My Balanced & Lazy ETF Portfolio

The Portfolio

The IRA that I track on this blog does not represent my full net worth. I designed a buy-and-hold portfolio using low cost ETF’s that is the primary vehicle for my savings.

I discuss the portfolio and my evolution on this idea here and here. Notably, I started off with a 20% allocation to TIPS that I have since moved to gold.

I own five key asset classes: (1) US small cap value, (2) international small caps, (3) real estate, (4) long term treasuries, and (5) gold.

This is my “I don’t know” portfolio. It is designed with built in protections for different economic environments. The objective is to deliver a consistent return through multiple environments with minimal pain.

I’m full of questions and doubts about the future. Are we going to have an extended period of prosperity? Will the Fed’s actions fuel hyperinflation? Will the dollar weaken? Will the dollar strengthen? Are we going to have a recession? Could the Great Depression happen again, complete with a 80% drawdown for stocks?

It doesn’t matter. The portfolio has elements that should do well in all of these environments. It it implemented with tax efficient vehicles that charge low fees. The portfolio also delivers a return comparable to owning 100% US stocks with far less pain – such as lost decades and massive drawdowns.

There are a number of assumptions built into my portfolio that I believe in. I might be wrong about these assumptions, but I am comfortable making these assumptions and they are all key to the construction of the portfolio.

  • Long term treasuries will continue to be a safe haven asset class, with outstanding performance during market meltdowns. Long term treasuries delivered a 22% return in 2008, for instance.
  • Gold will perform well during extreme economic crises, such as extreme inflation and extreme recessions and Depressions. I also expect that it will perform well during bad periods for US stocks, such as the 2000’s, 1970’s, and early 1930’s.
  • Real estate will continue to deliver a strong yield and property values will keep pace with inflation.
  • Small cap value will continue to outperform market cap weighted US stocks over long periods of time.
  • 60% of the portfolio is geared towards prosperity. My assumption is that periods of prosperity will last longer than periods of deterioration.
  • Inflation is likely to persist into the future.

allocation

Goals

This portfolio supports a number of goals.

  • It sidesteps market cap weighted indexes, for the express purpose of avoiding major bubbles which frequently plague these indexes. This also concentrates my equity exposure into the slice of the market that performs the best over the long run, small cap value. I also understand that while small cap value outperforms over the long run, it will underperform during major bull markets and market bubbles.equities
  • It has built in protections for a recession, primarily in the form of long term treasuries.
  • It has built in protections for a major economic disaster, such as a global Depression or extreme inflation, in the form of the gold ETF.
  • 60% of the portfolio is geared towards prosperity, which is the environment that I expect to be the case 90% of the time. While this allocation should avoid major bubbles, it will draw down significantly during major recessions and Depressions.
  • It is globally diversified. I wanted to avoid a home country bias and add an element of currency diversification to my portfolio.
  • It provides an allocation that avoids macro forecasting. I can be confident that this will perform well in most economic environments. The fact that I have built in protections for macroeconomic trouble helps me sleep at night.

Implementation

I implement this strategy with the below ETF’s. I re-balance either once a year or when I make a large contribution to this account from money that I’ve saved.

The ETF’s that I use are below. There are other ETF’s that could also be used to implement the strategy, but I chose the ones with the lowest expense ratios.

etfs

ETF’s are more tax efficient than mutual funds. Minimization of fees and taxes are critical over the long run. They are more important than the specifics of a strategy, in my opinion.

I also attempt to shield my savings (as much as I can) in tax advantaged accounts, such as Roth IRA’s, traditional IRA’s, and my 401(k).

In my brokerage accounts, I can purchase these ETF’s with no commissions, which is another advantage.

I will frequently add my savings to this account, which can usually bring the allocations back into balance. If my portfolio additions and buys are not enough to hit my target allocations, then I can re-balance the portfolio once a year, buying and selling ETF’s to bring the portfolio back into balance.

Performance

Independently, these are all highly volatile asset classes. Even long term treasuries are the most volatile slice of the treasury bond market.

However, in a portfolio, they interact very well with each other. This is because they deliver their returns in different economic environments.

The practice of re-balancing mechanically sells the out-performing asset classes and buys more of the under-performing asset classes.

The asset classes within the portfolio don’t all deliver a good return at the same time. Every year, there is always something to hate within the portfolio. That is a part of the design.

Below is the performance and pain of each asset class since 1995. Independently, each asset class has deep maximum drawdowns and can take a long time (often years) to recover. However, in a portfolio, they deliver a return that almost matches owning 100% US stocks with significantly less pain.

performance

Below is the annual performance of this portfolio since 2001. This is also broken out by swapping out the 20% allocation to gold to a 20% allocation to TIPS.

vsggold

Here is a visual representation of the annual returns of this portfolio since 1975, using data from Simba’s backtesting spreadsheet.

The portfolio has not recorded an annual loss greater than 20% since 1975 due to the significant allocation to long term treasuries and gold. Meanwhile, average returns are similar to owning 100% US stocks, but with a much less bumpier ride.

annualreturns

Portfolio Charts

I’m a huge fan of the Portfolio Charts blog. I’ve plugged this portfolio into the tool with a number of key takeaways.

The portfolio produces a consistent and high rate of return in different economic environments. It produces a return that is comparable to owning US stocks, but more consistently and with less pain.

annualvsg

annualtsm

vsgheat

tsmheat

Additionally, my portfolio accomplishes this result with minimal pain compared to owning 100% US stocks. Drawdowns are more shallow and less extensive than owning 100% US market cap weighted stocks.

drawdowns

tsmdrawdown

Using the portfolio ranking tool, in terms of average return, my portfolio is only bested by market cap weighted US stocks. However, it accomplishes this result with significantly less pain. Among the menu of lazy portfolios, it ranks 4th in terms of deepest drawdown, 4th in the ulcer index. Notably, it is 2nd in longest draw down. The longest drawdown for this portfolio was only 3 years, compared to 13 years for US stocks.

Most importantly, it ranks 1st in terms of perpetual withdrawal rate, implying it is particularly adept at preserving and growing wealth over a long period of time.

averagereturn

Savings & Personal Finance

I don’t think that any portfolio or investment strategy can overcome bad money habits and poor savings discipline.

The best book I’ve ever read on savings is Your Money or Your Life, which encourages people to think about money in a radically different way.

One of the key takeaways from this book is to think of money as a function of your time and life energy. It encourages you to think of a purchase in terms of how many hours of your time and energy did it take to acquire it? When you strip out taxes and work related expenses, your hourly wage is likely far less than you imagine it is.

When I started thinking like this, it led to a reassessment of my attitude towards money. I wasn’t spending $10 on lunch. I was spent a half hour of time. Over the course of a week, I was spending 2 and a half hours of my time on lunch, when I could have simply brown bagged it. For larger purchases, such as cars and housing, it helped me see things in a radically different light. What’s the point of having a massive house, for instance, if you have to spend a majority of your waking hours to pay for it – to the point where you barely spend any time enjoying it?

In short, money isn’t about stuff. It’s not about things. It’s about freedom. When you spend money, it’s a function of how much of your time you want to spend on something.

money

Conclusion

My passive portfolio isn’t for everyone. You might think, for instance, that my faith in small cap value is misplaced. You may not agree that the outperformance of REIT’s will persist. You might not want to have an allocation to bonds. Perhaps you can take more pain than me.

With that said, the portfolio helps me sleep at night. I like not having to think about this account. I like not having to worry about the economy or whatever hyped up disaster everyone is losing their minds over. I’m comfortable with the assumptions that are built into this approach and I don’t have to worry about it.

Having a “safe” account of investments that have built in protections for different economic environments also helps me approach my active stock picking account that I track on the blog with more confidence.

I am not a financial advisor. I also don’t have a financial advisor and prefer a DIY approach to my money. This is not for everyone. Speaking to a financial advisor can help you reach your goals and they may offer tools and advice that can add value, such as tax and estate considerations. They can also offer behavioral coaching during critical market drawdowns, when many are tempted to sell.

Money is deeply personal. Only you know your tolerance for pain and risk. Good tools to test your own approach are Portfolio Visualizer and Portfolio Charts. Another great tool is Simba’s backtesting spreadsheet.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

7 thoughts on “My Balanced & Lazy ETF Portfolio”

  1. nice post, any idea how this portfolio can perform so well without fang stocks, while fang has produced nearly all stock market returns over the last two decades….?

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    1. The portfolio did well this decade even though the relative performance of international and small value was poor. Absolute returns were still ok. Small value has done 8% or so over the last decade, with no exposure to FANG. Big growth tends to go through cycles of euphoria and fear. Does great some decades (the 90s, 2010s) and then melts down. Small value just chugs along and delivers a satisfactory return. That’s why it has never had a lost decade. Another key feature of small value is that it sells stocks. Quant value is really mostly buying stocks at depressed multiples and selling when they’ve improved. That process is happening in every kind of market, which is why small value delivers a consistent return every decade.

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      1. ok, thanks, some other questions….

        the portfolio has us small cap value and international small cap, is there, performance wise, a difference between small cap value and small cap? if yes, why doesn’t the portfolio have international small cap value?

        with bond rates near historical lows after four decades of decline and gold near all time highs, imagine starting this approach now,… wouldn’t it make sense to slowly scale into lt bonds and gold instead of starting at a full allocation at all time highs?

        https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

        https://goldprice.org/gold-price-chart.html

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      2. US small value has a much better track record, but I think diversifying throughout the world is important to contain risk against the dollar declining or the political situation falling apart. You do you, but my goal with this allocation was to not predict the future. That would be making strategic decisions about which allocations will work better. For me I equally weight and rebalance specifically to avoid my forecasts and biases from getting in the way.

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  2. thanks, i get the point about global diversification, my question was: small cap is split between value and growth, for the us portion, the portfolio has smal cap value, but for the international portion the portfolio has small cap (which includes small cap value + small cap growth), so, why take a subset of small cap, i.e. small cap value, for the us portion and take all small cap for international? i hope my question is clear now….

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I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.

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