Recs

108

Model Portfolios

So how does all this come together in the form of an actual asset allocation? Below are three model portfolios you can use as a starting point for cooking your own investment soup, followed by descriptions of the asset classes. (Note: We did not include cash in these allocations. We're assuming you have the money you need in the next year, as well as an emergency fund, already sitting safely in a money market account or similar investment.)

We've used five broad categories that could serve as the foundation of your portfolio. The categories can be further sliced and diced; in fact, the Model Portfolios we discuss in Rule Your Retirement feature 12 different asset classes. But these five will set you firmly on the path to a well-diversified nest egg. We've also thrown in a representative exchange-traded fund (ETF) for each asset class, so you can get an idea of what kinds of investments fall under each category, as well as a cheap and easy way to implement this core portfolio:

Asset class

ETF

Conservative

Moderate

Aggressive

Large-cap U.S. stocks

SPDR (AMEX: SPY  )

20%

30%

40%

Small-cap U.S. stocks

iShares S&P 600 (AMEX: IJR  )

5%

10%

20%

Foreign stocks

iShares MSCI EAFE (AMEX: EFA  )

5%

10%

20%

REITs

SPDR DJ Wilshire REIT (AMEX: RWR  )

10%

10%

5%

Bonds

iShares Lehman Brothers Aggregate Bond (AMEX: AGG  )

60%

40%

15%

An allocation adieu
Congratulations, Fool! You now know more about asset allocation than the large majority of your colleagues, collaborators, compatriots, and compadres. If you're itching to learn more, as well as receive regular updates about the most recent thinking on smart asset allocation strategies, give the Rule Your Retirement newsletter service a free trial; it's as easy as clicking here.


Read/Post Comments (4) | Recommend This Article (108)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2010, at 10:39 PM, S2000magician wrote:

    The author writes that, ". . . these five will set you firmly on the path to a well-diversified nest egg." Unfortunately, over the last five years, this hasn't been true.

    During that period, the average correlation of monthly returns for these ETFs with each of the others have been:

    SPY: +0.7081

    IJR: +0.6856

    EFA: +0.7040

    RWR: +0.6743

    AGG: +0.2145

    (For example, the correlation of returns for SPY and EFA is +0.9240; for SPY and IJR it's +0.9202.)

    Except for AGG, those numbers are huge! Put another way, having SPY, IJR, EFA, and RWR in the same portfolio over the last five years has done little to reduce the risk of the portfolio. Perhaps there are other ETFs that would provide much better risk-reducing diversification as the foundation of a well-diversified portfolio.

  • Report this Comment On March 28, 2011, at 1:35 PM, foolbsvd wrote:

    @ S2000magician: you went where I want to go -- to calculate correlation coefficients. But I get bogged down in the effort wishing there was a simple web site or tool that would allow me to enter the two securities (SPY and IJR for instance) and a number of periods (last 8 quarters for instance). The site would add the relevant returns and calculate away. Any suggestions?

  • Report this Comment On April 02, 2013, at 11:25 PM, HRamius wrote:

    John Bogle says buy the market. Since the war, US capitalization as a fraction of the world has changed from ~75% to ~25%. Why not buy the market:

    25% USA: VIG 15% VO 5% VB 5%

    25% Europe VGK 25% or EWG 25% as a safe proxy for Europe

    25% Pacific VPL 25%

    15% Emerging VWO 15%

    5% Canada

    5% Cash ?

  • Report this Comment On June 24, 2013, at 9:05 AM, charmboy wrote:

    How do you translate this to individual stocks?

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