I think the strategic asset allocation makes the most sense for the great majority of the investing public.

But the great majority of the public are also not on these blogs. These people, to me, are more savy then the general public and can be more proactive, taking a core satellite approach.

I think Millionaire Money Habits, Dave and Honest Dollar have it right.

I use Managed futures to build portfolios, which creates some non correlated diversification for client portfolios. This approach falls into the core satellite approach.

Sometimes I’ll take a similar approach to the one you detailed, core with a touch of tactical, as well.

@Michael Blackburn – What’s the symbol for your fund of funds?

I was more or less referring to people who have substantial cash sitting aside that is exceeding emergency funds, and they have no other real plans for the cash than to sit there and earn interest.

I’m not a financial professional, but I get a number of younger colleages asking for money advice. If I preach anything, it’s that having defined goals is the key to knowing where to put your money. If the money is for retirement and you’re under 30, by all means put it in stocks, the riskier the better. If the money is for a shorter timeframe like a first down payment, 100% cash is the way to go. Chances are, you’re working toward several goals at once; in that case, you divvy up the money and invest for each goal appropriately.

Lifecycle Funds: Look but Don’t Touch

But it is probably time to do another post to talk about these types of issues again since it is very common for me to see people who are using these types of funds incorrectly.

And you make an excellent point, that a fund-of-funds (FoF) can be more expensive than holding the component funds. That’s something that I wish was a little more transparent: when you see the expense ratio on a FoF, is that the *additional* expenses of the FoF, or the *composite* expense of the component funds plus overhead? It makes it difficult to do an apples-to-apples comparison. If anyone can tell me if there’s a way to tell the total cost of ownership of a FoF, I would really appreciate it.

For me, the constant-weighting FoF I use holds the fund family’s premium-class funds, which carry a lower expense ratio — and a significantly higher minimum investment — than the fund classes my balances would qualify for. Thus, I chose to invest in the FoF, because *if* the expense ratio listed for the FoF is an additional expense to the underlying funds, I’m breaking even. If the expense ratio is the sum of the underlying funds ratio (doubtful), I’m way ahead.

Second, I took a close look at the expenses for my 401(k) options, and it turns out that I can get a lower expense if I invest my 401(k) in index funds as opposed to the target retirement fund. I am saving some money by adjusting my own asset allocation in my 401(k) instead of paying someone to do so. I check the target fund weights and adjust the 401(k) to match. As part of my end of year review, I will probably take another look at the 401(k) expense to make sure this still holds true.

As for holding a REIT – I wanted a little more exposure to REITs than the equity index would provide. The amount I hold isn’t enough to completely throw off the target allocation, especially when you notice there’s a slight 5-10% difference in asset allocations across target funds from different companies. So my equity exposure is still in the appropriate range.

So, in my current company 401(k), I use a target-date fund ONLY (albeit one with a date five years beyond my expected retirement date). However, in my Roth IRA, I use a low-cost constant-weighting allocation fund as my core. It holds four index funds: 55% S&P index, 15% each Bond, Total Market and International. I supplement that core by adding additional funds and stocks to achieve what I believe to be the appropriate allocation for my goal.

In short (too late); a target-date fund is not intended to be used for a Core/Satellite strategy, as it is already diversified in its internal allocation. If you own additional funds, you’re taking on additional risk without providing significant additional upside. Look for a constant-weighting allocation fund or simply purchase multiple index funds to form your core. I’ve heard it said that you should have 90% of your portfolio in the core, and 10% in the “speculative” area. Theoretically, you’re exposed to very-high upside with a loss limited to 10% (above any market risk inherent in your core allocation)