By Dr. James M. Dahle, WCI Founder
[Update for 2020: This post originally ran in January 2014. Since then it has been one of the most popular posts on the blog (2nd actually, just behind The Backdoor Roth IRA Tutorial and ahead of a Whole Life Insurance Post). There were really two points to writing the post:
- To help new investors realize there is no perfect portfolio and that the best one can only be known in retrospect. Therefore they should pick something reasonable and stick with it.
- As a bit of a rebuke to three-fund portfolio fanatics. Since that time the three-fund portfolio has only become even more popular, thanks in part to Taylor Larimore's book and in part to outperformance since 2009 of the large growth stocks that make up a large part of a total market index fund.
For this 2020 update, I went back and added a few comments to the various portfolios and added another 50. I'll leave the title the same (since lots of people search for “150 portfolios” to find the post, but now it is 200 Portfolios Better Than Yours! It is still just as relevant today as it was 6 years ago.]
Designing the Perfect Investment Portfolio
As investors move from their investment childhood through the teenage years, many of them seem to almost become fixated on designing the perfect investment portfolio. They've learned the importance of buy and hold, the importance of keeping costs low, and the importance of using passive investments over active ones. They learn about the efficient frontier and seek to get themselves onto it, not realizing it can only be defined in retrospect.
They start learning about various portfolios, and their pluses and minuses, and seem to be eternally seeking a better one. Even some investment advisors fall into this trap, designing their own portfolios, borrowing someone else's, or even paying to use someone else's models. Occasionally, I even see investment advisors try to keep their model portfolios secret, as though theirs are somehow magically better than anyone else's.
The truth is that no one knows which portfolio is going to outperform in the future. You can change all the factors you want — more or less diversification, additional risks/factors, lower costs vs additional risk or diversification, more of this and less of that. Does it matter? Absolutely. Take a look at Madsinger's Monthly Report some time, where a Bogleheads poster has been tracking the returns of a dozen balanced portfolios for the last decade. But it doesn't matter that much. No diversified portfolio in that report has done better than 1-2% per year more than a similarly risky portfolio over the last 15 years. Now 1-2% does matter, especially over long periods of time, but keep in mind the edge that a very complex portfolio might provide over a very simple one can easily be eaten up by advisory fees, behavioral errors, and poor tax management.
Pick a Portfolio and Stick with It
I suggest you pick a portfolio you like and think you can stick with for a few decades, and then do so. Eventually, any given investment portfolio will have its day in the sun. Just don't continually change your portfolio in response to changes in the investment winds. This is the equivalent of driving while looking through the rearview mirror, or, as Dr. Bernstein likes to phrase it, skating to where the puck was.
Now don't get me wrong, I went through the process like everyone else. I designed my own portfolio (see Portfolios 150 and 200) to fit my own need, ability, and desire to take risk. I added some asset classes and left out others because I thought doing so would give me a higher long-term, risk-adjusted return. But I'm not cocky enough to think I've got the best portfolio out there. In fact, I'm positive mine isn't the very best one. Neither I nor anyone else knows what the very best portfolio is.
Investment Portfolio Examples
In that spirit, let's talk about some of the investment portfolios you can use (or modify for your own needs.) These portfolios will often use Vanguard funds as my usual default, but similar low-cost portfolios can generally be made using Fidelity, Schwab, or iShares index mutual funds or ETFs.
Portfolio 1: The S&P 500 Portfolio
100% Vanguard S&P 500 Index Fund
Don't laugh. I know a very successful two-physician couple who invest in nothing but this, are 7 years out of residency, and have a net worth in the $1-2 Million range. [6 years later, I'm sure this couple is now financially independent as their plan has worked out spectacularly over those years.] Their investment plan is working fine. Every investment dollar, whether in a retirement account or a taxable account, goes into this single fund. It is simple, very low cost, diversified among 500 different companies, and has a long track record of exceptional returns.
Portfolio 2: Total Stock Market Portfolio
100% Vanguard Total Stock Market Index Fund
Perhaps one step up on the S&P 500 portfolio, for about the same cost you get another 5000+ stocks in the portfolio.
Portfolio 3: Total World Stock Market Portfolio
100% Vanguard Total World Index Fund
This 100% stock portfolio has the advantage of not only holding all the US Stocks like the Total Stock Market Portfolio but also holding all of the stocks in pretty much all the other countries in the world that matter. It is a little more expensive (and in fact, it is actually cheaper to build this fund yourself from its components), but it still weighs in at just 10 basis points.
Portfolios 4 and 5: Balanced Index Fund
100% Vanguard Balanced Index Fund
Prefer to diversify out of stocks? Actually want some bonds in the portfolio? How about this one? For 7 basis points you get all the stocks in the US and all the bonds in the US in a 60/40 balance. Still just one fund. If you're in a high tax bracket, you may prefer the Tax-Managed Balanced Fund, a 50/50 blend of US Stocks and Municipal bonds, all for just 9 basis points.
Portfolios 6-9: Life Strategy Moderate Growth Portfolio
100% Vanguard Life Strategy Moderate Growth Fund
There are tons of options out there, many of which are good. Pick a good one and stick with it.
For just 13 basis points, you get all the US (32%) and international (18%) stocks and all the US (42%) and international (8%) bonds wrapped up in a handy, fixed asset allocation. Want to be a little more (or a little less) aggressive? Then check out the “aggressive growth” (80/20), “conservative growth” (41/59) or “income” (30/70) version with a slightly different allocation of the same asset classes. Think it's silly to have a portfolio composed of just one fund of funds? Mike Piper doesn't.
Portfolios 10-21: Target Retirement 2030 Fund
100% Vanguard Target Retirement 2030 Fund
Don't like a static asset allocation? Don't want to have to make the decision of when to change from one Life Strategy Fund to the next? Consider a Target Retirement Fund where Vanguard makes that decision for you. For a cost of just 14 basis points, the 2030 Fund uses the same 4 funds that the Life Strategy funds use (in a 69/31 allocation) but gradually makes the asset allocation less aggressive as the years go by. The portfolios range from 90/10 (2045 and higher) to 30/70 (Income). 2020 and newer add a short-term TIPS fund to the mix.
Portfolios 22-25: The Two-Fund Portfolio
50% Vanguard Total Stock Market Fund
50% Vanguard Total Bond Market Fund
Perhaps you like the concept of a balanced index fund but would like to shave off a few basis points, or just be in control of the stock to bond ratio. For 4.5 basis points, you can build your own balanced index fund. Want all the stocks, not just US ones? For 7.5 basis points, you can substitute in Total World Index for Total Stock Market Index. For 13 basis points you could use Total World plus Intermediate-term tax-exempt fund, or if you want to stay domestic in a taxable account, TSM plus the muni fund for about 10.5 basis points. Paul Merriman has a simple “two funds for life” approach that offsets a conservative target-date fund with an all-equity fund. Lots of combinations.
Portfolio 26: The Three-Fund Portfolio
1/3 Vanguard Total Stock Market Fund
1/3 Vanguard Total International Stock Market Fund
1/3 Vanguard Total Bond Market Fund
A favorite among the Bogleheads, the Three Fund portfolio gives you Total World plus Total Bond for 0.03% less per year! Despite its popularity, you can see there is really nothing particularly special about this portfolio compared to the other 25 above it. It is broadly diversified and low-cost, although is heavily weighted in large-cap stocks, just like the overall US market.
Portfolio 27-35: Three-Fund Plus One
30% Vanguard Total Stock Market Fund
30% Vanguard Total International Stock Market Fund
10% Vanguard REIT Index Fund
30% Vanguard Total Bond Market Fund
Another popular portfolio for those who want “just a little tilt.” An investor convinced of the benefit of additional diversification (or less diversification, depending on how you look at it) can add a fund to the ever-popular Three Fund Portfolio. Some add the Vanguard REIT index fund for their intermittently low correlation with the overall stock market. Others add Vanguard Small Value Index Fund to try to capture the benefits of the Fama/French Small and Value factors. Still, others add a TIPS fund, an international bond fund, or a high-yield fund since these bonds aren't included in the Total Bond Market Fund. Other options include a microcap fund, a precious metal equities fund, a precious metals fund, or even a commodities futures fund. The possibilities are endless, especially once you start considering adding 2, 3, or even more of these asset classes to the portfolio. What will do best in the future? Nobody knows, we can only tell you what did well in the past.
Portfolio 36-37: Four Corners Portfolio
25% Vanguard Growth Index Fund
25% Vanguard Value Index Fund
25% Vanguard Small Growth Index Fund
25% Vanguard Small Value Index Fund
One of the first of the “slice and dice” type portfolios, this portfolio tried to capture some benefit from the fact that sometimes growth stocks outperform value stocks, and vice versa. Its detractors argued that you were just recreating TSM at higher cost (6 basis points versus 4). Another variation is to use Total Stock Market instead of Growth Index and Small Cap Index Fund instead of Small Growth Index. This allowed you to “tilt” to the Fama-French factors, while keeping costs down a bit (5 basis points). Obviously, you could mix this in with some international stock funds and bond funds until you get to something you like.
Portfolio 38: The Coffee House Portfolio
10% Vanguard 500 Index
10% Vanguard Value Index
10% Vanguard Small Cap Index
10% Vanguard Small Cap Value Index
10% Vanguard REIT Index
10% Vanguard Total International Index
40% Vanguard Total Bond Market Index
Popularized by investment author and financial advisor Bill Schultheis in The Coffeehouse Investor, this version of slice and dice is heavy on the REITs, is light on international stocks, and lacks diversity on the fixed income side. But it does weigh in at well under 10 basis points. You want someone to tell you what to do? Bill will do it. Follow his instructions and you'll be fine.
Portfolio 39-48: The Couch Potato Portfolio
50% Vanguard Total Stock Market Index Fund
50% Vanguard Inflation-Protected Securities Fund (TIPS)
Guess who else will tell you what do? Scott Burns will. He offers 9 portfolios, ranging from 2 funds to 10 funds. You just have to choose how much complexity you're willing to deal with for some additional diversification. If there are 5 funds, each fund makes up 1/5 of the portfolio and so forth. He likes TIPS, international bonds, and energy stocks. Given the returns of energy stocks over the last decade (1.6% a year as of January 2020), that idea hasn't aged well.
Portfolio 49-58: The Ultimate Buy and Hold Portfolio
6% Vanguard 500 Index Fund
6% Vanguard Value Index Fund
6% Vanguard Small Value Index Fund
6% Vanguard REIT Index Fund
6% Total International Stock Market Index Fund
6% Vanguard International Value Fund
6% Vanguard International Small Cap Index Fund
6% An International Small Cap Value Fund
6% Bridgeway Ultra-Small Market Fund
6% Vanguard Emerging Markets Index Fund
40% Vanguard Short (or intermediate) Term Bond Index Fund
Paul Merriman will also tell you what to do. 10 equity asset classes and 1 fixed income asset class. Will it work? Sure. Will it be a pain to rebalance and allocate across all your accounts? Absolutely. Will it beat some of the simpler options above over your investment horizon? No one knows. In case you don't like the “Ultimate” portfolio, Paul has three others that are equally complicated, ranging from 100% stocks in 9 assets classes to 40% stock in 12 asset classes.
Portfolio 59: The Talmud Portfolio
1/3 Vanguard Total Stock Market Index Fund
1/3 Vanguard REIT Index Fund
1/3 Vanguard Total Bond Market Index Fund
Apparently, the Talmud, a central text of Rabbinic Judaism, had some portfolio advice, “Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.” This is one author's low-cost vision of that ancient portfolio. A little REIT-heavy for my taste.
Portfolio 60: The Permanent Portfolio
25% Vanguard Total Stock Market Index Fund
25% Vanguard Long-term Treasury Fund
25% Gold ETF (GLD) or, better yet, gold bullion
25% Vanguard Prime Money Market Fund
Here's another popular portfolio, this one from Harry Browne. He felt you wanted a portfolio that would do well in prosperity (stocks), deflation (long treasuries), inflation (gold), and “tight money or recession” (cash). There are lots of variations. There is even a one-stop-shop mutual fund for 84 basis points that's been around since 1982 with 15-year average returns of a little over 6%. Not only did it lose money in 2008, it managed to do so in 2013 as well. Poor performance (4.8%) over the last decade while the US stock market has been roaring demonstrates its severe tracking error.
Portfolios 61-84: FPL Portfolios
12% US Large
12% US Value
12% US Targeted Value Stocks
6% International Value Stocks
6% Global REITs
3% International Small Value
3% International Small Stocks
1.8% Emerging Market Stocks
1.8% Emerging Markets Value Stocks
2.4% Emerging Market Small Stocks
10% One Year Government Fixed Income
10% Short Term Government Fixed Income
10% Two Year Global Fixed Income
10% Five Year Global Fixed Income
FPL, one of the sponsors of this blog, has a whole bunch of model portfolios, made up mostly of DFA funds. This one is 60% stock but there are 9 more ranging from 10% stocks to 100% stock. There are also other folios including 3 fixed income ones (made up from funds of DFA, PIMCO, and various ETFs), a low beta portfolio, and 10 equity portfolios (made up from funds of DFA, Wisdom Tree, and Vanguard). Many other DFA-authorized asset management firms have similar portfolios, many of which they consider proprietary because they're so awesome. A common theme among them is complexity and factor tilts.
Portfolios 85-108: The Sensible IRA Portfolio #4
33% US Stocks
15% International Stocks
6% Emerging Markets Stocks
6% REITs
40% Fixed Income
Darrell Armuth at Sensible Portfolios, who used to advertise with me, runs a financial advisory firm that uses DFA funds. He offers 6 portfolios suitable for IRAs, this is one of them. He also offers 6 more suitable for a taxable account, 6 environmentally friendly portfolios, and 6 “express portfolios” designed for smaller accounts for just $500 a year. Unfortunately, when I went to update this post, I found that these portfolios were no longer listed on the website. I guess you have to hire him now to get the secret sauce.
Portfolios 109-131: Sheltered Sam 60/40 Portfolio
12% Vanguard 500 Index Fund
15% Vanguard Value Index Fund
3% Vanguard Small Cap Index Fund
9% Vanguard Small Cap Value Index Fund
6% Vanguard REIT Index Fund
1.8% Vanguard Precious Metals Fund
3% Vanguard European Stock Index Fund
3% Vanguard Pacific Stock Index Fund
3% Vanguard Emerging Markets Index Fund
4.2% Vanguard International Value Fund
24% Vanguard Short-term Corporate Bond Fund
16% TIPS (he recommends you buy the 2032 ones yielding 3.375% real, good luck with that)
William Bernstein, MD, in his classic The Four Pillars of Investing, had four investors, Sheltered Sam, whose assets were all in IRAs and 401Ks, Taxable Ted, whose assets were not, In-Between Ida who was partially sheltered, and Young Yvonne who didn't have much at all. He listed out 11 portfolios for Ted and 11 for Sam, ranging from 0% stocks to 100% stock. He listed one more for Ida, and then showed how Yvonne could gradually grow into Sam's portfolio. I've just listed one of them. If you want to see the other 22, buy the book or check it out at the library.
Portfolio 132: The Aronson Family Taxable Portfolio
5% Vanguard Total Stock Market Index Fund
15% Vanguard 500 Index Fund
10% Vanguard Extended Market Index Fund
5% Vanguard Small Cap Growth Index Fund
5% Vanguard Small Cap Value Index Fund
5% Vanguard European Stock Index Fund
15% Vanguard Pacific Stock Index Fund
10% Vanguard Emerging Markets Index Fund
15% Vanguard Inflation-Protected Securities Fund (TIPS)
10% Vanguard Long-Term Treasury Fund
5% Vanguard High Yield Bond Fund
This is apparently how Ted Aronson (who manages $25 Billion) invests his family's taxable money. I'm not sure I understand the logic behind some of its components. That said, even it is held for a long period of time, I'm sure it will work just fine. As of January 2o20, it has 10-year returns of around 8.3%, which is 1.4% worse than Balanced Index fund (see portfolio 4.)
Portfolio 133: The Warren Buffett Portfolio
100% Berkshire Hathaway Stock
Warren Buffett is admired by all as a great investor. You can have him manage your money if you'd like, and all you have to do is buy a single stock. 15-year returns are about 9.5% per year according to Morningstar. It's a simple solution, and you get a free ticket to the coveted annual meeting.
Portfolio 134: The Unconventional Success Portfolio
30% Vanguard Total Stock Market Index Fund
20% Vanguard REIT Index Fund
15% Vanguard Developed Markets Index Fund
5% Vanguard Emerging Markets Index Fund
15% Vanguard Intermediate Treasury Bond Fund
15% Vanguard Inflation-Protected Securities Fund (TIPS)
This is an example of an implementation of the portfolio put forth by David Swensen, the Yale investment guru, in his classic Unconventional Success. It's fine, like the other 133 portfolios before it. Its main criticism is that it is awfully REIT heavy.
Portfolio 135-137: The Wellesley Portfolio
100% Vanguard Wellesley Income Fund
This actively-managed Vanguard fund has been around since 1970, and despite only being 35% stock, has averaged almost 10% a year, while charging just 16 basis points. The main knock against it, aside from being actively managed, is that it isn't particularly diversified. It holds just 68 stocks, mostly large value stocks, and 1131 bonds. Don't expect 10%, or even 7%, a year out of this bond heavy fund going forward at today's low interest rates.
That said, it's hard to argue with success. Other actively managed funds that could be considered a reasonable portfolio all by themselves include the Wellington Fund (established 1929, 63/37, 10-year returns of 9.9%, ER 0.17%) and Dodge and Cox Balanced Fund (established 1931, 68/32, 10-year returns of 10.33%, ER 0.53%). There are probably more. I'm not a big fan of active management, but it's hard to nitpick funds that survived The Great Depression. Clearly, they're doing something right.
Portfolio 138-146: The Advanced Second Grader Aggressive Portfolio
54% Vanguard Total Stock Market Index Fund
27% Vanguard Total International Stock Index Fund
6% Vanguard REIT Index Fund
3% Precious Metals
10% Total Bond Market Index Fund
Allan Roth, in his excellent How A Second Grader Beats Wall Street, lists a conservative, a moderate, and an aggressive allocation for a second grader portfolio (3 Funds), an advanced Second Grader Portfolio (4-5 funds), and an alternative advanced Second Grader Portfolio (uses CDs instead of the Total Bond Market Fund). That's 9 more portfolios you could use without having to come up with your own!
Portfolios 147-150: The Dan Wiener Income Portfolio
Dan Wiener sells a newsletter to Vanguard investors. For just $100 a year he'll reveal his super-secret portfolios composed of various Vanguard funds. I can't tell you what the portfolios currently hold (there are quite a few actively-managed funds and the allocations change from time to time), but I can tell you the performance hasn't been terrible.
The Growth version has returns of 9.61% since 1999, almost 3.5% a year better than the 3 fund portfolio and about 2% better than a typical slice and dice portfolio like the Sheltered Sam portfolio, although you do expect higher returns due to significantly higher stock allocation. The less-aggressive “Income” version has returns of 5.52% a year. There is also a “Conservative Growth” and an “Index Fund Growth” portfolio whose returns are similar to slice and dice type portfolios.
While I'm certain there is a survivor bias effect here, it's still a pretty decent long-term record of actively-managed mutual fund picking. It helps that he mostly limits himself to low-cost Vanguard funds, of course.
Portfolio 151: The Larry Portfolio
32% DFA Small Value Fund
68% DFA One Year Treasury Fund
Larry Swedroe is smarter than me I'm sure. He is a huge fan of taking your risk on the equity side. He is a true believer in the small and value factors of Fama and French, and carries the idea behind a slice and dice portfolio to the extreme. He holds no fear of tracking error or the lack of traditional diversification, the primary downsides of investing like this. It is more important to him to diversify among “factors” like small, value, and momentum. It's not my cup of tea, but at least he puts his money where his mouth is. [Update: I'm told that Larry actually splits his equities between US Small Value, Developed Markets Small Value, and Emerging Markets Value, but you get the point- a very heavy small value tilt.]
Portfolios 152-165: The Rick Ferri Multi-Asset Class Pre-Retiree Portfolio
23% Vanguard Total Stock Market Index Fund
5% IShares S&P 600 Barra Value (IJS)
2% Bridgeway Ultra Small Company Market (BRSIX)
5% Vanguard REIT Index Fund
3% Vanguard Pacific Stock Index Fund
3% Vanguard European Stock Index Fund
2% Vanguard International Explorer Fund (he'd probably use the Vanguard International Small Index Fund now)
2% DFA Emerging Markets Fund
10% IShares Lehman Aggregate Bond Fund (AGG)
13% Vanguard Investment Grade Short Term Bond Fund
10% Vanguard High Yield Corporate Bond Fund
10% Vanguard Inflation-Protected Securities Fund (TIPS)
5% Payden Emerging Markets Bond Fund (PYEMX)
2% Vanguard Prime Money Market Fund
In another classic book, All About Asset Allocation, Rick Ferri suggests a Basic and a Multi-Asset Class investment portfolio for early savers, mid-life accumulators, pre-retirees/active retirees, and mature retirees, for a total of 8 portfolios. Rick isn't afraid to look for the “best of class” fund for any given asset class. Lots of great portfolio ideas here. See Portfolios 170-173 for more portfolios from Rick Ferri.
Portfolio 166: Frank Armstrong's Ideal Index Portfolio
7% Vanguard Total Stock Market Index Fund
9% Vanguard Value Index Fund
6% Vanguard Small Cap Index Fund
9% Vanguard Small Value Index Fund
31% Vanguard Total International Stock Market Index Fund
8% Vanguard REIT Index Fund
30% Vanguard Short Term Bond Index Fund
You can read more about this one in Armstrong's The Informed Investor. A nice heavy small/value tilt, but only domestically.
Portfolio 167: The 7/12 Portfolio
1/12 Vanguard 500 Index Fund
1/12 Vanguard Mid-Cap Index Fund
1/12 Vanguard Small Cap Index Fund
1/12 Vanguard Developed Markets Index Fund
1/12 Vanguard Emerging Markets Index Fund
1/12 Vanguard REIT Index Fund
1/12 Natural Resources
1/12 Commodities
1/12 Vanguard Total Bond Market Index Fund
1/12Vanguard Inflation-Protected Securities Fund (TIPS)
1/12 Vanguard International Bond Index Fund
1/12 Vanguard Prime Money Market Fund
7 major asset classes, 12 funds, 8.33% a piece. Clever, huh. Craig Israelsen, a professor at prestigious Brigham Young University, advocates for this approach in his book 7 Twelve. He wants you to send him $75 to tell you how to use Vanguard Funds (or those of any other company) to implement the portfolio. Send me $50 and I'll tell you how to do it. If you've read this far, you know more about portfolio design than 95% of “financial advisors” out there.
Portfolio 168: My Parent's Portfolio
30% Vanguard Total Stock Market Fund
10% Vanguard Total International Stock Market Fund
5% Vanguard Small Value Index Fund
5% Vanguard REIT Index Fund
20% Vanguard Intermediate-Term Bond Index Fund
20% Vanguard Inflation-Protected Securities Fund
5% Vanguard Short Term Corporate Index Fund
5% Vanguard Prime Money Market Fund
I help my parents manage their nest egg. I'm twice as smart and 2.5% per year cheaper than the last guy. This 50/50 portfolio is a good balance between keeping it simple and understandable, but still getting the benefit of a multi-asset class portfolio. It lost 18% in 2008, and more than gained it back in 2009. Returns are about 7% over the last 15 years, including the 2008 debacle.
Portfolio 169: The 2014 White Coat Investor Portfolio
17.5% Vanguard Total Stock Market Index Fund
10% TSP S Fund
5% Vanguard Value Index Fund
5% Vanguard Small Value Index Fund
7.5% Vanguard REIT Index Fund
5% Bridgeway Ultra-Small Company Market Fund (BRSIX)
15% Vanguard Total International Stock Market Fund/TSP I Fund
5% Vanguard Emerging Markets Index Fund
5% Vanguard International Small Index Fund
10% Schwab TIPS ETF
10% TSP G Fund
5% Peer 2 Peer Lending Securities (mostly Lending Club)
I'm more than willing to admit that it is unlikely that this portfolio will be the best of the 150 portfolios listed here over my investment horizon. However, since my crystal ball is cloudy, and since I'm convinced that sticking with any good portfolio matters far more than which good portfolio you pick, I'm going to stick with it (and have with minimal changes in the last decade, leading me to an annualized after-tax, after-expense return of around 9.5% [as of 1/11/2013]). See Portfolio 200 for my updated portfolio.
Portfolios 170-173: Rick Ferri's Core-4
48% Vanguard Total Stock Market Fund
24% Vanguard Total International Stock Market Fund
8% Vanguard REIT Index Fund
20% Vanguard Total Bond Market Fund
All four of these portfolios are really just a play off of Portfolio # 26, and range from 80/20 to 20/80. It's basically just three-fund plus a little REIT. It's too much REIT for some, too little real estate for others, but for a precious few, it's just right.
Portfolio 174: The Golden Butterfly
- 20% Vanguard Total Stock Market Index Fund
- 20% Vanguard Small Cap Value Index Fund
- 20% Vanguard Long Term Bond Index Fund
- 20% Vanguard Short Term Bond Index Fund
- 20% SPDR Gold Shares ETF (GLD)
This new-fangled portfolio from Tyler at Portfolio Charts claims to “match the high return of the Total Stock Market [Portfolio # 2] with the low volatility of the Permanent Portfolio [Portfolio # 60]”. I don't think it actually does that given its heavy emphasis on bonds and gold. Since TSM has outperformed all of those other assets classes over the last decade, there is no way this portfolio has matched its return in that time period. But I'm sure it has been less volatile.
Portfolio 175: The All Weather Portfolio
- 30% Vanguard Total Stock Market Index Fund
- 40% Vanguard Long Term Bond Index Fund
- 15% Vanguard Intermediate Term Bond Index Fund
- 7.5% Commodities
- 7.5% SPDR Gold Shares ETF (GLD)
A Ray Dalio creation, this one is also an attempt at improving the returns of the Permanent Portfolio while still improving bear market performance. The idea is that Growth can be up or down and inflation can be up or down, so you should pick something that does well in all four combinations of those factors. Of course, he seems to think Gold will do well in 3 of those 4 situations, but it makes for pretty fancy charts. If you really can get similar performance with lower volatility, that would allow you a higher withdrawal rate in retirement.
Portfolios 176-178: Kiplinger Portfolios
- 20% Dodge & Cox Stock Fund
- 20% Primecap Odyssey Growth
- 15% DoubleLine Total Return Bond
- 15% Parnassus Mid Cap
- 10% Fidelity International Growth
- 10% Oakmark International
- 10% T. Rowe Price QM U.S. Small-Cap Growth Equity Fund
Kiplinger published 3 portfolios for various time horizons. This one is the long-term (11+ years) one but they are all composed of actively managed funds, so I don't really like any of them. I included them because they're a good example of what you get from the financial media and many crummy 401(k)s. There's usually lots of back-testing involved and as a rule, these types of portfolios had great performance in the years prior to them being published.
Portfolios 179-183: Fidelity Index Focused Models
- 35% Fidelity 500 Index Fund
- 3% Fidelity Mid Cap Index Fund
- 4% Fidelity Small Cap Index Fund
- 18% Fidelity Ex-US Global Index Fund
- 35% Fidelity US Bond Index Fund
- 3% Fidelity Conservative US Bond Fund
- 2% Fidelity Core Money Market Fund
Fidelity has published lots of portfolio models, including 5 using index funds from 20/80 to 80/20. The one above is the 60/40 one. I think it's overly complicated. Not only are there four asset classes with less than 5% of the portfolio in them, but it uses a less diversified 500 index fund instead of a total stock market fund. In reality, this is just a fancied-up three fund portfolio. That said, it's low-cost, broadly-diversified and better than the vast majority of portfolios I've seen.
Portfolios 184-188: Betterment Portfolios
- 15% Vanguard US Total Stock Market Index Fund
- 15% Vanguard Value Index Fund
- 15% Vanguard Developed Markets Index Fund
- 6% Vanguard Emerging Markets Index Fund
- 5% Vanguard Mid Cap Index Fund
- 4% Vanguard Small Cap Value Index Fund
- 20% Vanguard Inflation-Protected Securities Fund
- 20% Vanguard Short Term Treasury Index Fund
This one comes from Betterment, at least back in 2012. They don't list their portfolios out now on their website, but they're basically variations of the above with different stock:bond ratios. You'll notice the heavy value tilts, a significant small tilt, and previously focus on safety on the bond side. It looks like they also include junk bonds and international bonds now in their portfolios.
Portfolios 189-197: SoFi Portfolios
- 28% Vanguard US Total Stock Market Index Fund
- 24% Vanguard Total International Stock Market Index Fund
- 8% Vanguard Emerging Markets Index Fund
- 20% Vanguard Total Bond Market Index Fund
- 10% Vanguard Short Term Bond Index Fund
- 5% SPDR Short-Term High-Yield Bond ETF
- 5% Vanguard Emerging Markets Government Bond Index Fund
SoFi also runs a roboadvisor like service that offers 9 portfolios from conservative to aggressive, for retirement and taxable accounts. This is the moderate one for retirement accounts. I'm not sure exactly what funds they use, so I added appropriate funds for each listed asset class. It's a little odd to have EM bonds without developed markets bonds.
Portfolio 198: The Physician on FIRE Portfolio
- 60% US Stocks (with a tilt to small and value)
- 22.5% International Stocks (50 / 50 developed and emerging markets)
- 7.5% REIT (Real Estate Investment Trust)
- 10% Bond & Cash (mostly bond plus cash emergency fund)
Very aggressive, especially for a retiree. Low allocation to real estate too, although I keep hearing he may be increasing this a bit.
Portfolio 199: The Physician Philosopher Portfolio
- 45% Vanguard Institutional Index Fund
- 20% Vanguard Mid Cap Index Fund
- 20% Vanguard Small Cap Index Fund
- 15% International Stocks
This is what he had in his 403b a couple of years ago. More info on this portfolio here. Aggressive, but otherwise pretty Plain Jane aside from a small tilt.
Portfolio 200: The New White Coat Investor Portfolio
- 25% Vanguard Total Stock Market Fund
- 15% Vanguard Small Cap Value Index Fund
- 15% Vanguard Total International Stock Market Fund
- 5% Vanguard FTSE Ex-US Small Index Fund
- 10% Vanguard Inflation-Protected Securities Fund
- 10% TSP G Fund
- 5% Vanguard REIT Index Fund
- 5% Debt Real Estate (primarily private hard money lending funds)
- 10% Equity Real Estate (primarily private funds and syndications)
I simplified our asset allocation about three years ago. Aside from consolidating asset classes, the major change was swapping out peer to peer loans for hard money lending and adding a bit more real estate. But basically it's 60% stock (2/3s of which is US, 1/3 International), 20% bonds, and 20% real estate.
A good investment portfolio is broadly diversified, low-cost, mostly or completely passively managed, regularly rebalanced, and consistent with its owner's need, ability, and desire to take risk. Every portfolio (except the Kiplinger ones) in this post meets those qualifications. Pick one you like, or design your own. Just don't go looking for the best one. As Prussian General Karl Von Clausewitz said, “The enemy of a good plan is the dream of a perfect plan.”
What do you think about all these portfolios? Do you use one of these, or have you designed your own? Comment below!
I use the Larry portfolio #138. Although I have never read or heard of Larry suggesting all in on US small value for the stock side, maybe I missed it somewhere. He usually suggest your stock allocation be 50% US Small Value, 35% International Small Value and 15% Emerging Markets Value on the stock side. More recently he has pared down the stock side to 2 funds: US small value (BOSVX) and World ex US Targeted Value Portfolio (DWUSX) for those with access to these funds.
Regardless, I agree with picking a portfolio and asset allocation that you an personally stick with for the long haul. Skating where the puck was every year or 2 is a likely way to underperform, although isn’t that kind of the basis for Madsinger’s hot hand portfolio?
Yes, hot hand is based on momentum. Thanks for the details on Larry’s portfolio. I mostly just wanted to illustrate the idea behind an all small value portfolio. There can obviously be variations, just like most of these.
Beware of P2P (Lending Club). It is very tax inefficient. I’ve invested 250k+ over a period of 4 years in a taxable account and now the taxes are killing me. I’m paying high tax rates now at regular income tax rates and have carryforward tax losses that will last me for at least a decade. If I would do it again (which I won’t), it would be in an IRA account. The pre-tax return is acceptable but don’t pay a high tax rate on the interest earned today if you don’t have capital gains to be offset by the losses?
I have 168,000 invested in LC tax sheltered IRA that returns about 7.6%. My RMD forces withdrawal each year that’s fully taxable just like any other IRA acct. Still a great non-bond passive investment though…
Nice post. Can you do a post like this with Fidelity Funds? Thanks
Try this link….
http://www.bogleheads.org/wiki/Fidelity
It provides information on Vanguard funds and their closest Fidelity counterpart.
There are a handful of nice Fidelity funds you can substitute in for many of the Vanguard ones. And no, I’m not repeating this post using them. I’m embarrassed to say how long this one took.
I’m sure it did take time! Thanks for putting in the effort, your blog is a valuable resource.
how do you calculate your after fees and taxes return?
It’s easy when all your investments are in tax-protected accounts. I use XIRR and fees withdrawn from the account are just worked in.
https://www.whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
Vesalius beat me to the punch regarding the Larry Portfolio: You need two funds for the equity side of the Larry Portfolio now: BOSVX for the US SV And DWUSX for the international as it is a “core” fund combining developed markets SV and Emerging markets value.
Just curious as to why you consider 10% or more to be heavy on REITs. I personally have a 17% allocation which is equal to every other equity asset class in my portfolio. That said, I do split it between the vanguard index and TIAA-CREF real estate, which is much less volatile.
I don’t have a problem with a 17% real estate slice, but I think it is a lot to have just in REITs. I’d probably keep that to 10% or less, which you have. That’s just opinion though, no great data to base that opinion on.
Thanks for this, I was wondering too.
Really great post! I’ll refer to this every time I want to tinker so I can remind myself to go skiing instead.
Good idea. I had a great day skiing today. Could use a little more snow though.
Very informative post. Thank you!
I adopted Portfolio 148: The 7/12 Portfolio about 3 1/2 years ago in hopes of avoiding another major meltdown just before retirement. So far it has worked fine with the expected returns, though commodities have certainly been out of favor lately. That said, many other slices have outperformed, so it’s worked as designed. The hardest thing about the portfolio is sitting on my hands while I wait to rebalance annually!
I consider The 7/12 Portfolio to work well for the “passive” portion of my portfolio. However, I am struggling to find suitable investments for the “active” portion of my portfolio – namely business ventures and investment real estate. This means my “active” portfolio currently sits in cash, which is going nowhere. I’m optimistic I will find the right investments in due time.
Why not move the active portion into the passive portion until you see a reason to take some out?
I think it is Michael LeBoeuf that said “Invest your money passively and your time actively.”
I have portfolio # 26. Did great last year, but, as you pointed out, its heavy with big caps, and from what I gather, small caps crushed it last year.
WCI,
Can you still contribute towards your TSP? Or is it what remains from your active duty time?
The TSP will accept rollovers from traditional IRAs or 401Ks, but I can’t make any new contributions to it. I haven’t yet had an IRA/401K to roll over into it, but may in the future. The real downside of the TSP is the very limited distribution options. Hopefully they’ll be better in 30 years.
Thanks for a very useful article on 150 portfolios! I have been in DFA funds for over 17 years now: US large growth, US large value, US small growth, US small value, Int’l large growth, Int’l large value, Int’l small growth, Int’l small value, (about 12% each), and the other 4% or so emerging markets. I think of my and my wife’s Social Security and my VA retirement (13 years) as “bond-like.” I also have 250 acres of timberland in Mississippi, which I also consider bond-like, albeit illiquid (short explanation: bought back my deceased Granddad’s old cotton farm and planted pine trees). When I was at the VA for the last 13 years of my career, I maxed out TSP. You CANNOT beat the fees and match! I made the asset allocation easy: 1/3 C fund, 1/3 S fund, and 1/3 I fund; no G or F funds. Agree with you that TSP’s distribution options were very limited; I think they have improved them since I retired. I just rolled the whole TSP over into my DFA IRA/Keogh plans (which had been rolled together previously). Miss those low TSP fees! Keep up the excellent work! Young docs will profit from it (literally)!
I have to stay within my 401K but right now it looks like this:
Vanguard Inflation Protected Securities (Bonds) 20%
Vanguard Institutional (Large) 30%
Fidelity Spartan Market (Mid) 15%
Northern Small Capital (Small) 15%
Fidelity Spartan International 20%
The only one without super low fees is the Northern Small Capital. Wish I could use Vanguard Total Market and Total Bond as well as Vanguard International. No options for REITS
Looks reasonable to me.
FYI, I believe that Vanguard Small Cap Value Index Fund in the Sheltered Sam portfolio should be 9% and not 10.5%
You’re probably right. I’ve loaned out the book so I can’t double check. Thank you for the correction.
White Coat,
I enjoyed the article. I can’t believe someone has documented all these model portfolios over the years. It doesn’t surprise me in the least bit that there are 150+ of them! Way to go.
Just 3 quick thoughts:
1) All the allocations look more or less reasonable, all but one that is. And that would be the 100% Small Cap Value mix that is 2/3 in bonds. That is not diversified under any reasonable definition of the term, and it is completely oxymoronic – to have that much in bonds obviously speaks to behavioral concerns over temporary losses…will those same nervous nellies not throw in the towel the next time small value stocks underperform the market in a meaningful way for a five+ year stretch? I don’t think they will…I know they will.
2) Those 12+ fund component DFA portfolios look like something ripped from the pages of a 2003 DFA Advisor Conference. They aren’t really representative of how the majority of advisors and wealth managers are (or should be) using DFA funds today. Take, for example, a balanced portfolio that is mildly tilted to small and value, contains REITs, and short/intermediate government and corporate bonds. You could get there with just 4 funds:
36% DFA US Core 2
18% DFA World exUS Core
06% DFA Global REIT
40% DFA Investment Grade Bond
…you hold every stock/bond contained in those two-dozen fund monstrosities with a fraction of the complexity.
Or for someone preferring a more tilted stock allocation offset with shorter-term bonds:
36% DFA US Vector
18% DFA Int’l Vector
06% DFA EM Core
40% DFA Five-Year Global
…again, virtually every publicly traded stock, a broad cross section of short-term, high-quality bonds in two dozen different countries, all with much less fuss.
3) I may have missed it, but when it comes to Vanguard, you can pretty confidently stock with just Vanguard Total Stock Index, Vanguard FTSE World exUS Stock Index, Vanguard US Small Value Index, and Vanguard FTSE World exUS Small Cap Index on the stock side. If going the REIT route, SPDR Global REIT is the only self-contained global portfolio I know of, so you’d have to break ranks there. On bonds, either ST Bond Index or Total Bond Index fit fine. No need to get more complex than that. In 75/25 (TSM/SV) blends, you can mimic the first portfolio I outlined above, in 50/50 (TSM/SV) blends, you can get close to the second. IMO, all the other Vanguard funds can be tossed aside.
Eric
I think all of those portfolios look great Eric. I like some of the innovations DFA has made over the last few years with the Vector/Core funds. It does make things simpler.
Take your concerns with the Larry Portfolio up with Larry Swedroe. His theory is basically “Take your risk on the equity side.” So very safe fixed income, and very risky equities. If you believe that small and value will outperform, well, put your money where your mouth is. It’s obviously not a portfolio I think I can stay the course with, but that doesn’t mean no one can.
eric,
I think you need to double check your market history.
You should also look how this strategy performed post 1992 when risk factors were first introduced and since the late 90s when Larry formulated it.
Steve,
Just what market history should I “double check”? Size and value have persisted in post-1992 research sample, interest rates have collapsed providing a one-time bump for bond-heavy portfolios (and long-bonds in particular), and under-diversified asset allocations are as inadvisable today as they have always been. Have I left something out?
White Coat,
Won’t be taking anything up with Larry. He’s stuck on it and there’s no reasoning with him. Fortunately no other advisor (or DFA for that matter) thinks all-small value portfolios make any sense, so it’s not even an issue worth really addressing. Common sense tells you that purposely excluding about 70% of publicly traded stocks is not diversified, no matter how many “factors” those remaining few securities are exposed to.
The whole advantage of diversifying more broadly by asset class, or “tilting” your portfolio towards smaller/more value-oriented stocks is to correct for the extreme large cap and growth bias of cap weighted total stock indexes. That size/value are unique risk/return factors that improve expected portfolio efficiency is just icing on the cake. To intentionally “turn that problem upside down”, and concentrate everything in the other end of the market (SV) just makes the same mistake using other vehicles.
Remember, the great advantage of capital markets is they all all investors to spread their wealth out over a wide variety of global asset classes in a manner consistent with their unique risk/return objectives. Speculating, or betting on some small corner of the market (US blue-chip stocks, Int’l small cap value, etc.) is unnecessary to produce acceptable long-term returns, so why do it? As Merton Miller said, “diversification is your buddy.”
To go one step further and hold the minimal amount of SV possible so one can load up on low-return fixed income (and a few individual securities at that!) in an attempt to avoid inevitable periods of short-term volatility really is the antithesis of sensible investing. The one universal tenant of investing is “risk/return is related”, trying to bet big on small slices of the market to avoid this reality goes against every prudent investing principle you can think of.
Thankfully, in a year or two, we’ll have moved on from this gimmicky portfolio approach just as we have with the Permanent Portfolio and so many others. And another 10,000 authored posts on Bogleheads discussing the “Larry portfolio” won’t change this a bit. For all the rumblings a few years ago, we don’t, for example, hear anymore about commodities or how “they’ve never lost value in a year along with bonds” anymore, do we?
Fads and extreme portfolios come and go…passive investing, broad diversification, targeting sources of expected return, keeping costs low, rebalancing periodically, behaving sensibly (changes based on personal circumstances and not market “developments”) – those never change.
White Coat,
Great article. I am only 2 years into retirement, but plan to stick with my 20 dividend payers for my income. The other 2/3 is in a growth bucket that is being whittled down to either 33/33/33 of VTSAX (TSM), VWENX (Wellington), & VWIAX, or I may go 50/25/25 of the same until the over-valued bond market comes in a bit.
fd
I find it interesting that you are retired, talking about a portfolio that is something like 85% stock, and worried about the bond market. Be sure to consider how your retirement would be affected by a 40% drop in the value of your portfolio. Given your age, I’m sure you’ve been through at least a couple of bear markets, so you’re probably well aware of your own risk tolerance, but that portfolio is probably more than I could handle in a bad stock bear market as a retiree.
Keep in mind also the fact that all of your stock investments are basically invested in the same stocks. No developed markets, no EM, very little SV, very little midcaps, very little REITs etc. You may own lots of different stocks, but the correlation between them will be pretty high.
White Coat,
To expand further right now I am 100% in stocks, so when I get down to 85%, it’s not really because I need to. What makes my plan work is the fact that I only need the INCOME from my 20 stocks, so whether the market takes a dive or not will not affect my income, provided the dividend payers hold up. A good portion of them have been increasing their dividends for 40+ years, so they have held up pretty well. Another large section is from REITS, which are a little more volatile, but with the growth from the other increased dividends it has pretty much averaged out to a pretty constant 6.3%. The very good news is that this income is less than 2% withdraw from my total portfolio, so even if I did need to pull some money from the growth side to shore up a dividend payer or two (which hasn’t happened so far) it would not be a problem. At age 62 I still have about 4 years until I start taking SS, at which time the situation will be even better.
Thanks for your great articles and good luck on your book.
Dividends get cut all the time. But I agree that if you are spending less than 2% of your portfolio each year, your portfolio is likely to last a very long time, probably forever. I would argue your income approach to investing, rather than a more theoretically sound total return approach, lead you to work longer than you otherwise had to and now to spend less than you otherwise safely could. It is a very conservative approach, but one that you can obviously afford to take.
To be clear I don’t advocate, and did not use myself, a dividend approach to the accumulation phase of my investing. I do agree that the total return approach (using index funds) is the way to go pre-retirement, however once you get into retirement your thinking needs to change — many argue on this point, but the logic is quite simple. When you are accumulating stocks, having the market go down on a correction, leads you to buy stocks on sale, at least in your equity portfolio, and you can pretty much ride out any of these downturns, if they do not happen too close to your retirement. Prior to retirement your fix for this is simple, just work 2 or 3 or 5 years longer, and wait for the market correction, or until you accumulate the necessary funds.
Once you are in retirement, downturns are not your friend, so you need to protect having to sell low from a total return type of investing approach as you can go broke or seriously damage your principal quite quickly. In this low yield bond environment many are finding out (I would suspect) that they just can’t get the income they need from the bond side of the equation, so they are forced to sell their equity side investments. Of course in years like the last 4, this is not really a problem, but going forward I fear will not be all roses.
I wish I could have gotten my retirement package at 55, but as it was I had to wait until 60.
Many like Pfau have shown that the “sound total return” approach is not all that it is cracked up to be and may not be able to even support 4% going forward. When he adds a secure income to the approach (in his case he uses annuities) and actually increases the equity exposure during retirement, he has found a much better result.
I have been saying for 2 or 3 years now that people who use any significant weighting in bonds over the next 20+ years will definitely need a larger portfolio. I have always been 100% equities, which have served me quite well and have given me the ability to only need 2% of my modest size portfolio.
In a lot of cases Social Security gives you more than enough exposure to a “bond like” income, and if you also have a pension then so much the better. Adding more bonds to an income stream that is already essentially 50-90% bonds already is just crazy IMHO.
Sounds like you’ve thought this through sufficiently to make a wise decision on the subject to me. I don’t have a problem with a SPIA + equities retirement portfolio in someone who knows they can tolerate the fluctuations of the equity markets. I hope you’re right about future stock vs bond performance (i.e. that it looks like the past). Hedging that bet is one of the reasons my portfolio has 25% bonds.
Actually,
I took a look at my Morningstar tracking portfolio of my income bucket and it seems the total return in 2013 was 15% and in 2012 was 13.3%, so even on that basis pulling 6.3% is not all that bad.
“Dividends get cut all the time.”
If you look at the actual data, you will see that dividend payments are very stable and growing from year to year, and over time. Capital gains on the other hand are much more volatile and unpredictable.
I agree capital gains are more volatile and more unpredictable than dividends.
I disagree that dividends are very stable and grow from year to year. 102 of the 500 S&P funds cut their dividends over a 15 month period in 2008-2009.
http://latimesblogs.latimes.com/money_co/2009/03/wells-dividen-1.html
The attraction to dividends is an interesting thing. Not only does it make investing less tax-efficient, but data would suggest it isn’t even the most best way to get a value tilt which is its main long-term benefit.
White Coat: With all due respect I would have to disagree with that argument, which is commonly made by the likes of Larry Swedroe etc. It is a great marketing strategy for those selling what he is selling but it is not empirically correct or backed by a wide range of research. Many investors have fallen for these arguments against dividends as presented in this gem: https://www.forbes.com/sites/baldwin/2013/03/18/dumb-idea-dividends-are-good-for-you/#21e0b8483785
The reality is that there is a large body of knowledge demonstrating the importance of dividends over long measurement periods. This argument that those who invest with a dividend strategy dont understand corporate finance, or that a dividend strategy is not the “best way to attain a value tilt” are both incorrect. If one does a deep dive into accounting research dividends are the purest forms of profit. Reasonable payout and growing dividends are two of the characteristics that should characterize investors equity portfolios because it demonstrates a larger quality tilt, as well as gaining exposure to value. But it should be noted that portfolios can be built where dividends are targeted separately from other factors. Therefore dividend investors can own a dividend fund as well as value, and don’t necessarily have to be targeting value exclusively.
The notion that one should be managing a portfolio for total return and then focus on selling assets instead of targeting quality companies that pay dividends with growing dividend streams, is simply untrue.
Research which demonstrates the superiority of dividends.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=99580
https://www.bloomberg.com/view/articles/2016-04-11/dividends-are-a-better-bet-than-share-buybacks
http://seekingalpha.com/article/4020988-dividends-matter
http://www.tweedy.com/resources/library_docs/papers/HighDivStudyFUND2014Web.pdf
I guess we’ll have to agree to disagree. I apparently draw different conclusions from the data than you do. But if you want a dividend focus instead of a value focus? No big deal. This argument is like # 30 on the list of stuff that matters in regards to investing successfully. It just doesn’t matter much. Especially in a tax-protected account where the tax-inefficiency argument against a dividend-based approach goes away.
I dont think it is a matter of drawing different conclusions, If you are following Swedroe & Co, I think it is a matter of limiting ones data set to their already predetermined conclusions. Also I would take issue with the idea that dividend strategies are a replacement for value. In reality dividend strategies, especially dividend growth strategies, are targeting the quality factor. Value is a separate discussion. The research I have presented offers a different perspective that Swedroe and Co ignore including the research of Robert Novy Marx.
Targeting quality through dividend growth has paid off for investors over the past decade and will continue to do so, as proven by larger data sets.
An investor who purchased Vanguard Dividend Growth over the past decade would have received a return of 8.50% vs 7.62% for the S&P 500 index. What is particularly note worth however is that the dividend growth investor achieved this objective with 17.58% less volatility and 20.79% less beta, which led to a sharpe ratio which was 25% higher. Value strategies performed no better than their indexes on a risk adjusted basis. So the non dividend investor took more risk per unit of return, and yet received lower returns in absolute and risk adjusted terms. I have run the analysis in international markets and across market caps, dividends absolutely matter. But we can agree to disagree.
Weird. You think you’re right? That’s so weird for a disagreement.
At any rate, you love dividend stocks? Great. Buy as many as you want. I think they’re great investments. I own them all too. Seriously, I really don’t care. I think what you’re doing is reasonable and, with investing, reasonable is good enough. It’s kind of a fun argument but it just doesn’t matter much in whether or not I meet my financial goals. You buy your dividend-focused funds and I’ll buy some small value funds. Many roads to Dublin.
Good post. Stopped reading and started scanning around portfolio 120, as most normal individuals should.
Just thought I would point out that you can own either a BRK-A share or BRK-B share and attend the annual meeting. I might just do that!
http://www.berkshirehathaway.com/compab.pdf
I think you got the point of the post. There are lots of great portfolios out there, and you only need one.
You really only have to own a share of BRK-B for a few weeks to get your invitation. You don’t have to be a long term investor. It’s cheaper to just read the annual report if you want to see what Buffett is thinking, but I’m sure it would be fun to go to the meeting once.
When you suggest regularly rebalancing your portfolio, how often do you recommend doing this? Or what criteria do you use?
It turns out that infrequent rebalancing is better than frequent rebalancing to take advantage of momentum. So don’t feel like you need to be rebalancing every month. Many balanced funds and endowments do daily rebalancing, however. The two most frequent methods, both of which are fine, is to rebalance once a year (this is what I do with my parent’s portfolio which doesn’t receive regular contributions) or to rebalance when it exceeds the 5/25 rule.
https://www.whitecoatinvestor.com/rebalancing-the-525-rule/
For most young investors, you just rebalance by directing new contributions to the lagging asset classes.
Financial Dave-
So what you’re saying is your dividend stock investment strategy underperformed just buying a total stock market fund by 18% in 2013 and 3.5% in 2012?
It doesn’t appear to me that you’re any better at picking stocks than all the professional mutual fund managers out there who can’t keep up with an appropriate index fund. I mean instead of spending your 2%, or 3%, or 6.3% yield and having the value of your investment increase by 13%, or 12%, or 8.7%, you could have sold some shares, spent 4%, or 6%, or 12.6% and still had your investment increase by 20 or 25%. Focusing on yield instead of return is not a particularly efficient strategy when investing in stocks.
I don’t see dividend stock investing as some panacea in the distribution phase any more than in the accumulation phase. If you need guaranteed income, buy guaranteed income with a SPIA. If you don’t need guaranteed income, then use a total return approach with an asset allocation appropriate for your need, desire, and ability to take risk. But I see no benefit of non-guaranteed income. Money doesn’t care where it comes from, and capital gains spend just as well as dividends, sometimes better depending on taxes.
WC,
Dividend income is a form of guaranteed income, as Erin Botsford points out in her book “The Big Retirement Risk.” IMO, it is much more valuable than a SPIA, because at the end of the day you usually get very close to 100% of your principal back, where with the SPIA you just spend your principal in one year or 30, but when you are done it is gone. When used properly as a supplement to your other income streams in can be quite valuable.
To look at just two up years and say “ah” total return out performed is to not understand the problem. If you go back to 2007 in Jan. and start with $100k in a year when VTSMX did 5.5%, you take $6k out at the end of the year, you start with $99.5k in 2008 lose 37% and then take $6k out, now your principal is down to almost half ($56.7k to be exact.) Even adding back all the gains over the last 5 years (and the 33.3% last year) the principal is still in the hole by over $10k ($89.9k). Just think what would have happened if last year was a 30% down year instead of an up year. Result – portfolio value of $44.4k. Just stack another 5 years like the last five and you are broke! FYI, there are over 300 companies that have been increasing their dividends for 10 years or more, which means they road through 2008 and increased your dividend cash flow in the process, so it is not like there is a lack of companies to put together a diversified portfolio if you want.
I am not implying it is a panacea, only one of many strategies, that is too easily dismissed, without really understanding where it should be applied.
In my case I was happy to apply it because frankly bonds are terribly overvalued, and they give you no guaranteed income growth. SPIA’s are not really any better because their returns are based off the bond world and they really give you no “total return” at all, as most will be lucky to even get their money back. Instead I took the $150k that I made in the last two years from my growth fund and paid off my mortgage. This is definitely a better return than the SPIA would give me, even with only a 3% mortgage.
Let me leave you with one further thought and I won’t bother this thread any more. Above I showed how even a 100% equity portfolio would have been whittled down over the last 6 years. Most retirees will not have a 100% equity portfolio, so maybe it didn’t drop by 37% in 2008, but I think most will admit that in most cases when you add bonds to the mix your total return does NOT go up, it is less. Certainly this would appear to be what we are in for going forward from here. When you say that your typical retirement portfolio is going to do better than my dividend strategy you have to remember that my form of income guarantee uses 100% equities where most others might be a 50/50 mix. Even a poorly picked group of income stocks is going to have a pretty easy comparison against this type of portfolio.
Finally, in retirement it is NOT about downside price protection, it is about downside income protection.
Oh I agree that 2 years is cherry picking. But keep in mind YOU picked the two years, not me!
I agree that a portfolio of 100% stocks is likely, but not guaranteed, to outperform a portfolio of bonds and/or SPIAs over a long period of time. I disagree that using an income stock approach is “like guaranteed income.” It’s not. Dividends get cut. Look at the percentage of stocks that cut their dividends in 2008 or the Great Depression. That isn’t insignificant. If your dividends are no longer sufficient for your income needs, you’re then doing what a total return investor is doing…selling stocks.
Also, the reason you’re likely to still have all your money at death using a dividend stock approach whereas it is all gone with a SPIA is simple math. You’re only getting 2-3% a year out of the dividend stocks, but you may be getting 4, 6, 8, or even 10% out of the annuity, depending on when you buy it. An inflation indexed annuity bought at age 70 pays over 6%. So you’re looking at likely higher returns (because you’re taking more risk) and you’re spending less of the portfolio each year. Of course you’re going to end up with more money. The point of buying a SPIA isn’t to HAVE more money at death, it’s to spend more money before death without having to worry about running out of it.
This banter back and forth has been very interesting to read (as has the article). I’m a perfectionist and stress myself about being a perfect investor and need to take a chill pill. My portfolio is not listed and would likely be ripped apart by most smart people (which I always value constructive feedback).
I personally am set at 70% income producing real estate (half held personally and half via syndication but will grow the syndication side more over time), 20% individual dividend paying stocks that I add to when they are in distress and dip by 25% or more from high, and 10% cash and other. I want to replace 10% later in life from equity real estate to asset based lending via a fund returning around 8-11% interest.
I know the dividend stocks may not make the most tax sense and most experts would shame me with data, but I chose an approximately 40 stock portfolio for the following reasons:
1) Ability to extract benefit at any time, potentially when I may need it most (income stream of a few grand a month will most likely be there during recession. In 2008, my portfolio of stocks collectively increased income).
2) Emotional buffer because I’m a weakling, and I like to see consistent income growth even when stocks are volatile. Keeps me from being dumb.
3) Philosophical bent toward wanting to own companies who’s mission is to return as much money as possible to me. There are many SP500 companies that I have no desire to own
4) Strong data that dividend growers have historically outperformed by a notable margin.
I will not allow any single investment, other than equity in personally held property, to exceed 4% of my net worth.
A lot of work. I’d argue it’s overly complex (especially the individual stocks). But the overall asset allocation of 70% real estate, 20% stock, and 10% cash isn’t crazy.
It probably is overly complex I agree, but I work in the real estate crowdfunding/syndication industry so the deals I invest in usually appear right in front of me with no effort as opposed to me performing tons of due diligence. I never rebalance my stocks or pay much attention, and mostly use prefiltered criteria on when and what I buy to take emotion out of it.
It actually comforts me to hear you dont feel my asset allocation is overly crazy because I respect your opinion. This is what normally stresses me out, wondering if I’m a naive idiot drunk on past success because the vast majority of smart people I respect advocate for something that looks very very different. I guess time will tell but I figure I’m really young and can bounce back if I’m dead wrong.
Oh yea, for sure use your edge. Like I don’t really recommend website investing to most of my readers, but I’m heavily invested there because I know the space well.
Still, if your edge is real estate, I’m surprised you don’t just use an index fund (a dividend focused index fund if you must) for stocks.
No one is mentioning the fact that with the annuity you are taking a risk that your insurance company survives the Next Great Recession. Even in states that have a back-up fund you run the risk of a haircut.
I think Financial Dave has won the argument because it is psychologically hard to spend down a portfolio that is going down. Yes, you can add bonds but that just guarantees that you make much less money over the long haul.
One more point , White Coat. You criticized the contributor who had the portfolio 33% Total Stock; 33% Wellington; 33% Wellesley Income. You claimed it was too stock heavy for a retiree. Or maybe you said volatile. Fact is this is a fantastic portfolio because it only had a worse case year draw down of about 22%!
I’m not really here to win arguments. If you read this entire post plus all 445 comments on this post, you’ve received more of an education on portfolios than the vast majority of investors.
Awesome post. My wife and I are a 2 doctor couple who started practicing in our mid-30’s after we switched careers. I’ve read every post on your blog. It’s an understatement to say that I’ve learned a lot.
Credibility wise, you’re on top in my book. Thanks for your work. You’re helping a lot of people.
Hi WCI,
I’ve read this post and the recent thread on Bogleheads about the 3 Fund portfolio and the active discussion around it.
I asked this question on Bogleheads but did not garner many responses.
I am about 28-29 years away from retirement, very much in the accumulation phase and have decided that a tilted portfolio is right for me. I am willing to dedicate to it for decades and very well aware of the increased volatility. I also know that while there is potential for higher return, I might just be in the wrong place at the wrong time and the most important thing for me to do is save, save, save and control costs.
My problem is in deciding what actual funds to use. My IPS calls for 80 equities, 20 bonds, with a 3:2 US stocks to international stocks.
Currently, it is very close to this in TSM, TISM (in taxable) and TBM (all in tax deferred).
If I tilt, I don’t want to use more than 5-7 funds and here is how I’m thinking of doing it:
TSM 35%
TISM 15%
SC value 10%
SC international 10%
TBM 20%
I don’t want to sell my TSM/TISM and I can get to the tilt above by just adding new contributions. Also, I will address the tax issues of international by slowly churning over my TBM into SC international. I anticipate that all my bond holdings will be in taxable in the next couple of years.
Questions:
1. Do you recommend an EM fund in addition to this?
2. If you had to choose one bond fund to put in taxable account (and assuming tax deferred will be taken up by equities), what Vanguard fund would you choose?
Thanks again.
JS
1. There’s no right answer. Remember that you do hold lots of EM in TISM already, so the question is do you want to overweight it or not. It’s one of those crystal ball questions, and mine is cloudy.
2. You don’t mention your income or your state of residence, but if you’re like most docs on here, you’re in a pretty high bracket. You might wish to consider a muni fund such as the Vanguard Intermediate term Tax Exempt Fund. I Bonds are also a nice option in a taxable account, but you can only buy so many per year.
Thanks WCI,
I live in NJ. I don’t see that changing in the near future due to family reasons.
My marginal rate for 2014 will be 39.6 but using my 403b, 457b and mortgage interest and property tax deductions, I hope to get it down to 33%. I also have an S corp doing moonlighting that complicates things a bit.
I was considering Vanguard Int Tax Exempt. Thanks for the reassurance.
What are the TSP S and. TSP G funds in your portfolio?
Thanks!
https://www.tsp.gov/investmentfunds/fundsoverview/fundManagement.shtml
If you don’t know, they’re probably not an option for you.
They definitely are not an option for me. I wanted to know what they were to get an idea of comparable funds from Vanguard or other fund companies. Your link shows what the G is but it doesn’t share which index the S follows.
Steve,
The S fund can be tracked using FSEMX.
C fund – VINIX
I fund – EFA
fd
The John Wasik Nano Portfolio is also interesting:
20% Total U.S. Stock
20% Total International Stock
20% REIT
20% Total Bond
20% TIPS
Wow! That’s another REIT heavy one. After watching REITs drop 78% in 2008, I’d be pretty hesitant about that one.
WCI,
Thanks for the great post and great book. My wife and I are two physicians both starting out after residency. We are trying to decide whether to have a money manager or do it ourselves. One question I have about the above is where each of the asset classes fit into in terms of 403b/401a/457b, IRA, or taxable accounts. The main motivation for hiring someone instead of doing it ourselves would be to understand the best tax strategy for where to put the money. Buying the above funds with with any of the allocations you lists seems reasonable, but where it gets complicated for the average physician who knows a little about this stuff but not a lot is to know what accounts to place them in and how often to rebalance.
Thanks!
The rebalancing is easy. Every year or two is fine, but most of us with small portfolios relative to contributions can just rebalance with new contributions. Deciding what account to put each asset class in is a great time to use the Bogleheads forum to post your portfolio and get some suggestions. Much of the time it doesn’t matter much, believe it or not.
WCI- do you still rebalance when all assets in this market are down?
Yes.
And all of my retirement assets are not down in 2022.
US Stocks: Down
SV stocks: Down, but not as much
International stocks: Down
Public REITs: Down
Muni Bonds: Down
G Fund: Up
TIPS: Down
I Bonds: Up
Private equity real estate: Up
Private debt real estate: Up
If everything is going down or up together routinely, you have to wonder if you’re really diversified.
WCI, I just stumbled upon your site and would like to ask two questions, “What did you do with your portfolio when the market crashed in 2008?”
Are you aware there are two (2) Standard and Poor’s 500 Indexes, that own the same stocks?
Thank you for your courtesy in advance I appreciate you insights.
In 2008, I stayed the course, rebalanced my portfolio, and poured extra money into it. I also did some tax loss harvesting. I made out like a bandit in 2009 because of that.
I’m not sure I understand what you’re referring to when you say two S&P Indices. Could you elaborate? Are you referring to an equal weight one and a cap weighted one?
I dont have a lot of control over my 401k. I can pick roth vs traditional, and from a few different options. Ive picked the low expense options and happy so far. Do you get charged a lot in fees to rebalance?
What if I change investment options substantially a few months before I rebalance? Id essentially be moving 300k from a target fund to the vanguard small cap admiral. Would the rebalance charge me a percentage of the 300k?
I can control when I contribute (default is 750 per biweekly pay check). During significant market drops, like we just face with the pandemic, would it make sense to up that contribution to front load the money during the drop?
Also, do you have thoughts on roth vs traditional 401k if one is blessed enough to be in the top tax bracket? Most of my partners do traditional expecting to save on high state tax and be in a lower federal bracket later. One guy does the roth with the beleif that he will be in a higher tax bracket when he retires than now, because new higher tax brackets will be made.
thank you
Most 401(k)s have no fees to rebalance. Some limit how often you can do it.
Yes, it can make sense to invest more when the market is down. Even if it continues to fall, those dollars should enjoy better returns. That said, I wouldn’t hold money in cash that you mean to invest. It is generally best to stay fully invested and that includes investing as soon as you make the money.
https://www.whitecoatinvestor.com/does-dry-powder-work/
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Buy individual munis long term in taxable account. A rated or better
I disagree that individual munis are a good idea. I’m still waiting for someone to submit a Pro/Con guest post defending this position. The benefits of buying individual bonds hardly outweigh the downsides in my view.
What are your thoughts on :
1.QTAA by Mebane Faber? (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461)
Seems to keep the results of the S%P while reducing the volatility in half.
2.Or relative strength sector rotation?
Have you tried tactical asset allocation? Did you honestly compare it, after tax and expenses and the value of your time to simply buying and holding a reasonable portfolio? If so, and you’re happy with it, then fine, use it. I find most people (including me) just get sucked into trying to time the market and end up underperforming. If you want to do tactical asset allocation, it should be small moves at a low frequency at market extremes. If you’re changing asset allocation multiple times a year, I think you’re doing it wrong.
Tactical asset allocation and section rotation both require the ability to predict the future to be successful. I prefer an investing plan that works with my very cloudy crystal ball. But it’s your money, do what you like.
I haven’t tried sector rotation (thus the question). Have been recently reading up on it and wanted your thoughts on the concepts.
I think they’re a lot harder to do successfully, especially after costs (true costs) than their proponents would lead you to believe. That’s all. The fun thing about investing is that you don’t have to try everything. All you need is one successful way to invest.
I prefer a strategy that doesn’t require a working crystal ball to be successful. I know lots of millionaires. I don’t know any of them who got there by doing sector rotation or who invest their millions using that strategy. Not to say there isn’t someone out there, and there are lots of ways to invest, but that doesn’t seem to be one of the better ways to me.
If you decide to do tactical asset allocation, I recommend Bogle’s advice on the subject- moves should be infrequent (years between them) and involve a relatively small percentage of the portfolio (like < 15%.) Not a fan of sector rotation, but there are many roads to Dublin. Save enough for long enough and it may work out fine for you. Same thing I tell the whole life folks.