Everyone always asks 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.
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Contents
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
Update July 2021: Got way too many emails from people using this portfolio and then asking me about TIPS and Emerging Markets gov't bonds (what they are, what they're for, etc.). They clearly didn't understand what they were buying. That's not good. So I removed those pieces.
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 90/10 stocks to fixed income using a long duration bond fund to, again, accommodate sort of 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. Specifically, this portfolio is roughly 1:1 large caps to small caps and for U.S. investors, it has a slight home country bias of 5:4 U.S. to international, nearly matching global market weights.
In selecting specific funds, I looked for sufficient liquidity, appreciable factor loading (where the expected premium would outweigh the fee), low tracking error, and low fees.
Here's what it looks like:
Ginger Ale Portfolio Allocations:
- 25% U.S. Large Cap Stocks
- 25% U.S. Small Cap Value
- 10% Developed Markets (ex-US)
- 10% Developed Markets (ex-US) Small Cap Value
- 10% Emerging Markets
- 10% Emerging Markets Small Cap Value
- 10% U.S. Treasury STRIPS
Below I'll explain the reasoning behind each asset in detail.
U.S. Large Cap Stocks – 25%
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 25%. You'll see why later.
Not much to explain here. The U.S. stock market comprises a little over 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 – 25%
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. Using VTI would also dilute my target large cap exposure.
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, the evidence suggests 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. The reason I don't want to go 100% factors like Larry Swedroe is because A) I don't have the stomach and conviction he has, and B) there's always the possibility of being wrong.
I know the exclusion of mid-caps entirely seems bizarre at first glance too. Factor premia tend to 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.)
I don't want it to seem like I think this is some profound, contrarian approach. Using VTI (total stock market) instead of VOO (S&P 500) would be perfectly fine, and at only 25% of the portfolio, the difference is admittedly probably negligible. The simple point is that I've already decided on a specific small cap allocation, and I'm choosing to get that exposure through a dedicated small cap value fund rather than through VTI. Similarly, I've also already decided on a specific “pure,” undiluted large cap allocation, and I'm choosing to get that exposure through the S&P 500 Index.
Previously, the S&P Small Cap 600 Value index (VIOV, SLYV, IJS) was basically the gold standard for the U.S. small cap value segment. AVUV, the new kid on the block from Avantis, has provided some extremely impressive exposure – superior to that of those funds – in its relatively short lifespan thus far, so much so that it recently replaced VIOV in my own portfolio. I went into detail about this in a separate “small value showdown” post here. In a nutshell, it has been able to capture smaller, cheaper stocks than its competitors, with convenient exposure to the Profitability factor, all while considering Momentum in its trades, and we would expect the premium to more than make up for its slightly higher fee.
Including small caps also took the famous 4% Rule up to 4.5% historically.
Developed Markets – 10%
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.
If you're reading this, chances are you're in the U.S. As I just pointed out, odds are favorable that you also overweight – or only have exposure to – U.S. stocks in your portfolio. The U.S. is one single country out of many in the world. By solely investing in one country's stocks, the portfolio becomes dangerously exposed to the potential detrimental impact of that country's political and economic risks. If you are employed in the U.S., it's likely that your human capital is highly correlated with the latter. Holding stocks globally diversifies these risks and thus mitigates their potential impact.
Moreover, 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. 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. For the famous “lost decade” of 2000-2009 when U.S. stocks were down 10% for the period, international Developed Markets were up 13%.
For U.S. investors, holding international stocks is also a way to diversify currency risk and to hedge against a weakening U.S. dollar, which has been gradually declining for decades. International stocks tend to outperform U.S. stocks during periods when the value of the U.S. dollar declines sharply, and U.S. stocks tend to outperform international stocks during periods when the value of the U.S. dollar rises. Just like with the stock market, it is impossible to predict which way a particular currency will move next.
Moreover, U.S. stocks' outperformance on average over the past half-century or so has simply been due to increasing price multiples, not an improvement in business fundamentals. That is, U.S. companies did not generate more profit than international companies; their stocks just got more expensive. And remember what we know about expensiveness: cheap stocks have greater expected returns and expensive stocks have lower expected returns.
Dalio and Bridgewater maintain that global diversification in equities is going to become increasingly important given the geopolitical climate, trade and capital dynamics, and differences in monetary policy. They suggest that it is now even less prudent to assume a preconceived bet that any single country will be the clear winner in terms of stock market returns.
In short, geographic diversification in equities has huge potential upside and little downside for investors.
I went into the merits of international diversification in even more detail in a separate post here if you're interested.
Vanguard offers a low-cost fund called the Vanguard FTSE Developed Markets ETF. Its ticker is VEA.
Developed Markets (ex-US) Small Cap Value – 10%
We can also specifically target small cap value in ex-US Developed Markets 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.
Remember we also get a diversification benefit here in doing so; it's not just for the greater expected returns. The earnings of large international corporations are more closely tied to global market forces, whereas smaller companies are more affected by local, idiosyncratic economic conditions. This means they are perfectly correlated with neither their large-cap counterparts nor with U.S. stocks.
Until just about a year ago, an expensive dividend fund from WisdomTree (DLS) was arguably the best way to access this segment of the global market. Now, Avantis has launched a fund available to retail investors that specifically targets international small cap value – AVDV. It 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 option DLS.
Emerging Markets – 10%
Emerging Markets refer to developing countries – China, Hong Kong, Taiwan, India, Brazil, Thailand, etc.
Investors sometimes shy away from these countries due to their unfamiliarity and greater risk. I would argue that makes them more attractive. Stocks in these countries have paid a significant risk premium historically, compensating investors for taking on their greater risk.
Arguably more importantly, Emerging Markets tend to have a reliably lower correlation to U.S. stocks compared to Developed Markets, and thus are a superior diversifier. Of course, we would expect this, as these developing countries have unique risks – regulatory, liquidity, political, financial transparency, currency, etc. – that do not affect developed countries, or at least not the same extent. I delved into this in a little more detail here. For the previously mentioned “lost decade” of 2000-2009 when the S&P 500 delivered a negative 10% return, Emerging Markets stocks were up 155%.
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.
Vanguard's Emerging Markets ETF is VWO.
Emerging Markets Small Cap Value – 10%
Just like we just did with Developed Markets above, we can focus in on small cap value stocks within Emerging Markets as well.
Here we’re using a small cap dividend fund from WisdomTree as a proxy for Value within small caps in Emerging Markets. Don’t let this sound discouraging. The fund also screens for liquidity and strong financials and has appreciable loadings across Size, Value, and Profitability. Factor investors are wise to this fact, as this fund boasts nearly $3 billion in assets.
The fund is DGS, the WisdomTree Emerging Markets SmallCap Dividend Fund.
Factor investors like myself thought AVES, Avantis’s newest offering for more aggressive factor tilts in Emerging Markets, might dethrone DGS when it launched in late 2021. While it’s certainly no slouch and would still be a fine choice, I still prefer the looks of DGS, even with its higher fee. I compared these specifically here.
U.S. Treasury STRIPS – 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 a risk premium in fixed income: term. I delved into the concept of asset diversification in detail in a separate post here.
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are basically just bonds where the coupon payment is rolled into the price, so they are zero-coupon bonds. Here we're using a fund that is essentially just very long duration treasury bonds (25 years).
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.
- 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.
- 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.
- 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.
- Bond pricing does not happen in a vacuum. Here are some more examples of periods of rising interest rates where long bonds delivered a positive return:
- From 1992-2000, interest rates rose by about 3% and long treasury bonds returned about 9% annualized for the period.
- From 2003-2007, interest rates rose by about 4% and long treasury bonds returned about 5% annualized for the period.
- From 2015-2019, interest rates rose by about 2% and long treasury bonds returned about 5% annualized for the period.
- 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.
- 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.
- 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. More volatile assets make better diversifiers. 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.
- 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.
- Similarly, short-term decreases in bond prices do not mean the bonds are not still doing their job of buffering stock downturns.
- 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.
- Historically, when treasury bonds moved in the same direction as stocks, it was usually up.
- 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. Also note how I've shown below that a 90/10 portfolio using STRIPS outperformed a 100% stocks portfolio on both a general and risk-adjusted basis for the period 1987-2021.
- 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.
- Bond convexity means their asymmetric risk/return profile favors the upside.
- 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 runaway inflation like the late 1970’s going forward. Stocks are also probably the best inflation “hedge” over the long term.
Here's that backtest mentioned above showing a 90/10 portfolio using STRIPS beating a 100% stocks portfolio for 1987-2021:
David Swensen summed it up nicely in his book Unconventional 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 EDV, the Vanguard Extended Duration Treasury ETF.
Ginger Ale Portfolio – Historical Performance
Some of these funds are pretty new, so I had to use comparable mutual funds from Dimensional in some cases to extend this backtest and give us a rough idea of how this thing would have performed historically. The furthest I could get was 1998, going through June 2021:
Here are the annual returns:
Here are the rolling returns:
Keep in mind the Size and Value premia and international stocks suffered for the decade 2010-2020, 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 – 25%
- AVUV – 25%
- VEA – 10%
- AVDV – 10%
- VWO – 10%
- DGS – 10%
- EDV – 10%
You can add this pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”
Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.
Being More Aggressive with 100% Stocks
I'd like to think I made a pretty good case for why you shouldn't fear bonds, but if you're young and/or you have a very high risk tolerance, you might still be itching to ditch the bonds and go 100% stocks. Here's a more aggressive version, basically giving an extra 5% each to VOO and AVUV for more of a U.S. tilt:
- VOO – 30%
- AVUV – 30%
- VEA – 10%
- AVDV – 10%
- VWO – 10%
- DGS – 10%
Here's the pie link for that one.
Just note that historically this would have resulted in worse performance than the original 90/10:
Incorporating NTSX, NTSI, NTSE
A lot of people know I'm a huge fan of WisdomTrees line of “Efficient Core” funds like NTSX and have explicitly asked about replacing the stocks index funds from the aggressive version with these new 90/60 funds from WisdomTree, so I've added this section to briefly address that. If this idea sounds foreign to you, maybe go read this post that explains how NTSX works first and then come back here.
Making those substitutions of the WisdomTree Efficient Core Funds (NTSX, NTSI, and NTSE) for the broad index funds for the S&P 500 (VOO), ex-US Developed Markets (VEA), and Emerging Markets (VWO) is absolutely fine, but I've tried to explain to a few people in the comments that this doesn't materially change the exposure too much from the original Ginger Ale Portfolio simply because EDV packs quite a volatile punch since it's extended duration treasury bonds. That was the whole point of its inclusion.
In other words, going 6x on intermediate treasury bonds (what the WisdomTree funds do) is nearly the same exposure as what EDV provides.
This is illustrated in the backtest below that shows the original Ginger Ale Portfolio, the aggressive 100% stocks version, and a version substituting in NTSX/NTSI/NTSE that delivers effective exposure of 95/35:
Making those substitutions, that 95/30 portfolio looks like this:
NTSX – 30%
AVUV – 30%
NTSI – 10%
AVDV – 10%
NTSE – 10%
DGS – 10%
Also keep in mind this one has a much greater expense ratio. You can get this pie here.
Adjusting This Portfolio For Retirement
I've also had a lot of people ask me how I plan to adjust this portfolio as I near and enter retirement. The answer is pretty simple and straightforward. I don't care about dividends or using them as income, so I plan to simply decrease stocks, increase bonds, decrease bond duration, add some TIPS, and sell shares as needed. Factor tilts and geographical diversification would remain intact.
For example, a 40/60 version using intermediate nominal and real bonds might look something like this:
- 10% VOO – U.S. Large Caps
- 10% AVUV – U.S. Small Cap Value
- 5% VEA – Developed Markets (ex-US)
- 5% AVDV – Developed Markets (ex-US) Small Cap Value
- 5% VWO – Emerging Markets
- 5% DGS – Emerging Markets Small Cap Value
- 30% VGIT – Intermediate U.S. Treasury Bonds
- 30% SCHP – Intermediate TIPS
That pie is here if you want it for some reason.
Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Questions, comments, concerns, criticisms? Let me know in the comments.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.
Disclosure: I am long VOO, AVUV, VEA, VWO, AVDV, DGS, and EDV.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment 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. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.
Rob says
What do you think about the following substitutions / changes?
QUAL instead of VOO (Seems a little more ex-S&P inclusive)
VEA 10% (Less emphasis on the Developed / US-related ; that 5% goes to AVDV below)
DGS 10% (Emphasizes emerging)
AVDV 5%
TLT instead of VGLT
I appreciate the breadth and depth of what you’re doing and the long-form writing. Many thanks for what you’re doing!
John Williamson says
Quality is basically interchangeable with Profitability, which VIOV, AVDV, etc. cover already. I wouldn’t replace a broad index like VOO with a Quality fund. Just my 2 cents. DGS for EM SCV makes sense; I put that in the Vigorous Value Portfolio. TLT and VGLT are nearly the same; I think TLT is slightly longer duration but higher fee.
Thanks for the kind words!
Augusto says
First, congratulations on the magnificent work. Secondly, if it’s a strange writing, it’s because I’m Brazilian and I’m not completely fluent in English, I apologize.
1- Why not put a small cap value etf for emerging as DGS? I heard that Avantis is about to launch a small cap value ETF for emerging AVES, are you thinking of including it?
2- I’m 20 years old, and 30 years or more until retirement, I’m thinking of making an allocation similar to yours, but I would add a small cap value ETF for emerging markets, the DGS or this AVES that hasn’t launched yet. My question is whether it pays to invest in active ETFs like Avantis, as historically active funds have lost to their benchmarks, as shown by SPIVA. I don’t know if I use AVUV instead of VIOV, if I use AVDV instead of DLS and if I use this AVES (not yet released) instead of DGS. Could you give your opinion about it?
3- What is a good allocation between USA, developed outside the USA and emerging? I don’t know if I use 50/30/20 or 50/25/25.
John Williamson says
Thanks, Augusto!
1. Not a bad idea. I might consider including DGS or just waiting for this new Avantis fund for EM SCV. I’d probably want to wait and see how it matures, though. I included DGS in the Vigorous Value Portfolio.
2. So far the Avantis funds deliver demonstrably superior factor exposure, and “passive” is a myth anyway; indexes are created and maintained by humans. The Avantis funds aren’t the real active the way we think about it when discussing active vs. passive, anyway. See this post for details on AVUV vs. VIOV.
3. Global market weights is a good place to start. Optimal can only be known in hindsight.
Augusto says
Thank you very much for the satisfactory reply John.
I would like one more of your answers, when I get close to usufruct I will increase my exposure to bonds, but what about stocks? Should I change all the actions part to ACWV for example? In order to reduce volatility? Or can the stock part remain like your Ginger wallet for example?
John Williamson says
Remember, when holding multiple assets, we always want to attempt to optimize the portfolio as a whole, not assets in isolation. Switching to low vol stocks for one piece does not necessarily lower the volatility of the whole portfolio. Also keep in mind factor diversification per se lowers portfolio risk. These are both things that can be hard to wrap one’s head around at first.
Augusto says
Thanks for the reply John, I read about the link you suggested. So with a multi-factor portfolio like your Ginger Ale, just add fixed income as you get older? No need to change your etfs, is that it?
John Williamson says
Yep, that’d be my move. I’ll just be scaling down the stocks and scaling up the bonds and TIPS, but keeping all the same stocks ETFs to maintain that factor diversification.
SeungHun says
Hi John,
I heard Avantis will release a couple more ETFs in September.
The fund I am really interested is AVES ( emerging market value). I probably will replace AVEM.
Are you planning to add any of new Avantis funds to your portfolio?
John Williamson says
Haven’t looked into them yet. Sounds intriguing, though.
Mike H says
Hi Ben, Enjoy your site! Noticed the pie for your Gingerale still uses VIOV whereas you are using AVUV. Any reason? I uses AVUV, but curious if you recommend VIOV over in this case only because it’s passive?
Cheers!
John Williamson says
Hey Mike, I explained that in the post. Basically, I love AVUV and use it myself, but an active ETF probably isn’t a suitable blanket recommendation for everyone in that instance and it’s very new, and VIOV is still a great fund. Also, not sure who Ben is. 😉
Mike says
Wow man. Scotch and investment reading.
James Kallman says
John,
Great site. It looks like this portfolio is meant for a tax advantaged account. I wonder how you might modify it in a taxable account. In particular, would you see a role for tax free mutual bonds for your bond allocation in a taxable account?
Jim
John Williamson says
Wouldn’t be horrible in taxable. Interest from treasuries is tax-free at the state level, plus foreign tax credit. Dividends from the Value funds are maybe the least ideal part in terms of tax efficiency.
Robert says
Hi John,
I am just starting out with investing and trying to put my savings into a taxable account (overflow after maxing out tax advantaged accounts).
I am using your emergency fund portfolio for a portion and trying to figure out where to put „the rest“.
Initially, I wanted to put it into your Ginger Ale portfolio, but now stumbled onto your NTSX review.
Now I am kind of torn between those two options. I cannot really gauge how big the tax effects are on them (since this is a taxable account).
Any comments on how big the negative tax impact of the Ginger Ale portfolio is on a taxable account? I am not sure if this is a stupid idea that makes me lose money or just „not that optimal“ (minor).
Thank you for your help! Your blog helped me to get into investing, which I dared for years.
-Robert
Robert says
*dreaded not dared
John Williamson says
Comparatively, NTSX should be slightly more tax-efficient, but don’t obsess over it as a reason to favor one strategy over another. Thanks for the kind words!
Robert says
Thank you for your quick reply! It helps and I really appreciate it!
-Robert
Ghebrezghi Shimhalal says
HI John, one thing I noticed is that there should not be any data for the Avantis International Small Cap Val ETF AVDV) because the fund was introduced sometime in Oct 2019. So, you cannot go back to 1998 with this ETF. Am I missing something here?
I also ran the models and it appears the following allocation has a better returns,
Ticker Name Allocation
VOO Vanguard S&P 500 ETF 30.00%
VIOV Vanguard S&P Small-Cap 600 Value ETF 15.00%
VEA Vanguard FTSE Developed Markets ETF 20.00%
VWO Vanguard FTSE Emerging Markets ETF 15.00%
AVDV Avantis International Small Cap Val ETF 10.00%
VGLT Vanguard Long-Term Treasury ETF 4.00%
SCHP Schwab US TIPS ETF 3.00%
VWOB Vanguard Emerging Mkts Govt Bd ETF 3.00%
Thanks,
Ghebrezghi
John Williamson says
I used comparable mutual funds to extend the backtest.
Gary Casham says
Hi John – this is an awesome site which I will be sharing with my 2 daughters in a few years time when they are old enough!! I wish I had access to such valuable material when I was in my 20s!
I am now 45 and well into my investing journey. I am 45 years old and live in Australia. I have online brokerage to invest in the Australian market and US online brokerage with Schwab (cant get M1 unfortunately!) to invest in the US market. Like you, I have spent the last 10 years individual stock picking. Like you, I have tried every approach possible and paid good money for subscription services to try and “beat the market”. I now have my very own really inefficient and time-consuming ETF!! I feel like such a FOOL!
I am now seriously looking at indexing as my core strategy and I have found the different portfolios fascinating reading. I am not looking for personal financial advice here. However, I am keen to get your thoughts on the following:
1) The choice of ETF products in the US is so much more advanced than Australia!! On this basis, I would be keen to have the majority of my assets in US ETF’s. However, I am concerned about managing currency fluctuations between the USD/AUD – which is typically quite volatile. Is there a strategy to hedge the USD/AUD currency fluctuation or do I accept the inferior ETF products in my local market and keep my assets in Australia?
2) Keen to get your thoughts on Crypto. I am on the journey and essentially using my “lottery money” to buy Bitcoin and the major ALTS. I read all the macro research and find the divergence of opinion confusing. I don’t know who to believe! Just wondering if I am better off using my lottery money for leveraged indexing (eg Hedgefundie). The volatility of Crypto makes this even more challenging to manage than individual stock picking!! Would you recommend the emerging Crypto ETF markets? If so, thoughts on % allocation?
I understand you cannot give personal financial advice and do not expect it. However, I would love to get your insights.
Regards, Gary
John Williamson says
Thanks for the kind words, Gary! I feel very privileged to know you’ve found the site useful enough to share with your family.
Always a fan of indexing as the core strategy.
1) I’d say definitely find a way to diversify globally, especially with U.S. exposure. Admittedly I don’t know the intricacies of currency risk and hedging, but I know it can work both ways (help and hurt) so over the long term we’d expect it to be a wash. You should be able to hedge to your local currency with bonds though.
2) Sort of the same story for crypto. I probably don’t know enough about the details to intelligently comment on it, but I view it just like I view gold: volatile, speculative asset with no intrinsic value that may offer a diversification benefit if one simply desires to reduce volatility alongside stocks and bonds. We still don’t even have a crypto ETF in the U.S. Since it’s so volatile, I’d personally put no more than 3% in it. I say 3% as a cap because its risk parity allocation in a portfolio with stocks and long bonds is literally 3%. Keep in mind any allocation to something like gold or crypto is space that could have gone to something else (opportunity cost), so, as with any asset in one’s portfolio, the investor should have a good reason for holding it. I would absolutely prefer a “lottery ticket” in a leveraged index strategy, because then we’d actually have expected returns greater than zero. Again, from my perspective, I’d only view crypto as a diversifier to lower portfolio volatility and I wouldn’t even expect a positive long-term return from it. I myself use leveraged indexing and I do not own any crypto.
Anthony says
Hi John,
I’ve had some pretty poor financial advise from my past 2 advisors and I feel i’m not getting any better with my 3rd advisor.
I’m looking into sorting things out and i found your blog to be very informative.
I’m hoping you might point me in the right direction:
1) I’m 41, French, married and we have 1 child.
2) We live and work in Qatar (tax free country).
3) Most of my Assets are in a Custodian Life account: 68% in Structured Notes + 24% in Stocks (individually picked) + 8% in Liquid Holdings and i’ve essentially had no ROI for the past 2 years.
I’m obviously looking at changing all that by applying a Passive Portfolio, but assuming i can easily get out of my current investments:
1) What platform would you recommend i use?
2) I cant seem to figure which type of portfolio would be best for me? Swensen’s? Paul Merriman’s?Considering i have a medium risk tolerance. I’ve managed to save quite well over the years and as much as want to increase my assets, i dont want to expose myself too much.
John Williamson says
Anthony, thanks for the kind words! Glad you’ve found the blog helpful.
So I can’t provide personalized advice and I’m unfamiliar with which brokers are available in Qatar. I’d say see if any of the big guys are available like Schwab, Fidelity, Vanguard, etc. Interactive Brokers may be available.
Regarding lazy portfolios, the most popular is probably the Bogleheads 3 Fund. It sounds like you might like something like the Golden Butterfly. Go with one that you understand the reasoning behind so that you’re able to stay the course and not feel uneasy about your choice.
Matt says
Hi John,
This website is brilliant and I plan to recommend it to every investor I know.
I’m 33 with a 27-year time horizon and I’m 100% VOO. The last information available to me showed VOO with a 3-year return of about 53% and a 5-year return of about 100%. VTI was roughly the same. VT was rather significantly lower. I know this is an extremely short window of time into the past and the future might be different. I’ll note that if there’s a market crash, I’m more comfortable holding VOO than VTI because of the largeness of the companies in it.
I’m relatively new to this, so I’m wondering if I’m missing something and please bear with me. Your AVUV find does interest me. The fund seems to have crushed it since its inception. However, there’s obviously not statistics going back even 3 or 5 years for it. I like evidence. I can tell that you do too.
With your expertise, do you have any advice for me? I’m open to anything. Should I be in any bonds, and if so, what kind do you suggest? Would it be wise for me to try some AVUV allocation?
Your portfolio does look like it may well be built for a successful future. And I really appreciate what you’re doing here for all investors.
Best,
Matt
John Williamson says
Ah, thanks for the kind words, Matt! Glad you’ve enjoyed it.
So VOO makes up about 82% of VTI by weight, with that other 18% being small and mid cap companies, which we would expect to beat large caps over the long term (and indeed they have historically). The former also has about 500 stocks while the latter has about 3,500. But as you’ve seen, their performance is pretty similar, even in downturns.
I’d say don’t miss out on international. Right now you’ve got what’s called home country bias, and as you noted, past performance does not indicate future performance. There are plenty of good reasons to diversify outside one’s home country. I laid them out here.
Don’t focus too much on past performance per se. Look at correlations and volatility and how different assets behave relative to each other. Looking at them in isolation usually doesn’t tell us much. I’d suggest always knowing exactly what you’re buying and why you’re buying it. This of course comes after a lot of research into what you should buy in the first place, which is what I’m usually rambling about on this site.
I can’t provide personalized advice, but I’d say most investors your age should still be 100% stocks. You might enjoy this post on asset allocation that explains why. I think it’s reasonable to overweight some other risk factors as well outside of market beta. I know that may sound like a foreign language to you right now; I delved into those in a post here. In short, greater expected returns and a convenient diversification benefit, which is why I overweight those small cap value stocks with AVUV.
Matt says
Thank you for the thoughtful and informative reply, John.
Your site is probably going to help get me to add international eventually. I agree with your personal take on asset allocation in terms of age. I read everything from the useful links you provided, but I might have to reread the factor investing one to get a stronger grasp on the topic.
I see that you use a 50-50 split with large cap and small-cap value for U.S. equities. I don’t know if I’m willing to go that far, yet. In your mind, is there a minimum percentage for the small-cap value (AVUV) portion to make the strategy effective enough? I wouldn’t want to start at only 10% or 20% if the upside is negligible. It seems that the 18% of mid caps and small caps in VTI isn’t doing much for that fund.
John Williamson says
Really no minimum, just depends on what level of tracking error you might be able to emotionally sustain. That is, if small value underperforms like it did the past decade, would you stick with the strategy or ditch it? If you’ve got VTI, any % of small cap value after that is overweighting it, so even 10% or so “helps” in that sense.
Abhi-viv says
Wow wow wow. Thank you. Not only useful information but brilliantly explained. I’ve read books from finance experts but you explain this so well.
Thanks again for doing this. I am lucky to come across this site. Highly recommend this site to everyone.
Andy says
Hi John. Thanks for sharing you etf portfolio and the reasoning behind it. It has been very interesting to read.
I compared your portfolio with the appropriate recommended weightings over different time periods compared to a simple 3 fund portfolio with 40% VTI 40% VEU and 20% BND.
Since AVUV and AVDV are new without a long history of annual returns, I used DGS and VIOV as their replacements. I also did not compare the expenses/management costs of your portfolio against the 3 fund one.
So the average annual return results for a 3 fund portfolio were:
YTD: 3.612% 1y 45.8% 3y 10.474%. 5y 11.344% 10y 8.274%
Your portfolio results were:
YTD 6.4135% 1y 54.19% 3y 8.9865% 5y 10.9915% 10y 7.9015%
So to summarise, the simple 3 fund portfolio seems to outperform your average annual returns over the longer period of 3-10y as well as cheaper in brokerage fees and probably management expenses.
I would be interested to hear your thoughts on this.
John Williamson says
First, a simple 3 Fund is pretty different from mine. An investor for whom one is attractive probably doesn’t want the other one.
Secondly, DLS would probably be more appropriate than DGS. The latter is only Emerging Markets SCV.
Lastly, past performance does not indicate future performance. More importantly, 3-10 years is a drop in the bucket, and Value has suffered greatly over precisely that time period. Basically, this kind of backtest means nothing to me and is what we would expect to see. The backtest I showed goes back to 1998 and uses the S&P 500 as the benchmark, which has outperformed an 80/20 3 Fund over that time period, so your summary is suffering greatly from recency bias. But again, backtests don’t mean much to me; I just threw it in there because people love to see them.
Andy says
Thanks again as your portfolio and reasoning makes a lot of sense and is great reading. What is your opinion on possibly using SCHZ etf instead of VGLT in the current climate of inflation? SCHZ seems to have a higher yield and not corporate bonds with intermediate term.
John Williamson says
SCHZ looks like the Schwab equivalent of BND. It’s just a total bond market fund, so it should have about 25% corporates in there. The “current climate of inflation” may be short-lived. Stocks are still the best inflation “hedge” over the long term. But if you’re concerned about inflation, buy TIPS.
Charles Kangas says
This looks like a great portfolio; the numbers posted against the S&P 500 are impressive. As you denoted, the last decade has been kind to US growth and less kind to other assets.
I did have a few questions, however.
The 7 12 portfolio uses commodities and natural resources as diversification tools. I had never been big on either, but the author made a strong case for their inclusion based on their low correlation with equities. What your reason was for not including them?
You noted that the pure equity variant actually had poorer results. In addition to increasing volatility, do you suspect there is a middle ground between the two that would back test better than either over most 20 periods?
Or in other words, if 5% of the total bond allocation was moved into equity based on existing weights), would you expect average annual returns to go up over most 20 year periods?
Also, what is your opinion on using a small amount of sector ETFs (perhaps 5% of US large caps)? Some sectors, such as consumer staples and health care seem to have both an above average historical record and to do comparatively well during market downturns.
Finally, what is your opinion on RZV for US small caps? Particularly on whether you think the additional fees are worth the additional tilt towards small and towards value.
Thanks in advance!
John Williamson says
Charles, thanks for the thoughtful comment! Let me see if I can give some answers.
Regarding commodities, I delved into them in a separate post here. Essentially, I still want my diversifiers to have positive expected returns and not just diversification for the sake of diversification, which was my take on the 7/12. We have TIPS now, and I see no advantage of commodities over them. I think I’d even use a gold fund before broad commodities.
One could use whatever bond allocation they want. The bond bull market over the last 40 years definitely makes their inclusion look better in backtests in terms of pure return. But don’t rely too heavily on trying to optimize backtests, which results in overfitting.
Not a fan of sector bets; they’re just stock picking lite. That said, my human capital is in tech, and the market is over 1/4 tech, so I diversify away from that with a dash of extra Utilities, which are conveniently considered “defensive” as they’re non-cyclical.
RZV would be a fine choice for SCV. Looks a tad expensive for my tastes. I use AVUV.
Charles Kangas says
Thanks for the reply. And apologies for most of the questions; as I read through your other articles I realized that all of the answers were all there. I’m going through something similar to the journey you mentioned at the top of the article. A month ago I thought 100% VT was optimal for average returns over 20-30 years. Your articles, along with other sources, have made me realize that as you mention it’s a good base, but that it’s probably not optimal in several ways.
Two last questions though if you’d be kind enough to indulge.
You detailed your reasons for not including funds with leverage in them. However, if it was in a context where you were not concerned that others would blindly copy the portfolio, would you use any of NSTX, NTSI, and NTSE as replacements to VWO, VEA, and VOO?
I realize this is a bit apples to oranges; replacing VEA with NTSI would lead to lower diversification and the removal of developed mid caps. But if you were forced to start over with your own investments/portfolios, would you use any of the WisdomTree NTSX, NTSI, and NTSE over VOO, VEA, and VWO? Ignoring size and liquidity concerns with the new funds. And if you did use them as replacements, would you lower your bond allocation as a result, or simply treat them as pure equities?
My second question is a person may have an IRA, HSA, 401K, and a taxable account for their investments once tax advantaged caps are reached. For a couple, this results in 7 accounts total. Transferring between accounts seems to be either not be possible, or to come at a steep cost (tax advantaged to taxable).
To some degree the different accounts are fungible in retirement, and there’s certain assets that you would only want in a tax advantaged account. But it still feels like a non diversified account would miss out on some of the diversification performance benefits; e.g. a 70/20/10 US/dev/EM historically outperforms a pure 100% US fund.
Do you view diversifying each account as simply too much complexity to add to a portfolio?
John Williamson says
Big fan of NTSX in the right circumstances. I explored it here. I use it for my taxable account. Curious to see if NTSI and NTSE attract assets.
As long as money in each account has the same time horizon, view the portfolio holistically across accounts and not as individual buckets, and place assets based on relative tax-efficiency.
Steve says
Hey John,
I ran across your website when researching Paul Merriman’s UB&H portfolio and wanting to learn more about the bond selections. The content here is fantastic as are your thoughts on bonds which have been really helpful.
In about 5 years or so I expect to begin drawing some funds from my accounts set aside for retirement when I reach 60. As such, I’m starting to move more into bonds (I’m about 70/30 now). In thinking about what you’ve noted about LT treasuries, what are your thoughts about the mix of LT, IT, ST and TIPS for someone like me?
Thanks again for all the the terrific content here!
– Steve
John Williamson says
Thanks for the kind words, Steve! Glad you’re finding my content useful! Best approach in my opinion is to match bond duration to time horizon. To that end, a mix of LT and IT may suit you best.
Nab says
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 ?
John Williamson says
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.
Ming says
So at the moment the Hedgefundie bucket is about 30% of your total portfolio?
3x 30% roughy would give a 2:1 ratio
John Williamson says
No
Justin says
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!
John Williamson says
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.
Eric M says
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.
John Williamson says
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
ERIC M says
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
Tommy Tilden says
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.
John Williamson says
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.
Tommy Tilden says
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.
John Williamson says
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.
TommyTilden says
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.
John Williamson says
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.
Carl says
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
John Williamson says
IGOV is developed markets. BWX is mostly developed markets. Again, I own VWOB for credit risk, not security.
Scott says
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.
John Williamson says
Thanks, Scott!
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.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.”
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.
That’s the entire purpose of holding bonds.
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.
Thanks! That’s the goal.
Scott says
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
John Williamson says
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.
“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.
Carl says
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
I’ve voiced my disdain for small cap growth stocks many times.
Scott says
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
DePingus says
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?
John Williamson says
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.
Scott says
Your blog is fantastic. Thanks for all your doing.
When one starts to reallocate based on age, do you sell existing ETF/index funds and reallocate bonds/more conservative options? Or do you keep all previous investments and just increase your allocation to bonds/conservative options?
John Williamson says
Thanks, Scott!
I plan to keep the same strategy and styles of funds but just increase bonds and TIPS and decrease their average duration.
SenorB says
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.
John Williamson says
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
SenorB says
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.
vinicius querino andraus says
HI.
Why VWO instead of AVEM, and why VEA instead of AVDE.
John Williamson says
So far AVEM and AVDE appear virtually identical to VWO and VEA, and again I’m using my factor tilts in small caps.
BJ Cleaver says
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?
John Williamson says
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.
BJ Cleaver says
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.
John Williamson says
Awesome, thanks so much for the kind words! I’m really glad you’re finding the content useful.
Daniel says
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! 🙂
John Williamson says
Thanks for the suggestion!
Jules says
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
John Williamson says
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.
Jules says
Thanks so much for the quick reply, John! This is actually in a taxable account.
John Williamson says
In that case you’d want to consider the tax implications of any selling, particularly short term capital gains vs. long term capital gains. An ideal time to sell would be at a loss, which is called tax loss harvesting. I probably wouldn’t want to incur taxes on gains just to switch funds, unless those gains are minimal. Maybe just start buying VOO now and don’t buy any more IWB. No harm in having both.
SenorB says
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.
John Williamson says
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.