By Dr. Jim Dahle, WCI Founder[AUTHOR'S NOTE: This post originally ran in January 2014. Since then it has been one of the most popular posts on the blog (it's second actually, just behind the Backdoor Roth IRA Tutorial). There were 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 become even more popular, thanks in part to Taylor Larimore's book and in part to the outperformance since 2009 of the large growth stocks that make up a large part of a total market index fund.
I returned to this post in 2020, made a few comments to the various portfolios, and added another 50. Now, in 2025, we're republishing this piece once again after updating a few things here and there. 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 more than a decade ago.]
Designing the Perfect Investment Portfolio
As investors move from their investment childhood through their teenage years, many of them seem to 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 they 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 a 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, and more of this and less of that. Does it matter? Absolutely. Take a look at Madsinger's Monthly Report sometime, where a Bogleheads poster tracked the returns of a dozen balanced portfolios from 2010-2020. 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 that time span. 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.
More information here:
The 1 Portfolio Better Than Yours
The 15 Questions You Need to Answer to Build Your Investment Portfolio
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. William Bernstein likes to phrase it, skating to where the puck was.
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 needs, 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. In fact, I'm positive mine isn't the very best one. Neither I nor anyone else knows what the very best portfolio is going forward.
More information here:
The 90/10 Warren Buffett Portfolio?
Let’s Celebrate Taylor Larimore’s 100th Birthday by Asking Him 4 Questions About Money
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
When I originally wrote this in 2024, I said: “Don't laugh. I know a very successful two-physician couple who are seven years out of residency and who invest in nothing but this. They have a net worth in the $1 million-$2 million range.” After outsized US large growth performance in the last few years, now everybody loves this portfolio, and all kinds of people are adopting it. While it feels like performance-chasing to swap into it now, if you hold on to it for decades, it'll probably work out fine.
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 3,500 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 holding all the US stocks, like the Total Stock Market Portfolio, while also holding all of the stocks in pretty much all the other countries in the world that matter. Originally a little more expensive than building it from its component parts, its expense ratio is now down to just 6 basis points, basically free like any other Vanguard index fund portfolio.
Portfolios 4-5: Balanced Index Fund
100% Vanguard Balanced Index Fund
Prefer to diversify out of stocks? Want some bonds in the portfolio? How about this one? For seven basis points, you get all the stocks and bonds in the US in a 60/40 balance. It's still just one fund. If you're in a high tax bracket, you may prefer the Tax-Managed Balanced Fund (VTMFX), 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
For just 13 basis points, you get all the US (37.4%) and international (23.4%) stocks and all the US (27.2%) and international (12%) bonds wrapped up in a handy fixed asset allocation. In the past five years, this index fund has tilted slightly more to equities and slightly away from bonds. Want to be a little more (or a little less) aggressive? Then check out the “growth” (80/20), “conservative growth” (40/60), or “income” (20/80) versions 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 2040 Fund
100% Vanguard Target Retirement 2040 Fund
Don't like a static asset allocation? Don't want to have to decide 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 eight basis points, the 2040 Fund uses the same four funds that the Life Strategy funds use in a 76/34 allocation but gradually makes the asset allocation less aggressive as the years go by. The portfolios range from 90/10 (2050 and higher) to 20/80 (Income). If you want to add a short-term TIPS fund to the mix, go with 2025 or Income.
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 just four basis points, you can build your own balanced index fund. Want all the stocks, not just US ones? For a few extra basis points, you can substitute in Total World Index for Total Stock Market Index. For a few more basis points, you could use Total World plus Intermediate Term Tax-Exempt Fund (VWITX), or if you want to stay domestic in a taxable account, TSM plus the muni fund for about 6.5 basis points. Paul Merriman has a simple “two funds for life” approach that offsets a conservative Target Date Fund with an all-equity fund. There are lots of combinations.
Portfolio 26: The Three-Fund Portfolio
33.3% Vanguard Total Stock Market Fund
33.3% Vanguard Total International Stock Market Fund
33.3% Vanguard Total Bond Market Fund
A favorite among the Bogleheads, the three-fund portfolio gives you all the stocks and US bonds. Despite its popularity, you can see there is nothing particularly special about this portfolio compared to the other 25 above it. It is broadly diversified and low-cost, although it 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 (like Rick Ferri with his trademarked “Core-4” portfolio) add the Vanguard REIT index fund for its intermittently low correlation with the overall stock market. Others add the 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. Nowadays, maybe people just add a 5% slice of Bitcoin.
The possibilities are endless, especially once you start considering adding two, three, 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 a slightly higher cost. 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. You could also 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 and light on international stocks, and it 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 to do? Scott Burns will. He offers nine portfolios, ranging from two 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 five funds, each fund makes up 1/5 of the portfolio and so forth. He likes TIPS, international bonds, and energy stocks. Considering energy stocks have underperformed for most of the past decade (though it's been a little better the past few years), 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. That's 10 equity asset classes and one 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 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 nine asset classes to 40% stock in 12 asset classes.
Portfolio 59: The Talmud Portfolio
33.3% Vanguard Total Stock Market Index Fund
33.3% Vanguard REIT Index Fund
33.3% Vanguard Total Bond Market Index Fund
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. It's 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 82 basis points that's been around since 1982 with 15-year average returns of a little over 7%. Not only did it lose money in 2008, it managed to do so in 2013, 2015, and 2022 as well. From 2010-2020, it did rather poorly when compared to the roaring stock market, demonstrating its severe tracking error, but in five of the past six years, it's gained over 10% per year.
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 Capital Management, one of the sponsors of this blog, has a whole bunch of model portfolios, made up mostly of DFA funds. This one is 60% stocks but there are nine more ranging from 10% stocks to 100% stocks. There are also other folios, including three fixed-income ones (made up of funds of DFA, PIMCO, and various ETFs), a low-beta portfolio, and 10 equity portfolios (made up of 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 WCI, runs a financial advisory firm that uses DFA funds. He offers six portfolios suitable for IRAs; this is one of them. He also offers six more suitable for a taxable account, six environmentally friendly portfolios, and six “express portfolios” designed for smaller accounts. Unfortunately, when I went to update this post a few years ago, 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)
Dr. William Bernstein had four investors in his classic The Four Pillars of Investing: Sheltered Sam, whose assets were all in IRAs and 401(k)s; 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 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 $28 billion) invests his family's taxable money. I'm not sure I understand the logic behind some of its components. That said, if it is held for a long period of time, I'm sure it will work just fine. As of January 2025, it has 10-year returns of around 6.55%, which is 1.92% 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. It's a simple solution, and you get a free ticket to the coveted annual meeting. Note that he has told the trustee of the trust supporting his wife after his death to put 90% of it into the S&P 500 and 10% into Treasury bills.
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 37% stock, has averaged 9.1% a year, while charging 16 basis points. The main knock against it, aside from being actively managed, is that it isn't particularly diversified. It holds just 75 stocks, mostly large value stocks, and 1,280 bonds. Don't expect 10% a year out of this bond-heavy fund going forward.
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, 66/34, 10-year returns of 8.75%, expense ratio of 0.26%) and Dodge & Cox Balanced Fund (established 1931, 64/36, 10-year returns of 7.95%, expense ratio of 0.52%). 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 (three 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 nine more portfolios you could use without having to come up with your own!
Portfolios 147-150: The Dan Wiener Income Portfolio
The now semi-retired Dan Wiener used to sell a newsletter to Vanguard investors where he revealed his super-secret portfolios composed of various Vanguard funds. I can't tell you what the portfolios held (there were quite a few actively managed funds and the allocations changed from time to time), but I can tell you the performance wasn't terrible.
From 1999-2020, the growth version had returns of 9.61%, almost 3.5% a year better than the three-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 had returns of 5.52% a year. There was also a “conservative growth” and an “index fund growth” portfolio whose returns were 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 limited himself to low-cost Vanguard funds.
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 he 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. [AUTHOR'S NOTE: Update from 2020: 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—it's 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 multi-asset class investment portfolio for early savers, mid-life accumulators, pre-retirees/active retirees, and mature retirees—for a total of eight portfolios. Rick isn't afraid to look for the “best of class” fund for any given asset class. There are 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
8.33% Vanguard 500 Index Fund
8.33% Vanguard Mid-Cap Index Fund
8.33% Vanguard Small Cap Index Fund
8.33% Vanguard Developed Markets Index Fund
8.33% Vanguard Emerging Markets Index Fund
8.33% Vanguard REIT Index Fund
8.33% Natural Resources
8.33% Commodities
8.33% Vanguard Total Bond Market Index Fund
8.33% Vanguard Inflation-Protected Securities Fund (TIPS)
8.33% Vanguard International Bond Index Fund
8.33% Vanguard Prime Money Market Fund
Seven major asset classes, 12 funds, 8.33% a piece. Clever, huh? Craig Israelsen, a professor at the prestigious Brigham Young University, advocates for this approach in his book 7 Twelve. He wants you to send him $150 to tell you how to use Vanguard funds (or those of any other company) to implement the portfolio. Send me $100, and I'll tell you how to do it, too. 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 they used. This 50/50 portfolio is a good balance between keeping it simple and understandable, but it's 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% per year over the last 20 years, including the 2008 debacle, the COVID meltdown in 2020, and the worst year ever for bonds in 2022.
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 I have with minimal changes in the last decade). 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 they range from 80/20 to 20/80. It's basically just a three fund plus a little REIT. It's too much REIT for some and 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 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 asset 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 three of those four 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 three portfolios for various time horizons. This one is the long-term one (11+ years) 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 plenty of portfolio models, including five using index funds from 20/80 to 80/20. The one above is the 60/40 one—or at least what it looked like the last time we updated this piece in 2020. 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 how it looked back in 2012. You'll notice the heavy value tilts, a significant small tilt, and a previous focus on safety on the bond side. It looks like Betterment also includes 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 robo advisor-like service that offers nine portfolios—from conservative to aggressive—for retirement and taxable accounts. This was the moderate one for retirement accounts from a few years ago. I'm not sure exactly what funds it used, so I added appropriate funds for each listed asset class. It's a little odd to have emerging market bonds without developed market bonds.
Portfolio 198: The Leif Dahleen Portfolio
60% US stocks (with a tilt to small and value)
22.5% International stocks (50/50 developed and emerging markets)
7.5% REIT
10% Bond and cash (mostly bond plus cash emergency fund)
This is very aggressive, especially for a retiree. The last time we published this article, it also had low allocation to real estate, although he might have increased that asset class since.
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 403(b) a couple of years ago. It's aggressive, but otherwise, it's pretty plain, aside from a small tilt.
Portfolio 200: The Current White Coat Investor Portfolio
25% US Stocks (VTI and ITOT)
15% Small Value (AVUV and DFSV)
15% International Stocks (VXUS and IXUS)
5% International Small Value Stocks (AVDV and DISV)
10% Inflation protected bonds (TIPS and I bonds)
10% Nominal bonds (TSP G Fund, VWIUX and VTEAX)
5% Vanguard REIT Index Fund
5% Debt Real Estate (Private debt funds)
10% Equity Real Estate (Private debt funds with a syndication or two)
I simplified our asset allocation in 2017. 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 (2/3 of which is US, 1/3 of which is international), 20% bonds, and 20% real estate. Note that there are two holdings for most asset classes. That's simply a reflection of the fact that most of the portfolio is in taxable and we need tax-loss harvesting partners. Long-term returns of just over 20 years as of the beginning of 2024 were 11.03%. Not too bad considering only 25% of it is in the US large cap stocks that have dominated the last few years.
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 Carl Von Clausewitz said, “The enemy of a good plan is the dream of a perfect plan.”
Want to talk about designing a portfolio? Join the discussion on the WCI Forum or Facebook Group!
What do you think about all these portfolios? Do you use one of these, or have you designed your own?
[This updated post was originally published in 2014.]
I am a new inexperienced investor and would like to get your feedback on the following portfolio.
After backtesting many portfolios from 1972 to 2014, I found that:
40% Vanguard Small Caps
60% iShares 20+ long term bond.
Has pretty good returns and low volatility.
What are your thoughts?
Thank you!
Remember the limitations of backtested data. I cannot stress that enough. That said, this is similar to the “Larry Portfolio” in that it’s a small amount of SV/very risky equity with a large amount of relatively safe bonds. The difference is that you’re using LT bonds instead of ST. Remember that rates were very high in the 70s and 80s so bonds, especially long term bonds, have had a serious tailwind over the last 30-40 years. That can’t repeat itself.
Bottom line, I don’t think this is a reasonable portfolio. It isn’t diversified enough. I cannot recommend it to you despite how well it backtests.
WCI,
Here is an article I published last year for Millenials on my own 3-fund portfolio, that is more of a “value tilt” to mimic what an all dividend portfolio might do, with a lot less trouble. The only caution is it does not have a bond position, as it is more meant for the young investor:
https://seekingalpha.com/article/2682355-setting-up-a-portfolio-that-millennials-can-relate-to
Thanks for all you do.
fd
Aside from “personal preference”, what are some objective ways to choose the superiority of one portfolio over that of the other.
Do some portfolios demonstrate better returns, lower volatility, increased sharpe ratios, and decreased MaxDD? Is there a place where portfolios can be compared?
That’s just it. You can look at PAST returns, volatility, sharpe ratios, and maximum drawdown. But you can’t look at FUTURE returns. In the end, you make your bet and you take your chances. Is it worthwhile looking at all that stuff to make an informed decision? Sure. But that’s only because it makes it more likely that you will stay the course, which is far more important than which reasonable portfolio you pick in the first place. The more you look into the various portfolios, the more you’ll realize that the important principles are pretty basic, and common to all- a reasonable amount of risk, low costs, broad diversification, stay the course, etc.
I first want to say that you are truly an inspiration to all doctors. I have your book and I follow this blog. Question. I see that you have 5% of your assets invested in Lending Club. How is that going? Is that a good investment vehicle?
High risk, high return (so far.) Be sure to do your due diligence.
I love this post, great work. a few thoughts:
I think it would require lots of work to keep rebalancing these portfolios with allocations <5%. Even more work when you try to juggle the different "buckets" such as IRA and 401k with limited choice and annual contribution limits. I'm inclined to keep it simple. I read "2nd grader portfolio," and Bernstein's books and have been attracted to their recommended portfolios in part due to simplicity with modest diversifcation.
Then I found this website (https://www.marketwatch.com/lazyportfolio/portfolio/second-grader-starter) which allows you to track the performance of some of the above mentioned portfolios against the S&P 500. Not a single one beats it. Not at one year, 5 year, or 10 years. I don't know how to look at 20, but I cant imagine its too different.
Maybe there's something to be said about the "laughable" couple with portfolio #1…obviously a little risky, but it seems that if the horizon is 10 years or more it will have a good chance to beat most any more diversified portfolio. Thoughts?
Recency bias. If you stop your analysis at the end of 1999 or 2014, an S&P 500 dominant portfolio looks really good due to recency bias.
High Risk. Most of the portfolios here are balanced, meaning stocks and bonds. The 500 portfolio is all stocks.
Lack of diversification. In a world with $10,000 publicly traded stocks, you’re choosing just 500 of the larger ones in a single country. Some of that risk is uncompensated since it can be diversified away.
What’s your thought on my portfolio (87% stock/13% bond) at Vanguard Roth IRA using Vanguard only ETFs? I’m currently a fellow and plan on retiring in 35 years.
21% Total Stock Market (exposure to U.S. large cap stocks)
25% Extended Stock Market (exposure to U.S. small/med cap stocks)
13% FTSE Developed Stock Markets (exposure to international large cap developed stocks)
22% FTSE Emerging Stock Markets (exposure to international large cap emerging stocks)
4% REIT (exposure to U.S. real estate stocks)
2% Energy (why not since the oil prices are so low!)
5% Intermediate-Term Government Bond (exposure to U.S. treasury bond)
2% Short-TIPS (exposure to TIPS)
6% Total International Bond (exposure to international bonds)
Because I used ETFs, my expense ratio for the portfolio is 0.106%.
This portfolio lacks exposure to certain markets, so my next purchases are:
— International small/med cap stocks –> FTSE All-World ex-US Small-Cap ETFs
— International real estate stocks –> Global ex-US Real Estate ETFs
— Commodities –> unfortunately, Vanguard does not have ETFs covering this sector
I’m also considering to invest more in TIPS and Energy sector (if oil prices remain low in the near future).
Any thoughts?
Seems silly to have 2% in anything. 87% stock is pretty aggressive. I find the heavy extended stock tilt odd without any small cap or small value, but that’s okay. Midcaps have great historical returns. Beyond those comments, looks fine.
I was hoping for 5%, but with ETFs and their prices, it’s sometimes hard to get them to perfect 5% increments when you have a finite allowable fund for the year ($5,500).
Via Morningstar, Vanguard Extended Stock has 33% small cap and 47% med cap. Of the small cap stocks, a third is in value, second third in blend, and the final third in growth.
This portfolio overall (U.S. + international) has large/giant cap of 62%, med cap of 23%, and small/micro cap of 15%. If just looking at U.S. stocks, the distributions are large/giant cap 62%, med cap 23%, and small/micro cap 15%.
I did purposefully invest more on small/med caps than most of the 150 portfolios mentioned above, just to be a bit more aggressive since I have 35 years until retirement. I also wanted 85% stock (ended up being 87%), but is this too aggressive? Many of my colleagues with similar retirement date are investing almost all in stocks. Is there a rule of thumb when determining proportions of stock/bond?
Sure, there are lots of rules of thumb. Such as Bonds = Age, Bonds = Age -10, Bonds = Age – 20 etc. But they’re worth exactly what you pay for them. What really matters is your behavior in the next bear market. If you end up selling low, then your asset allocation was too aggressive. If you’re not sure what your behavior will be like, then I’d suggest erring on the side of being too conservative.
Benjamin Graham, Buffett’s mentor, gave a rule of keeping your stock % between 25% and 75%. I think that’s pretty wise.
WCI,
Thanks for everything you do!
I have a question about asset allocation in my 401k. I don’t think I have a lot of good options in there and I’m wondering what to do.
Background: My wife and I are both 30 year old docs and each fully fund a Roth IRA, and I have a 401K which I contribute 5% to get 4% match. IRA’s have roughly 28K in them and I have about 9k in my 401K (this is my first eligible year). After those two retirement accounts and an emergency fund of about 25K we put remaining income towards debt repayment (still have 380K @ 6.5% student loans between the two of us, goal is to have that gone in 5 years).
My 401K is through John Hancock and right now this is my allocation:
70% Stocks:
50% – 500 Index Fund (expense ratio: 1.13)
10% – DFA International Value Fund (expense ratio: 1.53)
5% – Vanguard Mid-Cap Growth ETF (expense ratio: 1.25)
5% – Vanguard Mid-Cap Value ETF (expense ratio: 1.25)
30% Bonds:
20% – PIMCO Total Return Fund (expense ratio: 1.55)
10% – PIMCO Real Return Fund (expense ratio: 1.55)
I have two questions:
1) The only genuine international stock fund I have is the DFA international, and at 10% that seems to be on the low end of what you recommend one carry in their international portion of their stocks. However, when I take into account the international stocks inside my Index 500 fund and my Vanguard ETFs, my international holdings account for about 20% of my total stock holdings. Is that how I should be figuring that, by counting EVERY international stock I have in EVERY fund I have towards my total of international holdings, and does it look reasonable? In other words, if someone asks me how much of my stocks are in international funds, would the correct answer be 10% or 20%?
2) Because I have such a high expense ratio (totals about 1.30 if my calculations are correct) in my 401K, I have wondered if I should skip on the diversification and for now just put all of my contributions toward the Index 500 fund within my 401k because it has the lowest expense ratio (1.13). It would be tremendously risky without holding any bonds, but when my loans are paid off in the next 5 years or so and I have free cash to begin investing in after-tax accounts I could begin to hold bonds in funds with lower expense ratios. Is this a bad idea? Should I continue to hold my bonds for now, even though the expense ratio is high? Or should I split the difference and get rid of the ETFs and international fund, and keep 30% or so of my bonds?
Sorry for the lengthy questions. Thanks again for everything you do!
A few comments:
1) Any reason you’re not refinancing those loans?
2) Man those expense ratios suck. Hopefully you can get a better 401(k) somehow.
As far as your questions:
1) I’d keep it simple and call that 10%.
2) If you could get a 500 fund with an ER of 0.1%, then I’d say sure, maybe that would be reasonable, but they’re all high in my view.
Probably the best thing to do is build around the 500 fund, using your IRAs to diversify as best you can. Remember to look at your entire portfolio as one portfolio, instead of having a 401(k) asset allocation and an IRA allocation.
WCI,
Love this post. I’m actually in the process of reworking my portfolio now. When you were just starting (I’m still a resident), did you try to divvy up the overall asset allocation between you and your wife or look at them as two separate accounts? For instance, I have about 40k in savings (tax protected) and my wife has close to 100k (again, all tax protected). If I were to look at them as two separate entities, then dividing them amongst several different asset allocations would be challenging because for many I wouldn’t take advantage of admiral shares or even meet required minimums. However, by “combining” our money to make 140k, we can then take advantage of many different sectors and the admiral funds as well. The downside is obviously that the market can drastically affect one person more than the other depending upon which holdings I have in each. The good news is that since we’re 100% tax protected at this point, I can always rebalance as a whole. Just curious what you did.
Thanks.
We plan to stay together so we treat it all as one portfolio.
I guess I’m not really sure why I haven’t refinanced the loans (great answer, I know). Part of it might be that we’ve been doing a really good job paying so much towards them each month I’ve kind of been hesitant to go through a refinance and interrupt that momentum. I’ve also had the impression (a wrong one, perhaps) that if you refinance into a private loan you lose some of the protections from the government loans, ie death or permanent disability and the loans go away. I definitely need to do more research.
To your answer to my 2nd question, about going all-in on the 500 fund, I think I need a little clarification. Your first sentence after that question seems to say that since all the expense ratios are so high in all the funds, going to the 500 fund alone won’t make a difference. But then in your 2nd sentence you say best thing to do is build around the 500 fund and diversify with the IRAs. So now I’m really confused. Or just reading it wrong. Probably both, but can you provide some clarity?
Thanks!
You generally do still get death and disability protection with refinancing, but read the fine print of course.
It’s hard for me to say exactly what you should do without all the details. But if you had 50% of your money in a 401(k) and 50% in an IRA, and wanted a portfolio that was 50% US stock, 25% international stock, and 25% bonds, I’d make the 401(k) 100% S&P 500 fund and make the IRA 50% TISM and 50% a bond fund. Hope that helps. Don’t change your asset allocation, but take advantage of your best options, wherever they may be.
Logan:
Some numbers for you…
Since 1985 your asset allocation has returned
CAGR 10.58%
STD 12.59%
Max DD -25.35%
Sharpe 0.62
Sortino 1.22
Your specific portfolio since 2007
CAGR 6.95%
STD12.11%
Max DD -39.56% (Can you stomach this?)
Sharpe 0.51
Sortino 0.73
If you add a moving average (10 month SMA)
CAGR 8.00%
STD 6.94%
Max DD -10.74%
Sharpe 1.10
Sortino 2.04
If you use 3 month Momentum instead
cagr 14.70%
std 13.13%
max DD -17.37%
sharpe 1.04
sortino 1.97
SMA may help reduce volatility but momentum might help offset some of those ERs.
Right when I think I’m getting closer to understanding some of this investment stuff… you start bringing things up I’ve never heard of! Any way you can expand on your post (thanks for running those numbers!) or do you have a link to somewhere I can get caught up on what most of those statistics mean? I don’t know if you’re saying I’m doing good or bad here…
WCI,
Just found your site and absolutely love it. Bought the book earlier this week and plan to work my way through it over the next few weeks. I’m in the process of reworking my allocations after reading this post and a few others. I’d love to get your thoughts.
PGY-2 Rads resident with a husband who’s a midlevel provider currently working. We have about $150k in assets (all of which are in tax protected accounts – HSA, Roth, 403b, 401k…) and about $120k in loans between us. Our plan is to max out tax protected space going forward and anything extra go into the loans (which are now refinanced thanks to you).
I’m struggling to come up with a solid asset allocation that I want to stick with. This post has plenty of great ideas that got me started.
1) My husband and I are 28 and have lots of time to work going forward so I’m trying to figure out a good stock/bond ratio. Part of me thinks 100% stocks is the way to go given I’ve only just begun earning, however, I also think the idea of 120-age is warranted as well (so maybe 5-10% bonds makes sense too).
2) On the equity side, I like the idea of domestic, international, and REIT exposure with a little tilt as well towards value and small cap given FAMA/French, but not sure how much exposure makes sense for each. Right now I’m thinking of keeping my international side all in one fund for simplicity and maybe later I can slice and dice further if I so choose (developed, emerging, small, etc…).
3) Does it make sense to use the 500 index fund or the total market fund? I see a mix based upon all of the sample portfolios listed above.
Here’s what I’m thinking. I would love your thoughts.
Equities
Domestic: 67%
Vanguard Total US Market Index: 27%
Vanguard Value Index: 10%
Vanguard Small Cap Index: 10%
Vanguard Small Cap Value Index: 10%
Vanguard REIT Index: 10%
International: 33%
Vanguard Total International Index: 33%
If I do go with bonds, then I would use Vanguard’s Total Bond Market for that entire portion.
Thanks.
1) I’d recommend starting with more bonds than 0-10%. After you go through your first bear market (and this week might be the start of it) you can ramp up the risk if you choose and had no trouble handling a 60/40, 75/25, or 80/20 portfolio.
2) There is no right answer as to how much tilt is right. Obviously if small value works out well over your investing horizon, the more the better. But it might not work out that way and besides you need to be able to handle the tracking error. The right answer is what you can stick with for the long term.
3) Use TSM.
The portfolio looks fine aside from being very aggressive with big tilts and no bonds at all. I’d be hesitant to recommend that to anyone who hasn’t invested through a bull market already.
Thanks for the advice. Really appreciate the insight. I think I’ll up the bonds. Any thoughts on what allocation you’d suggest between 10-25%? I’ll also back off the tilts and maybe just do small value and reit to simplify things compared my original thoughts. The issue now is that with the stock market having several days worth of losses in the past week, what is the best way to get to my target allocation. Currently it is all between total US and total international with no tilt, no REIT, or no bonds. Does it make sense to sell some of those assets off and rebuy to get the right allocation (I’d also like to move my fidelity funds to vanguard based upon your posts), or just try to add with future contributions, although that could take a long time to get to the proper allocation. All are currently in tax protected accounts, so no capital gains on sales.
Here’s what I’m now thinking based upon your great advice. Increase bonds, decrease my tilt.
-Total Bond Market: somewhere between 10-25%
Equity breakdown (as a percentage of 100 – will be scaled back pending final bond decision)
-US Equity: 67%
Vanguard Total US Market Index: 50%
Vanguard Small Cap Value Index: 10%
Vanguard REIT Index: 7%
-International Equity: 33%
Vanguard Total International Index
Is this any better?
Seems more balanced to me. Certainly a reasonable allocation. If it fits you, it’s great.
My apologies for not answering sooner as well as for not defining the terms that I used.
CAGR: compounded annual return
STD: standard deviation; volatility…the range that your average can experience
MaxDD: this is the top to the low that your portfolio may experience; this is more important than the “worse year” a lot of portfolio tools show you.
Sharpe: is a risk measure. How much volatility are you buying for each additional point of return that you are getting.
Sortino: another risk measure. How much negative volatility that you are buying for each additional point of return you are aiming for.
I personally look at the sortino of any asset allocation portfolio. This is a good measure of how “safe” your portfolio you are looking at. The MaxDD is crucial because we all think we can handle a loss, but we are fooling ourselves. There are very few truly hardy souls that invest. WCI is the exception rather than the rule. A drop of 30% is heart wrenching even if you know that are getting funds on sale. Most can handle a max 10-15% drop at one sitting.
Since 1972, here are some returns for the most common portfolios used:
Portfolio CAGR STD MaxDD Sortino
No Brainer 10.5 14 -28% 0.78
Coffee House 10.6 11 -20.2 1.03
Lazy 10.2 12 -26.7 0.8`
Yale 10.6 12 -26.3 0.88
Ultimate B&H 10. 11.6 -21.8 1.07
Harry Brown 8.68 7.7 -5.10 1.01
Fat tails 8.6 9.7 -11.3 1.29
High Sortino 12.3 11.1 -14 1.71
High Sortino is a modification of mine on Harry Brown portfolio but I wanted to show you that Sortino can be optimized by balancing aggressiveness with safety.
(high sortino is small cap value 40%; internation small cap 15%; 25% Long Term treasuries; 20% gold). It uses Fama French findings, it’s 60/40 (almost).
My main point to the above is that 1.71 is the highest sortino you are going to find using static allocation, but if you use moving averages or momentum, you are going to get higher sortinos with low draw downs which will keep you invested for the long term. Moving averages give you the same return with lower drawdown while momentum gives you much higher returns with still lower drawdowns, but not as low as moving averages. It has to be done in a tax free account (your 401k) and you have to be willing not to commit and not second guess yourself when it isn’t working (like the past year).
The critique of the above is that it is based on past history and we don’t know what is going to happen in the future and the other is tracking error (slippage).
The latter is absolutely true. The former is true of static portfolios.
Good luck.
It is important to point out that your ending paragraphs should state that “moving averages [gave you the same return IN THE PAST WITH LOWER DRAWDOWN] while momentum [GAVE YOU much higher returns IN THE PAST with still lower drawdowns.]”
Whether that is likely to continue in the future can be argued, but it’s key for anyone to realize just how fragile the data conclusions like this are drawn on really is.
Thanks for defining the terms.
WCI, I do have a question about evaluating past performance. Maybe this is something obvious I’m missing, but I’ve noticed it in the books I’ve read as well as on bogleheads and here:
Whenever “momentum” or any other investing “system” is discussed on these blogs, it is always poo-poo’d based on the standard “backtesting flaws” argument.
Why isn’t passive investing critiqued in the same way? Aren’t we just using the past to make decisions about the future in the same way we would do that with momentum investing? This could be an obvious concept that I’m totally missing, but it’s been nagging at me…
Absolutely your critique is valid. Backtesting is just as invalid with buy and hold as with momentum. However, one thing to keep in mind is that 5 or 10 years from now, there will be another dozen momentum schemes being touted as the best based on backtesting the then current total sum of data. And they will all be compared to boring old buy and hold. Will some prove to be better going forward than buy and hold? Almost surely. Will some be worse? I think so. So you makes your bets and you takes your chances.
WC,
I sense that you are clearly not a momentum “fan”, and more of a buy and hold devotee. Nothing wrong with that, but it’s hard to argue with the math of some of the stronger papers out there concerning momentum techniques, i.e.) Mebane Faber and Gary Antonacci. Momentum is hardly a fad, scholarly articles have detailed it’s persistence across all markets for over 200 years. Personally, having lived through two bear markets , I have now moved assets into a momentum structure.
One of the greatest weaknesses of buy, hold and pray is that outside of diversification you have no risk management. Look at 2008, every asset class dropped, all correlations moved to 1, across the board. Even Mohammed El Erian in 2008 said ““First of all, diversification alone is no longer sufficient to temper risk. In the past year we saw virtually every asset class hammered. You need something more to manage risk well.”
Yet most momentum techniques came away with single digit max draw downs or even positive returns. Same , with the 2000 bear market.
Win by not losing. Or in the words capture the upside through relatively standard asset allocations and control your downside risk. That’s something I wish I did over the last 20 years of working, but I am now quite happy with my choices, based on sound mathematically robust and statistically valid models.
To each his own.
D
I don’t know that I’m particularly anti-momentum. I’m not using a momentum strategy right now, but if you want to, feel free. It has been discussed on the site before: https://www.whitecoatinvestor.com/dual-momentum-investing-a-review/
I do have a problem with someone denigrating a technique that has worked far better than the vast majority of other techniques proposed over the centuries. I disagree that something changed in 2008 to make buy and hold not work any longer and I’m certainly not going to take anything El Erian has to say as gospel. Even the names people call it are silly- “buy, hold, and pray.” Give me a break. It doesn’t take prayer to hypothesize that stock in all the companies in the US will be worth more in 30 years than it is today and that it will pay many dividends between now and then. It’s up to the proponents of alternative techniques to show their technique is better than buy and hold because we know buy and hold works just fine. However, back-tested data has significant limitations, and prospective data is limited.
Perhaps you were asleep in 2008, but all asset classes did not drop in value. Long treasuries, for instance, were up 24%. Gold was up 5%. I have a hard time taking portfolio advice from someone unaware of basic facts like that. The data on momentum is strong enough; it doesn’t require inaccuracies to defend it.
You are correct , buy and hold works just fine. You are also correct that you do not have to take investment advice from me , in fact I was not trying to give you investment advice, but simply make sure that your readers realize that there are other logical alternatives than holding through downturns. But , it cannot be an emotional response..DALBAR studies confirm that individual investors always screw it up. However, unemotional mathematically sound models take the individual out of the equation and perform beautifully.
You are also correct in that El Erian does not preach gospel, but I always found it an enlightening quote, my ex financial advisor had a similar reaction to yours. I lived through buy and hold and did “OK”, but there are logical, sound viable alternatives. Also, I did not mean to imply that something changed in ’08, it’s just a quote from a respected individual , in my opinion.
Pretty darn sure I was not asleep in ’08, but I did watch my investments drop close to 25%, and the only reason it wasn’t worse was due to bonds…so yeah pretty sure I was awake, but thanks for the snide comment. As Ed Easterling has clearly shown, there are long periods of time wherein buy and hold performs very poorly even over 20 – 30 yr time horizons. I would refer – the reader- to his data at Crestmont Research. Key point on his data is that one of the leading indicators for future performance is present valuations,that is high valuations portend lower future returns. And we are at quite high valuations now by any metric you choose, P/E, Tobin Q , CAPE, etc..
Bottom line – I’m not here to start an argument, nor give advice to anyone, simply to present some awareness of alternative investing techniques.
Cool! First day on the blog! Now on to the real estate side of the discussions, maybe I can spark up a lively debate there as well.
D
Dalbar studies have flaws. Although the effect they purport to show is definitely there, it isn’t as large as the studies would lead one to believe and it is typically quoted by high priced financial advisors trying to scare some new clients into signing up with them. The main issue is that an investor periodically investing in a rising market (which the market usually does) will always have a dollar weighted return less than the time weighted return.
I disagree that selling in downturns is usually or even often a good idea for many investors. I know lots of people who have done that and are still working. Once you move away from buy and hold, all kinds of questions show up. For example, with momentum techniques using trend following/moving averages you have to decide which moving averages and what signal. It just gets more complicated. Doesn’t mean it can’t work, but the more complicated you make it, the fewer people that will be able to handle it. I totally agree that if you’re going to use that sort of technique that it must be unemotional and involve following a written plan that you follow through thick and thin. Wait, that requires about the same discipline as buy and hold. 🙂 It also has higher transaction and possibly tax costs if you’re in a taxable account, so it doesn’t have to just be better than buy and hold, it has to be enough better to also make up for the costs.
I disagree that we are at quite high valuations by any metric. You may not have noticed the recent 15% drop in price. That makes valuations look lots better than they did 3 months ago.
The comment about bond returns in 2008 wasn’t meant to be snide, it was meant to point out your statement about all asset classes was not correct. You get to have your own opinions, but not your own facts.
I’m not big on Ed Easterling/Crestmont either, nor his choice investment, a fund of hedge funds.
There are many roads to Dublin. I sincerely hope yours gets you there quickly.
Kevin,
I was just (re)reading this classic post and found your posts interesting. What exactly is your allocation? Do you personally use your High Sortino modification of Harry Brown’s portfolio now? Gold’s been on a tear lately (a 20% allocation is quite steep)…
Or, can you modify the other lazy portfolios similarly? i.e., the Yale portfolio.
Steve
You can modify any lazy portfolio to suit your needs, but then it just becomes another lazy portfolio. Looking at all portfolios, there is really a minimum amount of difference between them. Probably 9.5% since 1972.
I use the high sortino for my daughters account. She wanted low drawdown (and I wanted high returns considering how young she is).
I’m hesitant to share my personal allocation because my personal situation is unique. I got a divorce right after the crash, my assets were frozen for a while, and the ex took half of my money at the bottom.
I want to be able to retire at 55 (I’m 42), but I’m sure that I won’t. I have to make up for the lost money so I choose to be hyper aggressive. I have no debt except mortgage and that will be paid off in 5 years. I save 30% gross income. I’m high income so a bad year in the market means probably 2 years extra of work.
My 401k consists of:
-25% dual momentum using vfinx/ veiex/vbmfx.
-25% dual momentum vghcx/vinex/vustx
-50% Top 3 momentum of IVY 13
IRA: This is my speculative folio
-net/net stocks
-Enterprise stocks
-50/50 blend TMF/TQQQ
-magic formula
Taxable account :
B&H: 80%
20% biotech
20% pharma
10% VDC
10% MTUM
10% VBR
10% VBK
10% MUB
10% RVNU
(I know Hillary might blow me up but I’ve survived the drawdown this past year)
20% cash for emergencies (like ex coming after me for more support). At the end of each year money in excess needed for 6 month salary goes to pay down mortgage.
I also fund the kids 529 and hope to have $150k/kid by 18, both on track. Fairly conservative with their accounts. They do well in school so I’m hoping for scholarships so they can let their 529 grow for their kids.
I like that you’re combining aggressive savings with an aggressive portfolio. Too many people just do the latter.
Wow, I wish I could say I understand most of what you wrote, re: investment choices in each account and momentum.
I’m sorry to hear about the divorce and subsequent financial set-backs. I’m not divorced but like a number of people reading this forum, I’m definitely playing catch-up with regard to savings. I’m a high income earner as well (now) and max out 401/457/backdoor Roth. I’d like to be very aggressive as well but I definitely struggle with investment choices in all my accounts.
This might help you understand what he’s talking about: https://www.whitecoatinvestor.com/dual-momentum-investing-a-review/
You can modify any portfolio you like to your taste. I would caution you against doing it frequently.
According to Fama French small caps and low price-to-book ratio stocks (value)do better than blended funds. This is why it is recommended to add some value funds as well as small cap funds.
But they also note that 3-12 momentum work also works.
My personal belief is that momentum works but the problem is slippage, fees, and taxes. These can be ameliorated with investing retirement accounts and the purported increase should cover the slippage and fees.
The real problem with momentum is that you are looking at the investment every month. This leads you to not be able to “set it and forget it”. The psychological benefits should not be underscored as the more you look at it, the more likely you are to doubt yourself. In addition, there are times when momentum underperforms (sideways markets like now) and it causes you to increase your doubt.
I am in the process of starting my roth IRA through Vanguard. I plan to start with the minimum $1000 contribution then contribute each month up to the max $5500. I also plan on doing the same for my wife. Reading all the above portfolios is somewhat overwhelming as I am new to the investing world. I was going to just stick with the Vanguard target retirement fund 2045 or higher. Would you recommend this strategy or should I rethink this before I set up my plans? Thanks.
If you’re eligible to make direct Roth IRA contributions, that sounds fine.
I appreciate your reply. So I just finished fellowship and started my new job a few months ago. Given that I am only going to be working at the higher salary position for 5 months I should be below the 183k limit for married filing jointly this tax year.
My next question is for next year when our combine income will be closer to this limit should I contribute to my IRA on Jan 2nd and rollover into the same Roth IRA that I started this year? And its my understanding that I can directly contribute to the Roth I set up this year until April 15th 2016, is that correct? Can the backdoor Roth contribution and the direct contributions overlap or should I wait until reach the $5,500 limit for this year before I start doing backdoor contributions? Thanks!
I guess I’d do my 2015 contributions as direct ones if I was sure I’d be under the limit. Then do the 2016 ones via the backdoor.
For an investor just starting out there is nothing wrong with a target date fund by Vanguard. I would probably go out at least 5 years beyond your retirement date, just to decrease the bonds slightly during your glide path.
As you get more money in the account and more comfortable with investing — after reading some books, you may want to expand some of your money into some areas such as small-cap value or even just add more U.S. stock exposure with a total stock market index. You will need to develop a plan that makes sense to you, but for now a target date fund is a great way to go. In fact you could definitely do much worse by listening to all the “market noise.”
Dave
Drew,
All different types of Roths can be put in the same account if that makes it easier for you. You just need to keep track of the 5 year window on any conversion.
Do keep an eye on new tax law, as I have heard rumblings of trying to make the Backdoor Roth go away after this year! Not a good thing for high income earners who can not participate. Though nothing keeps you from doing a regular Roth conversion from your IRA money, which really causes you no more tax than the backdoor method.
fd
What are your thoughts on the “gone fishing portfolio”? I read this book after I got the recommendation from your website.
I think it’s fine:
https://www.whitecoatinvestor.com/the-gone-fishin-portfolio-unveiled/
We are both fresh out from residency. Lots of debt. Lots of income, but negative net worth. Plan to max all tax deferred and put rest towards loans to pay down ASAP.
1. Reasonable to put all of the tax deferred in 100% stock? We won’t panic with bear as we barely look at accounts. I see no downside – was thinking to do 100% stock until net worth reaches our annual income. Thoughts?
2. Was thinking of below for the 100% stock portfolio:
25% US Large Market
25% US Small Value
25% International Large Value
25% International Small Market
What do y’all think?
A few things I think you ought to do before choosing to go 100% stock.
# 1 Read Why Bother With Bonds. https://www.whitecoatinvestor.com/why-bother-with-bonds-a-review/
# 2 Invest through a bear market. If you weren’t an investor in stocks in 2008, I don’t think you have any business being 100% stock. Given your negative net worth, I doubt you were. Extra return with a relatively small portfolio isn’t worth much anyway, so might as well wait until your first bear market and if you find it doesn’t bother you at all, then you can get more aggressive during the bear, with even better results!
# 3 Realize that it is entirely possible that bonds outperform stocks over long periods of time. Historically, 10 year periods are easy to find, but there is no reason you can’t have a period of 30 years or more. One reason to hold bonds is because there is a small chance that bonds will outperform stocks.
So you suggest 80/20?
What if I use the above allocation for the 80% equities part of the portfolio? Is that good? I can put the bonds in some kind of Low cost index.
I guess what I’d suggest is pick what you think you can handle, then back off 10-20% in case you’re wrong.
The equity allocation itself is a bit odd, but if you think that’s what you want to/can hold through thick and thin, then I’ve certainly seen much worse. Pretty huge tilts to small and value, should have pretty big tracking error, making staying the course even more difficult.
WCI;
Great topic. I really liked your portfolio. It was well diverse and filled with great funds across multiple vendors. I am currently in the process of setting up the portfolio for my retirement and I am trying to decide between having all Vanguard for convenience or also choosing multi vendors.
My Question: Are there differences in fees when balancing a portfolio across multi vendors compared to balancing across a sole vendor (ex. Vanguard)?
It depends on where your holdings are. If you’re like me and mostly just rebalance with new contributions, there is minimal cost to rebalance.
How do you calculate what fees you are paying in Vanguard and Fidelity, as these to me are always hidden – maybe I don’t know where to look! Thanks
If they’re hidden, you’re probably investing at the wrong place in the wrong investments. But I’m not sure how Vanguard can make them more transparent than they do. If you can’t find the fees at Vanguard, you just need to taught where to look. This post will help:
https://www.whitecoatinvestor.com/how-to-learn-about-mutual-funds/
Hi WCI,
I just bought your book a few days ago and have made it about half way already. Got to the link for this post (so haven’t finished the book yet). Love the book so far – awesome! Great review of 150 portfolio allocations!
Wanted to get your thoughts on my stock allocation.
Had it for a few years now (not through a bear market yet though).
– 35% S&P 500 Index
– 20% Small cap (blended)
– 20% Utilities – (Good dividends ~3.5%)
– 20% International
– 5% Emerging Market.
75% domestic and 25% international. So bit of tilt to Utilities and Small cap with a dab of EM.
Am I crazy, or is this reasonable?
Thanks again for the book and online resources….
I think the utilities tilt is pretty huge. That would make me uncomfortable. Not sure why you’re only posting your stock allocation either.
Hi WCI,
Thanks for the comments, much appreciated. . Yeah Utilities might be a bit high, may need to reduce a bit – you’re right.
In terms of the other allocations, overall I have 45% stocks (as allocated above), 45% in directly owned rental real estate, and 10% in cash (money market in the brokerage account).
No bonds at all. Bonds seem to have had a long run (~30yrs?). Feels like I’d be buying ‘high’, plus the rentals and utilities seem to me to provide the income and lower volatility – like a bond.
Thoughts on that?
Thanks again!
That’s a massive real estate chunk, but it’s not unreasonable. It’s overall a very aggressive allocation, 90/10, but the real risk depends on the leverage used on the real estate side. If you’re young and were able to hold an aggressive allocation through the real estate meltdown and 2008-2009 bear market then it’s probably okay.
Also (don’t know how to edit my previous post, sorry) if I reduced the utilities by, say 5% to 10%, what would you increase instead? Bump up S&P 500 from 35% to 45%?
Thanks.
I’d use TSM instead of S&P 500. I’d probably also use mostly small value instead of just small. But if I were going to pare back the utilities, I’d probably add more international. You’ve only got 25%*45%= 11% overseas.
Great feedback. Thanks again for your comments. Good point about the International exposure – I hadn’t look at it that way. I’ll need to make some changes.
Back to finishing the book 🙂
White Coat- Thanks for all this information. I am currently 30 and max out my 401k and do a roth conversion every year. I have purchased a few fidelity mutual funds and wanted to see your thoughts on my overall portfolio.
401k- age based retirement plan
Reverse roth- Franklin Balanced Fund (FBLAX)
Mutual Funds- FBIOX- 20k
FFNOX-20k
FSCSX-15k
FOCPX-15K
FLCSX-15K
HDPSX-15K
XOM-10K
All of these funds are being used for retirement purposes. Would love to hear your thoughts on my portfolio
Did you want me to look up those tickers for you? I certainly don’t have all the Vanguard tickers memorized, much less the Fidelity ones.
Does this help? Wanted to see what your overall thoughts were.
FFNOX-20k Fidelity Four in One Index
FSCSX-15k Fidelity Select Software
FOCPX-15K Fidelity OTC Port
FLCSX-15K Fidelity Large Cap
HDPSX-15K Hodges Small Cap Fund
XOM-10K Exxon Mobil Corp
There is a lot I don’t like about your portfolio but I don’t have all the information needed to really see what you own. Look at all of your retirement investments as one portfolio, whether in your 401(k), backdoor Roth IRA, or taxable. Then come up with an asset allocation. Then choose investments to give you that asset allocation.
Just a few comments.
1) It doesn’t make sense to me that someone with a 401(k), Backdoor Roth IRA, and a taxable account, all at different firms, would use funds of funds like your Four in One or the target retirement in your 401(k) without an extenuating circumstance like all the other available funds suck.
2) It doesn’t make sense to me to own a single company stock, much less have any kind of significant chunk of your portfolio in it. Now, maybe this is significant, maybe it isn’t. I can’t tell because you didn’t tell me how much is in 401(k) or your IRA. If you want some kind of energy allocation, why not use an energy ETF or mutual fund? You do realize you own lots of Exxon already in most stock mutual funds, right?
3) I don’t know any smart investors using Franklin funds or having their IRA at Franklin. My understanding is that is an actively managed, loaded fund with an ER of about 1%. I don’t like any of those three things. Is there a financial “advisor” involved in this scheme somewhere?
4) Fidelity has some good funds, like their Spartan index funds. It’s totally reasonable to have your entire portfolio at Fidelity. However, you don’t seem to be in the funds that I think are the reasonable ones. Have you looked up the expense ratios on your funds and compared them to the Spartan funds at Fidelity?
5) You seem to be collecting investments rather than following a rational plan. An individual stock here, a fund from Franklin there, a fund from Hodges here, some kind of weird over the counter fund, some kind of a tilt toward software companies, a fund of funds etc. You need a written investing plan. I’d say ANY of the 150 portfolios in this post are better than what you’re currently doing. Doesn’t guarantee they’ll outperform what you have over any given time period, but I’d certainly bet on it over any significant time period. Do you even remember the reasons why you bought each of these investments? Do you have those reasons written down somewhere?
Jeff:
I ran a backtest but had to replace some of your guns with vanguard funds because they dint have enough history. So I replaced your large cap with vfinx and your small cap with visvx.
Since 2004:
Cagr: 9.76
Stdev: 9.76
Worst year: -30%
Sortino: 0.94
-Better than s&p in every category.
-Better than Bill Bernstein no brainer in return and sortino.
Maybe you got lucky.
Run it through morningstar xray portfolio and your heavy in growth auth decent large cap value. Very little cap value (only growth).
48% of portfolio are in cyclical sectors but 37% in defensive (ironically that’s your biotech which got destroyed in 2000).
Speculative growth: 12.5%
Aggressive growth: 17%
Classic growth: 2.6%
Slow growth: 15%
12% distressed
Only 11% international.
Average expense ratio: 0.58% ($404 for expenses)
It’s a strange portfolio but it seems to have worked by the numbers. My concern is that you looked at the best performing funds over the last 5 years (15% return) and are hoping for it to repeat. It’s really growth heavy. High P/E, high P/B low ROA & ROE.
Exactly. I see this sort of thing all the time. You pick what did well the last 10 years and of course it backtests well over the last 10 years. But that doesn’t mean anything going forward.
Thanks for your help looking into this. I guess I don’t really “have a plan” besides maxing out my 401k through work and having a reverse Roth for my wife and I.
The plan for the fidelity funds is for long term growth. Hopefully to give to my kids or something along those lines. (I have 529 plan already established).
The reason for the mutual funds is that I had some extra money sitting around so I put them in these mutual funds.. I figured since I am going to have these funds for 30plus years with the dividend growth there is no way but to not grow.
I actually just started my Reverse roth for my wife and I this past year so we only have 5500 in each. Any recommendations I should allocate that to instead of the Franklin balanced fund? Any tickers?
Thanks again!!
I can tell you didn’t have a plan just by looking at the portfolio. Your last question is the wrong question to be asking. You’re asking “what should I invest in” when you haven’t first answered two other questions:
1) What are my goals?
2) What asset allocation am I going to use to reach my goal?
For example, let’s say your goal is to have a retirement income of $120K in today’s dollars starting in 20 years. You have $200K now and plan to save $50K per year for those 20 years. Of that $50K, $25K will go into your 401(k) each year ($18K + a $7K match), $11K into two backdoor Roths (not sure where you found the term reverse Roth BTW), and another $14K per year into a taxable account. What kind of a return do you need on your money to reach your goal? Well, using this Excel function, you see that =RATE(20,-50000,-200000,3000000) = 7.46% per year. That doesn’t sound so bad, until you realize it’s an after inflation number. Probably unrealistic. So you need to either lower your goal, save more toward it each year, or work longer. Let’s say you’ll save $60K per year (now $24K in taxable) and work for 23 years for the same goal. Now the required return is 4.77% after-inflation per year. I think that’s a reasonable figure, but will require you to be fairly aggressive. But you now have a goal. Step 1 complete.
Now you need an asset allocation likely to get you 4.77% per year after inflation over a 23 year period. A portfolio of 60% bonds isn’t going to cut it. You’ve got to take some significant risk. So what does a reasonable portfolio look like? Well, that’s what this entire post is about. Pick something that looks like portfolios discussed above that is reasonably aggressive. For example, just making this up off the top of my head, let’s say you want to do this:
75% Stocks, 25% Bonds
1/3 of Stocks international
A mild tilt to small value stocks and REITs
Both inflation-adjusted and nominal bonds
All seem reasonable choices. So now that asset allocation looks like this:
35% Total US Stock Market
25% Total International Stock Market
10% US Small Value Stocks
5% REITs
15% Nominal bonds
10% TIPS
Step 2 complete. Now we get to your question. What should you invest your Roth IRA money in?
Well, that’s a terrible place to start this process. The best place to start is with your 401(k) where you are most limited in your investment choices. So add up all your assets, and figure out how much is where. Let’s say you’ve got 30% of them in the 401(k), 20% of them in the Roth IRAs, and 50% of them in taxable. Most 401(k)s have a decent S&P 500 index fund and a decent bond fund, so you can use those for your asset allocation. You should have your IRA and taxable account at a place with lots of good low-cost investing options, such as Vanguard or Fidelity. So if it is at Templeton or somewhere else, you contact Vanguard and have them help you move it there. Maybe you end up with something that looks like this:
401(k) 30%
S&P 500 Index Fund 30%
His Roth IRA 10%
Vanguard TIPS Fund 10%
Her Roth IRA 10%
Vanguard REIT Index Fund 5%
Vanguard Small Value Index Fund 5%
Taxable 50%
5% Vanguard Total Stock Market Index Fund
25% Vanguard Total International Stock Market Index Fund
15% Vanguard Intermediate Tax-Exempt Bond Fund
5% Vanguard Small Value Index Fund
See how that works? Now, we get to your question? What I should buy in my Roth IRA? Well, according to your plan, you should buy Vanguard TIPS Fund, Vanguard REIT Index Fund, and Vanguard Small Value Index Fund.
Hope walking you through that process helps. If you can’t figure out how to do that, read a book like Bernstein’s If You Can or The Investor’s Manifesto or Ferri’s All About Asset Allocation. If you still can’t figure it out, hire a competent, low cost advisor for at least a few years.
Good luck!