Model Portfolios to Help You Get Started
How to pick an investment portfolio.
Picking a portfolio can feel stressful as a DIY investor. With endless possibilities across asset classes — including U.S. stocks, international stocks, value, growth, treasuries, TIPS, corporate bonds, international bonds and more — there’s no shortage of fund combinations or percentage allocations.
That’s why many investors look to model portfolios — pre-set allocations of assets — for inspiration for their own investments. These portfolios typically try to keep it simple for investors overwhelmed by all the choices they face while also offering plenty of diversification.
It’s impossible to list them all (although others have tried), but here are just a few of the major ones that can help you start thinking about your own portfolio allocation.
The Boglehead Three-Fund Portfolio
The Three-Fund Portfolio as evangelized by so many Bogleheads — followers of John Bogle, the founder of Vanguard — offers simplicity and a portfolio you can hold throughout your life.
It uses three funds:
Vanguard Total Stock Market ETF (VTI)
Vanguard Total International Stock ETF (VXUS)
Vanguard Total Bond Market ETF (BND)
The exact allocations will vary greatly depending on the investor. If you invest in 100% stocks, the Three-Fund Portfolio becomes the Two-Fund Portfolio, with the same goal of being as simple as possible. However you split the U.S./international allocation or what percentage you own in bonds, this is a portfolio that will do its job and grow your wealth over decades.
The secret to this portfolio is that it’s boring. I’d be pretty comfortable holding this for life knowing I was well-diversified across all major publicly traded asset classes.
The 60/40 Portfolio
The classic balanced portfolio is a mix of 60% stocks and 40% bonds. There’s no rule on what exactly comprises each portion. You’re free to come up with whatever specific allocation you want within that 60/40. But generally, the goal is to grow some part of the portfolio while preserving a significant portion to soften the blow of market turmoil.
This portfolio is too conservative for most young investors or anyone in the wealth accumulation phase, so it would appeal to older investors who are looking for more harmony between growth and preservation.
The Couch Potato Portfolio
This is a portfolio developed by financial writer Scott Burns. It consists of only two funds with a 50/50 split:
This allocation is quite conservative, and I think it would make more sense to use a total bond market fund over TIPS.
The Permanent Portfolio
The Permanent Portfolio contains four equal parts: 25% stocks, 25% bonds, 25% gold and 25% cash. Created by investment advisor and libertarian activist Harry Browne, the portfolio attempts to perform well in various economic environments, like inflation, deflation or recession.
There are a few variations of this portfolio, but this is generally what each portion contains:
Stocks: A U.S. total market (VTI) or S&P 500 index fund (VOO)
Bonds: U.S. long-term treasury bonds (VGLT)
Gold: Either gold bullion or a gold trust ETF (IAU)
Cash: A savings account, money market fund or treasuries bills (VGSH)
My biggest problem with this portfolio is that I’m not a goldbug, and there are some mixed data on gold’s real value as an inflation hedge. It also holds way too much cash, especially if you’re holding this through periods of low interest rates which we saw for many years up until recently. The rest of the portfolio checks out as a solid investment choice, even though it contains no international stocks.
Ray Dalio’s All-Weather Portfolio
The All-Weather Portfolio is famed hedge fund manager Ray Dalio’s version of the Permanent Portfolio. This is also designed to perform well in any market conditions, with its heavy allocation to bonds providing lower volatility than owning 100% stocks.
The composition breaks down as such:
30% stocks (VTI)
40% long-term treasury bonds (VGLT)
15% intermediate-term treasury bonds (VGIT)
7.5% commodities (GSG)
7.5% SPDR Gold Shares ETF (GLD)
I have similar issues with the gold and commodities portion of this portfolio. I just don’t think the average investor needs to bother.
Rick Ferri’s Core Four Portfolio
Investment advisor and host of the podcast Bogleheads On Investing Rick Ferri takes the Three-Fund Portfolio and adds in real estate with a real estate investment trust (REIT).
Vanguard Total Stock Market ETF (VTI)
Vanguard Total International Stock ETF (VXUS)
Vanguard Total Bond Market ETF (BND)
Vanguard Real Estate ETF (VNQ)
As with the Three-Fund Portfolio, the exact asset allocations will vary depending on your risk tolerance. The only comment I’ll make is that the total stock market already contains the stocks in REIT indexes, so if you intend to own the whole market, this part is redundant.
David Swensen's Lazy Portfolio
David Swensen, who made a name for himself as the chief investment officer for Yale University where he developed the Endowment Model, created this portfolio:
30% total stock market (VTI)
15% international developed markets (VEA)
5% emerging markets (VWO)
20% real estate (VNQ)
15% U.S. intermediate treasury bonds (VGIT)
15% treasury inflation-protected securities (VTIP)
In a later iteration, Swensen moved 5% from the real estate portion to emerging markets. You’d probably be better off combining developed and emerging markets using VXUS for more simplicity.
Vanguard/Avantis Core + Value Portfolio
I couldn’t finish this list without my own portfolio, which consists of a market-cap-weighted portion with Vanguard index funds and a small value tilt with Avantis ETFs.
55% Vanguard Total Stock Market ETF (VTI)
20% Vanguard Total International Stock ETF (VXUS)
15% Avantis U.S. Small Cap Value ETF (AVUV)
5% Avantis International Small Cap Value ETF (AVDV)
5% Avantis Emerging Markets Value ETF (AVES)
This portfolio is only for investors that have a large risk appetite and a conviction for factor investing.
How to Choose a Portfolio
Each of these portfolios claims to have a certain aim, although whether it actually achieves that aim is a different and much more complex story. Therefore, I can’t tell you which one you should invest in.
One thing you can do to become a more educated investor before selecting a portfolio is run it through Portfolio Visualizer with their backtest tool or a Monte Carlo simulation. This can provide insights into how the portfolio has done historically and what a retirement might look like invested in it.
You can use model portfolios as a starting point. If you don’t like something, you can take it out. If you want to give more weight to one asset, you can do that as well. Just avoid the urge to constantly change your allocation. Frequent buying and selling often lands investors in trouble and can wipe out portfolios in a downturn. Ultimately, the best portfolio is the one you can stick to over the long term.