This article provides three diversified investment portfolios based entirely on index ETFs for passive, hands-off investors.
Personally, I find that a combination of index funds and individual stock selections works best for me, and is what I often recommend. Between one-half and two-thirds of my net worth is in index funds while the rest is in individual stocks.
- Index funds are highly diversified, have low expense ratios, and outperform most actively-managed funds after fees are considered. The majority of people will not reliably outperform index funds via stock selection.
- On the other hand, buying individual stocks can tailor your portfolio to meet your specific needs. For example, buying a collection of safe high-yielding companies can help generate more reliable income than most index products are capable of.
In addition, owning individual stocks helps people learn about businesses.
Some people advocate that the vast majority of the population should only buy index funds and barely check their accounts, as they let the markets work their magic over time for growth. I don’t really think that’s a great way for the world to work, with most people totally separated from understanding or caring how their holdings make money.
Putting at least a small amount of your money into individual companies, and following those companies over time by reading their annual reports and voting your shares, helps you understand how businesses work and makes you more aware of economics and global business. It can also help make you more comfortable with your portfolio so that you can ride out tough periods in the market.
However, many people don’t have the capability, capital, or interest in buying individual stocks, and prefer to be 100% indexed. These sample investment portfolios are for you.
3 Investment Portfolios For Consideration
The following three sample investment portfolios have considerable diversification and are based purely on low cost index ETFs.
One is rather aggressive, one is somewhat conservative, and one is moderately in the middle.
Aggressive portfolios potentially offer higher-returns, but in exchange for more volatility and risk. Conservative portfolios typically have lower volatility and can protect capital more reliably. This usually comes down to how large their stock allocation is, and what types of stocks they have.
I built these in M1 Finance, which is a free investment platform that lets you invest in stocks and ETFs. I often recommend M1 Finance because it makes rebalancing and managing position sizes very easy, and helps keep investment fees super low. (See my disclosure policy here regarding my affiliation with M1.)
The sample portfolios in this collection share certain traits that are not common in other popular model portfolios. Namely, they all have a small gold allocation, they all overweight emerging markets to varying degrees (because that’s where most global growth is coming from currently and over the next few decades), and they all use some factor ETFs to enhance stock quality for a portion of the portfolio.
All three portfolios have very low total expense ratios, ranging from 0.10% to 0.12%. This is because they use a variety of low-cost ETFs and the platform itself doesn’t charge any commissions or fees.
This aggressive portfolio has 80% invested in a variety of equity funds, 10% in bonds, 5% in real estate, and 5% in gold.
The portfolio has 45% in U.S. equities, with 35% being in the broad Vanguard Total Stock Market ETF (VTI), and another 10% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength.
Then, it has 35% in foreign equities, including 15% in emerging markets (VWO), 10% in developed markets (VEA), and 10% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 10% in bonds, 5% in gold, and 5% in real estate investment trusts (REITs).
This moderate portfolio has 70% invested in a variety of equity funds, 20% in bonds, 5% in real estate, and 5% in gold.
The portfolio has 40% in U.S. equities, with 30% being in the broad Vanguard Total Stock Market ETF (VTI), and another 10% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength.
Then, it has 30% in foreign equities, including 15% in emerging markets (VWO), 10% in developed markets (VEA), and 5% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 20% in bonds, 5% in gold, and 5% in real estate equity trusts (REITs).
This conservative portfolio has 60% invested in a variety of equity funds, 26% in bonds, 7% in real estate, and 7% in gold.
The portfolio has 39% in U.S. equities, with 25% being in the broad Vanguard Total Stock Market ETF (VTI), 7% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength, and 7% invested in the dividend aristocrats ETF (NOBL) which is equally-weighted into companies with 25+ year streaks of consecutive annual dividend growth.
Then, it has 21% in foreign equities, including 7% in emerging markets (VWO), 7% in developed markets (VEA), and 7% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 26% in bonds, 7% in gold, and 7% in real estate equity trusts (REITs).
If you want to generate a higher investment income yield from a conservative portfolio, then adding some safe high dividend stocks can potentially help.
How Aggressive/Conservative Should You Be?
Figuring out how aggressive or conservative you should be is probably the single most important investment decision you can make. It dictates everything else and has a major impact on your investment returns and volatility.
There are two main considerations for determining this.
Consideration 1) Age and Risk Tolerance
If you are in retirement or close to retirement, it’s generally a good idea to invest conservatively to reduce volatility.
On the other hand, if you are just starting out in your career, you have plenty of time to invest in more volatile assets that historically provide better long-term returns.
Besides that, you must be aware of your personality and risk tolerance.
Are you comfortable watching your portfolio go up or down by up to 30% or more within a single year? Will you make irrational decisions if your portfolio has a big drop during a recession that will make you unable to recover from it? If so, you may need to invest more conservatively.
A common rule is that the percentage of stocks in your portfolio should be equal to 100 minus your age. So if you are 30, you should own 70% stocks. If you are 50, you should own 50% stocks. If you are 70, you should own 30% stocks.
However, that’s very simplistic, and it depends on your unique situation.
It’s important to realize that there are more considerations than just how much stocks and bonds to own. For example, you can alter the types of stocks you heavily invest in. By investing in lower volatility sectors, like utilities and consumer staples, or investing in higher-quality companies with low debt and stable profits, you can maintain good exposure to equities while still reducing your volatility from those equities.
Consideration 2) Business Cycle Progression
Being aware of where we are in the business cycle and avoiding bubbles can reduce your volatility and improve your returns over the long run.
In other words, be more aggressive when stocks are cheap and people are fearful, and be more conservative when stocks are expensive and people are excited.
Chart Sources: Market Realist, Fidelity
Economies almost universally grow and contract in cycles. When times are good, consumers and businesses take on more debt and expand more rapidly, which fuels more economic growth. But eventually they hit a limit on how much debt they can take on, and employment is maximized, and cracks start to form in the economy.
You can see, for example, how corporate debt tends to build through the cycle, and the recessions shaded in gray occur at the peaks of the cycle, forcing companies to reduce their debt:
Chart Source: Gluskin Sheff
And you can see at the same time how the stock market (blue line) tends to get too high compared to actual economic output (red line) shortly before recessions, when everything seems great. Then during recessions (again, shaded in gray) it falls to very low levels:
Chart Sources: Wilshire Associates, U.S. Bureau of Economic Analysis, St. Louis Federal Reserve
Most people make poor decisions in this area. When the economy is doing great and stocks are high, people get excited and comfortable, and want to own more stocks. Then, when a recession happens and stocks go down, people get scared and want to sell their stocks.
In addition, people are more likely to take on consumer debt, buy more expensive things, and move into bigger homes when we’re at the top of a market cycle. Then when a recession happens, people are forced to reduce their leverage and live below their means to recover.
But that’s the exact opposite of what you should do. It’s better to be contrarian, to be cautious when others are greedy, and greedy when others are cautious.
It’s preferable to be invested more aggressively when the economy is weak, when stocks are undervalued, and when there is plenty of spare capacity for economic growth. Then, it’s good to be invested more conservatively at the height of a business cycle when everything is great, stocks are expensive, and there’s more room to fall than to grow.
In addition, during the height of an economic cycle, it’s good to pay down debts, build up cash, and make sure your expenses are considerably below your income. Then, when things get bad, you can take advantage of opportunities, like buying a great rental property when it’s inexpensive and mortgage rates are low, or shifting more heavily into undervalued stocks.
These portfolios can be used as starting points, but you may want to tailor them to your unique goals, preferences, and needs.
No portfolios are perfect, but these model portfolios reduce some of the problems I see with a lot of common portfolios. Mainly, they spread out international equity allocations rather than concentrate them into slow-growth high-debt countries (which most international funds do), they include some quality factors to avoid pure market-cap weighting, and they include small allocations to gold and real estate.
Readers of my free investing newsletter can see my own M1 Finance portfolio, which includes index ETFs as well as individual stocks. The newsletter typically comes out every 6 weeks and keeps readers updated on where we seem to be the the business cycle, how expensive or cheap stocks are, and what I’m doing with my own money.
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