Updated 2024 0224
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 Portfolio
Like most of the portfolios in Model Portfolio Introduction, this portfolio is designed to accumulate, grow and distribute long term savings. It’s 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.
SHV 0%
GOVT 40%
VT 40%
CPER 1%
IAU 15%
SLV 2%
PLTM 2%
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 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.
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 50%
VT 50%
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.