On this site I talk a lot about investing, but very little about my own process. There are multiple reasons for that, not the least being that investing isn’t a one-size-fits-all proposition. There are too many variables in personal circumstances, goals and styles to suggest that the ideal solution for one investor is ideal for another. Another is that while principles are timeless, practices change.
That said, model portfolios exist for a reason. They can serve as a springboard for thought or as a starter template for customization. I’ve previously identified some of My Favorite ETFs and how they work together.
This model is equity income oriented, designed to produce a stream of income that over time keeps ahead of inflation. Although the underlying principles are applicable anywhere, by necessity the specific asset choices are peculiar to nationality, in this case US based investors. It starts by dividing investable assets into two parts. One for savings, another for income. The savings part isn’t intended to produce “returns” as such, rather it’s for preservation of capital. This would be the place for funds intended to cover irregular liquidity needs, such as for planned major or emergency expenses.
The savings portfolio is simply a basket of monetary commodities that should maintain real value over time. Copper, gold, silver and platinum. For short term liquidity, some is held in cash. Proportions may vary, but most is gold, though when, as it has been this year, policy is supportive, cash may predominate. The form will vary according to where it is kept; assets in your possession would be physical while assets in a brokerage account would include USD and ETFs such as CPER, IAU, SLV, PLTM, JJC, PHYS or other similar funds.
The income portfolio is a collection of exchange traded funds (ETFs). Although portfolio allocations are conventionally stated in terms of proportions or percentages of portfolio value, as a practical matter, any attempt to balance to a target proportion will be inaccurate before it’s even complete; the market value of everything is a moving target. So within this part the allocation is specified by share count. The income portfolio is then some multiple of Income Units, each of which is composed of the following:
This fund portfolio is broad and balanced. VT is virtually the entire world stock market and serves as the foundation equity allocation (Morningstar: Vanguard Total World Stock ETF May Be the Only Fund You Need). GOVT is the entire US Treasury market from one to thirty years maturity. (These are the regular or “nominal” bonds, as opposed to speciality bonds such as TIPS; long run inflation protection is better provided by stocks and commodities.) Many investors could use these two funds alone for their financial asset allocation.
Ideally, I would like to have an equity index fund that owns all the stocks in the world, weighted by market cap, except underweights stocks of large companies that don’t pay dividends (a mega cap corp still not paying dividends is probably squandering capital), and those that are of low quality and high valuation. There is no such fund, but we can construct a good proxy using a building block approach. The next eight funds do this … they skew the equity allocation in favor of dividends, quality and value. This combination itself is otherwise well balanced by industry, market cap, geography, etcetera. In short, it’s a buy-the-whole-market-except-the-bad-stuff kind of approach. Within this group it’s important to keep the share ratios as specified to maintain this balance.
The last two funds add global realty and commodities exposure.
This share count approach also has the advantage in taxable accounts of presuming no or very infrequent rebalancing.
Individual assets can replace a part or all of some ETFs allocations if they are sufficiently representative and diversified.
These share proportions result in a stock:bond mix of about 75:25 at recent prices. This of course will not be ideal for every investor or every market environment, but is easily adjusted by varying the share counts of GOVT and VT. There may be times, such as now, where I temporarily hold a higher proportion of bonds due to my medium term outlook. The realty and commodities allocations are another good area for tweaking to circumstance or taste. In the long run, however, it’s not designed for rebalancing; that shifts the focus from income to capital value, and capital value isn’t an issue if you don’t sell. As the name indicates, this is an income portfolio adapted for holding indefinitely … the returns of interest are dividends.
This is essentially a set-it-and-forget-it approach. Until recently this has been impractical due to excessively high prices and low yields for most financial assets. But as prices and yields normalize, it becomes increasingly attractive.
I first discussed these funds in these pages a year or so ago in My Favorite ETFs, after having used them for about a year. As a group they have solidly outperformed the market; the market has favored dividends, quality and value while as expected large cap non-dividend-payers have lagged. This will not always be the case in price terms, but the yield advantage it emphasizes is sustainable.
Finally let’s put this in the context of an overall financial picture. In general a retirement investor has two forms of income; an annuity type and a permanent type. The annuity type includes forms of income that terminate at death, such as Social Security, pensions, and private annuities. Portfolio investment falls in the permanent category. Allocating between these two types is mostly a function of how much an individual wants to leave to heirs. This bears mention also because the allocation of assets in each are not entirely independent; an investor with an ample annuity income that’s bond-like or US Treasury dependent (Social Security, civil service or military annuity), would normally discretionally allocate less to bonds or Treasuries than one for whom the majority of income will be from portfolio investments.
Disclosure: I have positions in the ETFs cited.
6 thoughts on “A Model Portfolio”
What is the current composition, with %s, of your portfolio? Today is January 4, 2023. If you respond to this at a later date, please share that date (time-stamp it).
CB you just highlighted why I no longer target percentages … the moment you nail them down they change. I don’t know exactly what they are because I no longer track them. Instead I use share ratios, as described above.
Another Joker in the deck is taxable versus tax deferred accounts. I don’t count taxable accounts because I don’t rebalance, due to some highly appreciated positions that would result in more tax liability than rebalancing benefit.
At last check, at prices in effect as of the date of the post, the income portfolio was about 75% stocks and 25% bonds. I am however holding a much higher amount of bonds and lower amount of stocks due to the financial outlook I’ve been describing, most recently updated yesterday. Again I don’t know the exact percentages but believe they’re roughly 45% stocks, 45% treasuries, with most of the remainder being in commodities. Half of that stock allocation is exUS. As described in the linked post, I’m no longer holding significant amounts of cash.
None of this should be taken as prescriptive. My allocation is motivated by personal circumstances as well as market outlook (per the last full paragraph of the post). This is why I usually frame market judgments in terms of “neutral”, “underweight”, or “overweight” … these descriptors are applicable to any default allocation.
With that in mind, the only part of the above where the ratios would be strictly observed would be among the middle eight funds on the list. One would personalize the fund portfolio by varying the weights of VT & GOVT (and REET & COMT if used), keeping the proportions of DTD…VSS fixed. In contrast to percentages, they are stable and exact.
Reading your article helped me a lot, but I still had some doubts at the time, could I ask you for advice? Thanks.
As our disclaimer indicates, we can’t give financial advice, but if you have a specific question about the financial markets, our outlook, or our model portfolio, I’ll be happy to take a swing at it.
Update: This modifies the proportions of the DQV (Dividend Quality Value) ETFs to better balance allocations between DNL and IQDF. I may eventually dedicate an article to a model portfolio update, but want to call attention to this tweak in case anyone is using this older article as a reference. Because the share count ratios in this section are fixed, it was best not to wait. Recall the share counts of the other ETFs are explicitly discretionary.