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What’s In My Portfolio?

In the last couple weeks, I’ve had a few people ask me about my own portfolio. I was surprised to find that I’d never actually written about it before. So here goes:

  • Vanguard Total Stock Market Index
  • Vanguard Total International Stock Index
  • Vanguard REIT Index
  • Vanguard Intermediate-Term Treasury Fund

That’s it. Nothing fancy. Nothing even remotely clever. Just low-cost mutual funds in four different asset classes: U.S. stocks, international stocks, real estate, and Treasury bonds.

Why So Simple?

My primary reason for keeping things so simple (or perhaps my second reason, because plain-old laziness may be the first) is that it helps me avoid mistakes.

I have a tangible understanding of what each of those funds represents, and I have a firm grasp of what each of them is doing in my portfolio. The result: I’m never tempted to bail out of any of them at exactly the wrong time just because of poor recent performance.

Also important to me: My wife also understands the role of each of these funds. If I were to die, she’d be perfectly capable of handling the portfolio.

Tinkering or Chasing Performance?

In other words, part of the reason I keep things so simple is to avoid a pitfall I’ve seen many investors run into. They read an article (or book, or blog post) explaining the benefits of owning a particular type of investment, and they add that investment to their portfolio.

Then, when that investment has a period of poor performance (as all investments do from time to time), they start to have doubts. The argument behind owning that investment no longer seems quite so convincing. Or they may have even forgotten the argument completely–leading to a “what’s this one for again?” moment.

There are perfectly valid reasons to add other asset classes to your portfolio (a small-cap value fund or commodities, for instance), but if you don’t have a fundamental understanding of why you’re doing it, all you’re really doing is chasing performance. And that’s not likely to end well.

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  1. What are your percentages? and do you expect to adjust them more towards fixed investments (or add something like Total Bond Market) as you get closer to retirement?

  2. Rob Medley says

    Hey Mike, I was just curious why you’ve chosen short term treasuries over, let’s say: a TIPS fund, mid/long term treasury fund, or even just Vanguard’s Total Bond market fund?

  3. 40% Total Stock Market
    40% Total International
    10% REIT
    10% Treasuries

    I don’t use a Total Bond Market fund, as I’d prefer to stick with Treasuries. From what I’ve seen, corporate bonds (which are included in TBM) tend to have a higher correlation to the stock market than Treasuries do, thereby making them somewhat less effective as a diversifier.

    Changes I plan to make over time:

    • Reduce the international allocation as retirement nears to cut back on currency risk somewhat.
    • Move more of my portfolio into bonds as I get closer to retirement.
    • As retirement nears and inflation becomes more of a threat to me, move more into TIPS.
  4. Rob: Your comment came in as I was typing the above reply to Larry’s comment. I think I may have (coincidentally) addressed your questions, but if there’s something you’d like more elaboration on, please let me know.

  5. @Mike: “From what I’ve seen, corporate bonds (which are included in TBM) tend to have a higher correlation to the stock market than Treasuries do, thereby making them somewhat less effective as a diversifier.”

    But it could be counterargued that TBM (from my quick calculation) gives you 43% mostly intermediate treasuries, 28% GNMA, 5% foreign, and 24% corporate – which may offset your diversification concern since a (say) 20% allocation to TBM would give you only 5% corporate bonds.

    And how do you feel about holding a small percentage of junk bonds?

  6. Larry: You’re right that a large part of TBM is Treasuries or gov’t-backed. It’s not a bad fund by any means. And you’re right that, if the amount of the total portfolio allocated to TBM is small, the amount allocated to corporate bonds is very small.

    If a person chose to use TBM for the bond portion of their portfolio, I wouldn’t say they’re making a mistake. Still, I’d rather stick with Treasuries if possible.

    As to junk bonds, I’d say that an attentive investor* will probably have a handful of opportunities during his/her lifetime to buy them at very advantageous prices (beginning of 09, for example). For the most part though, I’d generally avoid them, as they offer little diversification benefit (because of their high correlation to the stock market in bad years).

    *This probably goes without saying, but I’m not an attentive investor. I prefer to glance at my portfolio a couple times a year at most and ignore stock market/bond market/interest rate fluctuations as much as I possibly can.

  7. After Reading yours and other blogs I did something similar through Schwab. They have very low cost, commission free ETFs.

    I have the Short-term Treasury, REIT, TIPS, and US Broad Market.

    I don’t remember my exact splits, but I believe it was roughly 20%, 20%, 20%, and 40%.

    cd :O)

  8. Hey Mike,

    Now that I’m married, I’m beginning to move the majority of my funds in to either ETFs or mutual funds (I was playing the pennies which was alright when it was just my money I was gambling with). With my new strategy, I’d like to take advantage of dollar-cost averaging by buying a set amount of VWO or EWY each month. However, I don’t want to have to pay $7-10 in brokerage fees each time, especially since my purchases are so small (say, $250 each).

    How would you recommend dollar cost averaging for these ticker symbols without being eaten alive with fees?

  9. Mike, Great Post. After reading your Oblivious Investor book some time ago, I had always been curious as to what YOU actually did with your money since several different portfolio models were presented in the book. Very Similar to your portfolio, I have:
    50% Domestic ETFs (Schwab Broad Market, Schwab Mid-Cap, Schwab Small Cap)
    30% International ETFs (Schwab SCHF/SCHC)
    15% REIT (Schwab SCHH)
    5% Schwab Bond Index

    Im a younger investor (26) so my portfolio is (what I feel like at least) somewhat agressive since I have time on my side. Thanks again for the post. Good Stuff!

  10. Chris: You’re right. While I primarily use (and write about) Vanguard, Schwab can be a great place to build a low-cost diversified portfolio. πŸ™‚

    Andrew: For investors dollar-cost-averaging into or out of something, I think it may be best to use traditional mutual funds rather than ETFs so as to eliminate the commissions completely. (Alternatively, a handful of brokerage firms offer commission-free trades on certain ETFs.)

    Micah: Indeed, our portfolios are very similar. Looks good to me. πŸ™‚

  11. Mike, you have the uncanny ability to make complicated topics so simple. Thank you for this post and your books. I have purchased a couple of them and really enjoyed them.

    Keep up the good work.


  12. Debbie: Thank you for such compliments! I’m very happy to hear you’re finding the blog and books to be helpful. πŸ™‚

  13. Could you tell us a little more about your “tangible understanding of what each of those funds represents”? Here are my guesses:

    Total Stock Market – historically fairly high returns with fairly reasonable risk and no currency risk

    Total International – similar returns with a little more risk, but not perfectly correlated with the US stock market

    REIT – reasonable returns, but riskier than the broad market; with a relatively low correlation with stocks you can profit from rebalancing. Plus you tend to get more dividends, so you’re diversifying along the capital gains/dividends spectrum

    ST Treasuries – lower returns than stocks but with a relatively low correlation to stocks you can reduce overall risk and profit from rebalancing

    My ideal portfolio is similar but broken up into more pieces so I can better profit from rebalancing:

    10% large-cap growth
    10% large-cap value
    10% small-cap growth
    10% small-cap value
    10% European
    10% Pacific
    10% emerging
    10% REITS
    10% total bond fund
    10% TIPS/I-bonds

    (My actual portfolio is a bit different. I recently had all my eggs in one basket and haven’t wanted to buy things when they’re relatively pricy, so I’m currently lagging in the small-caps, bonds, and emerging stocks. I know, not very oblivious!)

    So mine’s close to your with less international and more bonds. I’m close to retirement (4 years), but I’m fairly young and (probably will) have a very good pension, so I can handle a lot more risk than regular people nearing retirement.

  14. Debbie M: Yes, your guesses are spot-on with regard to the role of each of the funds in my portfolio.

    As to your proposed portfolio above, it’s certainly aggressive for a near-retirement portfolio. But you’re right that if the pension covers your spending needs, your portfolio is basically an accumulation-stage portfolio rather than a distribution-stage one. (And, therefore, it’s probably OK to take more risk.)

    My only potential suggestion/question would be regarding the small-cap growth fund. Historically, SCG has had both lower returns and higher volatility than the market as a whole, which is why if you look through many suggested “lazy portfolios” you’ll notice that it’s left out completely.

  15. I like how you’ve diversified between US stocks, international stocks, real estate & treasuries. However, you are missing one important piece of the economy right now and that is natural resources/raw materials. With rising oil prices, gold surging above $1,300, cotton/silver/platinum prices all rising, you should look to investing in mining/raw material mutual funds, some good ones are listed here

    Best one in the category is Vanguard Precious Metals and Mining Inv up 11.49% in each of the last 5 years. Anyone know of any better raw material/mining related mutual funds, including exposure to gold/silver/platinum?

  16. Hi Abdul: As I mentioned above, I intentionally choose to keep things simple, though I fully recognize that other asset classes could be added to the portfolio that would potentially increase return and/or reduce the portfolio’s total risk.

    To me, commodities (gold or otherwise) are included in that group.

    That said, if I were to include commodities in my portfolio, I’d probably do it via a fund that invests in futures rather than mining stocks, in order to minimize the correlation to the rest of the equities in my portfolio. Larry Swedroe provides a better explanation than I can here:

  17. The more complicated the investment strategy, the more likely it is that you don’t fully understand what you’re investing in. Better to keep it simple and stick to what you know and can explain.

  18. Nice portfolio. Leaves out a lot of trash, and borderline stuff. Has enough complexity for good tax management and some extra diversification.

    As a fan of Swensen, the only things missing are TIPS and a separate allocation to Emerging Markets.

    You say you will “As retirement nears and inflation becomes more of a threat to me, move more into TIPS.”

    Do you have a small holding in TIPS already?

  19. Hi Tiny. No, I do not currently have any TIPS holdings. So the “more” will be “more than 0%.” πŸ™‚

    To be clear though, this isn’t a result of me not liking TIPS or anything like that. I think they’re extremely useful–especially in retirement once inflation becomes more of a risk. For the moment though, inflation isn’t a particular risk for me.

    In addition, with only a 10% total allocation to bonds for now, I don’t see a heck of a lot of benefit to messing around with 2 different bond funds.

  20. Mike: Thanks for the hint about small-cap growth stocks. I’ll be checking that out.

    Abdul: Commodities funds tend to have much higher fees than other funds and they have very low returns (they skyrocket when people are afraid of stocks and then plummet again when all the fuss is over). Looking at returns only over the last 5 years is deceiving.

  21. @Tiny: “As a fan of Swensen, the only things missing are TIPS and a separate allocation to Emerging Markets.”

    Vgd Total Intl. is 25% emerging; therefore he has 10% of his portfolio in that category.

    @Debbie: “Commodities funds tend to have much higher fees than other funds and they have very low returns.” Could be. But Vgd Precious Metals has an ER of .27%, and since inception in 1984 has averaged 8.74. Admittedly the fund has been all over the place, with a 1-year average of 37.45 and a 3-year of 2.18. Vanguard does not appear to have a total commodities fund otherwise with things like oil, wheat, livestock, and the like.

  22. Larry, thanks for the information.

  23. “If I were to die, she’d be perfectly capable of handling the portfolio.”

    Gee, Mike, are you a little too young to think about dying?

  24. Michael/DFA Advisor:

    That’s an interesting question. In my opinion, no. I actually try quite deliberately to make every (important) decision in light of the facts that a) I’ll be dead someday, and b) I don’t know when that day will be.

    But that’s really just a personal philosophy that I don’t necessarily expect anyone else to share.

  25. Plan for the unexpected. Have life insurance, and make sure your spouse knows what to do if something happens to you. Worst thing that you can do is die and leave a mess for your family to clean up because you never talked to them about it. A good idea is to have a drawer or safe with all the important documents and instructions on what she would need to do. Sounds morbid, but people die all the time and better to have planned than not.

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