An investment portfolio is like a good recipe. Not only does it need good ingredients, but it needs them in the right proportion. After reading various books and articles on the subject and listening to dozens of hours of podcasts, I was able to construct my own portfolio. Yes, it would be easier to use a service that builds and manages your portfolio for you (like Betterment). However, I want to have control over trading and exactly what I invest in and I do not want to pay someone to manage my portfolio for me.
Also, after my research, there are certain asset classes that I do not want to own, and therefore they are not in my portfolio. Before I present my model portfolio, I will present two model portfolios that you probably should use in place of mine. One is based on research completed by Vanguard and the other is from research completed by Charles Schwab. I will also discuss one portfolio which intrigues me but which I have not used. This is the Trinity Portfolio developed by investment guru Meb Faber of Cambria Investments.
All of these portfolios that I will show use Exchange Traded Funds (ETFs) and will be targeted to someone around 30 years old. The ratios can be adjusted based on age and goals. I use ETFs because they are more tax efficient and, in my mind, are superior to mutual funds in almost every way. However, you could easily implement any of these portfolios with low cost mutual funds. See my article on how to buy ETFs if you are unsure how to do so.
Model Portfolios And The Ingredients That Make Them
When you are cooking, some recipes are very simple while others are very complex. As long as the core ingredients are there in the right proportion, either type of recipe can be delicious. Investment portfolios are the same way. By mixing ingredients, or different types of holdings, you can limit the risk from any individual holding.
The main ingredients of a portfolio are United States Stocks, Foreign Stocks, and Fixed Income (bonds, CDs, or other debt instruments). Other non-core asset classes are commodities, precious metals, real estate, and foreign bonds. I do not like foreign bonds because they currently are negative yielding in developed markets or too risky in emerging markets. I also do not like commodities or precious metals because they are not businesses or debt instruments but just products. I do not want to own something that is pure speculation like a commodity. Any Portfolio that I am interested in will also have low fees. The Vanguard and Schwab portfolios, and my model portfolio, have extremely low fees.
Now that we have covered the main ingredients, let us discuss the simple 4 fund portfolio from Vanguard.
The Simple Vanguard Portfolio AKA “The Couch Potato”
This portfolio includes only 4 Vanguard ETFs. It is the portfolio made for me by using Vanguard’s online tool to build a portfolio.
|US Total Stock Market||VTI||48%|
|Total International Stock Market||VXUS||32%|
|US Total Bond Market||BND||14%|
|International Total Bond Market||BNDX||6%|
While a great portfolio for its simplicity, there are a couple issues. First of all, the International Total Bond Market index fund is negative yielding because it holds many international developed country bonds. Also, holding 48% in United States Stocks (mostly large stocks with some small mixed in) creates a lot of risk during market downturns. Still, this is a very good portfolio and one that most hedge funds cannot match, after fees.
The Charles Schwab Portfolio
This portfolio is also very simple and only holds 4 Schwab ETFs plus cash.
This is the portfolio made for me by using Schwab’s online tool to build an ETF portfolio in a self-managed account:
|US Large Cap Stocks||SCHX||45%|
|US Small Cap Stocks||SCHA||15%|
|International Developed Market Stocks||SCHF||20%|
|US Aggregate Bonds||SCHZ||15%|
This portfolio throws out international bonds which are negative yielding in favor of cash, which is currently yielding to about 0%. This is a huge improvement over the Vanguard portfolio. Unfortunately, the Schwab portfolio has no emerging market stocks (which is included in VXUS in the Vanguard portfolio) and there is even more US bias than with the Vanguard portfolio. When US stocks are doing well, we would expect the Schwab portfolio to perform much better than the Vanguard portfolio. There is also less interest rate risk due to less total bond holdings.
My 2018 Portfolio
I try to take some of the best parts of both portfolios and also add in some of the other ingredients to make my own portfolio recipe. I use Charles Schwab funds for all but one of the ETFs due to their marginally lower cost, but we could easily build this with funds from Vanguard, State Street, or iShares at a similar cost.
|US Large Cap Stocks||SCHX||33%|
|US Small Cap Stocks||SCHA||11%|
|International Developed Market Stocks||SCHF||20%|
|International Small Cap Stocks||SCHC||4%|
|International Emerging Market Stocks||SCHE||10%|
|US Real Estate Investment Trusts||SCHH||6%|
|US Aggregate Bonds||SCHZ||4%|
|Short Term US Treasuries (1-3 Years)||SCHO||4%|
|Short Term Floating Rate Corporate Bonds||FLRN||4%|
My portfolio adds in small cap foreign stocks and also increases risky foreign holdings such as emerging market stocks. I add in some United States Real Estate Investment Trusts and also utilize short term bond holdings in place of longer term US or foreign bonds. If interest rates rise significantly more, I will potentially add in longer term corporate bonds and foreign bonds and reduce my short term bond holdings. I also hold my cash in either a money market account or an ultrashort treasuries bond fund.
A Bonus Portfolio: Cambria’s Trinity Portfolio
I am including the Trinity Portfolio developed by Meb Faber because it is unique, well researched, and something I may start buying in my Vanguard or Robinhood account. The Trinity Portfolio aims for moderate risk and return with three rule based approaches: trend following, momentum, and value, while maintaining a global asset allocation that is diversified. Unlike all of the other funds in the prior portfolios, this strategy does not try to copy the market but rather tries to be different by following 3 proven quantitative investing strategies. You can learn more about this strategy here. This strategy is also unique because it can be purchased with one ETF, The Cambria Trinity ETF, ticker TRTY.
|Cambria Trinity ETF||TRTY||100%|
Expenses of the 4 Portfolios Compared
The 4 portfolios are compared below. Expense Ratio’s are percentages per year but are traditionally written without the “%” symbol. Thus 0.05 is the same thing as 0.05% and not 5%.
|Portfolio||Expense Ratio||Cost per $10,000/Year|
Expense ratios of the Vanguard portfolio, Schwab portfolio, and my portfolio are all extremely low. The lowest cost fund is definitely Charles Schwab, but it is only $2.90/year cheaper per $10,000 invested. The reason the Vanguard portfolio and my portfolio are both more expensive is because of the inclusion of more expensive asset classes. In the case of Vanguard it is the inclusion of emerging market stocks in VXUS and in my portfolio it is emerging market stocks, foreign small cap stocks, and floating rate corporate bonds.
Also, the trinity portfolio is quite a bit more expensive because of the costs of running the more complex strategies that do not simply follow the market but rather follow trend, momentum, and value. That does not mean that the Trinity portfolio is not a good pick, but it does mean that the Trinity portfolio starts off at a disadvantage due to its higher cost.
A Note About Rebalancing
Over time, any portfolio will drift from its asset allocation. You should rebalance at least once a year, but also not too often. I rebalance sometime in January or February, depending on when I get to it. There is a lot of research that finds that rebalancing is necessary but that rebalancing too often simply adds to capital gains taxes and actually hurts returns.
My Take On Building Your Own Portfolio
I think you should try building your own portfolio but you should not dwell too much on it. Many portfolios are going to perform similarly over long periods of time and nobody knows what the future holds. The most important thing is that you save and invest now. If you want someone to build your portfolio for you, I recommend using Betterment because they charge very low fees to build and manage your portfolio for you. If you do not have much to invest, I suggest choosing a simple portfolio such as the simple Schwab portfolio or, if you believe in the quantitative approach of Cambria, the Trinity ETF.
Disclosures: I own almost every fund discussed in this article, other than TRTY which I may purchase in the future. I received no compensation for anything written herein.