Crackerjack Greenback Prudent Advice for a Prosperous Future

November 17, 2008

What Does a Diversified Investment Portfolio Look Like?

Filed under: Investing,Retirement Planning — Paul Williams @ Crackerjack Greenback @ 4:00 am

       I often talk about a low-cost, tax-efficient, diversified portfolio as one of the keys to investment success. So what does such a portfolio look like? Here’s an example of a diversified portfolio with an overall allocation of 70% in stocks and 30% in bonds:

A Diversified 70/30 Portfolio

       You’ll probably have a few questions about the logic of this portfolio. I’ve put the answers to the questions I could think of below. If you have some questions I didn’t answer, leave them in the comments and I’ll answer them as soon as I can.

Why So Little in U.S. Stocks?
Why So Much in International Stocks?

Why Add Value Stocks?

What’s Up with the Bonds?
Why Aren’t There Long-Term Bonds?
Why Aren’t There Global/Foreign Bonds?
Why Aren’t There High-Yield Bonds?

So How Can I Invest in a Diversified Portfolio Like This?

Vanguard       I highly recommend using Vanguard to invest if at all possible. This could mean investing directly through Vanguard or buying their mutual funds in your retirement or brokerage accounts. Why Vanguard? They are by far the lowest-cost provider of Index Funds in the industry. Additionally, they have a long track record of great customer service. If you invest directly through Vanguard, you can avoid commissions and many other fees (especially if you sign up for their e-delivery option).

       So which Vanguard funds should you use to replicate the diversified portfolio shown above? Here’s the list (starting at the top of the pie chart going around clockwise):

Fund Name Fund Symbol Expense Ratio
Vanguard Total Stock Market Index VTSMX 0.15%
Vanguard Value Index VIVAX 0.20%
Vanguard Small Cap Index NAESX 0.22%
Vanguard Small Cap Value Index VISVX 0.22%
Vanguard REIT Index VGSIX 0.20%
Vanguard Total International Stock Index VGTSX 0.27%
Vanguard International Value VTRIX 0.43%
Vanguard Short-Term Bond Index VBISX 0.18%
Vanguard Intermediate-Term Bond Index VBIIX 0.18%

       A 70/30 portfolio using these funds and the allocation shown above would have a total expense ratio of only 0.25%. You would need to invest $54,000 to meet the fund minimums. If you have $54,000 invested directly at Vanguard in the allocation I provided, this portfolio will only cost you $135/year in investment management fees. That is just one reason why Vanguard is so great! (Note:  I do not work for Vanguard and gain nothing if you decide to use them except for the satisfaction of knowing I have helped someone save a ton of money and invest wisely at the same time.)

A Word of Caution

       Before you run off and invest your money with Vanguard or any other mutual fund company, I want to caution you first. I am in no way recommending that you invest in a 70/30 portfolio, since I do not know your personal situation. Your asset allocation is very dependent on your goals and somewhat on your risk tolerance (but not much). Exactly how you should invest also depends on where your assets are held and in what types of accounts. I highly recommend you talk with a fee-only, hourly financial planner if you’re uncomfortable with learning how to do it yourself. I also encourage you to do your own research if you’re skeptical of my endorsement of Vanguard. I’m sure you’ll find that they really are the best provider of Index Funds, but it will do you well to confirm it for yourself.

       In the future, we’ll talk more about how to figure out how much you should have in stocks vs. bonds. I’ll also discuss why you should use Index Funds and keep your costs low in addition to providing more background information so you can understand it all much better. If you have any questions, leave them in the comments and I’ll try to answer them as soon as possible!

3 Comments »

  1. I like your thoughts on US vs. International allocation. I’ve always questioned the often-cited wisdom of holding such a high percentage in just US equities.

    Comment by Mike @ Oblivious Investor — November 17, 2008 @ 9:48 am

  2. Mike,

    Glad you liked it. I questioned it too, and I’ve found that portfolios do much better historically if you don’t put so much into U.S. stocks. It’s the power of diversification coupled with the risk/reward relationship.

    Comment by Paul Williams @ Crackerjack Greenback — November 17, 2008 @ 10:14 am

  3. […] Williams from Crackerjack Greenback present “What Does a Diversified Portfolio Look Like?” This article discusses what a diversified portfolio […]

    Pingback by 180th Carnival of Personal Finance — November 24, 2008 @ 9:10 am

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