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As I was driving around town running errands on an unseasonably warm morning a few days ago, I spent a few minutes identifying some of the things I’m grateful for... my amazing wife, incredible family, hilarious friends, loyal dogs, quaint (but lovely) home, and career were the first things that came to mind. I then started thinking about all the amazing places my wife and I have been fortunate enough to travel in the past few years, the experiences ahead in the years to come, and how lucky we are to be in a position to design the life we want.  My mind then rapidly switched to the uber-practical, as I started thinking about how I could help position us to financially sustain the modest but experience-rich lifestyle we’ve built now that we’re about to have our first child...  

Given that both my wife and I work in Higher Education (and are not flush with inexhaustible assets), strategic investing isn’t just a good idea but necessary prerequisite to our eventual financial freedom.  Given that most Savings accounts net somewhere 1% annually while the average rate of inflation hovers somewhere around 2.5-3%, simply "saving" means we’d lose huge amounts of purchasing power over time.  On the other hand, putting our money in individual stocks would be speculative (at best) while diversifying by investing in mutual funds would mean overpaying in fees for a fund that, in all likely hood, will underperform relative to the market (as nearly 96% of mutual funds do)....

What’s a novice investor to do?  How does one invest their money so as to provide them the best chance at decent returns over time without “betting the farm” or having their returns eaten by brokerage and/or fund fees?  Also - Is it possible to design a portfolio that performs well in any economic climate? 

I’ve spent the last few months chasing these questions and have some answers.  Before I dive into specifics on investment asset allocation and the importance therein, let me stress a few investment basics that apply to just about every full-time professional. 

  1. If You’re Not Taking Advantage of Your Employer’s Retirement Plan and/or Contribution Match, Start Today – Most employers offer employees match contributions up to a certain percentage.  If you’re not taking advantage of this to it’s full potential – start doing so... it will compound significantly over time if invested right. 
  2. Start A Roth IRA (Assuming You Make Under 125k) – Roth IRA’s are a versatile investment tool that offer significant tax advantages. Investors can contribute as much as $5,500 annually without being taxed on earnings. Within a Roth, an investor can contribute allocations anywhere they want – stocks, bonds, exchange-traded funds, etc. and reinvest their gains.  Roth's also allow you to withdraw contributions tax-free in the event of an emergency (though, I'd strongly not touching them if at all possible). 
  3. Index Funds Are Your Friends – If you haven’t heard of Exchanged Traded Funds (ETFS) and/or Index Funds, spend a few minutes reading up on them.  They offer functionality and diversification similar to mutual funds for a tiny fraction of their fees.  Whether or not you’re new to investing, Index Funds and ETF's offer easy opportunities for diversification and long-term growth.  

Now that we’ve covered a few basics, let’s start talking about where, specifically, to invest your money. I modeled this portfolio off David Swensen's and Ray Dalio’s sample portfolios in Tony Robbins “MONEY: Master the Game”.  Both portfolios were designed to maximize potential growth over time while hedging against inflation and deflation, rising and failing interest rates, and fluctuations in the stock market.  

Broadly speaking, here’s how my ideal portfolio looks with regards to asset allocation:

 

Here’s the rationale behind the allocations...

  • Stocks - U.S. Stocks (30%) are the biggest allocation because they offer the most potential upside and, over time, yield the highest returns of any asset class.  Stocks perform well both during periods of economic growth and falling inflation, making them a cornerstone component of any diversified portfolio.  Emerging Market Stocks (10%) offer your portfolio exposure to international “small-cap” (small companies) that are domestically focused in emerging economies across the globe.   My Portfolio – VTI & ACWX.   
  • Long-Term U.S. Bonds & Inflation-Linked U.S. Treasure Bonds (TIPS) - Bonds aren’t the sexiest investment but hot damn – they’re reliable.  Long-term Bonds (25%) have an inverse relation to inflation and tend to perform best when inflation is falling and the market is trending downward.  Like Treasury Bonds, Inflation-Linked Bonds (10%) – a.k.a. TIPS - also perform well during periods of declining economic growth but, unlike Treasury Bonds, perform well during periods of Inflation.  Having both types of Bond in your portfolio hedges against market changes.  My Portfolio – ILTB & TIP.
  • Commodities & Gold – Commodities (7%) and Gold (8%) offer investment alternatives that don’t move in lockstep with Stocks or Bonds, providing even greater diversification to one’s overall portfolio.  Both assets perform well during periods of growth AND periods of inflation, which makes them unique among asset classes.  My Portfolio - VAW & GLD. 
  • Real Estate - Though I’m not the biggest fan of Real Estate investments given their speculative nature, a well-designed Real Estate Investment Trust (10%) offers opportunities quite a lot: interest dividends, asset diversification, liquidity, and long-term growth. Personally, I like Vanguard’s REIT (Real Estate Investment Trust) ETF as it provides exposure to a wide variety of commercial Real Estate holdings with very, very low fees.  Personally – I would likely lower the percentage of my REIT’s to 5% and increase my exposure elsewhere, but I included the 10% recommendation as so many investment gurus see Real Estate as a small, but important, component of a diversified portfolio.  My Portfolio – VNQ 

So there it is.  A portfolio built to weather all types of economic conditions while delivering handsome returns.  Please note: I took the time to include my recommendations for specific funds because, with investments, the devil is often in the details...

Here’s a more detailed description of specific recommended fund for each asset class.  Every one was specifically chosen because of their SUPER low fee structure and backing institution. High Fees, whether packaged within a mutual fund or a “sophisticated” financial instrument incentivized by brokerage sales, eat away at your annualized returns which adds up to HUGE amounts of money over time.   

Specific ETF Recommendations

  • U.S. Stocks (30%) – Vanguard Total Stock Market ETF (Symbol - VTI)
  • Emerging Markets (10%) – iShares MSCI ACWI (Symbol – ACWX)
  • Long-term U.S. Bonds (25%) – iShares Core 10+ Year USD Bond (Symbol – ILTB)
  • Inflation-Linked U.S. Treasury Bonds (10%) – iShares TIP Bond ETF (Symbol – TIP)
  • Commodities (7.5%) – Vanguard Materials ETF (Symbol – VAW)
  • Gold (7.5%) – SPDR Gold Trust ETF (Symbol – GLD)
  • Real Estate (10%) – Vanguard REIT ETF (Symbol – VNQ)

 

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