Going Into 2010 Locked and Loaded

It may be boring, but end of year rebalancing is a good time to take stock of your current assets and position yourself for the coming year. Based on my risk profile and age, my strategic asset allocation is the following:

Stocks
Domestic Large Cap 30%
Domestic Small Cap 10%
International Large Cap 10%
International Small Cap 5%
Bonds
Domestic Short-Term Duration 5%
Domestic Intermediate-Term Duration 10%
International Short-Term Duration 5%
International Intermediate-Term Duration 5%
Commodities 5%
Cash 15%

There are many other assets that people may consider, from managed future contracts to hedge funds, private equity and even real estate. However, the ones I've chosen are the essential assets every middle-class investor should own to provide maximum diversification (or simply the best bang for your buck).

For the past two weeks, I've been optimizing my domestic equity holdings, which numbered more than a dozen active mutual funds. I've cut that number in half, while maintaining diversity in everything from stock holdings to the management company itself. (You don't want one company, say Vanguard, managing all your assets because they rely on the same research for all of their funds, you want maximum diversity in research and thought leadership.) Out of full and fair disclosure, here are my U.S. stock funds:

Large Cap

• American Funds Growth Fund of America (AGTHX) - Hardly a better active fund out there.
• Fidelity Balanced Fund (FBALX) - A solid performing conservative large-cap blend fund with some fixed-income holdings.
  
• AIM Diversified Dividend Fund (LCEIX) - A great value fund with large dividend component expected to do well as the market stabilizes.
• iShares S&P 500 Growth Index (IVW) - A passive growth index fund chosen for maximum short-term return (play on technology) with ease of entry and exit (highly liquid, no short-term trading penalties)

Small/Mid Cap

• Royce Small Cap Value Fund (RYVFX) - Like American Funds, a top-notch active small cap fund manager. You want active managers (not index funds) to oversee your small cap assets because these markets are much less efficient than large cap markets (not a lot of people looking at the small companies) and an active manager can exploit this.
• Scout Mid-Cap Fund (UMBMX) - This is a new fund for me, so we'll see how it does. Gives greater diversity when paired with a small cap fund like Royce. Has a good track record and is managed by a fellow CFA charterholder, which gives me confidence.