A portfolio with moderate risk
Transcript
This video provides an overview of the Money For the Rest of Us Plus portfolio examples and how to use them.
Portfolio Decisions to Make
Let’s consider all the myriad portfolio management decisions we have to make as individual investors, from the asset allocation approach that we use, be it a strategic approach, a rule-based approach, or an asset garden approach. There is a video on the site on how to choose an asset mix, and comparing those approaches.
We need to decide our overall allocation between stocks versus bonds, the primary asset allocation decisions—there’s tools to help with that—whether we want to add additional public asset classes, and then how to implement it, which investment vehicles; direct, individual stocks or bonds, or indirect, using exchange-traded funds, mutual funds or closed-end funds. There are videos on both asset classes and investment vehicles.
Within the stock allocation, we need to decide our regional weights. Do we want to overweight our home country? Which factor exposures do we want? Be it growth, value, large, small? Do we want to adjust our sector exposure, technology, healthcare?
Within our fixed-income portfolios, we need to decide if they’re regional, and sector exposure. How much interest rate risk do we want to take, and what yields are we getting for that interest rate risk? What about credit risk? Do we want exposure to non-investment-grade bonds or investment-grade bonds? There are videos that go into detail on bond investing, as well as stock investing.
We need to decide whether we want to implement through active mutual funds, or use passive index funds or ETFs? How much do we want to invest in public versus private? What about portfolio adjustments?
Do we want to adjust our portfolio exposure as investment conditions change?
Do we want to use leverage, borrow money to invest, or use products that employ leverage? Do we want to use portfolio hedging to protect against downside losses? There’s a video on that.
What about the timing and approach to rebalancing?
Do we want to consider annuities, insurance products within our investment portfolio? And finally, how much do we want to invest in taxable vehicles versus tax-deferred?
How Portfolio Examples Can Help
All these topics are covered somewhere on this site, either in the asset allocation and portfolio tools section, or in a Plus episode. But with all these decisions, it can seem overwhelming, so portfolio examples provide a template or pattern to help us get started. They can be inspirational, or guides. If you’re considering building a new house, you’ll often look through home design magazines, or architectural magazines, or follow different Instagram feeds. You might not implement that specific home design, but they can inspire you as you make your decision.
The portfolio examples on Money For the Rest of Us Plus are there for the same purpose—they can help us get started, they can be an inspiration or a guide.
Most members won’t implement them exactly; they’ll make modifications, adjustments. These portfolio examples allow us to compare role-based portfolios, more strategic portfolios, those that adapt over time, and asset garden portfolios like my personal portfolio is. It allows us to compare the expected returns and risk of different portfolios within the same category, such as the static strategic portfolio; what’s the expected return of a conservative portfolio versus a more aggressive portfolio, and the risk.
The portfolio examples provide some guidance on specific holdings, the different options there are to implement an allocation to a specific asset class, and which ETF. And then the examples allow us to see changes over time, adjustments to the models, and why those adjustments are made, the trades that I make in my portfolio. So there’s many reasons to use the portfolio examples.
Portfolio Example Categories
Here’s the list of what’s included in the site—there’s a page with just some example index mutual funds and ETFs. There are three role-based permanent portfolio examples, a permanent portfolio golden butterfly and all seasons. There are ten strategic and adaptive model portfolios; they’re classified as static versus adaptive, ranging from ultra-conservative to aggressive. We include some model portfolio alternatives.
Sometimes an investor only wants to consider ETFs available on the Vanguard platform, or Fidelity, or Schwab. This has been less of an issue as the different platforms have lowered commissions, or in many cases don’t charge commissions. But there’s also some model portfolio alternatives for those that are part of the U.S. government’s Thrift Savings Program, the federal retirement program. And then each month I’m providing a snapshot of my portfolio, my allocation and weights, and I share anytime I make a portfolio trade for my personal investment portfolio.
These portfolio examples can help you address a number of those investment portfolio decisions. For example, the adaptive model portfolios will have a certain positioning in fixed income, based on credit risk, interest rate risk, regional exposure, and those examples come out of the metrics and analysis in the monthly investment conditions report. Same for some of the other decisions, such as factor weights within the equity portfolio, or the regional allocation.
These portfolio examples are there because they have passed the framework or screening that is covered in my book, Money For the Rest of Us: 10 Questions to Master Successful Investing.
Some Additional Considerations
Now, just a few things to consider with regard to these portfolio examples. While a particular model might have a specific fund or ETF, there are numerous funds and ETFs that could be used. Just because it’s included as an example doesn’t mean there isn’t an equally good, perhaps even better alternative fund or ETF that could be used. There are so many options out there, and I don’t want to imply that the particular fund or ETF in a portfolio example is the best alternative. It’s important to recognize that the adaptive and static models only contain public securities. Most investors will want to have an allocation to some private securities, even if it’s as straightforward as owning some gold coins.
The expected returns and risk for the different models—the role-based model, the static and adaptive models—those are updated every six months when the overall asset allocation expected return and risk assumptions are updated.
Performance Tracking and Backtesting
I sometimes get asked about performance tracking and backtesting. These are examples, so these are not live portfolios that are being implemented. And because there’s so many, it would be so cumbersome to track their performance. The reality is it just ends up being a weighted average of the different holdings that get adjusted, and we’d rather focus on the forward expected returns and the risk. Because again, these are examples; they’re not to suggest “This is the one best portfolio.” This is a portfolio to help jumpstart your investing, to be a guide, to be a template. But over a shorter to intermediate timeframe, there will be other allocations that will do better, and some will do worse.
The adaptive models are based on how I used to manage for institutional clients, and that process was backtested. But the Money For the Rest of Us Plus model portfolios have not been backtested. I’ve continued to use the investment approach I’ve used for close to 20 years.
And finally, these portfolio examples are not security recommendations, in the sense that this is not investment advice geared to your specific situation. You should consider your overall portfolio, you should consider your tax situation, perhaps you have an advisor that you work with. But they are indeed examples to hopefully help you as you work through the numerous decisions involved in managing your investment portfolio.
That then is our overview of the portfolio examples on Money For the Rest of Us Plus.
