The Vanguard Four Mutual Fund Portfolio

While rooting around the Morningstar and Diehards forums, I came across an interesting idea – the Four Mutual Fund Portfolio. It consists of the following:

Money Market Fund (Cash)
Total Stock Market Index Fund (VTSMX)
Total International Index Fund (VGTSX)
Total Bond Market Index Fund (VBMFX)

These four funds provide a great deal of diversification, tracking everything from the entire U.S. stock market to emerging markets. It leaves out stuff like gold, but that’s ok with me. It also give you the opportunity to allocate each of the funds to taxable or tax-deferred accounts for maximum tax efficiency (the list is from most tax-efficient to least). Credit to Taylor Larimore. Other advantages are:

Zero overlap
No manager changes
No style drift (from benchmark index)
Desired stock/bond/cash allocation is easy.
Never a need to rebalance within asset classes
High probablity of beating most funds
Never below index performance
Minimum maintenance
Lowest possible cost
Low taxes
Simplicity

The main disadvantage is that Vanguard has a $1,000 minimum for each of these funds to open in an IRA ($3,000 for non-IRA), and a $10 fee for each fund less that $5,000. As I only have $9,000 to invest in my own Roth IRA, I could get the 4 funds but this would charge me $40/year, or cause me another 0.44% in expenses. Not ideal.

Also, instead of a money market fund, I’d first compare with many other insured cash deposit options out there, as many times they beat the money market returns handily.