This Shotgun Portfolio Is Simplified To The Extreme

by: Evin Rohrbaugh


This article makes the case for a broad portfolio that is simplified to the extreme.

The allocation is 50% bonds and 50% stocks, but done with three Vanguard ETFs that spread the holdings out very widely.

With only three, low-cost ETFs you can have access to 7,532 stocks and 17,834 bonds.

This allocation is designed to be a core holding or the entire portfolio for a person who doesn't want to follow the market and make predictions on the future.

This article will make the case for an extremely simplified portfolio for long-term investing. Let's say that someone you know is asking for advice on how best to invest their money, but you don't have time to explain investment theory to them, they just want quick and actionable advice. This portfolio is what I would advise without much explanation attached. The use of low-cost ETFs will give us efficiency in accessing a huge amount of securities to put into this portfolio.

There is always a ton of discussion going on about the optimal portfolio and optimal allocations. I've written on this topic, talking about how to use ETFs to replicate Harry Browne's Permanent Portfolio strategy as well as the holdings in Ray Dalio's All-Weather fund. This time I'm trying to simplify things to the extreme and it can serve as core portfolio for those who wish to pick stocks in addition, or to the person who doesn't follow the markets but wants a simple way to do it. So here is the portfolio.

This is a very broad, shotgun approach to portfolio allocation which aims to take the guesswork out of investing. You've seen this 50/50 example before no doubt, but let's take a look at how that allocation and others have performed over almost a 100-year period, provided by this Vanguard resource.

Now to get a little more specific though with each allocation.

If following this simple strategy, here are the questions that you won't be required to have an answer for:
Which asset will perform better, stocks or bonds?
Which specific stock market will do better?
Which currency will outperform the others?
Which investment will perform better based on current and expected future interest rates?

Using this portfolio, your answer to all of those questions will be, "Don't know, don't care."

Now we'll cut to the chase and see which specific ETFs will be used. The only three will be Vanguard Total World Stock ETF (NYSEARCA:VT), Vanguard Total Bond Market ETF (NYSEARCA:BND) and Vanguard Total International Bond ETF (NASDAQ:BNDX).

When using these three ETFs, you will be holding 17,834 bonds and 7,352 stocks, or 28,019 securities in total with the yield (averaged from the three funds) of 1.85% after expenses. This is about as wide as you can get with so few funds. This is done on purpose due to the fact that the future is uncertain, and investing in so many securities keeps the investor from being required to make guesses or predictions regarding the future.

What about rebalancing? Since the goal is maximum simplification, my take on rebalancing will be a bit different as well. Firstly this goes to the point of what the investor's end game is. As I discussed in my last article on choosing the right dividend growth ETF, the goal for the average investor should be to buy income producing assets and use the power of compound interest until the point where the dividends/interest will be taken as income to cover their retirement needs. Since the investor is in it for the cash flow, the share price is largely irrelevant. The strategy is buy and hold, so that means not selling in order to rebalance, simply because you will incur a capital gains tax when you sell. Keeping with 50% stocks and 50% US and international bonds, you would rebalance annually by simply buying more of whichever ETF has dropped as a percentage of holdings in order to get the weighting back to 50/50 or 25/25 between the two bond ETFs.

This strategy might go against what many SA authors write about, which is picking individual stocks. My view is that the average investor (who is simply saving for future retirement income) shouldn't be a stock picker because at this point they have left the realm of investing and entered into speculation. This doesn't mean that the average investor can't use a very small portion of their money to speculate if they want, but if the main investing goal is to capitalize their own private pension, then speculating should be done only with the money that can afford to be lost. Also, I shouldn't make such a generalization for stock pickers, because many people are simply looking to add to their current long positions of blue chips on the dips, when they can buy at a discount. Adding to an existing position in Johnson & Johnson (NYSE:JNJ) on a dip is certainly not the same as taking a margin loan to buy a nano cap, biotech stock. I don't consider the former to be speculating.

I considered adding a different spin on the allocation to seek a higher yield, since the yield from the above ETFs is only a little less than the S&P yield. I change it up by splitting the funds equally four ways and going with Vanguard Total Stock Market ETF (NYSEARCA:VTI), Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU), Total US Bond ETF and Vanguard Emerging Markets Government Bond Index ETF (NASDAQ:VWOB), in order to get a little higher yield which comes to 2.99% after expenses.

I don't like this change because adding an ETF just adds another new expense ratio to the equation and the credit risk of VWOB is not quite worth the yield.

Not only could this serve as a wide approach for the person who doesn't follow the markets at all, but it can be a core position for the person who does follow the markets and does pick individual stocks as well. There are several counter questions that can surely be asked about this portfolio, such as:

What about real estate?
What about commodities?
What about energy?
What about MLPs?
And so on.

The answer to all of them is that this is an attempt to make things as simple and easy as possible, so adding in more sectors and getting more specifics will defeat the original purpose. Don't underestimate the power of keeping things simple.

Disclosure: I/we 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.