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.
Ketan says
Amazing post. Do you do auto invest like montly or weekly in this portfolio?
John Williamson says
Thanks! I invest when I get paid every 2 weeks.
Josh says
Do you have an updated version of the Ginger Ale portfolio? Did you ever decided on whether to use AVES or DGS?
John Williamson says
What do you mean by “updated?” What you see here is the most recent version. AVES is still too young; I’m giving it some time.
Mitya says
Hi John,
Thank you very much for what you do. Question on rebalancing – why would you rebalance quarterly vs. annually? If I understand it correctly, when you rebalance quarterly, you’re taxed on short term capital gains, but when you rebalance annually, you’re taxed on long term gains. Isn’t that an important consideration?
John Williamson says
Thanks for the comment, Mitya! Definitely an important consideration that is dictated by the account type. In a tax-advantaged retirement account like an IRA, for example, which is where these assets are for me, rebalancing incurs no tax consequences. In a taxable account, you would want to wait at least a year as you noted or, better yet, let new deposits go to the underweight asset(s) to do the rebalancing for you without incurring capital gains taxes.
Bill says
Thanks for all of your extremely helpful articles John!
I’m planning on using your portfolio as a basis for my own portfolio and also my kids who have already started investing in their Roth IRAs. I have a 401k (funds in both a Roth and Traditional 401k), Roth IRA, and a taxable investment account. For tax purposes, my plan is to allocate based off the following:
401k – VOO, VEA, VWO, and EDV
Roth IRA – EDV
Taxable – AVUV, AVDV, DGS
Any suggestions that I may tweak to may it more tax friendly? My 401k plan allows me to purchase mutual funds (no ETFs) so I have flexibility in what I may allocate in there besides the plan’s set funds (I noted the ETFs above but it will be the mutual fund equivalent to those ETFs).
Plan is to retire in about 14 years. Currently I will be at 80/20 stock/bond allocation and by the time I retire, I plan to be somewhere from 50/50 to 60/40 depending on my financial situation at that time. Instead of being at 20% EDV right now, I was thinking of going 10% VGLT, 5% VWOB, and 5% SCHP (your suggestion prior to recommending EDV). If I go this route, at what point should I start transitioning from VGLT to VGIT (or even EDV to VGIT and SCHP)? And, would you still recommend keeping VGIT, VWOB, and SCHP in retirement or should I drop VWOB as you don’t have that included in your breakdown for potential retirement portfolio.
John Williamson says
Thanks, Bill. Sounds like you’ll be limited based on what’s available in the 401k. Ideally, the small cap value funds would go in tax-advantaged space and VOO, VEA, VWO in taxable.
I can’t provide personalized advice, but all things being equal, bond duration should be matched to time horizon.
Terry says
Greetings, amazed by the completeness of this blog, very informative and well written, thanks a million for this hard work.
I am a resident outside of the US and have been investing in ETFs for several years, just would like to check if there are better (maybe should call them more suitable) portfolios for me.
After some reading in your blog, I am very interested in this ginger ale portfolio and perhaps putting some leverage by margin load. I am in my early 30’s and would consider going 2x for this portfolio in the beginning and perhaps deleverage per year by 5%-10% with annual new deposits to rebalance and hopefully deleverage with the growth of the market value of the said portfolio. (i may go without EDV)
VOO – 30%
AVUV – 30%
VEA – 10%
AVDV – 10%
VWO – 10%
DGS – 10% (have you got a chance to review AVES, as I preferred this one in Avantis 🙂
With regards to deleverage, do you have any input on this, as margin call is still a risk, yet this portfolio contains very broad ETFs that i see than with lower than 25% maintenance requirement in most brokers, may i ask if you have ever seen or heard, in the extreme times of the market, the requirements were to be raised above 50% for ETFs like this? I only meant historically. Hope to know if there is a great risk by going 2x with a margin loan, As in times of extreme, i still can remortgage my house for 20% value of the current portfolio to save the portfolio from margin calls.
I am prone to take a bit more risk for a higher expected return based on this portfolio, would you recommend LEFT to replace them or margin load or how to make adjustments as I saw you suggested to add more portion in emerging markets?
Somehow i may be irrationally a bit dislike LETFs.. I prefer to select the ideal and precise investments and leverage another way.
I am also considering to de-leverage by selling portions of my stocks when the value grows, say my initial deposit is $100. and 2x is $200, which is my target therefore when the value grows to $210. I would sell them partially to rebalance and get back to the total value of $200 thus deleverage until it is around 1.5x over the next decade and lower after retirement. . How is this strategy as I have never seen anyone do something like this before, or there is, could you point out a way to further study, or what is your input?
Greatly appreciate it,
John Williamson says
Thanks for the comment, Terry. I personally don’t use margin so I can’t really comment on that. I delved into LETFs in some other posts. Impossible to know the future and I can’t provide personalized advice, but you may be interested in reading about Lifecycle Investing from Ayres and Nalebuff. AVES is still very new but I plan to keep my eye on it.
Bill says
I will be transitioning my retirement portfolio using your Ginger Ale Portfolio as the primary guideline for myself and my “recently turned adult” kids (they’re reading your articles and are rearing to go!!). I will be using 3 different types of accounts, 401K (Roth except for the company matching portion), Roth IRA, and my taxable account. In trying to maximize my portfolio, I wanted to make sure I put the asset classes into the correct account, taxable vs. non-taxable. Which accounts would you place each asset class in if you had the choice?
John Williamson says
Thanks for the comment, Bill! Try to max out the tax-advantaged space obviously. Ideally, small cap value funds and bond funds would be better in tax-advantaged accounts. But don’t obsess over it too much. Bogleheads has a good page on tax-efficiency here.
Marcus says
Hi John, thanks for the post! I’ve leaned so much from your posts (factors, etc). I know this portfolio avoids leverage in order to be more of a one-size-fits-all. But what if we swapped out VOO with NTSX? I’m not sure how to backtest that more than a few years since NTSX is so new. What mutual funds did you use??
Assuming we did this, what do you think about weighting NTSX at 28% instead of 25% in order to take exposure to the S&P from 90 (NTSX is 90/60) to 100? My reasoning is that NTSX has lagged the S&P quite a bit year-to-date (not sure why?)…. In exchange EDV could possibly be lowered to 7% since NTSX incorporates those intermediate bonds.
Assuming quarterly rebalancing, do you think this would this increase returns (either total or risk-adjusted)? You would get bond protection from both NTSX and EDV. Or could that decrease in long-term bonds possibly hurt the rest of the portfolio? Thanks!
John Williamson says
Should be fine. Can’t know the future. Mutual funds to get a rough idea could be VFINX and PRTIX.
Karfai says
Hi John,
Very much appreciated for sharing your GAP and the useful resources for asset allocation planning. I am working on a portfolio which is modified from the David Swensen model. Swensen’s model was the first book I came across regarding asset allocation.
My portfolio is like this:
VTI – 50%
VEA – 10%
TIPS – 5%
VNQ – 20%
FALN – 5%
VWO – 5%
BND – 5%
I am thinking whether to add exposure to US small cap at the moment. Your comment is highly appreciated.
John Williamson says
Thanks. I can’t provide personalized advice, but I did note in my post on factor investing that factor tilts offer a diversification benefit, so that may be of interest to you.
Chris O. says
For the EM small-cap value fund, any particular reason you picked DGS instead of EEMS?
Also, given that AVES (Avantis Emerging Markets Value ETF) just came out, if you were starting with this portfolio today, would you use AVES instead of DGS?
John Williamson says
Slightly greater focus on Profitability and smaller stocks, cheaper, and more liquid.
AVES may be all-cap value in EM. I’ll give it some time and then assess. Any of those 3 would be a solid choice.
Cvan says
Ah the small cap growth vs small cap value question. I am so in 2 minds on that. It seems scv did outperform scg over a long period of time but there are long stretches within it where one outperformed the other by a large margin. I am almost leaning towards equal allocation between the 2.
John Williamson says
Yes, Value experiences periods of underperformance. Take a closer look at large cap growth versus small cap growth.
L says
Hi John, just wondering if you could comment on your choice of choosing 10% U.S. Treasury STRIPS in your portfolio. My thinking on bonds has been recently informed by Dave Plecha, Global Head of Fixed Income at Dimensional Fund Advisors in this Rational Reminder podcast episode: https://www.youtube.com/watch?v=toUmwo-mhjM
Check out at around 17m where it is timestamped, “Are long bonds better diversifiers?”
Ultra long term bonds are good at going inverse during a crash typically, but they are actually a really terrible investment in terms of risk and return. It has long been known that long term treasuries seem mispriced: very high volatility and relatively low expected returns. But the story is basically that people overpay for the inverse-to-stock effect. Long term treasuries look like an incredible diversifier in a mean-variance context (i.e., they inverse correlate very strongly with stock making your overall portfolio look much smoother) but the bonds (STRIPS) themselves offer very little if any additional return over a simple 10 year, but have about 4-10x the volatility
What I’m questioning is the long term treasury bond as no-brainer diversifier for mean-variance optimizing portfolios. The way people buy these long treasury bonds is BECAUSE of the volatility and inverse correlation, which disconnects the investment from it’s fundamental purpose: to return you money. So people would probably take an expected return of 0 for their long term bonds so long as they are filling this role in the portfolio. So it’s not such a free lunch, IMO.
John Williamson says
First, the reason I already noted, which is that at such a low allocation of 10%, I want that extra volatility. An intermediate bond fund at 10% is doing basically nothing for the portfolio. If I had >40% bonds, they’d be intermediate. For anything less than 20%, I’m using long bonds. Secondly, matching bond duration to time horizon, which no one seems to talk about, reduces interest rate risk. I have a long horizon. If I had a shorter one, they’d be intermediate.
I also fundamentally disagree with the assertion that buying long bonds “disconnects the investment from its fundamental purpose.” I’m always viewing the portfolio holistically, not looking at the assets in isolation. You acknowledge the former but then seem to still mostly speak through – and Plecha’s points were mostly within – the framework of the latter. The former is what you said here: “Long term treasuries look like an incredible diversifier in a mean-variance context (i.e., they inverse correlate very strongly with stock making your overall portfolio look much smoother).” That’s why I’m buying them. The latter is the statement that follows: “but the bonds (STRIPS) themselves offer very little if any additional return over a simple 10 year, but have about 4-10x the volatility.” While it may not immediately seem intuitive, these things can simultaneously be true with long bonds still being the preferable choice. Granted, with current bond yields, all my ideas might be wrong. Only time will tell. But at such a low allocation and a long horizon, I’m comfortable with long bonds at this point.
curran delaney says
Any thoughts on using DM/EM large cap ETFs like FNDF/FNDE in place of VEA/VWO? this would mirror what you’ve done with the U.S. stocks,..using large caps as a proxy for the total market and scoping out mid caps, small cap growth, etc. Obvious downside would be the 0.25%/0.39% expense ratios on FNDF/FNDE.
I currently have mostly VT in my portfolio with small cap value tilts laid on top of that via AVUV/AVDV/DGS. My thinking is to try an sharpen up the tilts by excluding small cap growth like you’ve done here on the U.S. side.
John Williamson says
Sure thing, if you want that extra Value tilt in large caps.
Brian says
You have been a great teacher in my investment journey, thank you.
It seems that the portfolios are meant for a single cash injection and left untouched for a long period. What are your thoughts on regular (monthly) cash top-up like a savings plan?
John Williamson says
Glad to hear it, Brian! I didn’t mean for it to seem that way. Definitely invest regularly and often, and rebalance annually. The only one that may warrant a single buy and no new deposits would be a leveraged strategy “lottery ticket” like the Hedgefundie Adventure.
Brian says
Thank you for the advice.
By the way are the funds you mentioned provide dividends? As I am not a US citizen, I am liable for 30% dividend withholding tax. For example for VOO, it supposedly has a dividend yield of 1.27% but the pay out ratio is 0%, so do I understand correctly if it does not give dividends? or am I somehow subject to withholding tax for the 1.27%? Trying to fit pieces of this puzzle
Would be grateful if you can shed some light on this, thanks again!
John Williamson says
Yes, these funds pay dividends.
phqb says
Many thanks for the sharing, just one quick question related long treasury bond ETFs.
If it is possible, shall we have your comment of the comparison among EDV, ZROZ, as well as GOVZ?
Thanks again.
John Williamson says
ZROZ and GOVZ are slightly longer than EDV. ZROZ is more expensive. GOVZ and EDV cost the same but EDV has far greater liquidity than the other two.
Arvind says
Hi John
Thanks a lot of taking the time to share your portfolio. I have learned a lot from your blog posts on SCV tilting, leveraged ETFs and the comparisons you’ve made between PSLDX, NTSX & HFEA.
I would like your opinion on how would you fit PSLDX in this “safe” money portfolio which I understand is held in Tax advantaged accounts. I believe you mentioned owning some PSLDX.
Here are some options I could think of –
1. PSLDX – 25% (as a substiute for VOO)
2. PSLDX – 35% (as a substiute for VOO + EDV)
John Williamson says
Hey Arvind, thanks for your comment. Glad you’ve learned something! I’d probably use option 1 and let it replace VOO.
John says
How about NTSX instead of VOO and the bonds allocation?
John Williamson says
Sounds good to me.
Chris O. says
Thanks so much for all your content John! Really love pouring over all this and trying to get a handle on it. Very much appreciate you sharing your thoughts here on OptimizedPortfolio.com!
I’m curious how to think about replacing VOO and EDV entirely with NTSX. If we did that, we’d have this portfolio:
35% NTSX
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
Which, when we break down into its constituents, gives us:
31.5% U.S. Large Cap Stocks (35% NTSX x 90%)
3.5% U.S. Treasuries – Intermediate (35% x 10% bonds), levered 6x (21% effective exposure)
25.0% U.S. Small Cap Value
10.0% Developed Markets (ex-US)
10.0% Developed Markets (ex-US) Small Cap Value
10.0% Emerging Markets
10.0% Emerging Markets Small Cap Value
If I’m not mistaken, that’d be a 96.5/21 portfolio, giving it a risk profile closer to an 80/20 allocation (closest to 82/18, I think).
Given that this would effectively be an 80/20 portfolio and Ginger Ale is a 90/10, shouldn’t we expect replacing VOO and EDV with NTSX to have lower volatility and lower returns compared to original Ginger Ale portfolio?
On the other hand, given that NTSX is 90% SPX and the 6x intermediate-term treasuries allocation is effectively a modestly-leveraged EDV, it seems like there should be a way substitute the VOO and EDV allocations in Ginger Ale with just NTSX to get similar or better performance over long time horizons.
Curious if you have any thoughts on this or have done any back-testing of Ginger Ale with NTSX instead.
John Williamson says
Thanks, Chris. Replacing VOO with NTSX may be fine. Leverage isn’t appropriate for everyone, and that fund may be too complex for the average investor to understand what they’re buying. 90/10 VOO/EDV is similar in exposure to about 90/50 VOO/VGIT, which is “nearly” NTSX. Backtesting doesn’t mean much to me, and we can’t know the future.
Madi says
Hey thank for the amazing insight.
I tried punching in the portfolio on the portfolio visualizer website. For some reason S&P 500 has been exceeding it every year..
PS. I had a previous comment that I cant seem to find even though it is one of the latests post and it is only showing july 29th as the most recent
John Williamson says
As I noted, the Size and Value factors and int’l stocks have all underperformed the S&P 500 in recent years. Here is your other comment I found.
Joe says
Any thoughts on how to re-create this using fidelity ETFs or mutual funds? That’s all I have available in my 401k brokerage link.
John Williamson says
Hey Joe. I’m not too familiar with Fidelity’s offerings but I’ll glance through them if I have time later and see if I can offer some suggestions. Do you have a small list of available funds or is it just any Fidelity ETF or mutual fund?
Joe Spindler says
Hey John- Sorry, I think I may have commented this twice. In my 401K I have access to 27 funds. Honestly the only ones I would use to recreate this probably are the SP500 index and the tips fund. To create the rest of the portfolio I moved over the funds to my brokeragelink and was amazed to find I could buy avantis funds (their mutual funds , not the ETFs). I got AVEEX, AVDVX, AVUVX. I honestly couldn’t find a single EM small cap value fund.
Let me know your thoughts. I can literally buy nearly any mutual fund on the market , and I can buy any of the fidelity ETFs or funds. Only downside to the avantis funds is I have to pay $50 Everytime I buy.
John Williamson says
Interesting. Again, I’m not familiar with what all Fidelity offers off the top of my head. Makes sense that you don’t have an EM SCV mutual fund. Not sure one exists. I also don’t know mutual funds off the top of my head for each segment except ones from Dimensional. If you wanted to keep it simple and cheap, just use Vanguard’s or Fidelity’s, e.g. FISVX for small cap value based on some quick Googling.
Joe Spindler says
Thanks again for the response. I think/ hope I have covered the bases. The only thing that makes me nervous is I cant back test the avantis funds since they are pretty new. I know they have a new EM SCV ETF fund coming in September I hope they also creating a matching mutual fund like they have done for their other ETFs. Any thoughts on how / where you might add leverage to this portfolio? SP500 seems like the obvious choice. Also you have talked about this a bit in the past but is there any value in adding utilities to this in case of a downturn? Wonder if that could balance out the extra leverage a bit.
John Williamson says
You can get a very rough idea by using Dimensional funds. To add leverage, you could use margin for the whole portfolio, or LETFs for the bonds, S&P 500, or Emerging Markets.
Brent says
Thanks for sharing. I’m making Ginger Ale my main portfolio, with some All Weather Portfolio on the side for “psychological” reasons :). Ginger Ale appears to be a way to beat the SP 500, long term, while *increasing diversification*. To me that is the holy grail of investing. Sector funds like information technology have appealed to me in the past for their outperformance, but that may not be a long term trend, and they decrease diversification in and of themselves. So I think you’ve helped me see the light. I like your objective, data-driven approach.
John Williamson says
Thanks, Brent! Glad you found it useful. You’re right; sector bets can be tempting when we see something like Big Tech dominating over the past decade. But doing so invariably introduces concentration risk, as you noted.
Andy says
Hi,
Why did you choose EDV (strips) for your bond allocation as opposed to a long treasury etf such as GOVT or VGLT?
John Williamson says
Just to get that longer duration for maximum protection at that relatively low allocation of 10%. GOVT is intermediate since it’s total treasury market.
Anson says
In the retirement version of this portfolio you use VGIT and SCHP. I am assuming you are using SCHP as an inflation hedge. I am nearing retirement and hold Vanguard BND. Can you explain why you prefer Intermediate-Term Treasuries. I don’t understand the nuances of bonds and the difference here.
John Williamson says
Hey Anson. This post should answer your question.
Jon says
I don’t guess I understand why you wouldn’t just use VTI over VOO. It is objectively better.
Also, how much VWO would you add to VXUS given that I didn’t want to sell that position?
John Williamson says
Already explained that in detail.
However much you want to achieve your desired ratio of Developed to Emerging. I prefer 1:1. VXUS is 3:1.
Andy says
Hey John, followed here from your NTSX dissection but there is no NTSX in this portfolio. Just trying to see how you put NTSX into play. Can you toss a clue out?
John Williamson says
NTSX is my taxable account. I also didn’t mention it here because I’d say it’s a bit more “advanced” and leverage is not suitable for everyone.
Madi says
Hey John,
I wanna thank you for such an informative post.
Im currently 27 and wanted to ask how would you increase and decrease risk/reward for this amazing portfolio ?
Would you decrease bonds and increase emerging markets for higher risk?
I would love to hear how you would deal with this.
Thank you again for this post
Madi
John Williamson says
Thanks, Madi! Increasing risk and expected reward would be, as you noted, going 100% stocks and possibly even adding some leverage. Decreasing risk and expected reward would involve, as I noted in the section on adjusting it for retirement, decreasing stocks and increasing bonds.
PrakashA says
Thank you so much for responding. I posted another comment by mistake. Makes sense,
I was thinking about it reducing the QQQ to lower percentage to avoid recency bias
QQQ – 20% (Only reason to invest more here is because of its impressive CAGR)
VIOV – 20%
VOO – 20%
VEA – 10%
VWO – 10%
AVDV – 10%
VGLT – 10%
In addition to this, I was thinking about just investing around 10-20K one time contribution into TQQQ for 10+ years and just for the exponential growth TQQQ is offering. is it a good idea?
PrakashA says
Thank you so much for sharing your portfolio. I am 31 years old, getting started on my personal finance journey. I am trying to build an aggressive portfolio but also diverse, plan is to invest money periodically every month (which I don’t need for next 10-15 years) to build wealth and take advantage of compounding. Below specified is the split, I am inclined towards
QQQ – 50% (Only reason to invest more here is because of its impressive CAGR)
VIOV – 10%
VEA – 10%
VWO – 10%
AVDV – 10%
VGLT – 10%
When I backtested for last 10 years in http://www.portfoliovisualizer.com, I am getting somewhere around 14% CAGR .
Would love to hear your thoughts on this portfolio. Being an amateur I would like to understand, what I am getting myself into. Your website is awesome, I am learning so much, thanks again.
John Williamson says
So first, past results don’t indicate future results. Secondly, QQQ is basically a tech fund and should not be considered a replacement for broad US stock market exposure with something like VTI. Large cap growth did great the past decade. But the next decade may not – and likely won’t – look the same, especially since Growth stocks now look extremely expensive and have lower expected returns than Value stocks.