Recs
87
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
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Comments from our Foolish Readers
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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 ?
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