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15th November
written by simplelight

Many people, after finally saving up a modest nest egg, are faced with the dilemma of what to invest it in. For those who don’t have any interest in spending the rest of their lives following stock tickers and listening to analyst conference calls, the following approach can be implemented extremely easily, is very cost effective, and should take less than 30 minutes each year to maintain.

This approach is suitable for people who a) have saved at least $5,000 and b) are aged 10-60. If you are older than 60 you should probably adopt a more conservative approach. If you have less than $5,000 you should spread your investments over fewer funds else trading fees will dampen your returns considerably.

At a high level, you allocate your investments as follows:

60% stocks

20% real estate

10% bonds

10% commodities

There’s no real magic to this. It just depends on how risky you want your portfolio to be. If you already own a house, I would probably halve the real estate section and increase the rest.

Then the allocation to stocks I break down as follows:

60% US stocks

40% International stocks

That is a good mix given the increased participation in the global economy of the rest of the world and helps guard against currency fluctuations of the dollar.

The US stocks I break down as follows:

33% Large cap stocks

33% Medium cap stocks

33% Small cap stocks

The international equity allocation I break down into:

50% Emerging markets (South Africa, China, India, Brazil, Russia etc.)

50% Developed markets (Europe, Japan, etc.)

For the bond allocation, I recommend a broad-based bond index fund (a mix of long-term and short-term bonds). For real estate you can only really invest in commercial real estate (office buildings, shopping centers, apartment complexes). You then round out your portfolio with an allocation to commodities: oil and precious metals.

Putting that all together works out to the following target portfolio (with ticker symbols and fees of representative index funds in brackets):

12% Large cap US stocks [ VV, 0.07% ]

12% Medium cap US stocks [ VO, 0.13% ]

12% Small cap US stocks [ VB, 0.10% ]

12% International : Emerging market stocks [ VWO, 0.25% ]

12% International : Developed markets stocks [ EFA, 0.35% ]

20% Commercial real estate [ VNQ, 0.12% ]

10% Bonds [ AGG or VBMFX, 0.20% ]

10% Commodities [ IGE, 0.48% ]

If anyone finds a comparable fund with lower expense ratios, please leave a comment and I’ll update this list. For instance, in the emerging markets I have substituted VWO for EEM. The former has fees of 0.25% versus 0.75% for the latter. It should be possible to create a portfolio with a blended fee of 0.14% or less.

I generally prefer the exchange-traded funds as it makes it easier to keep all your investments in one place. I recommend E*Trade for a good blend of low fees, ease of use, and reasonable service. The disadvantage is that you have to pay a fee each time you trade whereas at Vanguard you can add money whenever you feel like without paying a broker fee.

Arranging the list in order of decreasing risk would give:

12% International : Emerging market stocks [ VWO ]

12% International : Developed markets stocks [ EFA ]

12% Small cap US stocks [ VB ]

12% Medium cap US stocks [ VO ]

12% Large cap US stocks [ VV ]

10% Bonds [ AGG or VBMFX ]

20% Commercial real estate [ VNQ ]

10% Commodities [ IGE ]

In the long run, the more risk you take, the higher your returns. The key term is “in the long run”. That’s why as you approach retirement you gradually make your portfolio less risky and weight it more and more towards bonds and fixed income securities. There is plenty of evidence that asset allocation is far more important in determining your eventual return than picking the exact stocks or countries to invest in.

The Barclays iShares web site ( is the best thing since sliced bread and has pretty much everything you need to get started. Most of the funds are index funds which can be traded through an online brokerage like E*Trade.

Always try to find the funds with the lowest fees. High management fees are a vastly underestimated destroyer of long term wealth. You will always pay higher fees for international stocks and the more esoteric funds. You should definitely never pay more than 0.50% in annual fees. The highest fees are for emerging markets funds and specialty funds which should be around 0.45%. The lowest cost funds, like standard S&P 500 index funds, have fees below 0.1%. Fees tend to come down in the long run so keep reevaluating your choices. Always read the entire prospectus for any funds that you invest in so that you know what you actually own.

One slightly tricky part is balancing your asset allocation across your retirement/non-retirement/tax-deferred accounts. Thanks to the complexities of the US tax code there is no way around having three or four investment accounts. A good rule of thumb is to have the investments which pay dividends in the tax-sheltered accounts and the high-risk, high growth assets in the taxable accounts.

Finally, once you have got your asset allocation set up, you need to rebalance it once or twice a year. Since the various funds grow at different rates, eventually your carefully assigned percentages will be all out of whack. One solution is to add your latest contributions to whichever fund is the furthest off at the time. That way you end up investing new money in the funds which have performed poorly recently (buying low). At the beginning of each year, you can spend 30 minutes rebalancing your portfolio to make sure you remain on target. Resist the temptation to go with the latest fad sector. Investing is a long term discipline.

One last comment:

Your investing will dramatically improve if you read a few solid books that lay the theoretical groundwork for choosing where to put your hard-earned cash. I have read scores of books on investing and I would say that the ones that have most shaped my investing philosophy and have enabled me to outperform the S&P 500 for over 15 years are:

  1. Reminiscences of a Stock Operator by Edwin Lefevre
  2. The Intelligent Investor by Benjamin Graham
  3. Common Stocks and Uncommon Profits by Philip Fisher

Buffet describes his investment philosophy as 80% Benjamin Graham and 20% Philip Fisher. Reminiscences is a classic that has stood the test of time because it so accurately describes the emotional traps that lay in wait for the investor.

Advanced Topic

Finally, there is an excellent website, Asset Correlation, which dynamically calculates a correlation matrix for the major asset classes. It is important to check that you are suitably diversified if you decide to tweak my recommended asset allocation.


  1. 07/09/2006

    Phenomenal post. I have been looking for something like this for months. As obvious and conventinal as it all is, one would think this type of information would be more widely available (maybe it is, and Im just a dumbass). The presentation as well is perfect. I intend on building a portfolio to match these asset allocations as closely as possible. Ill probably track on MS Money 07. I expect to be up and running within the next 30 days. Ill post a snapshot of my portfolio accompanied with a post on my blog at that time if you are interested in seeing. Thanks a lot for taking the time to maqke this info available on your blog. Have a great day. Jacob Barde

  2. 07/09/2006

    Glad it helped, Jacob. I too was surprised that it is not clearly laid out anywhere that I could find.

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  4. Bob Fritts

    Roger Gibson’s book “asset allocation” shows that a portfolio that includes both Real Estate and commodities in addition to stocks (US and Foreign)
    will give better results.

    I think that the target % for asset classes should also reflect some assessment of the future for the class. For example, now that the S&P p/e is down around 14 -15, I would increase that segment, whereas bond tip spreads are somewhat lower than usual, so I would decrease the bond segment. Gibson’s book makes a strong case for more REIT (I assume commercial) than the 10% or so that is often suggested, and with REIT dividend yields around 7-8%, I would increase REITs %.

  5. […] excellent start for any beginner investor. I haven’t calculated the blended expense ratio of my recommended portfolio but it is probably close to 15bp and slightly more complex. Explore posts in the same categories: […]

  6. 21/08/2009

    My friend told me about this website, she loves it

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