ITA Wealth Management

This is a “basic” portfolio for the beginning investor.  It is a simple portfolio for anyone wanting to get started constructing a portfolio and do it without much fuss. This is a seven-factor-model to portfolio building. Listed below are seven asset classes, recommended percentages, and recommended ETFs.

• Large-Cap – VV – 15%
• Mid-Cap – VO – 15%
• Small-Cap – VB – 15%
• International – VEU – 20%
• Emerging Markets – VWO – 15%
• REITs – VNQ – 10%
• Commodities – DBC – 10% 
  
• One can also use GSG for commodities.  One asset class missing in the above example is bonds.  AGG, TIP, and BND are possible ETFs to cover the bond asset class.
  

It does not get much simpler than this. The one disadvantage to this portfolio is that one does not have the flexibility to skew investments to the value side of the investing spectrum, and we all know value outperforms growth over the long run.  At least that is what happened over the last 20 years.  The market may not behave this way over the next 20 years.

Faber and Richardson recommend a 5-ETF portfolio in their book, “The Ivy Portfolio.”  Their five ETFs are: VTI, VEU, VNQ, BND, and DBC.  Note the overlap in the portfolios.  F & R put it this way.  “You can put together a bunch of risky assets (stocks, real estate, commodities) and as long as they don’t all move together in a correlated fashion, the combined portfolio is less risky than the individual parts.”

Over on the Premium Content side of the blog I analyze potential portfolios based on mean-variance analysis.  The idea is to find portfolios with the highest projected return for a given level of risk or the lowest risk for a given level of return.  However, assumptions such a stocks outperform bonds, value does better than growth, and small-caps outperform large-caps may only be true looking back over the last ten to twenty years and may prove to be unreliable over the next five to ten years.

Conclusion:  It is extremely difficult to put together a portfolio that will provide a reasonable return and perform better than our benchmark.  The best we can do is to set up a well diversified portfolio that covers at least five major asset classes, and then monitor those investments.  The two example portfolios shown in this entry are efforts to aid the beginning investor in the development of a “starter” portfolio.

Lowell Herr

Photograph:  Big Ben in London, England

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