In this article we present a portfolio allocation that we believe does well in multiple environments over the long run.
A new addition to the Portfolio is a 10-15% plus exposure to innovative or “moonshot” investments. (i.e. Ark ETF’s) Also an additional 1-3% exposure to crypto such as Bitcoin or Ethereum.
We loosely base our portfolio on the Ray Dalio “All Weather” portfolio, with some adjustments.
We seek a balance between common asset classes such as stocks, bonds, real estate, etc., and leave a little room for speculative and prudent risk taking.
This is not individual investment advice. All investing has inherent risk, seek the advice of a fiduciary financial professional. Everyone’s risk tolerance and stage in life is different.
I am considering changing the name to my “No Worries” portfolio that I really only need to review and tinker with a few times a year based on market conditions and research. Perhaps only making modest adjustments to exposure or adding a particular sector ETF of note.
Why are we here?
Sorry to burst the bubble, but I cannot answer the BIG why question of life. However we can answer why we invest? Simply put, we are trading today’s consumption for more consumption tomorrow. But in order to reach greater consumption in the future, our money needs to be making money and reach a critical mass level. Therefore, each dollar invested needs to be working hard to generate more and more dollars, in fact so many more that you harness the power of compounding interest. If you really want to double and triple your net worth try harnessing the power of The Investing Trifecta!Why else do we invest? We also invest to improve our lives in the future, create a sense of security for our families and some want to leave a small legacy to their children. Therefore, this begs the question: But how and what do we invest in? How do we balance our portfolios among asset classes to weather potential storms and achieve growth? What is the perfect stock or bond?
You don’t need to pick stocks
Money Vikings do enjoy looking into individual stocks and buying a few shares. But this is maybe 10% at most of our portfolios. We mainly keep it all very simple plain vanilla low cost index funds and bonds funds. We generally follow the allocations supported by Ray Dalio and Jack Bogle creator of Vanguard.
A pyramid of strength
A portfolio can be thought of like a pyramid. The bottom foundation could be exposure to a strong foundation of quality low cost stock and bond index funds. Maybe some cash for emergencies and opportunities. In the middle of the pyramid could be exposure to real estate. The top may be a small amount of exposure to Individual stocks or other risky asset classes.
Jerry wrote about how past returns in different asset classes are no guarantee of future outcomes. In fact, it seems very difficult to predict future returns in this class or that. Therefore, I hear many people I talk with tell me how confusing it all is. And the financial industry seems to have made it confusing by design in order to charge us high fees and support fancy job titles. As mentioned, my sleep at night portfolio is loosely based on the Ray Dalio “all weather” portfolio. Ray’s portfolio is designed to do well in all types of environments, during booms and busts, etc. One of the main differences is that I do not do much with gold. Mainly because I do not understand it, it does not produce a product and Warren Buffett doesn’t like it, that is my rationale.
For me personally, I am dividing investments into various categories, asset classes or buckets as follows:
S&P 500 & OTHER INDEX FUNDS (30%)
30% of my portfolio is invested in a low cost index fund that is made up of 500 large to medium high quality US companies. 100 million people in the US own some shares of these companies. Here are a sample of some of the companies that are in the S&P 500:
Vanguard S&P 500 Index is a good example of this kind of exposure. here are the sectors and the top 10 holdings as an idea of what this diversified fund invests in:
Berkshire Hathaway Inc.
JPMorgan Chase & Co.
Johnson & Johnson
There are many different kinds of low expense Vanguard funds and exchange traded funds that offer exposure to a broad array of great American companies. For example the Vanguard Dividend Appreciation Fund VDADX holds positions in strong companies like Microsoft, Visa, AT&T, etc. Another one I find strong is the Vanguard Equity Income fund VEIPX.
To me, owning this type of investment is an investment in the greatness of our country. I do not know of any other country in the world that has produced so many strong companies with so much value.
Yes, the economy will go up and down during normal cycles and other strange things will happen. But chances are many of these companies are going to be just fine over the coming decades. They will continue to spin off customer value and shareholder value through their diverse products and services.
And owning equity in these companies as part of a fund manages your risk levels. Chances are a few of the great companies will go through rough patches, but there is a very small chance they all go down.
ADDED BONUS: Do not forget to ROTH. Check our review of why a Roth IRA account for some of your index funds is very important to your tax strategy in the future: Rock Out With Your Roth IRA!
CONSIDER SECTORS and TRENDS
Another area to consider within the equities buckets are sector ETF’s and trends. Let’s say your research indicates that the energy sector is prepped for a rebound. Instead of taking the risk of choosing an individual stock, a person could invest in sector ETF’s. For example the iShares ETF’s or SPDR Select Sector Funds.
I deploy and utilize these often when I want to add exposure to a certain meta theme such as energy, real estate, healthcare, financial services, technology etc. For more information I research the iShares funds and others:
FROM THE iShares approach:
A new way to approach sectors
Technological advancements are constantly changing the way businesses develop and deliver products and services. Modern companies have not only evolved their business models, they have revolutionized behaviors—Apple changed communication, Amazon changed commerce and Alphabet changed the way we access information.
Yet traditional sector classifications such as GICS tend to group together companies using a backward-looking lens. A company’s and even an economy’s changing dynamics may not be captured.
Anticipating change and challenging the status quo have always been at the heart of iShares’ mission. That’s why we’ve implemented a new way to classify companies – one that looks where they’re going rather than where they’ve been.
Case study: Amazon
Amazon started as an online retailer selling books, but over time it has expanded to other business with the build-out of Amazon Web Services (AWS), the acquisition of Whole Foods and its recent announcement involving the healthcare market.
GICS classification: consumer discretionary
Evolved classification: discretionary spending and technology
BlackRock’s evolved sector approach
BlackRock’s evolved approach seeks to provide a more representative view of sectors within the U.S. economy by:
Using forward-looking inputs guided by big data analysis
Allowing companies to sit in more than one sector
Allowing sector constituents to change more frequently than traditional classifications
The evolved sector approach uses text analysis, guided by machine learning statistical techniques, to identify words and phrases companies use to describe themselves in publicly available materials such as regulatory filings and earnings reports. Companies are grouped into sectors based on similarities in the language each uses when describing their businesses (see Figure 1). In the example below, words in larger font sizes occurred with greater frequency among the listed companies and had greater relevance.
BOND FUNDS (30%)
The government and corporations issue bonds to raise money for large projects or investments. For example, XYZ Company may issue a bond to raise the money to build a new factory or plant. As the investor, you are part of a group of people funding this bond and you are paid a specific percentage of interest each year until the bond matures. When the bond matures, you receive your principal investment amount back. This broad index includes U.S. Government, mortgage-backed, corporate, and foreign government (issued in the U.S.) sectors of the U.S. bond market.
Having some cash has a couple advantages. One, it is liquid meaning it can be deployed to deal with emergencies or better yet deployed to take advantage of opportunities in the market. Imagine someone in 2009/10 timeframe sitting on a pile of cash. They could have poured that into real estate or stocks and would have tripled their money over the subsequent 10 year run!Remember, opportunities come every few years. Some asset class gets pummeled for some reason. For many, these are opportunities to pick up assets on sale. Are you preparing now for on of your big 3 investment opportunities?
REAL ESTATE (15%)
Real estate holdings are a combination of physical property owned and rented out, select Real Estate Investment Trusts like Realty Income “O” and STOR and crowd funding platforms like Fundrise.The physical real estate owned has several advantages. The monthly cash flow from rents is like a dividend payment each month. In addition, if the property is well maintained and in a good neighborhood, the value steadily rises. Another advantage is that the principal on the mortgage is also paid down each month, steadily increasing the cash out potential in the future. There are also many tax advantages to real estate investing like depreciation and certain write offs.
This is a change from last year. A portfolio now needs exposure to innovative tech in multiple sectors. I personally like the Ark exchange traded funds as an efficient way to gain exposure to cutting edge innovation. I do reserve about 15% of my portfolio for what I used to call “fun money” investing. But I am starting to see this as required diversification for a portfolio that will stand the test of time!
See my Dividend Portfolio update. Please keep in mind this is not crazy casino style investing in whatever I read is the next hot thing. I actually enjoy doing the research into high quality dividend paying stocks and then purchasing shares for free on a platform like Robinhood. This is not for everyone because some people do not like doing this. This is a hobby and a game to me. It is challenging myself to invest and increase dividend payments. I enjoy the research, some of which I share on this blog.
Jerry enjoys buying and selling options. Options trading is a kind of educated investing and you are guessing which direction a particular stock may go in the short run. There are other strategies that are neutral but leverage your capital in ways. Here are some of our related articles on this practice:
Options TradingCovered Calls & Dividend StocksTrading Iron Condors
1-3% Bitcoin & Ethereum
Lately we are understanding the use case for having some exposure to Bitcoin and some alt coins. Bitcoin is increasingly considered “digital gold” simply because of its finite supply. Ethereum demonstrates ever increasing use cases such as DeFi, Smart Contracts and DApps.
Crypto is inherently risky and can have wild mood swings, but it has displayed some extraordinary returns. As Bitcoin and Eth are increasingly adopted by institutions and popular platforms, it may rise significantly more in value.
SEE RELATED: The Crypto Episode, Bitcoin, Eth, Dodge and more
For me, there is a psychological element here. It allows me to have that small amount of risk taking and choice in the investments, beyond just using a straightforward S&P 500 low cost index. I also enjoy learning about what companies do in this world, I find it interesting.
INTERNATIONAL & SMALL CAPS (5-10%)
I put about 10% in a couple International Index Funds and Small Cap Index Funds. This is again for the sake of diversification and broader exposure. In general, my portfolio is one that is betting on the USA with the S&P 500 and Real Estate holdings, but having some international exposure can be good. Small caps also tend to have growth potential, but also upside and downside potential.I know that assets will go up and down. Although, I am betting that society will continue to grow, find efficiencies, consume, live, age, etc. I am also betting heavily on the US! Having a well diversified portfolio of investments allows for me to sleep well at night no matter what the market does or does not do.
There is no perfect, it is life
I am not saying this is the best portfolio in the world, there are dozens of views about what people should do or not do.I am trying to deploy my personal capital into growth potential in several areas. The main thing I am missing from the Ray Dalio portfolio is exposure with gold and commodities. As mentioned, I have a hard time with the gold thing for a couple reasons. One, Warren Buffett is not a fan of gold because it is not adding value like a great American business. It’s expensive to get out of the ground and becomes a simple store of value. But why not use cash as a store of value or dare I say crypto currency? That said, some say gold is low now and could rise, who knows?
What we are trying to do is manage risk and let our money grow efficiently and effectively. There will never be a “perfect” portfolio because no one has any idea what the future holds for various asset classes. But having a well diversified portfolio, with low fees, and a collection of great American companies is probably as good as it gets. If all this goes down, then we probably have greater problems than the book value of our portfolios.
We keep it simple with accounts through low fee investment companies such as Vanguard, Fidelity, etc. in the following allocations:
S&P 500 INDEX FUNDS (30%)
BOND FUNDS (30%)
REAL ESTATE (15%)
INTERNATIONAL & SMALL CAPS (5-10%)
INNOVATION & OPTIONS (10-15%)
Our mix is similar to the Ray Dalio All Weather Portfolio asset allocation mix. Ray argues that too many people are locked into a situation where they do well when the market is up and bad when it is down. He says the all weather type portfolios can do well in both environments for the average investor.
The point here is not to recommend this to any one person. I believe each person has to do their own research, gain the insight of a fiduciary advisor and assess their own level of risk tolerance. For some people maybe it makes sense to simply save cash. Perhaps they do not feel comfortable with markets. They probably will not end up with as much, but they also do not need to stomach the ups and downs of markets. Do your research, know yourself and seek advice. A new form of online advice is coming from Personal Capital, which I plan on doing more research and experimentation with in order to write a thoughtful post and review of their services.
This is not personal financial advice for anyone in particular. Please see a fiduciary financial professional with questions about your own particular asset allocation mix.”