Updated 2024 0913

We covered a few model portfolios in Model Portfolio Introduction, generally variations on Harry Browne’s Permanent Portfolio. Here we outline some newer favorites, adapted for exchange traded funds (ETFs).

Capital Portfolios
Like most of the portfolios in Model Portfolio Introduction, these portfolios are designed to accumulate, grow and distribute long term savings. They’re designed for any pot of funds you intend to sell from to use, for example a traditional IRA with IRS required minimum withdrawals. Vary the allocations to GOVT and VT to adjust to your target bond and stock mix according to personal circumstances, time frame, and risk tolerance, while holding the balance between the next four funds constant. SHV, along with residual cash, serves as a liquidity buffer between portfolio cash distributions and withdrawals.

Capital I This portfolio is a general purpose portfolio roughly tracking the Global Market Portfolio.

SHV 0%
GOVT 40%
VT 40%
CPER 1%
IAU 15%
SLV 2%
PLTM 2%

Capital II This portfolio is a more targeted variation specifically tuned for inflationary environments. It makes an ideal complement to an Income Portfolio containing a significant bond allocation.

VT 60%
COMT 10%
CPER 2%
IAU 20%
SLV 4%
PLTM 4%

Income Portfolios
It’s not actually necessary to sell off your investments to realize returns. The Income Portfolios are designed to provide income from interest and dividends, to be assembled and then left untouched aside from withdrawal of cash distributions. This not only simplifies management, but contributes to long term performance as the funds that grow income the most tend to also increase in price and increase their allocations automatically.

The whole investment paradigm underlying these portfolios is a departure from most conventional investment thought. Convention is preoccupied with price, and structures investment programs around minimizing the risk that assets will have to be sold at unfavorable prices. And it’s fine for some of your investments; in fact those in traditional IRAs are required to be liquidated over time. But it’s not the only way to go. It’s both possible and practical to structure some of your investments in a way that does an end run around the whole problem of at what prices you might sell, because it presumes no sales in the first place.

It’s hard to overstate the value of liberating yourself from the selling price problem. Forecasting the price at which an investment might be sold is next to impossible. The stream of income an investment is likely to produce on the other hand is a much less speculative matter. Emphasizing the more over the less predictable is inherently a more solid basis for planning anything. This, along with eliminating the risks embedded in predicting life expectancy and the prospect of outliving your money, makes it a no brainer. Contrast that with the conventional paradigm based on probability and statistics … in essence the basis of gambling.

Worse still, common advice is to take a fixed percentage in your first year of retirement, and withdraw the same amount (adjusted by the CPI) for the rest of your life, no matter what the markets do. This exacerbates risk by omitting feedback, a basic tenet of robust system design.

In contrast to the Capital Portfolio, the Income Portfolios are best suited for assets not intended to be sold off, and so are a better fit for regular taxable accounts and Roth IRAs than traditional IRAs

The funds are identified here by ticker. Descriptions can be found in Model Income Portfolio Introduction, along with an overview of rationale behind their selection and weighting. The TBill fund SHV can be used in any as a near cash equivalent and to cover the 0-1 year portion of the Treasury market omitted by GOVT.

Income I This is the simplest income portfolio, consisting of just two ETFs. Yet it’s very broadly diversified and balanced, with GOVT covering essentially the entire US Treasury market and VT the world stock market. Vary the proportions to suit your target balance of bonds and stocks.

This simple portfolio is ideal for beginners while they build assets and experience for the more sophisticated versions that follow.

GOVT 40%
VT 60%

Income II This income portfolio emphasizes dividends, quality and value, moving away from market cap weighting and deemphasizing stocks of supersized companies that don’t pay dividends, low quality and overpriced stocks. This version incorporates WisdomTree and FlexShares ETFs. Vary the proportion of GOVT to adjust the overall bond and stock allocation while holding the balance between the other three funds constant. For example, for a 60:40 bond:stock allocation, set GOVT 60% and divide the remainder 2:1:1 for DTD 20% DNL 10% IQDF 10%.

GOVT 20%
DTD 40%
DNL 20%
IQDF 20%

Income III This income portfolio emphasizes dividends, quality and value, moving away from market cap weighting and deemphasizing stocks of supersized companies that don’t pay dividends, low quality and overpriced stocks. This version incorporates Vanguard and iShares ETFs. Vary the proportion of GOVT to suit while holding the balance between the other seven funds constant.

GOVT 10%
VYM 20%
VFQY 10%
VFVA 10%
VYMI 35%
VSS 5%
REET 5%
COMT 5%

Income IV This income portfolio emphasizes dividends, quality and value, moving away from market cap weighting and deemphasizing stocks of supersized companies that don’t pay dividends, low quality and overpriced stocks. This version incorporates iShares, Vanguard and Schwab ETFs. Vary the proportion of GOVT to suit while holding the balance between the other five funds constant.

GOVT 20%
VT 40%
SCHD 15%
SCHY 15%
REET 4%
COMT 4%
IWC 1%
VWO 1%

Income V This portfolio combines Income Portfolios II, III & IV. It is suitable for larger allocations and investors that are comfortable holding a larger number of positions in pursuit of a robust and growing income. Vary the proportions of GOVT and VT to adjust the overall bond and stock allocations while holding the balance between the other funds constant.

GOVT 25%
VT 5%

DTD 10%
SCHD 5%
IWC 1%
VYM 8%
VFQY 4%
VFVA 4%
DNL 6%
IQDF 6%
SCHY 3%
VWO 1%
VYMI 14%
VSS 2%

REET 3%
COMT 3%

One quarter bonds (GOVT) may seem low for a retirement allocation, but this is an income portfolio not intended to be sold, so equity price risk isn’t a prime consideration. Assets for eventual sales would be a separate pot of funds (eg the above Capital Portfolio). This portfolio however currently yields in excess of 3%, in the neighborhood of commonly recommended retirement withdrawal rates, and historically has produced income growth solidly in excess of CPI, without depending on the sale of shares and risk of running out. This structural conservatism permits a higher equity allocation in pursuit of long term income growth and inflation protection, and compares favorably with withdrawal strategies designed to deplete capital. Increase the bond allocation if desired.

For the equity portion of this portfolio, recall our starting point was the global market portfolio, so ideally we would like to include all the world’s stocks, except weight them more according to merit than by market cap. There is no one ETF that does this, so essentially we’ve cobbled one together from off-the-shelf parts. A detailed account of how we did this can be found at Financology Model Income Portfolio. To oversimplify, the design philosophy is the mirror image of what many investors use … rather than start with nothing and add the things we want, we start with everything and subtract the things we don’t.

Cash USD and the TBill fund SHV have no fixed allocation, but are useful liquidity buffers, with USD first and SHV next in line. GOVT serves as a third place holder. To cover a large outlay, like a new car or a new roof, these allocations can be saved to and borrowed from, usually without tax complications like large capital gains. You can effectively borrow at the same rate as the United States Treasury … a trick not usually possible by conventional means.

You may notice I haven’t explicitly included gold or other elementary commodities in the Income Portfolios. The reason is simple enough … they don’t produce income. Any well rounded investment program however includes at least some. The COMT allocation does include a little gold, but if your income portfolio makes up the bulk of your assets, simply compensate by making sure your Capital Portfolio has plenty.

Schematically, the core equity income portfolio is one quarter each:
DTD+SCHD+IWC
VYM+VFQY+VFVA
DNL+IQDF+SCHY+VWO
VYMI+VSS

REET & VWO fill structural gaps in the other funds. For example 38% of the core funds (SCHD, VYM, VFQY, VFVA, SCHY, VYMI) excludes REITs, so REET fills the gap, and VWO balances the structural EM underweight in SCHY. It’s less important to allocate the exact percentages listed than the relative sizes; that is, a fund with a higher percentage should receive a larger allocation. Within the twelve center listed the total allocations to the US and XS funds (the first and last six) should be roughly equal.

Do not rebalance. This portfolio takes some time to set up, but is designed for almost no maintenance thereafter. Once a quarter withdraw the accumulated dividends. Over time, the funds that most successfully grow their dividends are likely to have increased in price and allocation too, so that the portfolio is on a sort of automatic self improvement course. This is one of the reasons it includes a variety of fund strategies. With this diversification approach, risk management and long term returns are consonant objectives.

Income VI This portfolio is suitable for larger allocations and investors that are comfortable holding a larger number of positions in pursuit of a robust and growing income.

GOVT 20%
VT 10%

DGRW 6%
SCHD 10%
VYM 8%
VFQY 4%
VFVA 4%
DNL 6%
SCHY 9%
VWO 1%
VYMI 14%
VSS 2%

REET 3%
COMT 3%

Integrated Portfolio
Although it’s helpful to keep in mind their separate objectives and manage them accordingly, Capital and Income portfolios don’t need to be physically separate. The following portfolio integrates both.

This portfolio is 60% stocks, 20% treasuries, and 20% commodities. It’s the classic 60-40 portfolio adapted for an inflationary era in which half of the bonds are substituted with commodities for inflation protection. Lest the fund selections and weightings appear an ad hoc hodgepodge, the conceptual framework is one fifth each in the following categories:

DVQUS
US domestic dividend, quality and value
DGRW 15%
SCHD 30%
VYM 25%
VFQY 12.5%
VFVA 12.5%
REET 5%

DVQXS
World ex-US dividend, quality and value
DNL 15%
SCHY 25.5%
VYMI 42.5%
VWO 4.5%
VSS 7.5%
REET 5%

EQT
Global equity index
VT 100%

UST
US Treasuries, entire maturity spectrum (0-30 years)
SHV 6.6%%
GOVT 93.4%

HMXCOM
Hard money and other physical commodities
COMT 25%
CPER 5%
IAU 50%
SLV 10%
PLTM 10%

The first three DVQ factor positions in each category are respective US and XS counterpart dividend-oriented ETFs from WisdomTree, Schwab and Vanguard. 15% & 30% each go to the first two, except 15% of the XS Schwab allocation goes to VWO to compensate for SCHY’s structural EM underweight. Vanguard’s US and XS high dividend funds make up the remainder of the core, with VFQY and VFVA rounding out the US dividend quality and value allocation with active management and a small cap tilt, and VSS compensating for the exclusion of small caps from the some of XS core funds. REET compensates for the exclusion of REITs from the Schwab and Vanguard core funds.

The global equity group is the lone global index fund VT. The resulting overall equity allocation meets our objective of covering virtually the entire investable world equity market – over 12,000 stocks around the world – except muting much of the market cap weighting in favor of weighting according to merit.

The US Treasury market is triangle weighted by maturity with SHV covering the 0-1 year and GOVT the 1-30 year maturity ranges respectively.

The commodities allocation is half gold, with the remainder allocated to the other monetary metals and the energy-heavy GSCI commodities index. This is tunable; for even more inflation hedging, divide the 20% in treasuries again in half and split it 10% UST and 10% COM. Then the final 20% is HMX.

Putting it all together:

DGRW 3%
SCHD 6%
VYM 5%
VFQY 2.5%
VFVA 2.5%
DNL 3%
SCHY 5.1%
VYMI 8.5%
VWO 0.9%
VSS 1.5%
REET 2%
VT 20%

GOVT 18.7%
SHV 1.3%

COMT 5%
CPER 1%
IAU 10%
SLV 2%
PLTM 2%

Dual Portfolio
Another approach to an overall portfolio is to combine dedicated Capital and Income Portfolios. A retirement investor for example could divide funds into two portfolios like these:

Capital
VT 60%
COMT 10%
CPER 2%
IAU 20%
SLV 4%
PLTM 4%

Income
DGRW 4.5%
SCHD 8%
VYM 8%
VFQY 4%
VFVA 4%
DNL 4.5%
SCHY 6.8%
VYMI 13.6%
VWO 1.2%
VSS 2.4%
REET 3%
GOVT 40%

This approach is particularly well suited to Roth IRA funds. Regular taxable accounts can be used instead, though Roth accounts allow rebalancing without losing capital to taxes. Traditional IRA accounts can also be used, though required minimum distributions will eventually exceed the 3% capital withdrawals and income generation. Again, this protocol does take some time to set up, but requires very little maintenance thereafter.

In this strategy, one would effectively treat the Capital Portfolio as an income source by withdrawing 0.75% of the portfolio value each quarter and rebalancing to the targeted allocations. Because the withdrawals are based current value (incorporating feedback) and less than historic and likely total returns, over the long run this should allow both the portfolio value and the distributions to grow. For the Income Portfolio, simply withdraw the accumulated cash each quarter, sans rebalancing.

The Capital Portfolio is 60% stocks and 40% commodities; the Income Portfolio is 60% stocks and 40% bonds. So together the two are similar to the Integrated Portfolio but with a distinct management protocol for each portion. And like the income model, it provides growing income without depleting capital.

18:18:32:32 Portfolio

CPER 180‱
IAU 1440‱
SLV 90‱
PLTM 90‱

GOVT 1440‱
COMT 360‱

DGRW 200‱
SCHD 400‱
VYM 600‱
VFQY 160‱
VFVA 240‱
DNL 200‱
SCHY 400‱
VYMI 600‱
VWO 160‱
VSS 240‱

VT 2880‱
REET 320‱

This final, most sophisticated of the Financology Model Portfolios is an enhancement of the above Integrated Portfolio. The four groups respectively sum to 18% 18% 32% 32% of the portfolio. It’s still further tuned for inflation with larger commodities and equities allocations. Equities total 64%, commodities 21.6%, with gold and treasuries totaling 28.8%.

The first group is, appropriately enough, of the oldest of assets; elementary commodities. It’s predominantly gold, based on extensive analysis showing it to be singularly uncorrelated to stocks and therefore the most diversifying (The Impermanent Portfolio).

The second group is a market based proxy for TIPS (I Don’t Like TIPS) by virtue of blending commodities with treasuries. Adjust the proportions of COMT and GOVT for more or less inflation protection. The default listed above is optimized for volatility and rebalancing returns in most foreseeable financial and economic conditions, but a lower COMT:GOVT ratio could be used if disinflationary policy is in vogue or a higher ratio could be used to dial in even more inflation protection should the outlook warrant.

The equites allocation, the third and fourth groups, is, like the preceding portfolio, comprehensive and flat, covering virtually all the world’s investable stocks, but with less weighting by market cap and more by merit, emphasizing dividend, quality and value factors (Financology Model Income Portfolio).

Because inflation is especially pernicious over longer time frames, it’s inherently a long term portfolio and appropriate for investors that have adequate short term reserves elsewhere. Being light on treasuries (for a retiree portfolio) it also assumes the investor has other government assets like Social Security or a pension sufficient to cover essential living expenses. Although this portfolio is designed to provide reliable, sustainable and growing income, to the extent either of these doesn’t apply, a generous helping of treasuries or other guaranteed income in other accounts is a safety prerequisite.

The portfolio adapts to any personal management protocol, but for rebalancing, it is, like the preceding, particularly well suited for a Roth account. It can also be used for a traditional IRA, though required minimum distributions may exceed the your preferred withdrawal rate. It can work in regular taxable accounts too, but the benefits of rebalancing will be at least partially offset by tax costs.

As it includes both Income and Capital assets – those that distribute income and those dedicated to preservation and growth of capital – a suitable approach is to rebalance and withdraw income quarterly. Multiply the total portfolio value (including accumulated cash) by 397/400, then multiply that result by the listed factor to find the allocation for each of the eighteen funds. The remaining cash is income.

To use this protocol without drawing income, change 397/400 to 399/400 and omit the withdrawal. A small cash buffer is useful anyway because rebalancing trades will not generally net out to exactly zero.

It is not necessary or even desirable that the quarterly rebalance be complete. It’s sufficient to rebalance the one or two most over and under weight positions at each quarterly iteration, even just part way, because the most important market cycles are longer than a quarter; both reducing the number of trades and adding an element of ‘let your winners run’ to the ‘buy-low-sell-high’ returns from the rebalancing of variegated assets (Invest With A Demon). Investors comfortable with spreadsheets will find it easy and fun to manage. I personally use this strategy.