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Portfolio: 12 Funds

CONSIDER YOURSELF an investment junkie? Here’s what a balanced portfolio might look like if you were willing to buy a dozen funds:

  • U.S. large-cap value stocks: 10%
  • U.S. large-cap growth stocks: 10%
  • U.S. small-cap value stocks: 3%
  • U.S. small-cap growth stocks: 3%
  • Real estate investment trusts: 3%
  • Developed foreign markets large-cap stocks: 16%
  • Developed foreign markets small-cap stocks: 6%
  • Emerging stock markets: 7%
  • Gold stocks: 2%
  • Short-term corporate bonds: 23%
  • Inflation-indexed Treasury bonds: 14%
  • High-yield junk bonds: 3%

This portfolio is probably most notable for what it doesn’t include. There are no bonds from developed foreign markets. This avoids inserting currency risk into the conservative portion of a portfolio. Similarly, there’s no emerging-market debt, which is now mostly denominated in local currencies, not U.S. dollars. In addition, there’s no dedicated U.S. mid-cap exposure, partly to hold down the number of funds.

Academic research suggests you can boost performance by tilting a portfolio toward value and small stocks. We’ll discuss that further in the chapter on financial markets. You could easily adapt the above portfolio to that strategy by upping the allocation to U.S. large- and small-cap value funds, while shrinking the stake in the two growth funds. Alternatively, you could anchor your U.S. stock portfolio with a total market index fund, which would give you broad U.S. stock market exposure, and then add U.S. large- and small-cap value funds to provide the tilt. The latter strategy may involve lower investment costs, and somewhat smaller tax bills, than buying the two growth funds and two value funds, plus you’ll own fewer funds.

Beyond the chance to tilt toward value or growth, what’s the advantage of this more complicated portfolio? As with the moderately complicated portfolio, you gain greater control over your diversification and get the opportunity to bolster returns through rebalancing, but to an even greater degree.

Next: Rebalancing Sectors

Previous: Portfolio: Eight Funds

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