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The Ginger Ale Portfolio (My Own Portfolio) and M1 ETF Pie

Last Updated: April 2, 2021 40 Comments – 16 min. read

Everyone has been asking how I invest my own money. Some have basically pieced it together from various mentions across the blog, but I finally got around to laying it out in detail. I’ve named it the Ginger Ale Portfolio.

Interested in more Lazy Portfolios? See the full list here.

Disclosure:  Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.

Contents

  • Foreword – A Brief History of My Investing Journey
  • About the Ginger Ale Portfolio
    • Ginger Ale Portfolio Allocations:
      • U.S. Large Cap Stocks – 20%
      • U.S. Small Cap Value – 20%
      • Developed Markets – 15%
      • Emerging Markets – 15%
      • International Small Cap Value – 10%
      • U.S. Long-Term Treasury Bonds – 10%
      • TIPS (Treasury Inflation-Protected Securities) – 5%
      • Emerging Markets Government Bonds – 5%
  • Ginger Ale Portfolio – Historical Performance
  • Ginger Ale Portfolio Pie for M1 Finance
  • Being More Aggressive with 100% Stocks

Foreword – A Brief History of My Investing Journey

I hate when recipe websites tell an unnecessary, long-winded story before getting to the recipe, so feel free to skip straight to the portfolio by clicking here.

Starting around age 18, I spun my wheels for nearly a decade stock picking and trading options on TradeKing (which Ally later acquired), usually underperforming the market. I was naive and egotistical enough to think that I could outsmart and out-analyze other traders, at least on average.

Unfortunately, a math degree with a focus in statistics strengthened my faulty conviction for a few more years before I finally converted to index investing. Thinking back on that time and the way I traded (I don’t think I can even call it investing) makes me cringe now, so these days I try to do whatever I can to help others – particularly new, young investors – avoid those same pitfalls I succumbed to. I’d be much further ahead now had I just indexed from the start.

Since I had previously only traded U.S. securities and entirely ignored international assets, when I converted to index investing, I went 100% VTI for the total U.S. stock market (U.S. companies do business overseas, right?) and wrote myself an Investment Policy Statement (IPS) to avoid stock picking as a hard rule going forward. I was also still tempted to try to time the market using macroeconomic indicators and by selectively overweighting sectors around this time before realizing that sector bets are just stock picking lite, market timing tends to be more harmful than helpful, and the broad index fund does the self-cleansing and sector rearranging for me.

Then I dug deeper into the Bogleheads philosophy and realized I was still being ignorant by avoiding international stocks (more on this below), so I decided to throw in some VXUS at about 80/20 U.S. to international. I kept reading and researching and digging and concluded that I still had way too much home country bias. The U.S. is only one country out of many around the world! So I switched to 100% VT. Global stock market, market cap weighted. Can’t go wrong. And “100% VT” would still be my elevator answer for a young investor just starting out.

Then I got further into the nuances of evidence-based investing as well as the important behavioral aspects of investing and what the research had to say about these things – Fama and French, Markowitz and MPT, efficient markets, leverage, Black and Scholes, Merton Miller, asset allocation, risk tolerance, sequence risk, factors, dividend irrelevance, asset correlations, risk management, etc.

I started realizing that, in short, 100% VT is objectively suboptimal in terms of both expected returns and portfolio risk. Emerging Markets only comprise 11% of the global market. Small cap stocks make up an even smaller fraction. And we should probably avoid small cap growth stocks. And certain funds have superior exposure to Value than others based on their underlying index’s selection methodology. And can I stomach the drawdowns that accompany a 100% cap weighted stocks position during a crash? This line of thinking led me to books and lazy portfolios from present-day advisors like William Bernstein, Larry Swedroe, Ray Dalio, Paul Merriman, and Rick Ferri, all of whom influenced my thought process and subsequent portfolio construction.

I also realized there’s an observable tradeoff between simplicity and optimization. I’m a tinkerer by nature and tend to default to the latter, probably to a fault (i.e. overfitting and data mining), which is why this blog’s name is what it is, for better or for worse. People say indexing is boring, but it doesn’t have to be. There’s still plenty of learning to be had, and subsequent research-backed improvements to be made in the pursuit of optimization if you choose to tinker.

But don’t get me wrong. Simplicity is – and probably should be – a desirable characteristic of one’s portfolio for most people. Whatever allows you to sleep at night, stay the course, and not tinker during market downturns is the best strategy for you. It can take some time (and probably a market crash) to figure out what that strategy is. The portfolio below will seem “simple” to a stock picker with 100 holdings; it may seem complex to the indexer who is 100% VT.

So below I’ve pieced together what I think is optimal for me, based on my understanding of what the research thus far has to say about expected returns, volatility, diversification, risk, cognitive biases, and reliability of outcome, all while realizing I may get it wrong and that I may want to change it in the future.

About the Ginger Ale Portfolio

I’m bad at thinking of clever names for things. When writing posts, I usually sip on a can of ginger ale, so the Ginger Ale Portfolio seemed like an appropriate name.

Aside from “lottery ticket” fun money in the Hedgefundie Adventure and my taxable account in NTSX, this portfolio is basically how my “safe” money is invested. Leverage, while perhaps useful on paper for any investor, is probably not appropriate for most investors purely because of the emotional and psychological fortitude its usage requires during market turmoil.

Thus, for a one-size-fits-most portfolio, I can’t in good conscience just recommend a leveraged fund. Moreover, whatever I put below will likely just be blindly copied by many novice investors who won’t even bother reading or understanding the details, so I have to take that fact into consideration and be at least somewhat responsible.

This portfolio is 80/20 stocks to fixed income to, again, accommodate a one-size-fits-most asset allocation for multiple time horizons and risk tolerances. I’d call it medium risk simply because it has some allocation to fixed income. It is a lazy portfolio designed to match or beat the market return with lower volatility and risk. It heavily tilts toward small cap value to diversify the portfolio’s factor exposure. It is also diversified across geographies and asset classes.

In selecting specific funds, I looked for sufficient liquidity, appreciable factor loading, low tracking error, and low fees.

Here’s what it looks like:

Ginger Ale Portfolio Allocations:

  • 20% U.S. Large Cap Stocks
  • 20% U.S. Small Cap Value
  • 15% Developed Markets (ex-US)
  • 15% Emerging Markets
  • 10% International (ex-US) Small Cap Value
  • 10% U.S. Long-Term Treasury Bonds
  • 5% TIPS
  • 5% Emerging Markets Government Bonds
ginger ale portfolio

Below I’ll explain the reasoning behind each asset in detail.

U.S. Large Cap Stocks – 20%

Most lazy portfolios use U.S. stocks – and specifically large-cap U.S. stocks – as a “base.” This one is no different, but they’re still only at 20%. You’ll see why later.

Not much to explain here. The U.S. stock market comprises roughly half of the global stock market and has outperformed foreign stocks historically. I don’t feel comfortable going completely small caps for the equities side so we’re keeping large caps here to diversify across cap sizes, as large stocks beat small stocks during certain periods, while small stocks beat large stocks over other periods.

This segment captures household names like Amazon, Apple, Google, Johnson & Johnson, Microsoft, etc. Specifically, we’re using the S&P 500 Index – considered a sufficient barometer for “the market” – via Vanguard’s VOO.

Why not use VTI to capture the entire U.S. stock market including some small- and mid-caps? I’ll answer that in the next section.

U.S. Small Cap Value – 20%

I don’t use VTI (total U.S. stock market) because I want to avoid those pesky small-cap growth stocks which don’t tend to pay a risk premium. Even mid-cap growth hasn’t beaten large cap blend on a risk-adjusted basis.

Specifically, small cap growth stocks are the worst-performing segment of the market and are considered a “black hole” in investing. The Size factor premium – small stocks beat large stocks – seems to only apply in small cap value. As Cliff Asness from AQR says, “Size matters, if you control your junk.” Basically, if you want to bet on small caps, you want to do so in small cap value, preferably while also screening for profitability.

By “risk premium,” I’m referring to the independent sources of risk identified by Fama and French (and others) that we colloquially call “factors.” Examples include Beta, Size, Value, Profitability, Investment, and Momentum. I delved into those details in a separate post that I won’t repeat here, but I’ll be referring to these factors and their benefits quite a few times below. Though it may sound like magic, the evidence suggests that overweighting these independent risk factors both increases expected returns over the long term and decreases portfolio risk by diversifying the specific sources of that risk, as the factors are lowly correlated to each other and thus show up at different times.

I know the exclusion of mid-caps entirely seems bizarre at first glance too. Factor premia get larger and more statistically significant as you go smaller. That is, ideally you want to factor tilt within the small cap universe. That’s exactly what we’re doing here by basically taking a barbell approach in U.S. equities: using large caps and small caps to put the risk targeting exactly where we want it while still diversifying across cap sizes and equity styles. Essentially, we’re letting large caps be our Growth exposure in the U.S. and consciously avoiding small- and mid-cap growth stocks.

In short, small cap value stocks have smoked every other segment of the market historically thanks to the Size and Value factor premiums. “Value” refers to underpriced stocks relative to their book value. Basically, cheaper, sometimes crappier, downtrodden stocks have greater expected returns. Small cap value stocks are smaller and more value-y than mid-cap value stocks. Thus, no mid-caps. (As an aside, Alpha Architect basically takes this idea to the extreme – finding the absolute smallest, cheapest stocks and concentrating in only 50 of them; talk about a wild ride.)

The fund I’ve chosen for U.S. small value tracks an index that also screens for strong financials, conveniently providing some exposure to the Profitability factor as well. That fund is VIOV from Vanguard. Full disclosure, I recently replaced it with the new fund AVUV from Avantis in my own portfolio (I explained why here), but AVUV is actively managed, so I can’t make a blanket recommendation to others for that fund given that VIOV is a fine choice to capture this market segment; I wouldn’t include it if it weren’t.

Some will note that Vanguard’s VBR is cheaper and more popular. I discussed here why VIOV is demonstrably better. In short, VIOV has superior factor exposure across the board, as VBR calls itself a small value fund but is unfortunately not very small or very value-y.

Developed Markets – 15%

Developed Markets refer to developed countries outside the U.S. – Australia, Canada, Germany, the UK, France, Japan, etc.

At its global weight, the U.S. only comprises about half of the global stock market. Most U.S. investors severely overweight U.S. stocks (called home country bias) and have an irrational fear of international stocks.

No single country consistently outperforms all the others in the world. If one did, that outperformance would also lead to relative overvaluation and a subsequent reversal. Consequently, we want to diversify across geographies in stocks.

During the period 1970 to 2008, an equity portfolio of 80% U.S. stocks and 20% international stocks had higher general and risk-adjusted returns than a 100% U.S. stock portfolio. Specifically, international stocks outperformed the U.S. in the years 1986-1988, 1993, 1999, 2002-2007, 2012, and 2017. 

In short, geographic diversification in equities has huge potential upside and little downside for investors.

Vanguard offers a low-cost fund called the Vanguard FTSE Developed Markets ETF. Its ticker is VEA.

Emerging Markets – 15%

Emerging Markets refer to developing countries – China, Hong Kong, Taiwan, India, Brazil, Thailand, etc.

Stocks in these countries have paid a significant risk premium historically, compensating investors for taking on their greater risk. Arguably more importantly, Emerging Markets offer a lower correlation to U.S. stocks compared to Developed Markets, and thus are a superior diversifier. I delved into this in a little more detail here.

Emerging Markets only comprise about 11% of the global stock market. This is why I don’t use the popular VXUS (total international stock market) – because its ratio of Developed Markets to Emerging Markets is about 3:1. Here we’re using a 1:1 ratio of Developed to Emerging Markets, as well as a 1:1 ratio of U.S. to international stocks.

Vanguard’s Emerging Markets ETF is VWO.

International Small Cap Value – 10%

We can also specifically target small cap value in ex-US stocks. It costs a bit more to do so, and some who tilt small cap value in the U.S. don’t feel the need to do so in foreign stocks, but I think it’s a prudent move considering the factor premia – in this case Size and Value – have shown up at different time periods across different geographies throughout history.

Until just about a year ago, expensive dividend funds from WisdomTree (DGS and DLS) were arguably the best way to access this narrow segment of the global market. Now, Avantis has launched a fund available to retail investors that specifically targets international small cap value – AVDV.

I know I’m being a bit hypocritical in suggesting the actively-managed AVDV here while refusing to include the actively-managed AVUV for U.S. small value above. I think this case is different because there are far fewer options for ex-US small value. Again, prior to the launch of AVDV, we were forced to use dividend funds as a suboptimal proxy for international small cap value. Now AVDV is the only fund available to the public that specifically targets Size and Value (and conveniently, Profitability) in ex-US stocks. AVDV is also roughly half the cost of the former options DGS and DLS.

U.S. Long-Term Treasury Bonds – 10%

No well-diversified portfolio is complete without bonds, even at low, zero, or negative interest rates.

By diversifying across uncorrelated assets, we mean holding different assets that will perform well at different times. For example, when stocks zig, bonds tend to zag. Those 2 assets are uncorrelated. Holding both provides a smoother ride, reducing portfolio volatility (variability of return) and risk. We used the same concept above in relation to risk factor exposure. Now we’re talking about entirely separate asset classes, but we’re also taking advantage of the two risk premia in fixed income – term and credit.

I can see the waves of comments coming in, which I see all the time on forums and Reddit threads:

  • “Bonds are useless at low yields!”
  • “Bonds are for old people!”
  • “Long bonds are too volatile and too susceptible to interest rate risk!”
  • “Corporate bonds pay more!”
  • “Interest rates can only go up from here! Bonds will be toast!”
  • “Bonds return less than stocks!”

So why long term treasuries? Here are my brief rebuttals to the above.

  1. Bond duration should be roughly matched to one’s investing horizon, over which time a bond should return its par value plus interest. Betting on “safer,” shorter-term bonds with a duration shorter than your investing horizon could be described as market timing, which we know can’t be done profitably on a consistent basis. This is also a potentially costlier bet, as yields tend to increase as we extend bond duration, and long bonds better counteract stock crashes. More on that in a second.
  2. Moreover, in regards to bond duration, we know market timing doesn’t work with stocks, so why would we think it works with bonds and interest rates? Bonds have returns and interest payments. A bond’s duration is the point at which price risk and reinvestment risk – the components of what we refer to as a bond’s interest rate risk – are balanced. In this sense, though it may seem counterintuitive, matching bond duration to the investing horizon reduces interest rate risk and inflation risk for the investor. An increase in interest rates and subsequent drop in a bond’s price is price risk. A decrease in interest rates means future coupons are reinvested at the lower rate; this is reinvestment risk. A bond’s duration is an estimate of the precise point at which these two risks balance each other out to zero. If you have a long investing horizon and a short bond duration, you have more reinvestment risk and less price risk. If you have a short investing horizon and a long bond duration, you have less reinvestment risk and more price risk. Purposefully using one of these mismatches in expectation of specific interest rate behavior is intrinsically betting that your prediction of the future is better than the market’s, which should strike you as unlikely.
  3. It is fundamentally incorrect to say that bonds must necessarily lose money in a rising rate environment. Bonds only suffer from rising interest rates when those rates are rising faster than expected. Bonds handle low and slow rate increases just fine; look at the period of rising interest rates between 1940 and about 1975, where bonds kept rolling at their par and paid that sweet, steady coupon.
  4. New bonds bought by a bond index fund in a rising rate environment will be bought at the higher rate, while old ones at the previous lower rate are sold off. You’re not stuck with the same yield for your entire investing horizon. The reinvested higher yield makes up for any initial drop in price over the duration of the bond.
  5. We know that treasury bonds are an objectively superior diversifier alongside stocks compared to corporate bonds. This is also why I don’t use the popular total bond market fund BND.
  6. At such a low allocation of 10%, we need and want the greater volatility of long-term bonds so that they can more effectively counteract the downward movement of stocks, which are riskier and more volatile than bonds. We’re using them to reduce the portfolio’s volatility and risk. The vast majority of the portfolio’s risk is still being contributed by stocks. Using long bonds also provides some exposure to the term fixed income risk factor.
  7. We’re not talking about bonds held in isolation, which would probably be a bad investment right now. We’re talking about them in the context of a diversified portfolio alongside stocks, for which they are still the usual flight-to-safety asset during stock downturns. It has been noted that this uncorrelation of treasury bonds and stocks is even amplified during times of market turmoil, which researchers referred to as crisis alpha.
  8. Similarly, short-term decreases in bond prices do not mean the bonds are not still doing their job of buffering stock downturns.
  9. Bonds still offer the lowest correlation to stocks of any asset, meaning they’re still the best diversifier to hold alongside stocks. Even if rising rates mean bonds are a comparatively worse diversifier (for stocks) in terms of expected returns during that period does not mean they are not still the best diversifier to use.
  10. Historically, when treasury bonds moved in the same direction as stocks, it was usually up.
  11. Long bonds have beaten stocks over the last 20 years. We also know there have been plenty of periods where the market risk factor premium was negative, i.e. 1-month T Bills beat the stock market – the 15 years from 1929 to 1943, the 17 years from 1966-82, and the 13 years from 2000-12. Largely irrelevant, but just some fun stats for people who for some reason think stocks always outperform bonds.
  12. Interest rates are likely to stay low for a while. Also, there’s no reason to expect interest rates to rise just because they are low. People have been claiming “rates can only go up” for the past 20 years or so and they haven’t. They have gradually declined for the last 700 years without reversion to the mean. Negative rates aren’t out of the question, and we’re seeing them used in some foreign countries.
  13. Bond convexity means their asymmetric risk/return profile favors the upside.
  14. I acknowledge that post-Volcker monetary policy, resulting in falling interest rates, has driven the particularly stellar returns of the raging bond bull market since 1982, but I also think the Fed and U.S. monetary policy are fundamentally different since the Volcker era, likely allowing us to altogether avoid hyperinflationary environments like the late 1970’s going forward. That said, I’ve still thrown in some TIPS.

David Swensen sums it up nicely in his book Unconvential Success:

“The purity of noncallable, long-term, default-free treasury bonds provides the most powerful diversification to investor portfolios.”

Ok, bonds rant over.

For this piece, I’m using Vanguard’s VGLT.

TIPS (Treasury Inflation-Protected Securities) – 5%

TIPS are relatively new, complex instruments with a lot of moving pieces, so their details are beyond the scope of this post, but basically they’re treasury bonds linked to inflation, so they help hedge against unexpected, rapid inflation during which nominal bonds would likely suffer.

Here we’re using the low-cost intermediate-term TIPS fund from Schwab (SCHP), as Vanguard only offers a short-term TIPS fund.

Why not gold?

Gold is not a value-producing asset, meaning it has a long-term real expected return of zero. We still want our diversifiers to have positive future expected returns, otherwise we’re not really improving the expected risk-adjusted return of the portfolio. That is, an asset like gold reduces the portfolio’s volatility and risk but likely simply drags down its long-term total return.

Secondly, gold has not been a reliable inflation hedge historically. With its small positive correlation to stocks, I think gold may offer a short-term diversification benefit, but I invest for the long term and I try not to care about the short-term noise. I maintain that gold has no place in a long-term investment portfolio unless the investor is very risk averse and simply aims to minimize volatility and risk.

Lastly, gold funds are comparatively pretty pricey, and the metal is taxed as a collectible at 28%.

Emerging Markets Government Bonds – 5%

I know this one looks weird at first glance, too, but hear me out.

Government bonds from developing countries have much greater credit risk than those of developed countries, and thus tend to compensate investors in the form of a significant risk premium, in this case called “credit” or “default.” Junk bonds (high yield corporate bonds) offer the same credit risk, but they’re inherently highly correlated to stocks. Emerging markets government debt is lowly correlated to both U.S. stocks and U.S. bonds. I don’t subscribe to the “take your risk on the equities side” idea, and just like with stocks, I like the idea of avoiding an overweighting to Developed Markets assets that are highly correlated with U.S. assets.

Until fairly recently, holding Emerging Markets government debt was difficult due to illiquidity and subsequent greater implementation costs, but USD-hedged funds like Vanguard’s VWOB have emerged (pun intended) that have largely solved these issues. And at the end of the day, at a 5% allocation, it’s not going to break anything.

You might also be wondering why there’s no dedicated allocation to REITs. Though they are treated as such, REITs technically aren’t a distinct asset class. Interestingly, in the 2018 paper Are REITs a Distinct Asset Class?, Jared Kizer and Sean Grover found that we can achieve the same factor exposure that explains REIT returns – effectively replicating them – with a 66/34 split of small-cap value stocks and lower-credit bonds.

Now this obviously isn’t their exact replication (they used long-term corporate bonds), but with a healthy amount of small cap value stocks and some lower-credit government bonds from Emerging Markets, we can arguably get some behavior that mimics what REITs would otherwise do, while avoiding the idiosyncratic risk of the real estate market. Will this provide a diversification benefit? Probably not, because it’s debatable whether REITs even do that in the first place. But the point is we don’t have to worry about any dissonance from excluding them here.

Ginger Ale Portfolio – Historical Performance

Some of these funds are pretty new, so I had to use comparable mutual funds in some cases to extend this backtest. The furthest I could get was 1998, going through February 2021:

ginger ale portfolio performance backtest
Source: PortfolioVisualizer.com

Here are the annual returns:

ginger ale portfolio annual returns
Source: PortfolioVisualizer.com

Here are the rolling returns:

ginger ale portfolio rolling returns
Source: PortfolioVisualizer.com

Keep in mind the Size and Value premia and international stocks have suffered over the past decade, otherwise I think the differences in performance metrics would have been even greater.

Ginger Ale Portfolio Pie for M1 Finance

So putting the funds together, the resulting Ginger Ale Portfolio looks like this:

  • VOO – 20%
  • VIOV – 20%
  • VEA – 15%
  • VWO – 15%
  • AVDV – 10%
  • VGLT – 10%
  • SCHP – 5%
  • VWOB – 5%

You can add this pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”

Being More Aggressive with 100% Stocks

If you’re young and/or you have a very high risk tolerance, you might be itching to ditch the bonds and go 100% stocks. Again, the one I designed above is sort of a one-size-fits-most asset allocation. Here’s a more aggressive version, basically giving 5% each to VOO, VIOV, VEA, and VWO:

  • VOO – 25%
  • VIOV – 25%
  • VEA – 20%
  • VWO – 20%
  • AVDV – 10%

Here’s the pie link for that one.

Just note that historically this would have resulted in worse performance than the original 80/20:

100/0 ginger ale portfolio
Source: PortfolioVisualizer.com

Questions, comments, concerns, criticisms? Let me know in the comments.


Disclosure: I am long VOO, AVUV, VEA, VWO, AVDV, VGLT, VWOB, and SCHP.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.

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About John Williamson

Analytical and entrepreneurial-minded data nerd, usability enthusiast, Boglehead, and Oxford comma advocate. I lead the Paid Search marketing efforts at Gild Group. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.

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Comments

  1. Nab says

    April 11, 2021 at 7:34 am

    I have been reading your advise for a few months and incorporating it in my own portfolio. You mentioned that you also have invested in Hedgefundie Adventure and NTSX. Do you have both? May I ask how much allocation ?

    Reply
    • John Williamson says

      April 11, 2021 at 9:10 am

      Hedgefundie is bucketed as a lottery ticket with no new deposits. Ratio of my taxable to retirement accounts is about 1:1. Leverage ratio of my total portfolio is about 1.8 at this point. Don’t just try to blindly copy these things though; they’re tailored to my personal time horizon, risk tolerance, and desire for temporal diversification.

      Reply
  2. Justin says

    April 4, 2021 at 2:22 pm

    Hi John,

    I’m a beginner in this and your article has greatly helped me!

    Paul Merriman recently updated his ultimate buy and hold Portfolio (https://paulmerriman.com/best-in-class-etfs-for-the-ultimate-buy-and-hold-2021/). In the emerging markets, he replaced DGS with AVEM, citing the reason that it will lower ER and Yield from 3.66% to 1.59%. VEA is replaced by AVDE, because the after-expense factor predicted return increase of 0.1%. He also has a video on this https://www.youtube.com/watch?v=y0_6dzA-p54.

    I was wondering what’s your thoughts on it? And do you think it is a good idea to follow the same strategies to make a modification to your Ginger Ale Portfolio?

    I think it will be something like this for the more aggressive portfolio.

    VOO – 25%
    AVUV – 25%
    AVDE – 20%
    AVEM – 20%
    AVDV – 10%

    Also, a minor suggestion for your blog is that it might be a good idea to have a short update log at the beginning of your articles, so it’s easier to spot new changes.

    Thank you for your help!

    Reply
    • John Williamson says

      April 5, 2021 at 1:39 am

      Thanks, Justin. Glad it’s helped!

      Yea, haven’t gotten around to putting in his new “best-in-class” ETFs for 2021.

      AVDE and AVEM aren’t materially different from VEA and VWO so far. That’s why I didn’t use them. Keep in mind Avantis funds are also actively managed; I can’t go suggesting a portfolio full of actively managed funds to ardent index investors (probably most of my readership).

      DGS vs. AVEM is less clear. DGS still has superior factor loading across the board, but obviously costs more. I’ve sent Paul some emails about this.

      Thanks for the suggestion! Any significant update will always get a callout, like in the post on the All Weather Portfolio. Probably would be a good idea to put them at the top though. Usually I’m just tweaking some wording.

      Reply
  3. Eric M says

    April 4, 2021 at 10:41 am

    Thanks for your kind sharing and guidance. Very helpful! It is quite interesting to notice if we tried different portfolios for some time (~5 years), the differences in performance become smaller. I guess in the long run, as far as we keep investing, time will pay us back. Also, a quick note to confirm: the GAP is for IRAs, and for taxables would be NTSX. Many thanks again.

    Reply
    • John Williamson says

      April 4, 2021 at 11:50 am

      Really glad you found it helpful, Eric! GAP wouldn’t be terribly tax-inefficient, as states don’t tax interest from treasury bonds and we’d get foreign tax credits for VEA and VWO. Here’s a page that shows that sliding scale: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

      Reply
      • ERIC M says

        April 4, 2021 at 1:04 pm

        Indeed, agree and happy to get this confirmation. It confused me a bit at the first glance. The GAP is somewhat similar to the typical Morningstar tax efficient ones. Thanks

        Reply
  4. Tommy Tilden says

    April 2, 2021 at 1:03 pm

    Hi John,

    I’ve been reading a lot from this site in the past couple days, and I’ve certainly learned a lot. Thanks so much for providing all this detailed information for free in such a clear way! It’s definitely a good resource.

    As a younger investor, (23) I’m wondering how this portfolio compares to the Vigorous Value portfolio posted elsewhere. I’m interested in employing one of the strategies for my Roth IRA, but I’m unsure which to go for. Also, I am interested in using leverage to try to accumulate capital early, as per the Hedgefundie’s adventure. What percentage of a portfolio would you recommend to set aside to that?

    On another note, you mention NTSX in a couple places. In a taxable account, would a 100% NTSX allocation be a bad idea, or would it made sense to diversify? Wondering how this compares to the 3x AWP for younger investors with longer time horizons.

    Finally, I know you’re a big proponent of M1 Finance. Do you use their Borrow feature to ratchet up leverage? Wondering if this is right for a long-term investor with a medium-high risk tolerance.

    Sorry for so many questions! Thanks and best wishes.

    Reply
    • John Williamson says

      April 3, 2021 at 7:03 pm

      Thanks, Tommy! Really glad you’ve found the info useful and clear!

      Basically, the VV is a heavier bet on Value which includes a Value tilt in large caps, which I didn’t do here. Really comes down to personal preference and one’s “belief” in the future of the Value factor premium. I’d say the VV is for the seasoned investor who is 100% sure they want to place a large bet on Value. Unfortunately I definitely can’t tell you which one to choose. If you’re stuck, I’d suggest just doing more research into factors and deciding on an asset allocation that fits your personal risk tolerance and time horizon.

      Only you can decide if leverage is right for you (and the amount thereof). I can’t provide personalized advice, but I maintain that a “modest” amount of leverage is suitable – and even strategically advantageous – for a young investor starting out, provided one’s tolerance for risk can support it, and is a statistically better bet than stock picking. Something like 90% VT and 10% UPRO would be 1.2x leverage in stocks.

      My taxable account is 100% NTSX. I think it’s great if one wants leveraged exposure (once again, a pretty “modest” amount of 150%) on a diversified 60/40 portfolio. I explored the fund’s use cases here. It’s comparatively much less leverage – and just a different vehicle – than something like the 3x AWP.

      All things being equal, I like the idea of greater diversification as the leverage increases, because the drawdowns become larger and potentially more detrimental (both mathematically and psychologically). In other words, using hypothetical examples, this might look like 100% stocks at 1.15x, 60/40 stocks/bonds at 1.5x (this is NTSX), and the AWP at 3x (adding in gold, etc.).

      I do use Borrow, just to juice up NTSX a bit more, as LETFs aren’t great in a taxable environment. Again, only you can decide if it’s right for you.

      Hope this helps!

      P.S. – Did you leave some other comments with bogus email addresses? The system automatically threw them in the spam folder.

      Reply
      • Tommy Tilden says

        April 3, 2021 at 11:29 pm

        Thanks for the in-depth response! I did indeed try to leave a couple comments with a throwaway email until I used my real one – just some caution out of habit!

        I think I might just allocate 50% each to the Ginger Ale and VV. Perhaps it’s a little simplistic, but when in Rome…

        How do you backtest the 3x AWP before the creation of said leveraged ETFs? Interested in doing some comparison.

        Also, could you explain a little why LETFS are worse in a taxable account? Couldn’t find anything on the Bogleheads website.

        Reply
        • John Williamson says

          April 3, 2021 at 11:48 pm

          Just wanted to check before I approved and replied to those.

          Best to create simulation data for the LETFs. I might do a post on that process. Quick and dirty way is to use the underlying at 300% and a negative CASHX position to simulate borrowing in Portfolio Visualizer.

          The daily resetting of LETFs means very high turnover.

          Reply
  5. TommyTilden says

    April 2, 2021 at 11:20 am

    Hi John,

    I’m really enjoying your content, and have been spending the better part of a week reading your blog posts.

    In this and some other posts you mention the usage of NTSX in your taxable account. Do you mind sharing your portfolio of that taxable account, in addition to this one (which appears suitable for a retirement account?)

    I’m a younger investor, looking to use leverage effectively in order to accumulate capital early. You also mention the UPRO/TMF Hedgefundie strategy, but I’m wondering how much you allocate to that, and which accounts they’re parked in.

    Thanks and best wishes.

    Reply
    • John Williamson says

      April 3, 2021 at 11:52 pm

      Glad you’re enjoying it!

      Taxable account is 100% NTSX.

      Hedgefundie Adventure is a lottery ticket (no new deposits) in a Roth IRA. Overall leverage ratio of my portfolio is about 2.

      Reply
  6. Carl says

    March 31, 2021 at 11:40 pm

    Re VWOB:
    I took a look at the corona crash, and VWOB whiplashed harder than stocks. That episode still gives me headaches as even treasuries slumped.

    But anyways, would you see IGOV or BWX offering better intl treas alternative to VWOB? Taking into account that VWOB is dollar denominated, vs the others are local currency hence more true diversification especially with the risk of the weakening dollar and consequently USD denominated debt?

    PS your LinkedIn photo gives you a more down to earth nerdier look. Haha. Peace and thanks

    Reply
    • John Williamson says

      April 1, 2021 at 12:12 am

      IGOV is developed markets. BWX is mostly developed markets. Again, I own VWOB for credit risk, not security.

      Reply
  7. Scott says

    March 28, 2021 at 5:25 pm

    Found this while googling ETF portfolios. A lot of great info, tend to agree with just about everything in this post….fantastic work!! Small and Mid cap Growth have beaten Small Value over the last 15 years by 50-100%. I’ve read all of the research so I’m familiar with why everyone recommends small value. However, there’s another research that says never use past returns to predict future returns. So I wonder if in 20 years researchers will be tilting to growth instead. Second, bonds. For now bonds seem like the opposite of investing. I invest to grow my capital, which bonds just don’t do right now. The only value I see in bonds, is to stop your account from swinging violently when the market does. However, the equities in your portfolio swing violently regardless, it just “appears” less violent. I keep my money that would be bond money, in CDs that mature every month. I keep about 24 CDs that mature in Jan, Feb, etc. Again, great work, this post could help a lot of investors stay the course.

    Reply
    • John Williamson says

      March 28, 2021 at 10:01 pm

      Found this while googling ETF portfolios. A lot of great info, tend to agree with just about everything in this post….fantastic work!!

      Thanks, Scott!

      Small and Mid cap Growth have beaten Small Value over the last 15 years by 50-100%.

      No they haven’t, especially when we look at rolling returns and risk-adjusted returns. Not sure where you’re getting that from. Correction: Scott was right. I accidentally linked a backtest going back 25 years instead of 15. I’d maintain that neither of those time periods tells us anything about the future.

      However, there’s another research that says never use past returns to predict future returns.

      Keep in mind that diversifying a portfolio’s exposure to independent sources of risk is not at all “using past returns to predict future returns.”

      So I wonder if in 20 years researchers will be tilting to growth instead.

      Probably not, because we’ve identified a Value premium, not a Growth premium. An extended period of outperformance by Growth (like the past decade) does not change the expectation of greater returns from Value.

      The only value I see in bonds, is to stop your account from swinging violently when the market does.

      That’s the entire purpose of holding bonds.

      However, the equities in your portfolio swing violently regardless, it just “appears” less violent.

      This is a bit silly and irrelevant though. We’re seeking to optimize the portfolio as a whole, not assets in isolation. This is like saying for a 10/90 stocks/bonds portfolio, the 10% stocks position is still going to “swing violently” so we shouldn’t bother with putting 90% in bonds. Moreover, I’m more concerned with drawdowns than with volatility per se.

      Again, great work, this post could help a lot of investors stay the course.

      Thanks! That’s the goal.

      Reply
      • Scott says

        March 31, 2021 at 5:30 pm

        I appreciate you taking the time to review my comments.

        Growth stocks have absolutely beaten Value over the last 15 years, This should be common knowledge for anyone following the market. Check VBR vs VBK…did I miss something?

        My point about bonds, is that they are useless in the discussion of investing, useless. To suggest someone invest in bonds, is the same as telling them to not invest at all. Its equivalent to recommending someone buy a call and buy a put just in case. Just keep the money in a money market fund and at least get a tax break in tax favored investments like 401k, HSA, IRA etc.

        I think you’ll find all the “old” investment knowledge will soon be the equivalent of claiming the earth is flat. Bitcoin, Gamestop, disruptive technologies, derivatives….this isn’t your grandpas market anymore.

        Best,
        Scott

        Reply
        • John Williamson says

          March 31, 2021 at 6:59 pm

          Growth stocks have absolutely beaten Value over the last 15 years, This should be common knowledge for anyone following the market. Check VBR vs VBK…did I miss something?

          Sorry about that. I went back 25 years instead of 15 with my backtest I linked. I’ll edit my original comment to reflect that.

          But why would we want to cherrypick start and end dates over a terribly short amount of time to try to illustrate that a factor premium is dead anyway? Any seasoned investor well-versed in factors knows we should expect negative premiums from time to time, and Fama and French themselves recently concluded there’s no reason to conclude that Value is dead. Don’t succumb to performance chasing and recency bias. History tells a very different story wherein even large value has beaten small growth.

          Also for the record, note that VBK is more like mid-cap growth and VBR is more like mid-cap blend. The latter is neither very small nor very value-y. VIOV and AVUV – and even ISCV – are vastly superior to VBR in my opinion. I delved into those details here.

          My point about bonds, is that they are useless in the discussion of investing, useless. To suggest someone invest in bonds, is the same as telling them to not invest at all. Its equivalent to recommending someone buy a call and buy a put just in case. Just keep the money in a money market fund and at least get a tax break in tax favored investments like 401k, HSA, IRA etc.

          “Useless” simply isn’t true in the context of a diversified portfolio alongside stocks. Once again, I’m not talking about bonds held in isolation. But I don’t know what better argument I can offer than what I already laid out in detail in my section on bonds. It sounds like your risk tolerance may just be higher than mine.

          Reply
          • Carl says

            March 31, 2021 at 11:27 pm

            If I may add my 1 cent or 1 Satoshi, I came across an article (sorry can’t find the bookmark in the ocean of bookmarks) either by Ray dalio or some major bank, that looked at small cap growth back to 100 years, since the roaring 20s, great depression, inflation, all these periods, small cap growth has underperformed small cap value in all environments. The article was an observation and admitted to having no explanation yet.

            What do you think?

          • John Williamson says

            March 31, 2021 at 11:40 pm

            I’ve voiced my disdain for small cap growth stocks many times.

          • Scott says

            April 3, 2021 at 1:55 am

            Appreciate the feedback.

            I just noticed your stock only version is almost identical my portfolio.

            It’s nice to see the explanations to go with the choices.

            Thanks again!

            Scott

  8. DePingus says

    March 23, 2021 at 12:21 pm

    Hi. great article (and website in general). You wrote that is pie is a sort of one-fits-most. But you also wrote that you’re working with a 20+ year time horizon on your example. As time passes (or if starting late) how does one adjust for a shortening time horizon?

    For instance, at 10 – 12 years out, would we replace VGLT with VGIT? Or instead add VGIT and start shifting % from long term to intermediate slowly every year? Should we also start shifting the 80/20 ratio towards a more conservative one? Or, at this point, would it just be better to change investment strategy all together?

    Reply
    • John Williamson says

      March 25, 2021 at 9:24 am

      Thanks! Yes, you’ve got precisely the right idea – decrease average bond duration and increase the allocation to bonds. I delved into this framework here.

      Reply
  9. SenorB says

    March 22, 2021 at 8:34 pm

    You’ve written in other posts that real estate is an important diversifier in long term portfolios but also that real estate presents “idiosyncratic risk.” Can you explain what you mean by that? The paper you link does talk about replicating the returns of real estate by using small cap value stocks and corporate bonds but the paper also concludes by saying that real estate does merit some, albeit small, exposure in a portfolio. So I’m trying to understand the role real estate plays and why some, including yourself, exclude it, while others, like Ferri in one of his Core 4 portfolios, include it. Thanks.

    Reply
    • John Williamson says

      March 22, 2021 at 9:22 pm

      I don’t know that I’ve ever said REITs are an “important diversifier” but they may be useful for those who want some exposure to real assets, and they’re fairly lowly correlated to the broader market. REITs already make up about 4% of the market. But since we now know we can replicate their returns, we A) can just do it that way, and B) know that they don’t offer a true diversification benefit. Ben Felix goes into those details here: https://www.youtube.com/watch?v=IzK5x3LlsUU&ab_channel=BenFelix

      Here’s some literature on idiosyncratic risk: https://www.investopedia.com/terms/i/idiosyncraticrisk.asp

      Reply
      • SenorB says

        March 24, 2021 at 9:46 am

        Ok, I see, that makes sense. I checked out the links, they were helpful. In your article on the best REIT etfs for 2021, the first paragraph describes reits as an important diversifier. Thanks for the reply.

        Reply
  10. vinicius querino andraus says

    March 22, 2021 at 2:59 pm

    HI.

    Why VWO instead of AVEM, and why VEA instead of AVDE.

    Reply
    • John Williamson says

      March 22, 2021 at 3:04 pm

      So far AVEM and AVDE appear virtually identical to VWO and VEA, and again I’m using my factor tilts in small caps.

      Reply
  11. BJ Cleaver says

    March 19, 2021 at 2:36 pm

    Awesome article and insight! My own portfolio is pretty similar minus the TIPS and EM Bonds, but that gives me some food for thought.
    How often do you rebalance and why?

    Reply
    • John Williamson says

      March 20, 2021 at 10:32 am

      Thanks BJ! M1 keeps things pretty balanced through their automatic rebalancing, but if things need rebalancing, I usually do quarterly just because it’s convenient. Quarterly is probably marginally better than semi-annually, and semi-annually is probably marginally better than annually, but the differences are likely negligible.

      Reply
      • BJ Cleaver says

        March 20, 2021 at 11:58 am

        Easy enough in my IRAs which I tweaked to add more value this year (I’m with Fidelity.) I’ve been tinkering with my taxable accounts and how to best structure those. It’s a mish mosh right now of “play” money in stocks, Bogle-style index funds, etc. Rebalancing those more often than annually gets tricky unless I keep adding funds so I can buy vs. sell (and incur taxes.)

        Anyway, the insight is appreciated. I enjoy your articles and the perspectives they offer.

        Reply
        • John Williamson says

          March 20, 2021 at 12:43 pm

          Awesome, thanks so much for the kind words! I’m really glad you’re finding the content useful.

          Reply
  12. Daniel says

    March 18, 2021 at 11:58 pm

    Reading through this gradually. My initial reaction is that you should write an article on how to write an IPS and hyperlink to it within this article! 🙂

    Reply
    • John Williamson says

      March 19, 2021 at 2:24 am

      Thanks for the suggestion!

      Reply
    • Jules says

      April 18, 2021 at 9:06 pm

      Hi John,

      Thank you for making this information available – you’ve been an incredible resource as I try to build and improve my personal portfolio.

      One question I have is regarding how to switch funds. For example, I would like to switch from holding a core percentage in IWB (ISHARES RUSSELL 1000 INDEX FUND) to VOO.
      – Do I sell all of my shares of IWB and immediately use the funds to buy the same amount in VOO?
      – Do I sell a bit of IWB to buy a bit of VOO and do it over time until I hold zero IWB? But then I will be holding two similar funds and paying two expense ratios.
      – Or do I sell all IWB at once and buy VOO over time to dollar cost average?

      You write about switching from one fund to another quite often, but I just don’t know the correct mechanics of how to do it. Your guidance will be much appreciated!

      Many thanks,
      Jules

      Reply
      • John Williamson says

        April 19, 2021 at 12:56 am

        Jules, thanks for the kind words! Really glad you’ve found the content useful.

        In terms of selling, assuming we’re in tax-advantaged space, you can buy and sell anytime you want without consequence. VOO and IWB are nearly identical, except IWB is 5x the cost of VOO. So if it were me, I’d sell all the IWB at once and immediately put all that money in VOO.

        In a taxable account, it’s another conversation entirely.

        Reply
        • Jules says

          April 19, 2021 at 9:02 am

          Thanks so much for the quick reply, John! This is actually in a taxable account.

          Reply
  13. SenorB says

    March 17, 2021 at 11:11 pm

    John,

    Thanks for sharing your own portfolio. It’s really insightful to read about your thought process and also to compare it to the other lazy portfolios. I’ve learned a lot by reading your analysis and I can see why you made the choices you did especially with regard to choosing assets with low correlation.

    A few questions:

    How would you adjust the portfolio to be a 60/40 and 40/60 allocation? One thing I like about portfolios like the Vanguard 3 fund or Rick Ferri’s portfolios, is that it’s easy to understand how to adjust the allocations to one’s own risk tolerance. With yours, and many other lazy portfolios, it’s more difficult to see how they can be properly adjusted to reduce risk.

    For the emerging market government bonds, I’m intrigued by this because I don’t think I’ve seen this in any other lazy portfolio. I understand you’re choosing it due to its low correlation to the US market and US bonds, but do you have a sense of how it has performed historically, say in 2007-2008 or 2000-2002? VWOB only goes back a few years. Also, if one was hesitant to include this, would short term treasuries be an appropriate substitute?

    Thanks.

    Reply
    • John Williamson says

      March 18, 2021 at 12:11 am

      Glad you’ve learned a lot from my ramblings! And you were right, this comment got thrown in the spam folder initially too.

      You’re right, the math on scaling back the stocks side while adding bonds doesn’t provide for simple increments. You’d basically just multiply each holding by the percentage you’re dropping, so a 10% holding in a 100/0 becomes 8% in an 80/20, 6% in a 60/40, etc. No need to change the holdings themselves; factor tilts conveniently reduce risk in terms of distribution of outcomes. I’d personally probably keep 10-20% in the long treasuries and then start using intermediate treasuries, again roughly matching bond maturity to time horizon.

      You can use PEBIX to get an idea of what VWOB would have looked like historically, but there’s not much use viewing its past performance in isolation. Short term treasuries would definitely not be a substitute. Again, junk bonds or long term corporate bonds would provide credit risk, but the correlations would be significantly different. If one were hesitant about that piece, I suppose they could just throw that 5% into the stocks, long treasuries, or TIPS depending on where they want it to go.

      Reply

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