I'm going to do this a little different than those who write the books that move Wall Street. I am going to offer the portfolio in advance, then explain it.
This is the Know-Nothing Portfolio;
- Vanguard 500 Index (VFINX)
- Vanguard Mid-Cap Value Index (VMVIX)
Vanguard Small Cap Index (NAESX)
Vanguard Small Cap Value Index (VISVX)
Vanguard Developed Markets Index Fund (VDMIX)
Vanguard Emerging Market Index (VEIEX)
Vanguard International Value (VTRIX) - Vanguard International Explorer Fund (VINEX)
Vanguard REIT Index (VGSIX)
Vanguard Precious Metals (VGPMX)
Vanguard Energy Fund (VGENX)
Vanguard Inflation-Protected Securities Fund (VIPSX)
Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX)
For the Bogleheads, I came up with what I call the Compromised Know-nothing Portfolio, in that it offers more in large caps per Bogle's wishes and also holds Total Stock Market and a few less funds to try to woo Taylor. ;o),
The Compromised Know-Nothing Portfolio;
- 35% Vanguard Total Stock Market Index (VTSMX)
5% Vanguard Mid-Cap Value Index (VMVIX)
5% Vanguard Small Cap Value Index (VISVX)
5% Vanguard Emerging Market Index (VEIEX) - 5% Vanguard International Explorer (VINEX)
5% Vanguard REIT Index (VGSIX) - 20% Vanguard Total bond index (VBMFX)
10% Vanguard Inflation-Protected Securities (VIPSX)
10% Vanguard Short-Term Investment-Grade Fund (VFSTX)
This is a little simpler, fitting a bit closer, but probably not close enough to Taylor's Four Fund Portfolio, his KISS rule, (Keep It Simple Stupid).
Taylor's Four Fund Portfolio;
- Vanguard Total Stock Market Index (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total bond index (VBMFX)
- Vanguard Inflation-Protected Securities (VIPSX)
Equal percentages will work well with Taylor's 4fund as with my Know-nothing Portfolio, but of course you will want to adjust up as you see fit with my fixed income, and Taylor does not suggest equal percentages in his portfolio.
Another simple portfolio would be the Coffeehouse portfolio;
http://coffeehouseinvestor.com/ - 10% Vanguard 500 Index (VFINX)
- 10% Vanguard Value Index (VIVAX)
- 10% Vanguard Small Cap Index (NAESX)
- 10% Vanguard Small Cap Value Index (VISVX)
- 10% Vanguard Inflation-Protected Securities (VIPSX)
- 10% Vanguard REIT Index (VGSIX)
- 40% Vanguard Total bond index (VBMFX)
If CRS memory does not fail me, I remember Bill speaking favorably about adding TIPS to the portfolio, and he also offers it is not so much the portfolio as his 3 principles;
http://coffeehouseinvestor.com/Principles.htm Three Principles of Investing;
1) Don't put all your eggs in one basket.
2) There is not such thing as a free lunch.
3) Save for a rainy day.
Under #3, he suggests "Invest your raise," along with more, but I have had more positive feedback on this one suggestion than any I have offered my friends and coworkers. Investing your raise is one of the easiest and least painful ways of not only increasing the size of your portfolio, but also learning to live below your means. You invest more while reducing how much of your income you use to live. This is an excellent way to reduce the amount of time it takes to build a portfolio you can retire on early.
One more portfolio I should give mention of is William Bernstein's Vanguard portfolio from "The Four Pillars of Investing."
The percentages may be a little off, but I think this is fairly close;
- 12% Vanguard 500 Index (VFINX)
15% Vanguard Value Index (VIVAX)
3% Vanguard Small Cap Index (NAESX)
9% Vanguard Small Cap Value Index (VISVX)
6% Vanguard REIT Index (VGSIX)
2% Vanguard Precious Metals (VGPMX)
3% Vanguard European Stock Index (VEURX)
3% Vanguard Pacific Index (VPACX)
3% Vanguard Emerging Market Index (VEIEX)
4% Vanguard International Value (VTRIX) - 15% Vanguard Inflation-Protected Securities (VIPSX)
25% Vanguard Short-Term Investment-Grade (VFSTX)
His portfolio is based on risk/return per historic returns and correlations and the best guess of the Efficient Frontier. Other than keeping track of the percentages, I have no problem with this portfolio and actually think risk-adjusted it should do better than my Know-nothing Portfolio. The percentages should be easily enough adjusted to where you could more easy keep up with them, or you could set up a spreadsheet to keep up with them.
In fact, I see no problem with any of the above portfolios. Like Bill Schultheis said, "Don't put all your eggs in one basket."
As a side note, these portfolios work best tax-advantaged account.
As for the taxable account, you could use something to the nature of;
Taxable;
- Vanguard Total Stock Market Index (VTSMX)
- Vanguard FTSE All-World ex-US Index (VFWIX)
- Vanguard Tax-Managed Small-Cap Fund (VTMSX)
- Vanguard Variable Annuity - REIT Index Portfolio
The REIT annuity has an expense ration (ER) of 0.61% which is high per index investor standards, but the benefits of REITs in diversification warrant having some of this for asset allocation reasons in your portfolio. Maybe keeping it at around 10% of the total portfolio might be wise.
Also as far as stocks go, you might want to add a small percentage, maybe 5% each;
- Vanguard Precious Metals (VGPMX)
Vanguard Energy Fund (VGENX)
Though not perfect, energy and metals are the two book ends of commodities. A small percentage of these two should offer some commodities effects in diversifying your portfolio.
Rebalancing in a non-tax advantaged account should be done by adding to the funds that are below your set asset allocation percentages in the nest egg building years (buying into value), and selling the funds that are above your set asset allocation percentages in retirement years (selling growth). Keeping perfect asset allocation percentages are not that important.
As far as fixed income, munis and I-bonds will help the high income investor, and as much as I might be concerned about mentioning it, you may want to reduce your percentages, risk tolerance considered, in fixed income in a taxable account. Taxes eat through the risk/return benefits of most fixed income products. In nominal bonds short-terms offer the best diversification.
I-bonds may be different, as long as I-bonds do not offer too much lower a real coupon rate than other fixed income investments. But for the older investor, building I-bonds over time offer an excellent opportunity as they offer positive correlation to inflation and the lowest correlation to stocks and long-term bonds as inflation is the strongest economic risk to stocks and long-term bonds.
Mainly, you just don't want to go overboard with fixed income in a taxable account, but you do need to know your risk tolerance and how much volatility you can stand.
Chin
