Is Your Portfolio Easy Like Sunday Morning?

crispydoc Uncategorized Leave a Comment

One of my resolutions for 2017 is to bare more personal details, so in this spirit I’ll share my investor policy statement* for your perusal.

Asset Allocation:
100 – (% in bonds) to be divided among stocks as follows:

  • Domestic Equity (65%)
  • International Equity (25%)
  • Real Estate Investment Trusts (REITs) (10%)
  • numbers rounded for simplicity
  • 3-6 months’ expenses in Money Market Fund counted as fixed income
  • Once bonds > 20%, add Treasury Inflation Protected Securities (TIPS) so fixed income is 50% bonds, 50% TIPS

Age 45: 90/10 stocks/bonds

  • 60% VTSAX – Total Stock Market Fund
  • 20% VTIAX – Total Int’l Stock Market Fund
  • 10% VGSLX  – REIT Index Fund
  • 10% VBTLX – Total Bond Market Fund

Glide Path

Age 50: 80/20 stocks/bonds

  • 50% VTSAX – Total Stock Market Fund
  • 20% VTIAX – Total Int’l Stock Market Fund
  • 10% VGSLX  – REIT Index Fund
  • 10% VBTLX – Total Bond Market Fund
  • 10% VIPSX – Inflation-Protected Securities Fund

Age 55: 70/30

  • 45% VTSAX – Total Stock Market Fund
  • 15% VTIAX – Total Int’l Stock Market Fund
  • 10% VGSLX  – REIT Index Fund
  • 15% VBTLX – Total Bond Market Fund
  • 15% VIPSX – Inflation-Protected Securities Fund

Age 65: 60/40 terminal allocation

  • 40% VTSAX – Total Stock Market Fund
  • 15% VTIAX – Total Int’l Stock Market Fund
  • 5% VGSLX  – REIT Index Fund
  • 20% VBTLX – Total Bond Market Fund
  • 20% VIPSX – Inflation-Protected Securities Fund


Funds & Accounts:
Use non-overlapping low cost index funds to maximize diversification across asset classes. Assume only market risk. Tax-efficient fund placement.

Tax-efficient Fund Placement:

  • VCTXX – CA Tax-Exempt Money Market Fund – Taxable
  • VTSAX – Total Stock Market Fund – Taxable + Tax-sheltered
  • VTIAX – Total Int’l Market Fund – Tax-sheltered
  • VGSLX  – REIT Index Fund  – Tax-sheltered
  • VBTLX – Total Bond Market Fund – Tax-sheltered
  • VIPSX – Inflation-Protected Securities Fund – Tax-sheltered

Other considerations:
Rebalance yearly on June 1st. No market timing. Rounding sub-allocations for simplicity is fine provided overall stock/fixed allocation is maintained.  Any change in allocation / funds requires 3-month waiting period.

Why did I structure it this way?
“The Majesty of Simplicity,” is a phrase coined by Jack Bogle and evangelized by Taylor Larimore, author and prolific presence on the Bogleheads forum.  Taylor uses it to advise an equally divided three index fund portfolio (Total US Stock, Total International Stock, Total Bond).  I began with these funds, altering the allocations to reflect my risk tolerance and desired rate of return.  This is a passive portfolio, and as such, I set it and forget it until the annual day to rebalance.  Consequently, more of my time is spent doing what I love and less is spent fine-tuning a complex portfolio.  In the same way that there is power in recognizing you have enough, there is also power in accepting your portfolio is good enough to reach your goals.

I add REITs to Taylor’s suggested mix because wiser folks (Rick Ferri, Dr. William Bernstein) have advised that adding real estate, which is not correlated to stock market performance but yields comparable returns, helps reduce volatility over the long haul.  By adding REITs I’ve used the tools of Rick Ferri’s Core Four portfolio but adjusted the allocations to fit my situation.

On the fixed income side, I add TIPS as a hedge against inflation.

Was I tempted to get a little fancier and take on more of a “Slice and Dice” portfolio?  Sure.  The “Slice and Dice” approach seeks to divide a single asset class (eg, stocks) into many smaller sub-asset classes to either improve returns, reduce risk (through low market correlation, like the REITs above), or both.

I thought long and hard about adding a small cap and value tilt to increase returns (I may yet  adopt a variant of a the six-fund portfolio suggested by the Oblivious Investor; as a counterpoint, Jack Bogle’s 2002 speech entitled “The Telltale Chart” challenges assumptions that small and value tilt inevitably outperform simpler portfolios).   

For the time being, I’ve accepted that the increase in complexity would add more stress than I wanted or needed.  Five funds seem easy to rebalance once a year and forget about.  Seven funds make me feel like the plate spinner on the Ed Sullivan show.  Your personal sweet spot will vary.

My final consideration is a downer. On my last shift, I broke the news to two separate patients that their CT scans revealed masses concerning for cancer.  There’s nothing to say I couldn’t be sitting on that gurney someday.  I am the financial navigator for our family, and should anything happen to me, I need my wife to be able to assume the captain’s role easily. 

Consider whether your recipe for financial success is one that a distracted spouse could follow in your absence.  For many of us, choosing a portfolio that’s “Easy Like Sunday Morning” beats a complex, “Slice and Dice” portfolio.  However fun the latter  will be for the family finance geek to micromanage in good times, it might overwhelm a  financially disinterested spouse in a crisis.

*Regulars on the Bogleheads forum will recognize that Sunny’s famously concise, brilliant post served as my template.  While there are more specific and voluble examples of equally valid IPS’s on that same forum thread, I liked this template because it was explicit, brief, and could be followed by my spouse should I become incapacitated.

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