Sometimes you’re not sure where to start with investing. It turns out many experts have come up with portfolios that they would, and often do, implement for themselves or their loved ones. Here we run through some of the most robust options.
Warren Buffett – The 90/10 Portfolio
This portfolio follows the instructions that the great investor Warren Buffett has apparently set out in his will for his wife’s trust. He outlined this plan on page 20 of his 2013 letter to Berkshire Hathaway Shareholders. The allocation is as follows:
- 90% low cost S&P 500 tracker (here Buffett specifically suggests Vanguard as a low-cost fund option)
- 10% short-term government bonds
The basic principle here is to “own a cross-section of businesses that in aggregate are bound to do well,” for Buffett the easiest way to do that is the S&P 500, which also happens to be very cheap to own via ETFs. He also thinks that this strategy is appropriate for those who don’t invest for a living, and the approach avoids high fees and expenses. He believe this portfolio will be “superior to those attained by most investors – whether pension funds, institutions or individuals.”
The potential drawbacks of this portfolio is that is is exclusively invested in the U.S. when many believe international diversification is helpful and its high exposure to stocks could cause major swings in performance. Also, with just two asset classes, some opportunities for diversification are missed. Nonetheless, historically this simple to implement portfolio has delivered strong performance over decades, for those can endure the potential periods of major decline such as 2008-2009.
Paul Merriman – Ultimate Buy and Hold Strategy
Paul Merriman is a successful investor, who know focuses his time on educating people on how to invest through his foundation. He has a number of variations of his portfolios, but here we take Portfolio #7 as described here which captures all his main insights on equity asset classes. It’s important remember that Merriman believes in holding bonds too, so this is only the stock part of the portfolio:
- 10% S&P 500
- 10% U.S. Large Cap Value
- 10% U.S. Small Cap Blend
- 10% U.S. Small Cap Value
- 10% U.S. REITs
- 10% International Large Cap Blend
- 10% International Large Cap Value
- 10% International Small Cap Blend
- 10% International Small Cap Value
- 10% Emerging Markets
Essentially, Merriman’s approach is to start with the S&P 500 as a base, but then show that adding small amounts of other asset classes can either help return, reduce risk, or both.
Ivy League Endowments
I’ve written previously about how the Ivy League universities invest. Some of the things that university endowments do are hard to replicate simply for the individual investor, such as owning private equity or investing in absolute return strategies, but when translated into accessible ETF-based asset classes, the average of Harvard, Stanford and Yale’s allocations look like the below.
- 35% U.S. Equity
- 28% Bonds
- 15% Foreign Equity
- 11% Commodities
- 11% Real Estate
As Proposed by Bill Schultheis, author and investment adviser. He stresses that this may not be the right portfolio for you, but many take it as a starting point for a well-balanced portfolio.
- 40% Fixed Income
- 10% Large Cap Blend
- 10% Large Cap Value
- 10% Small Cap Blend
- 10% Small Cap Value
- 10% International
- 10% REITs
Bill Bernstein’s No Brainer Portfolio
In his book, the Intelligent Asset Allocator, Bill Bernstein examines academic research and historical performance to arrive at a relatively simple to implement portfolio that he expects to perform well for the long-term.
- 25% Bonds
- 25% European Stocks
- 25% U.S. Small Cap Stocks
- 25% S&P 500
Harry Browne’s Permanent Portfolio
Sometime described as a fail-safe or bullet proof portfolio. Browne’s portfolio is designed to hold up well in any economic environment and be a simple portfolio to implement. Each asset class has a role to play: the long-term bonds will perform well during deflation; stocks will do well during times of economic growth; Treasury Bills will hold up during recessions and gold is helpful during times of inflation. By holding all four together you can, in theory, deal with anything that the economy throws at you and still have at least one part of your portfolio do relatively well.
- 25% U.S. long-term Treasury bonds
- 25% U.S. Treasury Bills
- 25% U.S. Total Stock Market
- 25% Gold
What lessons can we learn by looking across these portfolios? Well each of them advocate owning both stocks and bonds. The exposure to bonds varies, Buffett’s willing to go as low as 10%, and Harry Browne is higher at 40%. But all fundamentally recognize the value of having some bonds in your portfolio. Basically, a portfolio without bonds can get too risky in the short-term for most to stomach, but if your bond exposure is too high, you may miss out on longer run returns.
The other thing which occurs in a few of the portfolios, but not all, is using either commodities or real estate/REITs to deal with the problem of stocks and bonds potentially falling together, such as at times of high inflation. Again, there’s no consensus here, some would exclude these assets entirely, but those that include favor allocations to real assets in the 10% to 20% range.
Finally, most portfolios, but again not, all include some international stock market exposure. So even, if none of these particular portfolios appeals to you, there are some clear lessons to take away. Firstly own both stocks and bonds, secondly consider real assets like commodities and/or real estate, and finally some international diversification may be helpful. All portfolios are slightly different in the precise allocations, but most follow these patterns.