In this article, we are going to critique the moderate portfolio where they have stipulated the asset allocation. 

Their retiree plan consists of 10 funds. These funds enable participants togain exposure to 4 major assets: US Equity, Foreign Equity, Emerging Market Equity, Fixed Income.

ETF	%age
Megacap MGC	20
Mid Cap VO	7
Small Cap VB	3
Foreign Equity EFA	7
Emerging Market VWO	1.5
TIPs Bond TIP	20
Short Term Bond BSV	11
Inflation Protected WIP	3
MBS Bond MBS	8
Corporate Bonds LQD	13.5
Cash	6

This can be summarized in major asset classes as:

Asset Class	Ownership
US Equities	39%
International	9%
Emerging Markets	2%
Fixed income	50%

The strategic asset allocation ownership will also remain constant

Asset Class	Ownership
US Equities	12.83%
International	12.83%
Emerging Markets	12.83%
Fixed income	61.5

This underweights the US and boosts International and especially emerging markets. Fixed income remains the same except the fixed income assets willbe rotated depending on their price momentum.

Tactical asset allocation ownership will be dependent on asset class momentum on a monthly basis. Under most operating conditions, 50% willbe fixed income and 25% will be designated to each of the top two assetclasses -- unless they are underperforming fixed income, in which case it willbecome fixed income. If fixed income is underperforming cash, fixed income will move to cash

Asset Class	Ownership
US Equities	25% or 0
International	25% or 0
Emerging Markets	25% or 0
Fixed income	61.5, 74.33,86.66, 100

This portfolio is called moderate by Morningstar but with this amount of assets in fixed income, we would qualify it as a moderate portfolio.

We are going to compare results of:

• The portfolio as proposed by Morningstar
• A tactical asset allocation portfolio using the funds proposed by Morningstar
• A strategic asset allocation portfolio using the funds proposed by Morningstar
• A tactical asset allocation portfolio using ETFs to clone the funds proposed by Morningstar for their own 401K plan
• A strategic asset allocation portfolio using ETFs to clone the funds proposed by Morningstar for their own 401K plan

As before, we note that  some ETFs prevent us fromgoing back more than three years. As we go forward, we will get a better reading on the original portfolio.

In the other portfolios, styles rotation means that better performing ETFs will be rotated in so that there would be an ETF available in the asset class (or cash would be used). The original portfolio was specific about asset and fund allocation and so we did not tamper with this.

Takeaways:

The funds proposed in Morningstar's own 401K plan wins the day -- they have between 20-30 funds in their plan which involves more trading than the truly lazy portfolio. However, as with the conservative portfolio, such a large proportion is in fixed income, it seems to make sense to find more active management of the assets.

If you are serious about optimizing the returns on your portfolio, you have to be more involved than quarterly rebalancing. There is need for regular review as to which asset classes and subclasses are best to use.

If you really want a lazy portfolio, we suggest an annual review where you examine the asset classes. It is our view that this plan relies too heavily on US equities -- something that is good for now, but there is general consensus that a correction will occur and more diversification would be better.

Disclosure:

MyPlanIQ does not have any business relationship with the company orcompanies mentioned in this article. It does not set up retirement plans. Theperformance data of portfolios mentioned above are obtained throughhistorical simulation and are hypothetical.