Keeping Portfolios Simple
Different strokes for different folks. Some investors, prefer individual stocks and bonds. Others prefer funds. Some have a combination. All too often, investors have an eclectic collection of stocks, bonds, funds and annuities that they have accumulated over a lifetime with no clear rationale or plan.
Greater simplicity is most often the obvious need. At the extreme of simplicity is the use of a handful of broad, passive index funds.
We frankly prefer an intermediate portfolio composition — less than complex, but more than simple — let’s call it “simplexity”. However, for those seeking great simplicity in their portfolios, here are some very basic ideas.
A small group of funds could be used as a the core of a portfolio or as the entire portfolio (examples shown in the image above).
Once allocation weights are established for each broad asset category, if you have a large cash position, you would step into the market for each category in stages based on the fundamental logic and/or market conditions applicable to each category.
To the extent that you wish now or later to have exposures that differ from the core funds, you could “tilt” the exposures by:
- Supplementation (such as by adding a China fund to increase that country’s overall weight in the emerging markets category, or by adding an investment grade corporate bond fund to increase the weight of that form of debt in the US taxable bonds category), or by
- Complementation (such as by adding an foreign currency denominated international Treasury fund to expand the fixed income exposure beyond US only bonds; or by adding a commodity or real estate fund to expand into those categories).
There are all sorts of ways to supplement or complement core exposures with regional or country funds, sector or industry funds, market-cap and/or style funds, thematic funds, bond funds with different credit quality or duration, and other subclasses and categories; but selectivity is important to avoid recreating a complex mass of holdings, or inadvertently recreating a virtual broad index with many funds.
Tilting the few simple core positions remains an option when and if appropriate or desired to expose you to various risks/opportunities in a tactically targeted way.
Here are charts for seven of the funds identified in the image above as candidates for a simple portfolio:
Even if you don’t chose simplicity, or even “simplexity” for your portfolio, a simple portfolio concept may be useful as a benchmark against which to compare your actual results in yoru real portfolio.
Securities named or implied in this article: VT, ACWI, BND, AGG, VTI, IWV, VEU, MUB, VWITX, VEA, EFA, VWO, EEM, FXI, LQD, BWX, DBC, VNQ.
Richard Shaw
QVM Group LLC