Tonight I introduce you to my top-secret portfolio.
To read this is to understand my values.
I am laying bare my innermost investment secrets.
And without further ado:
Overall Makeup
Total stocks 72%. (68.5%– 75.5%)
Domestic stocks 43%. (40.5%– 45.5%)
International stocks 29%. (26.5% – 31.5%)
Total bonds 28%. (25.5% — 30.5%)
Domestic stocks.
9% Large blend VOO (6.5% – 11.5%)
10% large value. RPV (7.5% – 12.5%)
9% small blend VB (6.5 – 11.5%)
10% Small value. RZV (7.5% – 12.5%)
5% real estate Investment trust. VNQ (2.5% – 7.5%)
International stocks
6% Large blend. SCHF (3.5% – 8.5%)
6% large value EFV (3.5% – 8.5%)
6% small value-ey blend DLS (3.5% – 8.5%)
6% emerging markets SCHE (3.5% – 8.5%)
5% international REIT VNQI (2.5% – 7.5%)
Bonds
14% long-term treasury inflation protected securities. LTPZ (11.5% – 16.5%)
14% short-term corporate investment grade bonds. VCSH (11.5% – 16.5%)
Whew…that was liberating.
I share this with you, not because it is a portfolio that you should emulate.
This portfolio is perfect for one person and one person alone and that is me.
It reflects my appetite for risk, my view of the world, books that I’ve read, my aspirations, my values and my fears.
I share it because it is an example of choices that one investor has made. And the structure can be used as a template to overlay your own values and ideas, should you wish to go that route.
Here are the questions that I’ve both asked myself, and answered to come up with this portfolio.
How much risk are you willing to take?
Quite a bit. Although the stock to bond ratio is 72 to 28. I.e. appropriate for a generic investor 12 years younger than my age of 40. It’s actually more aggressive than that. The stock composition is quite a bit smaller than the stock market as a whole. And it is very tilted towards value. These should both add returns, and possibly risk.
With this allocation, I’m saying that I’m okay with a loss of portfolio value somewhere between 40 and 50% during a big bear market.
What is important to you?
The first principle for me is frugality. I’m picking out the cheapest good fund in the category that I’m interested in, in each case here.
Also while intellectually I would have loved to include a momentum fund in place of the large clap blend categories here since momentum would do a good job of balancing out my predisposition towards the value play, in the end I just decided I couldn’t resist the low low prices on the large cap funds. I’m giving up some portfolio efficiency for cheapness.
Put simply, I’m a big believer that costs matter.
The second principle here is Value. Both philosophically, and temperamentally, the idea that companies with a low price relative to their intrinsic worth will do better over time resonates with me. I buy the argument that this trend will continue well into the future.
The third principle here is size. By investing in small companies I’m saying that I’m willing to take on more risk if I’m paid a premium for it over time.
Why include real estate in my equity portfolio?
I believe this will increase the efficiency of the portfolio. (i.e. I’m going for the diversification benefit here.) Real estate investment trusts have had an imperfect correlation with my other categories of stocks and bonds over their history (though this correlation waxes and wanes.)
Real estate is also a hedge against inflation.
I also like having this high dividend yielding asset class in my portfolio.
Finally I like the argument that Rick Ferri makes about real estate representing a sizable proportion of our economy, and being under represented in the stock market as a whole.
Why have a roughly 60:40% split of domestic versus international stocks?
If international stocks were as cheap as domestic stocks I would likely have a 50-50 split here to reflect the actual makeup of the world economy, (and to harvest the additional diversification benefit.) But domestic funds have lower expense ratios, so I slightly favor domestic stock funds.
Why are there no commodity funds in the portfolio?
Although I do believe there is a significant diversification benefit to including commodities within the portfolio (think gold, silver, etc) I just want everything in my portfolio to pull some weight, i.e. have expected earnings and price growth above inflation into the future.
What is the significance of the percentage ranges displayed to the side of each category?
These represent acceptable ranges within my portfolio at which point I would not rebalance my assets and incur the costs of trading/capital gains taxes at the time of rebalancing.
I used the 5/25 rule here, meaning that if any asset or asset class rises or falls by 5% of its ideal value, or an absolute percentage value of 2.5% from its ideal value, then rebalancing should occur.
So if my total allocation of domestic stock falls below 40.5% or rises above 45.5%, that is when I should consider rebalancing, come rebalancing time.
The only thing I have to really add to this chart to have a functional investment plan, is my planned frequency of rebalancing.
For a taxable account I would not likely rebalance more than once a year.
But for a tax sheltered account, like an IRA, I would consider rebalancing up to every quarter.
If you’re interested in investing in this particular portfolio. I’ve made a motif on motifinvesting.com entitled the MD squared index. Feel free to use it.
I will be doing a formal review of motifinvesting.com in the future, when I have had more experience navigating the site, and executing trades. But early research looks promising.
