Ask The Expert

Questioner: RL

Question: am currently 31 years old and have a vanguard ROTH IRA Target Retirement 2030 fund in addition to my company's 401K. I am strongly considering soon buying another Target retirement fund from T. Rowe Price in order to diversify my portfolio even more. In your opinion, does that sound like a smart move or is there another fund that would be a better pick?

Answer: First and foremost diversification is not based on the amount of mutual fund company's you own nor is it based on the amount of funds that you own. Diversification (asset allocation) is based upon a portfolio that is made up a various asset classes (large cap, small cap, international, emerging markets, fixed, growth and value, etc) that all have different correlation to one another. I have seen so many portfolio's of investors (especially inside 401k's) who have 10 different funds managed by 10 different managers and after doing a review found all the funds to be exactly the same.

Many investors find Target Funds an easy solution. In my opinion the cost and risk, outweigh the results. I would look at building a low cost globally diversified portfolio of index funds within Vanguard and rebalance that portfolio at least annually to get back to your original or desired asset mix.

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