Cookie Cutter Portfolios Are (Usually) Just Fine

A reader writes in, asking:

“I don’t get it. From reading Harry Sit’s series on Vanguard financial plans, why would I want to pay for a financial plan if all that’s included in the portfolio is the same four funds that are included in a target retirement fund anyway? That seems like a cookie cutter portfolio.”

Yes, they are cookie cutter portfolios. And, in my opinion, that’s a good thing.

That is, if Vanguard thought that the average investor should have some other allocation (e.g., overweighting REITs or using only TIPS for the bond portion of the portfolio), then wouldn’t they build the Target Retirement (and LifeStrategy) funds that way as well?

Ideally, you should only get a different recommended allocation if there’s something about you that makes you unusual. And, the truth is, for most investors, there isn’t.

Investing is much like nutrition in this regard. Some people do need a specialized diet — whether that means low-protein, gluten-free, or something else. But, for most people at most points in their lives, a run-0f-the-mill healthy diet will do just fine.

Similarly, some people do need specialized portfolios in some way. But most investors’ needs are not terribly different from the needs of most other investors. That is, while your risk tolerance is personal, how to implement a portfolio appropriate for that level of risk tolerance is generally not a very personalized sort of thing. (In most cases, different risk tolerances can be satisfied by simply bumping a cookie cutter portfolio’s stock allocation upward or downward.)

For you to need a very different portfolio from somebody else, there must be a specific, identifiable difference between the two of you. For example, if you have significant assets in taxable accounts, your portfolio should probably look different than the portfolio of somebody who has all of his/her assets in tax-sheltered retirement accounts. (For example, you may want to consider holding muni bond funds, and you probably don’t want to use all-in-one funds due to their tax-inefficiency.)

Please note that I’m not saying here that Vanguard’s specific 4-fund cookie cutter portfolio is distinctly superior to other cookie cutter portfolios. Rather, my points are simply that:

1. Uniqueness is overrated when it comes to investing, and
2. When evaluating an advisor, it’s a good sign if the advisor recommends portfolios that are generally very similar from client to client. (Not identical, but similar.)