By Dr. Jim Dahle, WCI FounderI probably don't write as often as I should about the mainstay of our portfolio (it might help if Vanguard, BlackRock, and Avantis were blog sponsors), which consists of low-cost, broadly diversified index and index-like traditional and exchange-traded mutual funds. It is important to understand WHY you own the investments you do (and to buy them for good reasons in the first place).
So, today we'll go through each piece of our publicly traded portfolio (85% of the total portfolio) and discuss why we own what we own. We'll start at the asset allocation level for each asset class, then go to the subasset classes, move on to the actual investments, and finally arrive at some trivia questions.
Why We Own Stocks
Sixty percent of our portfolio is invested in stocks because this allows us to participate in the earnings of the most profitable businesses the world has ever known. While risky, the expected and historical long-term returns of stocks allowed our portfolio to beat inflation and achieve our financial goals. More conservative investments simply don't grow as quickly as we need them to, due to lower rates of return.
Why We Own US Stocks
Forty percent of our portfolio (2/3 of stocks) is invested in domestic stocks. We spend dollars now, we expect to spend dollars later, and we think betting on the United States, despite its problems, is still a good idea. We have no problem with the majority of our stocks being in the US, even with the valuation differential between US and international stocks being as wide as it currently is after a long period of US outperformance.
Why We Own VTI
Twenty-five percent of our portfolio is in the Vanguard Total Stock Market Exchange Traded Fund (VTI). VTI provides a nearly free way to invest in the equivalent of all US publicly traded stocks. Vanguard has plenty of experience running index funds, and I trust them to do it well. We use the ETF version of the fund since this holding is in our taxable account, and while the ETF share class of Vanguard index funds isn't any more tax-efficient than the traditional mutual fund version, we find it far easier to find solid tax-loss harvesting (TLH) partners for it. Plus, I like the additional control over the process that ETFs offer.
Why We Own ITOT
It's not entirely true that 25% of our portfolio is in VTI. It is true that 25% of our portfolio is in VTI + ITOT (currently about 84% VTI). The iShares Total Stock Market ETF (ITOT) is BlackRock's version of VTI, and it does almost as good a job. We certainly have no qualms holding shares of ITOT until the day we die, and while it isn't “substantially identical”(the words the IRS uses) to VTI, the performance is so similar it makes a great tax-loss harvesting partner. Are there other great ways to invest in the overall US stock market? Yes, there are. We don't think any of them are significantly better than these, though, and lots of them are significantly worse.
More information here:
The Nuts and Bolts of Investing
How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?
Why We Own International Stocks
As I write this post in June 2025, the US stock market is up 2.19% on the year, and the international stock market is up 15.76%. That, in short, is why I invest in international stocks. Sometimes international stocks outperform US stocks. Both are risky asset classes, but they don't have perfect correlation with each other. Not only does including international stocks in the portfolio increase diversification by adding thousands of additional companies to the portfolio, but it also provides geographic and currency diversification. I expect both US and international stocks to beat inflation (and less risky investments like bonds) in the long term, and there will be times (like 2025) when US stocks zig and international stocks zag.
Why We Own VXUS
Fifteen percent of our portfolio is in the Vanguard Total International Stock Market Index ETF (VXUS). Since I started investing in this fund two decades ago, the expense ratio has fallen and fallen and fallen. Now, like VTI, it's essentially free at just five basis points. For five basis points a year and 30 seconds of my time, I can own >8,600 stocks in 51 countries. That's a deal.
Why We Own IXUS
Just like we need a TLHing partner for VTI (ITOT), we also need one for VXUS. This partner is the iShares Total International Stock Market ETF (IXUS). It's almost as cheap and almost as good, and we certainly don't mind holding shares of it forever. One could argue that other partners might be better, but nobody can argue another partner is MUCH better. IXUS is good enough. Which is good, because something like 99% of our money in this asset class is currently in IXUS due to some TLHing timing.
Why We Tilt to Small Value Stocks
Twenty percent of our portfolio is invested in small value (SV) stocks (15% US and 5% international). Small and value stocks have shown higher long-term returns across multiple countries and time periods. This is due to both risk reasons (smaller and more valuey stocks are more likely to go out of business; they're riskier investments) and behavioral reasons (large growth stocks are better known, much sexier, more comfortable, and easier to own).
Now in our third decade as investors, we continue this tilt. While this decision has not paid off so far, that is offset by the fact that the valuation gap between large growth stocks and small value stocks has rarely been higher and the fact that staying the course with any reasonable plan is more important than what that plan is. Our plan is reasonable, and sticking with it has helped us to accomplish all of our goals. We'll stick with it some more.
Why We Own AVUV
Once you've chosen to tilt your portfolio, deciding on small value funds to do it with is a lot harder than just choosing some Total Stock Market (TSM) funds. Originally, we used the Vanguard Small Value Fund and then ETF (VBR) with the Vanguard S&P Small Cap Value 600 ETF (VIOV) as the TLHing partner. However, I've always admired Dimensional Funds, particularly after some of their staff left Dimensional, founded Avantis, and began offering ETFs that didn't require advisory fees.
After careful analysis, we decided to move our small value funds to the Avantis Small Cap Value ETF (AVUV). While the cost is not “Vanguard-low” at 25 basis points, it wasn't that long ago that we paid that much for Vanguard index funds. We think the additional cost is worth it. It is much smaller and a little more valuey than the Vanguard options, and we think the DFA/Avantis experience with small value and little tweaks to the index fund process (passive philosophy with active implementation) is worthwhile.
Why We Own DFSV
Since we own AVUV in taxable, we need a TLHing partner for it. Once DFA saw Avantis start ETFs, Dimensional finally got on board with it. Now, it offers its own funds in ETF versions without an advisor requirement. We use the Dimensional Small Value ETF (DFSV) as a TLHing partner for AVUV.
Why We Own VIOV
Unfortunately, we decided to switch to Avantis/DFA small value ETFs after we had started moving small value funds into our taxable account, creating a legacy investment issue. Our method of dealing with legacy investments is to use them for our charitable contributions. We just have so many of them after switching to Avantis/DFA ETFs that it's going to take a while to get rid of them, even given our usual levels of charitable giving.
Why We Own AVDV
Just like we have AVUV on the domestic side, we need a holding on the international side. For a long time, we didn't see a great option for a small value international fund. So, we used the Vanguard Small Cap ETF (VSS). Now, we use the Avantis Small Cap Value ETF (AVDV). We don't like that (unlike VSS) it avoids emerging market (EM) stocks, but we'd prefer to get the value tilt than to have EM stocks.
Why We Own DISV
The Dimensional Small Value ETF (DISV) is the obvious tax-loss harvesting partner for AVDV. I'm not thrilled about the 42 basis point expense ratio (I don't even like the 36 basis point ER for AVDV), but I think it's worth it. There aren't a lot of other options in this space, and I think these two are the best of them. Which of the two is the very best is hard to say, but over the last three years, DISV has had a slight edge (13.02% vs 12.93% per year). Which is fine since we have similar amounts in each of them.
Why We Own VSS
Again, this is a legacy holding in taxable. We still own some VSS. In fact, about half of our “international small cap” allocation is still in VSS, but that's where charitable contributions came from last year, where they will come from this year, and probably where they'll come from the year after that. Then, we'll go back after that to VIOV. I'd rather wait to have exactly what I want than to realize capital gains. VSS is good enough for now. We owned it for years, so we're obviously fine with it.
More information here:
Value Tilt – Don’t Give Up on Your Small-Cap Value Strategy
Avantis vs. Vanguard: Does It Make Sense to Switch Up Your Portfolio?
Why We Own Bonds
Twenty percent of our portfolio is in bonds. Bonds haven't been very popular in the last few years. Part of that is the incredible run that the US stock market has had over the last 10-15 years. Part of it is that 2022 was the worst year for bonds . . . ever. Frankly, a lot of the “100% stock” folks are just performance chasing. Many of them will “discover” bonds after selling stocks low during the next big downturn.
We own bonds for several reasons:
- Bonds might outperform stocks, even over long periods.
- We don't have the risk tolerance for a 100% stock portfolio. Basically, we discovered that having some bonds in our portfolio in 2008 helped us to stay the course—75/25, 80/20, 60/20/20, etc., is about right for us. It balances our Fear of Missing out (FOMO) with our Fear of Loss (FOL).
- We don't need to take 100% stock risk to make the money we don't need to buy the things we don't want to impress people we don't even like. We've pretty much reached all of our financial goals already. Bill Bernstein says, “When you've won the game, stop playing.” We have enough in bonds to live reasonably comfortably for the rest of our lives, and that feels pretty good. It also allows us to take investment and business risks that others may not be comfortable taking that pay off even more than going 100% stocks.
Why We Own SCHP
We have always split our bond portfolio in half with 50% nominal bonds and 50% inflation-indexed bonds. We're somewhat agnostic about which will outperform, but we think a healthy dose of inflation-indexed bonds is wise, given that inflation is the biggest long-term risk to bonds. We used to use the Vanguard Inflation Protected Securities Fund (VAIPX), but when our 401(k)s ended up at Schwab and Fidelity, I wasn't willing to pay additional fees (there is no ETF version) to buy it. We started using the Schwab TIPS ETF (SCHP), which we've now been using for years. Even now that some of our TIPS are moving into taxable, we still find it a reasonable holding to use. We've never had to TLH it either, so it is our only TIPS bond fund. (If we ever do, I'd probably use TIP, the iShares TIPS ETF.) SCHP is 1/6th the cost of TIP, and it's about the same size with similar holdings and with a slightly better past performance.
Why We Own Individual TIPS
There was a time when we were seduced by the merits of individual Treasury bonds. Having no expense ratio and no possible loss of principal when held to maturity are compelling arguments. But so is simplicity. And SCHP is simpler than individual TIPS, especially when dealing with the TreasuryDirect website. So, we plan to close our TreasuryDirect accounts and eventually get out of the individual TIPS game by moving proceeds when they mature into SCHP.
Why We Own I Bonds
Series I Saving Bonds (I Bonds) are another great inflation-indexed type of bond. They work slightly differently than TIPS (and worked A LOT better in 2022 for various reasons). They're very low-risk investments. However, they have a couple of big downsides. The first is that you must have a TreasuryDirect account to buy them, and if you've ever logged into a government account, you know why this is a downside. The second is that you can only buy $10,000 (per entity) per year. That makes them a fine investment if you're not that rich or if you became rich over many years while buying I Bonds each year. Neither of those describes us. We don't and will never have enough I Bonds in our portfolio to justify holding them at all, so we plan to close our TreasuryDirect accounts soon, liquidate the I Bonds, and move the proceeds into SCHP. It's a bit of a legacy investment issue, but it's not too painful since the gains just aren't very high because I Bonds don't have very high returns (well, except in 2021-2022).
Why We Own the TSP G Fund
I spent four years on active duty, and I was thus eligible to make Thrift Savings Plan (TSP) contributions. We also rolled over an old SEP-IRA and a couple of cash balance plans into the TSP after I left service. While it was once the largest part of our portfolio, the TSP slowly became less and less significant. I love the G Fund. Treasury returns for money market risk; it's one of the few free lunches in investing. But it is also on the chopping block for us, simply to reduce the number of accounts to manage. Inertia, nostalgia, and that pesky free lunch are keeping it alive so far.
Why We Own VWIUX
Most of our bonds, like most of our portfolio, are now held in a taxable account. Since we're in the top tax bracket, that means using municipal bonds. Our chosen holding here is the Vanguard Intermediate Term Tax Exempt Fund (VWIUX). Technically not an index fund, its turnover is about 30% (still low for intermediate bonds), and it charges nine basis points. It has over 14,000 bonds in it and a duration of just under six years. We find intermediate munis to be at the sweet spot for bonds—attractive due to a higher yield than short-term munis with lower volatility than long-term munis.
Why We Own VTEAX
We have had to TLH VWIUX, so we also own the Vanguard Tax Exempt Bond Index Fund (VTEAX). It is a true index fund, and it has a slightly lower ER (seven basis points) and an ETF version (three basis points). The duration is slightly longer (seven years), but the turnover is a little lower (20%) and the yields are very similar. VWIUX gets the performance nod, but VTEAX is still good enough for a TLHing partner.
More information here:
I Bonds and TIPS: Which Inflation-Indexed Bond Should You Buy Now?
The G Fund (Finally) Gets Its Day in the Sun
Why We Own Real Estate
Twenty percent of our portfolio is invested in real estate. As I have often told WCIers, real estate is optional as asset classes go. Bonds are optional to some WCIers, though, and I suppose stocks could be optional too, so long as there is plenty of real estate in the portfolio. But I see little reason to come down definitively on one side of the stocks vs. real estate debate. I never have. Real estate has lots of advantages, including:
- High and (done in a reasonable way) relatively predictable long-term returns
- Low correlation with stocks and bonds
- Easily leveraged
- Some unique tax breaks (most prominent in the private space, especially when investing directly)
- Relatively high income-to-return ratio (if you care about that)
Of all the “alternative” investments out there, I find real estate the most attractive. It has a very long track record, and it is easily understood. (Buy property, rent it out, pay all expenses with the rent, and keep what's left.) Stocks, bonds, and real estate. That's what we invest in. Yes, I know there are lots of other things out there to invest in, including:
- Commodities
- Derivatives
- Currencies
- Cryptoassets
- Collectibles (including precious metals)
But, like real estate, they're all optional. Unlike real estate, they don't all have the above advantages (to be fair, I think cryptoassets like Bitcoin may be THE most tax-efficient assets on the planet as long as you never need to spend anything, and even then, it's not too bad).
Why We Own VNQ
Our primary real estate holding for many years was simply the Vanguard Real Estate Index Fund or ETF (VNQ), and it still makes up 5% of our portfolio. VNQ owns all the equity Real Estate Investment Trusts (REITs) traded publicly in the United States. We have also invested directly (been landlords) and invested in a large number of private syndications and funds. Sometimes I'm asked by real estate doubters why I don't just buy VNQ. Well, we do. We own a lot of it. We've only ever owned it in tax-protected accounts, so I've never bothered looking very hard for a TLHing partner. But it wouldn't be the worst thing to have in a taxable account (that would be a private real estate debt fund).
Trivia
Let's spend a few minutes answering questions I often get about our portfolio.
Why Don't You Own [Fill in the Blank]?
You don't have to invest in everything to be successful. Choose a reasonably diversified asset allocation, pick a few funds to give you that allocation, and move on. How much money you make, how much of it you save, and how well you stay the course with your written investing plan will make a far bigger difference in your financial outcomes than your exact asset allocation or investments. We specifically avoid speculative investments—those that do not produce interest, dividends, earnings, or rents. These include precious metals, cryptoassets, art, collectibles, empty land, commodities, derivatives, and more. We also avoid picking individual stocks, fun money accounts, active managers trying to beat the market, and other investment techniques shown to have poor outcomes most of the time.
If You Like REITS and Bonds, Why Not International REITs and Bonds?
Simplicity. I think a great argument can be made for having three asset/subasset classes in your portfolio. A good argument can be made up to seven. One can still argue effectively for perhaps 10. Beyond that point, you're just playing with your money, especially when you're putting 1% in this and 2% in that. Investing is about reaching your goals while taking on the minimum amount of risk and complexity. It's a single-player game. My fun money gets spent on rafting gear and international travel, not gambling on the latest meme stock or crypto fad. You don't have to invest in everything to be successful, and most investment “collectors” eventually regret it.
What's the Rest of the Portfolio Invested In?
Fifteen percent is invested in private real estate: 10% on the equity side and 5% on the debt side. More details here.
Why Not Cash Instead of Bonds? Why Not Long-Term Bonds? Why Not BOXX? Why Not CDs? Why Not Treasury Bills?
There are plenty of reasonable ways to invest in fixed income. If you think it really matters which of those reasonable methods you choose, you're mistaken. Your chosen way is probably fine. We prefer to take our risk on the equity side, so we keep term risk short to intermediate and minimize credit risk.
What Was the Point of This Article?
I want YOU to have the ability to do THIS exercise with YOUR OWN portfolio. You need to know why you own every one of the investments you own. And if you don't have a good reason, it's time to get rid of it, especially in a tax-protected account where there are no tax consequences to doing so. If it has a large amount of capital gains in a taxable account, then perhaps it becomes a legacy investment until you give it away or die.
What do you think? Why do you own each of your investments? Why is it important to understand the role of each of your investments in your portfolio?
Hi Dr. Dahle, I found i t difficult to purchase ETF (v.s index fund) regularly because ETF price is fluctuating during the day and it’s hard to make a decision when to buy. I often set a limit price and when market price does not drop to that level, the order goes unfilled for many days or even weeks/months. If I purchase index fund (FSGGX, FXAIX), I can just set automatic investment to purchase 4 times a month at certain days of the months. Do you set up limit price to purchase ETF? If not, do you purchase at certain time of the day to avoid artificially inflated price?
No, I use market orders on the day I have money to invest. I agree it’s easier to automate traditional mutual fund purchases than ETF purchases, but I think it can still be done. But if not, it’s only a few minutes to log in and get it done. That can probably be done on a short break in the work day if your partner can’t do it and you don’t have an advisor.
Vanguard launched a total TIPS etf last week (ticker:VTP, ER: 0.05%) similar to schp … not a different share class of vaipx, but a new fund it seems
Cool! I may change over or at least use it as a TLHing partner. It’s about time. Thanks for the heads up.
“We don’t need to take 100% stock risk to make the money we don’t need to buy the things we don’t want to impress people we don’t even like.”
Dr. Dahle, I loved this. Wish more people had this philosophy!
Really great post—super clear and helpful, as always. I especially liked the reminder to know why you own what you own. That part alone is worth revisiting regularly.
A few quick questions I’ve had trouble finding solid answers on (maybe you’ve written about these before and I missed it?):
1. Have you ever done a post breaking down how you approach tax-loss harvesting? I know it’s valuable, but it’s tough to find good info that’s not just a sales pitch for a managed account. Curious how you do it and what you think the actual benefit is in bps per year. Also wondering what level of complexity gets you most of the value without turning it into a part-time job.
2. From an asset location standpoint, are your TIPS in retirement accounts, or do you mix in taxable now too?
3. For the TIPS side of your bond allocation, have you ever thought about just skipping TreasuryDirect and ETFs, and doing non-competitive bids at auction through a brokerage to build a ladder that covers, say, X years of living expenses? Seems like a way to get peace of mind and not have to worry about selling stocks in a downturn.
Thanks again for continuing to share all of this—it’s consistently some of the most practical stuff out there.
1. https://www.whitecoatinvestor.com/is-tax-loss-harvesting-worth-it/
https://www.whitecoatinvestor.com/tax-loss-harvesting/
2. I have them in both currently, but bear in mind our taxable % is like 85% and climbing now. It was definitely one of the last asset classes we’ve moving out of tax protected accounts.
3. Yes. I have thought about it. I think it’s a wise way to invest in TIPS and a great solution to sequence of returns risk.
https://www.whitecoatinvestor.com/4-methods-of-reducing-sequence-of-returns-risk/
And it would eliminate an account to just do it at Vanguard brokerage instead of treasury direct. We went there because we already had the accounts for I bonds, which we’re probably dumping too.
We don’t have that need due to our ratio of wealth to spending so we’re probably going to get rid of our TIPS ladder and just use a fund for simplicity.
How much return do anticipate that your private real estate investments will provide compared to VNQ? What about compared to total international or total (US) market?
I’ve held VNQ (10% of my portfolio) or its mutual fund equivalent for 20 plus year as REITs were highly promoted in the random walk down Wall Street and David Swenson’s book that I read 25 years ago when designing my portfolio.
I’m conflicted on whether to keep, though. Some say that reits is a sector bet and not worth it. On the other hand the 90% payout rule is a good way to distribute profits to investors instead of burning up on crazy schemes like the metaverse. If I dropped reits the alternative would be to buy more international as it’s currently 25% of my portfolio. Still accumulating — of course don’t want to buy international now as that would be performance chasing (based on last 6 months) so I’ll likely just keep.
No interest in private real estate as no interest in complicating my taxes. Your article on your multiple state income taxes was enlightening. Since I’m a do it myself tax preparer as well as investor that sounds like a nightmare.
Our private real estate investments are different from what is in VNQ. On the equity side, the properties are smaller, are more value add and core plus than the core found in VNQ, and of course much less liquid (presumably with an illiquidity premium). On the debt side, there are no debt investments in VNQ. You seem to be just comparing returns, and not even past returns which we can look up somewhat, but future returns which are unknown and unknowable. What do I expect? I expect my stock returns and real estate returns to be similar. Something like 7-12% long term.
Some do say REITs are a sector bet. I’m not in that school of thought but I do think it’s reasonable. I think REITs are fundamentally different from other stocks. You should think long and hard before making changes to your portfolio. Changing from REITs to international NOW feels like performance chasing to me due to recency bias.
If simple tax returns are a priority for you, I would stay away from private real estate. Most will send a K-1 and at least half of them will be late and some will eventually require filing taxes in multiple states.
Thank you. Love it. Simple. You give asset allocation. The actual products you buy. You also are aware of your behavioural patterns. Really useful(especially because I’m debating more bonds-midlife/post midlife reluctantly.. accumulation phase), but also getting enough assets to want to start to err on protection. I also like that you’re simplifying accounts. Honestly when you go through your private real estate holdings i get palpitations. Maybe it’s the unknown but too complicated for me. Thanks again. Long time reader.
Hi Jim,
Thank you for all you do for our community; it is much appreciated!
What do you think of my 60/40split: 40% VTI, 10% VXUS, 10% VSCIX, 10% BND, all in retirement accounts, and 30% in VUSXX in my Brokerage since I am in the highest tax bracket and fear the vicissitudes of Munis? This has yielded 10% return since my Fellowship, but please let me know if you have other suggestions.
Thank you again!
Best, Steve
A little odd to tilt to small instead of value though. VSCIX is just small, not small value. But certainly within the realm of reasonable.
Treat all funds designated for retirement as one big account/asset allocation no matter what account they’re in.
What do you fear about munis? Seems odd to fear munis and not the corporates or mortgage bonds in BND. If you just want treasuries, then use treasuries, both in tax protected and taxable. Cash (VUSXX) is not the same thing as bonds. If you want bonds, use bonds. If you want cash, use cash. Either is fine, but make a decision and stick with it.
Super interesting podcast based on evidence based research article on why you should never own bonds, just transiently some notes right when you retire. All should listen here.
https://podcasts.apple.com/us/podcast/the-rational-reminder-podcast/id1426530582?i=1000701042104
I’m not sure most will listen. Maybe good idea to summarize the arguments put forth on this eternal topic.