Don't Resort To A 'Dumb' Portfolio

Includes: BND, VT
by: Adam Aloisi

While the two-position total portfolio strategy suggested in Alex Bentley's article, namely an investment in two Vanguard ETFs, Total World (NYSEARCA:VT) and Total Bond (NYSEARCA:BND), will help one get a good night's sleep, I doubt it will prove to be an effective solution for most investors looking to prepare and provide for retirement or other goals. Equity indexing, especially broad equity indexing in a product like VT, only succeeds in an upward-trending market. And if the next ten years prove anything like the last ten, it will be a wheel spinning experience for indexers and other ETF investors.

I'm not saying you shouldn't be utilizing indexes or ETF products for part of all of a portfolio. Indeed, if you think global equity markets will steadily trend higher, perhaps a simple strategy like this will work for you. However, I'm not inclined to assume that we'll see anything short of the volatile, mostly range bound market we've experienced for the past thirteen years. Further, investors looking to develop a reliable, perhaps growing stream of income won't be able to invest confidently here. And though the roughly 3% that one earns from BND could arguably serve as some sort of portfolio hedge or buffer, the low interest rate environment does not bode positively for bond funds or bonds in general given the odds of rate increases down the line.

While I'm not a proponent of his strategy for investors willing to invest time in portfolio building, Mr. Bentley is right that many are prone to making emotional decisions, buying and selling securities at precisely the wrong moment because of greed and fear. If you are one of those people, either you need to follow his advice and resort to more simple, set it and forget investing strategies and resist monitoring financial news, or you need to develop better discipline with individual securities and develop a tactical investment strategy. I would argue that if you avoid the emotional pitfalls of investing, develop better buy and sell tactics, and increase your sophistication, over the long-term you'll do much better weaning yourself off even the most nominally priced products from Vanguard and the like.

Mr. Bentley is also correct to say that it's probably not a wise move to own a large basket of ETFs in search of diversification or as an alternative to a more broadly based index. In the end you may be simply overlapping and paying more expense than you need to. VT is indeed a stunningly diversified investment product with a substantially lower cost than focused or strategic ETFs that can run 50 basis points and higher. And though I still don't recommend loading up on them, I believe even the most sophisticated of investor can benefit from owning strategically targeted ETFs or CEFs for timing, leverage, or diversification benefit. At the end of the day however, investors seeking maximum value for their portfolios should promote self-reliance, educate oneself, and seek individual stocks and bonds that best meet targeted needs and goals.

Given the diversification that this two security portfolio provides, I would not necessarily call it dumb. It is simple, however, and I for one think everyone is capable of outperforming the market with an ongoing education and well defined strategy. Don't throw in the towel and settle for index returns if you don't have to. You can do better.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.