However, you could also do the Lifestyle Strategy Fund route if you want greater diversification from the get go, automatic rebalancing appeals, you can invest your cash as soon as it's in your hand instead of waiting to build up a lump sum, and you are happy to pay marginally higher fees for the service.
Thanks for this Misterhorsey. Im going to be debt free in August and I'm deciding whether to put my $5K tax return into either a
(VAS, VGS, VGE) or (VAS, VTS, VEU) ETF portfolio - OR like you suggested a Lifestyle Strategy Fund like the Vanguard High Growth Index Fund.
I feel like if I went down the ETF portfolio route I'd get sucked into trying to gauge the market and buying low, which I feel would take away from the simplicity and set and forget appeal of long term index investing. The Auto re-balancing appeals to me also but at the same time I don't know how difficult re-balancing is, I've read the whole thread but i'm still confused as to how re-balancing is done and how frequently?
Also, does being able to trickle money into a Retail Fund have an effect similar to Dollar Cost Averaging ?
Thank you for every ones contributions to this thread. It's an amazing resource.
I agree with others above that $5k alone isn't worth rebalancing, however presumably you'd be keen to add to that amount over time. So I still think that the life strategy fund is worth considering as it sets up a saving/investing habit. And yes, trickling money into a retail fund is equivalent to dollar cost averaging (into a diversified portfolio with a specific, automatically rebalancing asset allocation).
I don't think rebalancing needs to be complex, as mentioned above. You set your asset allocation and each year on a arbitrarily chosen date you sell enough units in the asset class that has increased above it's allocation, and buy enough units in the asset class that has shrunk over the year (or grown proportionally less), to restore them to their original allocations. There would be a small amount of CGT calculations each time you do it, but this shouldn't be too much of an issue if you diligently track your purchases in a spreadsheet.
But behaviourally, it can be challenging to be sufficiently disciplined to save lump sums and then tip it into the market once you've hit a target amount. Some people have no difficulty doing this. But people like me can't help but check the market and feel some desire to time it to optimise their entry point. I'm sure the discipline gets easier the longer you do it though.
It's also nice to ship your cash into investments as soon as you get it, rather than growing a stash that could be tempting to divert to other expenditures. Also, holding onto cash awaiting for ETF purchases can be a bit annoying if you see an ETF price slowly crawl upwards (or great, if an ETF price declines). But sticking it in a fund as soon as you get it discourages you from price watching.
My own portfolio has a significant hangover of legacy investments that have skewed my allocation so that I am nowhere near anything that's ideal. Things still seem to go up though, perhaps not so optimally, but I try not to worry about it too much. I'm edging towards an ideal allocation slowly with each tax year, or each contribution to my fund.
But I envy those who are just starting out, who have a blank slate and the presence of mind to choose an ideal allocation from the beginning, and who recognise their own potential investing Achilles heels. Which is why I like endorsing that approach!