By Dr. Rikki Racela, WCI Columnist

The ultimate question: What is the best portfolio to maximize the amount of money you make in investing and to achieve your goals? Dr. Jim Dahle had already mentioned in “150 Portfolios Better Than Yours” that multiple portfolios (actually there are more than 150 in that post; many have been added since the original article was titled) are reasonable to achieve your financial goals. As Jim says, there are many roads to Dublin.

Today, at the risk of sounding brazen, I will make the argument that I have the best asset allocation. I will outline my reasons why I believe, through a systematic and comprehensive process of analyzing my situation and choosing my asset allocation, I have built a portfolio that I will stick with through thick and thin to reach my financial goals. Namely, I will outline why my portfolio is better than yours.

And I won’t require you to wait until the end of this column to find out what that asset allocation is. In case the anticipation is killing you, the one portfolio better than yours is . . . drum roll . . .

65% total US stock market, 25% total international stocks, and 10% small cap value.

Now, let me tell you why.


Know Your Financial Goals

The first step Jim mentions in building a portfolio is to identify your goals. It makes sense: you should know where you’re headed before you plan out a path to get there. That path you build is your asset allocation. For my financial plan, the main reason I invest is for retirement. Let me reiterate: the No. 1 goal in my written financial plan is to invest for retirement. It's not for another 24 years, at which time I will turn 65 and be eligible for Medicare. My financial plan is not for short-term gain, not to have fun, not to beat my friends, and not to brag to other docs in the hospital. It is for RETIREMENT.

This statement already eliminates many potential asset classes, including Bitcoin, options, individual stocks, NFTs, angel investing, etc. Can I depend on Bitcoin to be there in 24 years for a guaranteed long-term return? Or any of the other assets that I mentioned? Absolutely not. Bitcoin hasn’t even been out for 24 years. Options are more like gambling. No thanks.

Equities, on the other hand, have stood the test of time. The New York Stock Exchange was started in 1792, more than 230 years ago. When you invest in the total US stock market, you have almost zero chance of your investment going to zero. Better yet—as Ben Carlson mentioned in his blog at A Wealth of Common Sense—over rolling 20-year periods, the S&P 500 has never been negative. And in 90% of those 20-year rolling periods, the S&P made 7% or more annually. In the context of reaching my retirement goals, stock index funds it is.

In case you were wondering which ones I use in particular and why:

Rikki chart


You might have noticed a pattern for the stock index funds I have chosen. Not only do they fit my chosen asset allocation, but they are DIRT CHEAP. These index funds were chosen as the cheapest available options across our taxable, IRA, and work retirement accounts. Like Jack Bogle says, you get what you don’t pay for.

More information here:

10 Reasons I Invest in Index Funds

How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?


100% Equities? Are You Nuts?

Author Larry Swedroe defines asset allocation as “the process of investing assets in a manner reflecting one's unique ability, willingness, and need to take risk.” In regards to the ability to take risk, I believe I am up there. During my short investing career, I've witnessed that stocks are indeed risky. But are they truly risky FOR ME? The risk we are usually talking about when it comes to equities is volatility risk—which, given MY time horizon and the rolling 20-year data mentioned above, is not really a risk to me at all. Since I am not drawing down my investments anytime soon, I can wait out volatility. Since my wife is not interested in looking at this financial stuff, she's technically probably the best investor in this relationship.

I'm a neurologist, and my wife is an anesthesiologist. Our incomes are incredibly stable. Even during the pandemic, while some other docs had a loss of income because of canceled outpatient procedures, we got busier. I got consulted much more during the pandemic, and my wife was busy intubating sick and dying patients. This increased amount of work resulted in our income actually increasing during the pandemic. Because of how horrendous COVID was, our skills were sorely needed. So, the volatility risk of a 100% equity index portfolio is also neutralized by our high stable income.

What if disaster strikes? What if I die in a car accident motoring down the Garden State Parkway? What if my wife is in the passenger seat with me and mangles her hands in the same accident? Not to worry (at least financially)—we have appropriate term life and true own occupation disability insurance. No need to deplete our 100% equity portfolio. As mentioned in our written financial plan, having appropriate insurance in place shores up our ability to handle volatility risk.

As for Swedroe’s “willingness” to take risk, I slept like a baby through the Coronabear and the bear market earlier in 2022. Actually, let me take that back. What keeps me up at night is that the market was NOT FALLING MORE!!! I was actually upset that the market was not tanking more, losing 50%, 60%, or even 99% of its value. You know why? Because if it fell to 1% of its value tomorrow, then I have a whole lot of my paycheck to buy a larger percentage of every company that is publicly traded.

Don’t get me wrong: I wouldn’t want the horrendous job losses or the soup lines that characterized the Great Depression. I would want society still working and fed. I just want the stock market to be horribly mispriced due to inappropriate psychological panic so that I am buying stocks at an awesome sale. When Bill Bernstein says, “If you are in the accumulation phase of investing, you should get on your hands and knees and pray for a bear market so you can buy cheap stocks,” I am taking him seriously. And my knees hurt!

In the end, every bear market to me is a lucky positive occurrence bringing me much closer to achieving my financial goal of retirement (for those of you reading this in the decumulation stage of retirement, I didn’t forget about you—I would also pray that there is an equal flight to safety and that the bond portion of your retirement portfolio will have an equal meteoric rise commensurate to the equity fall).

And finally, for Swedroe’s “need” to take risk, my wife and I don’t have to be 100% equities. But there is a sense of urgency since reaching our FI number will allow us the option of cutting down our work hours to spend more time with our kids and each other. The longer we take, the less time we have to choose more time with family. So, we are motivated to get to FI sooner, and a 100% equity portfolio is a shorter and straighter path to get there.

To clarify, getting to FI is not the same for us as retirement. FI to us just means the option of cutting down work to spend more time with family. If equities take a prolonged downturn preventing us from reaching FI sooner, so be it. As I said above, the actual goal of our investment plan is for retirement.

More information here:

Yes, Risk Tolerance Can Be Modified: You Just Have to Rewire Your Brain


But Don’t Some Bonds Also Have High Returns?

Yes they do, but evidence suggests that even the riskiest of bonds (i.e. junk bonds or long-term bonds (or God forbid, long-term junk bonds)), do not have the risk-adjusted returns of equities. As the late financial writer Raymond DeVoe Jr., famously quipped, “More money has been lost reaching for yield than at the point of a gun.” Seems like Silicon Valley Bank may have forgotten this statement.

For myself, I am taking a longer-term approach for my portfolio during the accumulation stage where I want to make the most money possible at the lowest possible risk to reach my goals. Riskier higher-yielding bonds are inferior in this regard.


Why Not Invest in Real Estate?

best portfolio

Easy answer: because I don’t want or need to. It is not essential to include real estate in my portfolio for me to reach my goals. I read Jim’s post about his real estate investments and started getting nauseous. He has so many RE funds/investments to track that it violates the simplicity principle. I find it ironic that Jim also authored a blog post regarding simplicity, but I guess when you run a business based on teaching about investing and sound financial principles, you really should violate the simplicity principle to learn your craft. I am a neurologist that can’t humanly practice forever, and I need a portfolio to see me through my non-working years. Real estate is not necessary for that.

But what about REITs? They’re pretty simple, right? While REITs are easy to add to a portfolio, WCI columnist Francis Bayes went over the excellent points about why REITs may not be the right move. It is highly correlated to equities, most recently approaching 0.75. Also, its projected return is not higher than equities. Finally, a REIT index is generally more expensive with VNQ, the Vanguard real estate ETF, having an expense ratio of 0.12%, while VTI is 0.03%. So, if adding REITs doesn’t add much diversification to equities in my portfolio, if it doesn't boost my return, and if it's more expensive, why in the world would I add it to my asset allocation?


Don’t You Think You Should Add More International?

What an excellent question! Many index investing purists will mention that as long as you're indexing the entire world stock market, why not mirror its percentages—currently 60% US and 40% international? I have to take a page from Saint Jack Bogle on this one. Jack is very well known for not wanting to add any international to an individual’s stock allocation. His main argument was that domestic companies already have significant operations overseas, so by investing in the total US stock market index, you have significant international exposure anyway. His insight is well founded when looking at the high correlation of international indices compared to the US stock market—consistently above 0.8, according to Morningstar.

He did soften up in later years and mentioned in his book Bogle on Mutual Funds that you could dedicate, at most, 20% of your asset allocation to international equities. Why would Jack not match the world of 60-40? He mentions how currency risk, where depending on the relative strength of the dollar compared to whatever local currency your international investment lies within, can affect your return. A second point he makes is the significant political risk that occurs in investing internationally, especially in emerging markets. These two risks of currency and political risk may not be compensated with a higher return; hence, his hesitancy to increase international exposure past 20%. But I feel my 25% allocation is close enough to Saint Jack’s advice.

There is also a behavioral bias that I am taking advantage of when I have two-thirds of my allocation in US equities: namely home bias. Yes, many cite this bias as hurtful to investors. But let’s face it: if there was a country to have a home bias in, the US is it. Having the world’s largest economy with many of its profits derived globally, you already have global diversification when investing in a US index.

More importantly, I love the US down to my core. I am proud to be an American, so much so that it will tap into my System 1 when my portfolio is tanking. If my US index falls 50%, 70%, or even 90%, my home bias will help me stay the course because I believe in America. This country has gone through so much financially, including the Great Depression almost a century earlier, and with my home bias, my System 1 will never want to sell if the US stock market is tanking. From a non-financial perspective, the success of the US stems from building a country based on all that is good in this world and what’s best for humanity. Despite not always being perfect, the fierce protection of freedom in this country for its citizens without regard to race, gender, and socioeconomic status is unparalleled anywhere in the world.

If I had more of my portfolio internationally and the world index was tanking, my System 1 would be more inclined to sell. Investing more in the US helps me stay the course.

More information here:

Why You Shouldn’t Bail Out on International Stocks


Why the 10% Small Cap Value?

Why not more than 10%? What about other factors?

med school scholarship sponsor

I have to say that the small cap value tilt is all Paul Merriman. During my financial literacy journey, I have eaten up all he has to offer. Ever since I heard him on the WCI podcast while I was binge-listening to old episodes, I started listening to Paul’s “Sound Investing” podcast. He makes a phenomenal argument reinforcing the Fama/French data that shows small cap value has a premium over the overall stock market. So, I have a small cap value tilt. Why not add more? The small cap value premium is looking at historical data, and there is no guarantee that there will be a premium in the future. And even if it does, it might not show up in my lifetime.

Paul relays a story when somebody asked economist Eugene Fama, “You tell us that small cap has a premium over large cap. For the last 30 years, it hasn't.” Fama responded, “Well, you're not very patient, are you?” Fama’s response likely would be the same regarding value, so no, I am not comfortable making my small cap value tilt larger than 10%, given Fama’s response. I am happy with my tilt to small cap value to boost my returns to achieve my goals, and having listened to Paul, I can stick with that tilt through thick and thin. I don’t need to add more from the factor zoo.

More information here:

Which Small Cap Value Funds Are Best for You?


What About Investing in Gold or Commodities?

I look to Warren Buffett’s quote on why I don’t invest in gold:

“[Gold] gets dug out of the ground . . . Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

I am standing in the overtaxed state of New Jersey, and I am scratching my head. Gold really does not produce anything like the hardworking companies that a total stock market index fund does. The same with commodities. Investing in these assets is making a bet that someone will pay you more for them in the future. Really? You could make an argument that maybe it dampens the volatility of your overall portfolio, given its low correlation to equities, or that commodities are a good inflation hedge. I’m fine with that for other investors. For me, I want my investments to make the most money for me in the long run, and gold and commodities will not serve that role.

They say one ounce of gold 200 years ago (as well as today) buys a nice men’s suit. If you invested $100 in the S&P 500 at the beginning of 1950, you would have about $241,255 at the end of 2023, assuming you reinvested all dividends. Definitely more than a nice men’s suit!


Simple and Cheap

I mentioned the simplicity principle earlier, and my portfolio exemplifies that. My portfolio is stupidly easy to rebalance. I can easily calculate how much I should have in assets, as the US should be roughly 2/3 of my overall assets, international with one-quarter, and small cap value with one-tenth. The math is third-grade level. This asset allocation is also easily implemented across the different account types available to my wife and me. I mentioned before that the particular index funds I have chosen are DIRT CHEAP, and the average expense ratio of all our investments is 0.04%.

See the calculation below as per Personal Capital (now Empower).

Rikki retirement analyzer


I Am Also Very Competitive

I mentioned at the start of this column that beating others at this investing game is not my goal. And it shouldn’t really be your goal. Investing is a one-player game where it’s you vs. achieving your goals. I am not competing with my friends, my neighbors, other doctors, Jim Dahle . . . you get the point.

However, my System 1 is very competitive, and when I see my asset allocation of 100% equities and having that small cap value tilt, I know my portfolio has the highest chance of beating 99% of investors when I utilize low-cost index funds. Since I'm 100% in equities, a high-risk asset, the expected return is the highest it can be, short of going all out on small cap value.

Many people who pick stocks like trying to make a lot of money—and they also love to brag about it when it happens. I get to brag because I know history is on my side when I say my portfolio is going to beat 99% of all other investors in the world, as long as I don’t sell low. I can feel the dopamine hit in my nucleus accumbens, where evidence shows that even the anticipation of a win releases dopamine. My portfolio is even expected to beat the owner of this website—it’s because of his 20% in bonds. (To be fair, I am not sure when Jim will derisk, if at all. Currently, we plan to start adding bonds five years before retirement and retire on a 60/40 portfolio. If Jim stays with only 20% bonds all the way until and through retirement, then he might win.)


Did I Convince You?

So, why do I have the best portfolio? Because it is appropriate to my high-risk tolerance. Because my high-risk capacity can neutralize the volatility risk. Because, when choosing this asset allocation, I have taken into consideration the stability of my family income; my need to take risk; and, heck, even my behavioral psychology.

It is the best portfolio because it is the best one FOR ME, the asset allocation that I can stick with through thick and thin.

It’s simple to maintain and extremely cheap where any returns lost to fees are minimal. It fulfills my need to brag and beat other investors, providing me a dopamine hit. It leverages my deep-seated patriotism. I even included my wife’s risk tolerance within this calculus since, technically, it's both of us who are investing. And that is the crux of my column. The best portfolio is the one you can stick with, that has considered the multitude of factors of your life, personality, and loved ones.

I challenge you when choosing an asset allocation and building a portfolio to go through all the variables that I have outlined so you can build the one portfolio that's better than mine.

What do you think? Have you considered all the factors that I have when choosing your asset allocation? Do you think some of the items I considered are completely asinine when choosing an asset allocation? Are there some things I haven’t considered that I should have? Comment below!