept the I-Bond and continue to add every month. Now all our bond mutual funds are in tax sheltered accounts.

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