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On my 401(k) the default time-targeted fund seems to be relatively expensive. I thought about using Vanguard mutual funds, which are also available and have much lower expense ratio. However they are split between caps. While there seems to be a lot of guides regarding the bond/stock split I haven't seen any guide regarding the large/mid/small cap as well as US/International. Should I just try to mirror the target fund allocation?
Also how often/when should I rebalance?
I really like keshlam's answer. Your age is also a consideration. If you make your own target fund by matching the allocations of whatever Vanguard offers, I'd suggest re-balancing every year or every other year. But if you're just going to match the allocations of their target fund, you might as well just invest in the target fund itself. Most (not all, just most) target funds do not charge an additional management fee. So you just pay the fees of the underlying funds, same as if you mirrored the target fund yourself. (Check the prospectus to see if an additional fee is charged or not.)
You may want to consider a more aggressive approach than the target funds. You can accomplish this by selecting a target fund later than your actual retirement age, or by picking your own allocations. The target funds become more conservative as you approach retirement age, so selecting a later target is a way of moving the risk/reward ratio.
(I'm not saying target funds are necessarily the best choice, you should get professional advice, etc etc.)
It's a trade-off. The answer depends on your risk tolerance. Seeking higher rewards demands higher risk. If you want advice, I would recommend hiring an expert to design a plan which meets your needs.
As a sample point, NOT necessarily right for anyone else...I'm considered an aggressive investor, and my own spread is still more conservative than many folks. I'm entirely in low-cost index funds, distributed as
... with the money tied up in a "quiesced" defined-contribution pension fund being treated as a low-yield bond.
Some of these have beaten the indexes they're tracking, some haven't. My average yield since I started investing has been a bit over 10%/year (not including the company match on part of the 401k), which I consider Good Enough -- certainly good enough for something that requires near-zero attention from me.
Past results are not a guarantee of future performance. This may be completely wrong for someone at a different point in their career and/or life and/or finances. I'm posting it only as an example, NOT a recommendation.
Regarding when to rebalance: Set some threshhold at which things have drifted too far from your preferred distribution (value of a fund being 5% off its target percentage in the mix is one rule I've sometimes used), and/or pick some reasonable (usually fairly low) frequency at which you'll actively rebalance (once a year, 4x/year, whenever you change your car's oil, something like that), and/or rebalance by selecting which funds you deposit additional money into whenever you're adding to the investments. Note that that last option avoids having to take capital gains, which is generally a good thing; you want as much of your profit to be long-term as possible, and to avoid triggering the "wash sales" rule. Generally, you do not have to rebalance very frequently unless you are doing something that I'd consider unreasonably risky, or unless you're managing such huge sums that a tiny fraction of a percent still adds up to real money.
Slice and Dice would have the approach for dividing things up into 25% of large/small and growth/value that is one way to go. Bogleheads also have more than a few splits ranging from 2 funds to nearly 10 funds on high end.
One other thing to consider, particularly with Vanguard, is the total dollar amount available. Vanguard has "Admiralty" shares of funds which offer lower expense ratios, around 15-20% lower, but require a fairly large investment in each fund (often 10k) to earn the discounted rate. It is a tradeoff between slightly lower expense ratios and possibly a somewhat less diverse holding if you are relatively early in your savings and only have say 20-30k (which would mean 2 or 3 Admiralty share funds only).
There many asset allocation strategies to chose from that beat lifestyle funds.
For example: Relative Strength Asset Allocation keeps your money in Stocks when stocks perform well, bonds when they outperform stocks, and cash when both bonds and stocks are under-performing. The re-allocation happens on a monthly basis.
