As a followup to William Bernstein's e-book, "The Ages of the Investor," what might a portfolio look like for a 25-year old investor? The following portfolio is built around 15 ETFs that cover the U.S. Equities market, developed international markets, commodities, emerging markets, both domestic and international REITs, sovereign debt, bonds, and treasuries. In other words, we are diversifying all over the globe.

**QPP Analysis**: If one is a TD Ameritrade client, many of the ETFs used in this portfolio are commission free when sold and purchased. This portfolio has many things going for it. The projected return is 8.6% or 160 basis points above that projected for the S&P 500. Our goal is to come up with a portfolio that is 100 basis points above the S&P 500 projection. Second, the projected volatility is 14.3% or below our upper limit of 15%. The Diversification Metric is 36% or just a little below our goal of 40%. We could lift this above 40% by increasing the percentage allocated to bonds and commodities, but we run the risk of pulling down the projected return. The Portfolio Auto-correlation is quite low, a desired goal. The yield is a respectable 2.5% per year.

The historical beta for this portfolio is approximately 80%, so it is not a volatile portfolio. According to Bernstein, young investors are risk averse, so this portfolio is one that should satisfy many young investors. One can lower the beta percentage by employing the ITA Risk Reduction (ITARR) model, explained in great detail elsewhere on this blog. However, following this model requires closely monitoring each ETF once a month.

**Correlations**: Closely look at the correlations. Note how highly correlated all the equity holdings are, even if they are international. For example, VTI, VEA and VWO are all highly correlated. We need to get into commodities and bonds before we find low correlated investments.

It is possible to find individual stocks that carry a low correlation with the broad market, but this adds a lot of additional analysis to the portfolio construction process.

*Click to enlarge*

**Retirement Projections**: The following retirement projections are built using a number of assumptions.

- The 25-year old only saved $10,000. While this may seem a lot to some readers, it is a slow start as you will soon see.
- The worker will retire in 2054 at age 67.
- Inflation is projected to average 3.5% per year.
- The S&P 500 is projected to grow at 7.0% per year.
- The worker will save $500 per month or $6,000 per year.
- The income during retirement is $60,000 in today's dollars.

Using these assumptions, the negative of this situation is that there is a 50% chance of running out of money by age 82. I consider this a high risk game. There are several things this 25-year old can do.

- Plan to work beyond age 67.
- Plan on living on less than $60,000 in today's dollars. For example, if we lower the retirement income to $50,000 we increase the 50% chance of running out of money up to age 86.
- Save more money. If one were to double the savings, the 50% chance of running out of money in retirement is increased to age 90.

Disclaimer: Keep in mind these are only projections and the more assumptions involved the greater the risk of missing the final projections. The projections provide a possible road map, but one that needs to be adjusted every few years. If this example is close to accurate the clear message is that one needs to begin saving early in life and the level of savings needs to be increased. The underlying assumption that the S&P 500 will generate a steady 7.0% growth over a lifetime of investing is most likely optimistic in this global economy. It could happen, but don't bank on it.