Now that we are several months into 2019, I want to share my investment portfolio with my readers. In setting up my investments, I have made changes as I have learned more and dialed in my investments. In setting up my investments, there are several key decisions that I have made, and I want to share those before I get to the actual numbers.
1. Invest in Exchange Traded Funds, Not Mutual Funds
This is simple. Exchange Traded Funds (ETFs) are bundles of stocks which are traded like stocks. They have a share price and you can only buy whole shares (unless you invest somewhere like M1 Finance that offers partial shares). Exchange Traded Funds are simply better for normal investment accounts because they pay less capital gains than the comparable mutual fund. Less capital gains means you, the investor, pay less in taxes.
2. The Actual ETFs Do Not Matter (I Use Schwab and iShares)
Simply pick low cost, index-based ETFs. There are low cost ETFs from Schwab, Vanguard, iShares, and State Street. For example, everything but some of the foreign stock and bond ETFs in your portfolio should charge less than 0.1% each year in fees. Core US holdings should be under 0.05%.
The true message is buy from whatever company you like as long as it is low cost and from a reputable company. Even Vanguard, the darling of the low cost ETF space, is no better than its competitors at this point. If you cannot buy any of the 4 brands of ETFs listed above without commission, then you should open a Schwab, Vanguard, or Fidelity account so that you can. You can also buy these funds on platforms like Robinhood and M1 Finance.
3. I Believe in the Global Asset Allocation Model
What this means is that I do not believe that I should own more US stocks than the relative size of the US market compared to the rest of the world. Therefore, I have decided to buy 50% of my stock holdings as American companies and 50% in foreign companies. In fact, expert Meb Faber has presented studies showing that US outperformance has only occurred in recent years and is not a historical trend. Home country bias is a problem and is easily avoided by simply buying more foreign company stocks.
4. I Limit My Exposure to Bonds Because I am Young
Because of my age, I am limiting my exposure to bonds and cash equivalents to 20%. This amount will increase as I get older. I roughly use the equation of 110 less my current age to determine how much of my portfolio should be in stocks and how much in bonds. If you are already older or nearing retirement, I would not suggest as aggressive of an allocation as my 80% stocks and 20% bonds portfolio.
5. I Overweight Real Estate Investment Trusts Because I Believe in Real Estate
While not wise from an investment perspective, I also purchase real estate separately in my portfolio. I believe in real estate and I want to own at least 5% of my portfolio in real estate. At some point, I may move this money out of publicly traded REITs and into the private real estate markets. For now, I am buying US REIT ETFs. I keep my ownership in REITs low because it is a small portion of the Global Market Portfolio of total world stocks. Also, REITs are already included in other stock market ETFs.
I think you should feel free to put some money in what you believe in. Just keep the amount you put there small when measured as a percentage of your portfolio.
6. I want to keep my account manageable
To keep things manageable, I want to make sure that I do not hold too many ETFs. In order to do this, I have one ETF for each asset class which leads to a total of 9 ETFs and cash, which I generally hold in a money market mutual fund. While I do own some fundamental ETFs, I am not buying more because buying fundamental or smart beta ETFs adds at least 5 additional holdings without much real benefit.
7. My Cash is Invested To Make Money
I invest my cash to make money. Currently, I invest my cash in a money market fund yielding approximately 2.3% annually. Whatever you do, don’t let it sit there and earn nothing. Buying ultra-short term ETFs in the investment grade bond category would be another way to seek yield without taking too much risk. There are several good ETFs in this category such as BIL, GBIL, USFR, and SHV.
8. I Buy Large and Small Stocks in Separate ETFs
While you can buy total US stock market ETFs (VTI, SCHB, and ITOT) or total international stock market ETFs (IXUS and VXUS), I prefer to buy my large and small companies separately so that I can overweight my small company holdings more easily. This is just a preference, and buying a portfolio with ITOT and IXUS or VTI and VXUS is a valid strategy. If you want the simplest porfolio or are just starting out, I reccomend ITOT and IXUS for the lower single share price (meaning you can more easily invest with less money).
Now For The Actual Portfolio:
|US Large Stocks||27%||SCHX|
|US Small Stocks||10%||SCHA|
|Foreign Developed Large Stocks||20%||SCHF|
|Foreign Developed Small Stocks||5%||SCHC|
|Foreign Emerging Market Stocks||12%||SCHE|
|Real Estate Investment Trusts||6%||SCHH|
|US Investment Grade Bonds||8%||SCHZ|
|Foreign Investment Grade Bonds||4%||IAGG|
|Emerging Market Dollar-Deonominated Bonds||4%||EMB|
There are very good alternatives from iShares, State Street, and Vanguard for most of these funds. While I prefer Schwab funds because I enjoy Schwab’s platform, you will notice that I had to use two iShares funds to finish my global asset allocation. You can build a complete and low cost portfolio with only iShares or Vanguard funds, but Schwab and State Street will need to fill in certain gaps with funds from Vanguard or iShares. Luckily, Schwab offers both iShares funds I needed commission free.
You may notice that I don’t talk about Fidelity in this piece. That is because they do not actual have a good lineup of ETFs. While they do have competitive ETFs in niche categories, I don’t think that type of product has a place in most people’s portfolios. However, Fidelity has partnered with iShares and offers all of the iShares ETFs you need to build the perfect Global Asset Allocation portfolio. In other words, if you want to build a Global Asset Allocation portfolio using iShares, you probably should consider doing it at Fidelity or Vanguard so that it is commission free.