These portfolios may be useful to you as a starting reference point to design a portfolio best suited to you and your life stage, goals, means, limitations preferences, risk tolerance and other factors.
There are many model investment portfolios, perhaps too many model portfolios to be found. The could be bewildering. This is an attempt to present a limited number of portfolios that cover the broad spectrum of investor needs and circumstances.
Before we look at them, remember that asset allocation is a far more important determination of your investment returns and portfolio volatility and periods of maximum drawdown than the specific securities you chose to represent asset categories in your portfolio.
Five-Step Portfolio Design Process
The five steps might be best divided between long-term ideas and intermediate term to short-term ideas (Investment Policy and Investment Strategy).
- Decide the mixture of the three “Super Classes” OWN, LOAN and RESERVE to use in the portfolio.
- Decide which asset Sub-Classes to include and which to exclude within each super-class for the portfolio (e.g. domestic or international stocks or gold or commodities or real estate in the OWN super class).
- Decide upon the normal, or long term, weights for each of the Super Classes, and to the Sub-Classes in the portfolio.
- Deviate from the long-term policy weights of asset classes up or down (overweight or underweight) in an attempt to capture excess return, or to manage portfolio volatility, or maximum drawdown risk.
- Select individual securities or funds within an asset class to achieve superior returns relative to that asset class (expense levels are a major contributor to differences in returns for funds).
It is best to commit the Investment Policy to writing, along with other important factors such as goals, means and risk tolerance and other limitations, to serve as a reference and possible behavioral control when markets, news and situations raise your positive or negative anxiety.
Before doing anything rash or spontaneously, take a deep breath, pull out and read your written Investment Policy, then ask yourself whether what you are about to do is appropriate. Maybe referring back to that document prepared when your emotions were calm and news flow was normal will modify the action you are about to take.
The portfolio models below deal only with the three steps of Investment Policy.
Note that investment models for pension plans and endowments are of necessity generally different from those suitable for most individuals. Pensions and endowments are generally presumed to be perpetual, or at least to last longer than a typical human life.
Individuals generally have finite time frames for their portfolios (let’s ignore the ultra-wealthy whose portfolios that may be perpetual). Individuals go through three broad phases:
- Accumulation with aggressive risk investing with gains priority (early stage years).
- Continued accumulation with moderate risk investing, seeking gains, with some income focus (middle stage years).
- Withdrawal with conservative investing, with income priority at least equal to gains priority and limiting volatility and maximum drawdown risk (late stage years).
As a result, “glide path” considerations come into play for individuals. There is certainly variation among institutions and advisors about an appropriate glide path, but the glide path published by Vanguard is somewhat in the middle of the pack. That makes it a useful data point to consider (not to be bound to it, but to consider it when designing a portfolio).
This is their glide path. I have added the concept of the ratio of Human Capital to Financial Capital to the customary age or years to retirement dimensions as a glide path issue.
Human Capital (“HC”) is the present value of future savings to be added to the portfolio from money earned by work. Financial Capital (“FC”) is the market value of the portfolio. The Human Capital-to-Financial Capital Ratio is HC/FC and is an important consideration along the portfolio allocation glide path.
19 Model Portfolios:
The tables that follow pursue different levels of risk, or life stage utility as contemplated by their authors:
- IVY portfolio
- Pinwheel portfolio
- Swensen portfolio
- 3 Fund portfolio
- Bernstein portfolio
- Golden Butterfly portfolio
- Permanent Portfolio
- Dalio portfolio
- Swedroe portfolio
- Bogle 60/40 portfolio
Vanguard Life Stage (age/years before retirement):
Vanguard Risk Levels:
- Aggressive Growth
- Moderate Growth
- Conservative Growth
This table shows these metrics for the portfolios:
- OWN/LOAN/RESERVE allocation
- # of positions in the portfolio
- Total return: 1 mo, 3 mo, 6 mo, 1 yr, 3 yrs and 5 yrs
- Trialing 12-month trailing yield
- 3-year standard deviation
- 3-year Sharpe Ratio (basically return over risk)
- Maximum drawdown in the last 6 years
This table for the same 19 models repeats the very important OWN, LOAN, RESERVE Super Class allocation, then shows key sub-class allocations between US stocks, International Stocks, US Bonds, International Bonds, Cash and Other.
In this chart we have selected an ETF to represent each of the sub-classes that each model specifies, showing the percentage allocation per sub-class.
In this last table, for all but the Vanguard models, you see these performance dimensions of each portfolio since 1970, as rendered by portfoliocharts.com.
The two most obvious findings are that the Classic John Bogle 60/40 portfolio consisting of 60% S&P 500 and 40% US Aggregate Bonds has the least attractive history, and the Golden Butterfly has the most attractive set of long-term metrics.
Pinwheel has the highest average return and the most attractive overall metrics set in the Growth group.
Golden Butterfly has the highest average return and the most attractive metrics set in the Moderate group.
Permanent may have the most attractive set in the Conservative group, but does not have the highest average return (4.8% versus 5.3% for the other two). Dalio has a 5.3% average return, a better maximum drawdown than Swedroe, but a 10-year duration of the maximum drawdown versus only 5 years for Permanent.
The long-term metrics for the models are (in order):
- Average Return Since 1970
- Baseline 15-Year Return*
- Baseline 15-Yr/Av Since 1970
- Baseline 3-Year Return*
- Standard Deviation
- Ulcer Index
- Deepest Calendar Drawdown
- Longest Drawdown (yrs)
- Safe 30-Yr Withdrawal Rate
- Perpetual Withdrawal Rate
* Baseline excludes the worst 15% of annual periods.
“Ulcer Index” measures short-term downside risk (depth and duration of price declines), over 14 days in this case.
Note: Golden Butterfly is data mined since 1972, whereas the others were developed using data from periods ending various multiple years ago and/or are based on investment logic.
Note: Swensen revised his model a few years ago to increase emerging markets to 10% and reduce real estate to 15%.
These are the ETFs used as proxies for the sub-classes in the portfolios to generate the short-term metrics, sub-class and sector composition via Morningstar. PortfolioCharts.com used other data to generate the long-term metrics from 1970.
|Total US Stocks||VTI|
|US Small-Cap Value||VBR|
|International Small-Cap Value||DLS|
|Emerging Markets Value||DEM|
|Aggregate US Bonds||BND|
|Aggregate Int’l Bonds||BNDX|
|ST Inflation Protected Treas.||VTIP|
There are many more portfolio models, but these are a good departure point for thinking about what may be best for you.
Disclosure: QVM has no positions in any of the securities identified in this article as of the publication date. We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, and are not compensated by Seeking Alpha in any way relating to this article.
General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.