The more investors learn about investing, the more they want to create the "perfect portfolio" using the concepts they've grown to understand over the years.
The more investors learn about investing, the more they want to create the “perfect portfolio” using the concepts they’ve grown to understand over the years.
Portfolios that have worked in the past are borrowed and attempted to improve upon, when — investors should remember — no one really knows what will outperform in the future. What does matter is what will make you feel comfortable as an investor. Do you want to increase or decrease risk or diversification? Do you want more bonds? More international stocks?
James M. Dahle, MD, FACEP, of the White Coat Investor and a regular contributor to Physician’s Money Digest, tried to help by taking a look at 150 different portfolios that are better than yours.
“I suggest you pick a portfolio you like and think you can stick with for a few decades, and then do so,” Dahle writes. “Eventually, any given portfolio will have its day in the sun. Just don’t continually change your portfolio in response to changes in the investment winds.”
No one knows what the best portfolio is, there’s just the portfolio that is best suited to you. Here are 10 from White Coat Investor to give you a taste.
1. The S&P 500 Portfolio
100% Vanguard S&P 500 Index Fund
We’ll start off simple. This portfolio might not look like much, but Dahle claims he knows a two-physician couple who managed to create a net worth of $1 million to $2 million simply with this portfolio—and they’ve only been out of their residency for seven years! So although it seems simple, their plan, in which every investment dollar goes into this single fund.
“It is simple, very low cost, diversified among 500 different companies, and has a long track record of exceptional returns,” Dahle writes.
2. Total World Stock Market Portfolio
100% Vanguard Total World Index Fund
Perhaps the United States is too small for you, then this 100% stock portfolio has the advantage of holding all of the stocks in pretty much every country in the world that matters. Dahle warns that this is not going to come cheap, though, and you might be better off building a fund from various components rather than buying into Vanguards already made fund.
3. Balanced Index Fund
100% Vanguard Balanced Index Fund
Stocks might not be the only investment you’re looking at if you really want to diversify your investing portfolio. The Balanced Index Fund throws more than just some bonds into the mix—you’ll get all the stock and all the bonds in the U.S. represented in a 60/40 balance in just one fund.
But Dahle notes that investors in a high tax bracket might prefer the Tax-Managed Balanced Fund, which is a 48/52 blend of U.S. Stocks and Municipal bonds.
4. Target Retirement 2025 Fund
100% Vanguard Target Retirement 2025 Fund
The benefit of target date funds is that as the target date approaches, the more conservative the fund becomes. It takes all the decision making out of it for investors who don’t want a static asset allocation, but don’t want to worry about when to change from one life strategy to the next. This does all the heavy lifting for you.
The 2025 Fund uses U.S. and international stocks, and U.S. and international bonds (in a 70/30 allocation), and gradually makes the asset allocation less aggressive as the target date approaches.
5. Three Fund Plus REITs
30% Vanguard Total Stock Market Fund
20% Vanguard Total International Stock Market Fund
10% Vanguard REIT Index Fund
10% Vanguard Total Bond Market Fund
There is a Three Fund Portfolio (one-third Stock Market Fund, one-third International Stock Market Fund and one-third Bond Market Fund), but this portfolio is for the investor who wants the benefit of additional diversification.
The fourth fund added is up to the individual investor, whether they choose the REIT Index Fund, or the Small Value Index Fund, a TIPS fund or an International Bond Fund.
“Other options include a microcap fund, a precious metal equities fund, a precious metals fund, or even a commodities futures fund,” Dahle writes. “The possibilities are endless, especially once you start considering adding two, three or even more of these asset classes to the portfolio.”
6. The Ultimate Buy-And-Hold Portfolio
6% Vanguard 500 Index Fund
6% Vanguard Value Index Fund
6% Vanguard Small Value Index Fund
6% Vanguard REIT Index Fund
6% Total International Stock Market Index Fund
6% Vanguard International Value Fund
6% Vanguard International Small Cap Index Fund
6% An International Small Cap Value Fund
6% Bridgeway Ultra-Small Market Fund
6% Vanguard Emerging Markets Index Fund
40% Vanguard Short (or intermediate) Term Bond Index Fund
This portfolio comes courtesy of Paul Merriman, a financial educator and advisor and founder of Merriman, LLC. You’re looking at 10 equity asset classes and one fixed-income asset class. The only trouble with this portfolio is that the investor will need to stay on top of it to rebalance and allocate across all accounts.
The Ultimate Buy-and-Hold sample strategy has been recommended since 1992 and, according to Merriman, LLC, it’s based on the research of many academics, some of whom won the Nobel Prize in Economic Sciences.
Unfortunately, you might not be able to put this one together yourself — Merriman recommends hiring a professional money manager.
7. The Sensible IRA Portfolio
33% U.S. Stocks
15% International Stocks
6% Emerging Markets Stocks
40% Fixed Income
Over at Sensible Portfolios, Darrell Armuth has created six different models depending on the client’s age and their risk tolerance/need for safety in investing. The portfolio represented here is number four of six.
The first sample portfolio has 80% in fixed income, 11% in U.S. stocks, 5% in international stocks, and 2% each in emerging markets and REITs. Meanwhile number six has 0% in fixed income, 55% in U.S. stocks, 25% in international stocks and 10% each in emerging markets and REITs.
8. The Warren Buffett Portfolio
100% Berkshire Hathaway Stock
Buffett is one of the best investors of all time, admired by all, and by purchasing a single stock in his company Buffett will manage your money. His company owns GEICO, Dairy Queen and Helzberg Diamonds, half of Heinz and has significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo and IBM.
But Berkshire Hathaway’s stock doesn’t come cheap. Class A stock will run you $172,350. But, as some financial writers have pointed out, Berkshire Hathaway’s stock runs very close to the S&P 500 these days, so it might not be worth the money.
9. The Wellesley Portfolio
100% Vanguard Wellesley Income Fund
This actively-managed Vanguard fund has been around since 1970 and has actually done better than Warren Buffett the last decade, averaging 7.43% per year.
However, Dahle predicts that considering how bond heavy this fund it, it probably won’t do as well in the future. Plus it is actively managed (which usually perform worse than passive funds) and it isn’t particularly diversified. Most of its 62 stocks are large value and it only holds 715 bonds.
“Don’t expect 10%, or even 7%, a year out of this bond heavy fund going forward at today’s low interest rates,” Dahle writes. “That said, it’s hard to argue with success.”
10. The 7/12 Portfolio
1/12 Vanguard 500 Index Fund
1/12 Vanguard Mid-Cap Index Fund
1/12 Vanguard Small Cap Index Fund
1/12 Vanguard Developed Markets Index Fund
1/12 Vanguard Emerging Markets Index Fund
1/12 Vanguard REIT Index Fund
1/12 Natural Resources
1/12 Vanguard Total Bond Market Index Fund
1/12Vanguard Inflation Protected Securities Fund (TIPS)
1/12 Vanguard International Bond Index Fund
1/12 Vanguard Prime Money Market Fund
There’s a lot going on in this portfolio: seven major asset classes and 12 funds, all at 8.33% a piece. A professor at Brigham Young University advocates for this portfolio, but he’ll change you $75 just to tell you how to use the funds above to implement the portfolio.
Want to see the full list or The White Coat Investor’s own investor portfolio? Visit White Coat Investor to see the other 140 portfolios doing better than yours.