How to Determine Portfolio Holdings
When determining the make-up of your portfolio, there are several questions to consider:
- What is your investment horizon? An investment horizon is the amount of time that you expect to be invested. If you’re saving to buy a house in the next couple of years, perhaps your investment horizon is small; but if you’re saving up for retirement 35 years from now, you have a longer investment horizon. To a certain extent, your investment horizon will dictate your risk tolerance.
- What are your goals? Again, why are you investing? Are you saving for a house, college, retirement?
- How much risk are you willing to take on? The amount of risk you’re willing to take on should depend somewhat on your age. The younger you are, the more time you have to make up any losses realized by risky equity holdings. As you age, your risk tolerance is likely to decline, pushing you into less risky assets such as bonds.
Generally, it’s a good idea to invest in a good mix of equity holdings (stocks) and bonds. A good rule of thumb to follow is to invest (110 – your age) in equity holdings and the remaining amount in bonds. For instance, if you are 30 years old, you would invest 80% in stocks (110 – 30 = 80) and the remaining 20% in bonds.
It’s a good idea to diversify within asset classes as well. It would be unwise to hold 80% of your entire investment portfolio in one company or one sector of the economy. A prudent investor will spread out his risk in his 80% equity holdings to include a good mix of growth and value equities as well as large- and small-sized market caps. Also, it’s usually a good idea to invest some holdings in non-US equities to further diversify. As you grow older, your portfolio would slowly shift out of stocks (high risk) and into bonds (low risk), as your investment horizon got smaller.
ETFdb’s Sample Portfolio for a 30-Year Old Investor
Let’s consider the case of a 30-year old person saving for retirement. His investment horizon is approximately 35 years, so we have a good amount of time to take some risks early on. We’ll use the 110 – age rule to determine equity/bond holding ratio.
- 60% U.S. Total Market (Vanguard Total Stock Market ETF ( VTI A+ ))
- 15% Developed Markets (iShares MSCI EAFE Index Fund ( EFA A ))
- 5% Emerging Markets (iShares MSCI Emerging Markets Index Fund ( EEM B+ ))
- 20% Bond/Fixed-Income (Vanguard Total Bond Market ETF ( BND A+ ))
Perhaps you’re thinking: Can I really have an effective portfolio with as few as four ETFs? The answer is a definite ‘yes.’ Most individual investors and mutual fund managers won’t even match the indexes’ returns, so simple low expense portfolios such as this one will, in the long run, tend to outperform portfolios that contain individual stocks or actively-managed mutual funds. A good portfolio doesn’t need to be complex.
Rebalance at Regular Intervals
As time passes and you get older, you will
want to regularly re-balance your portfolio (once a year is good) to ensure that you have the proper equity/bond holding ratio. You’ll also want to ensure that your diversification among asset classes of your equity holdings is still in line with your goals, as the rise or decline in value across different classes will dictate. For instance, if your goal is to keep VTI at 60% a year from now, you should buy or sell enough VTI shares after a year to stay on track
Profiling 4 Total Portfolio ETFs
Another unique option are “Total portfolio” ETFs. These are funds which aim to be an all-in-one investment; these products offer a way for investors to gain exposure to an entire portfolio through a single equity ticker, and all at a relatively low cost. We outline four such funds below:
S&P Moderate Allocation Fund (AOM A- )
AOM seeks to replicate the S&P Target Risk Moderate Index, a benchmark that is comprised of several ETFs that offer a healthy mix of equities and fixed income exposure. This fund of funds is primarily invested in domestic fixed income, but also has a healthy allocation to United States and international equities as well.
For those looking for a more aggressive or conservative “total portfolio” ETF. iShares’ lineup offers several options: S&P Growth Allocation Fund ( AOR A ), S&P Conservative Allocation Fund ( AOK A- ), S&P Aggressive Allocation Fund ( AOA A- ).
Cambria Global Tactical ETF (GTAA B )
This offering from AdvisorShares puts an international twist on a multi-asset allocation strategy. GTAA is actively-managed, shifting exposure across a number of asset classes using a rules-based model that emphasizes trend following and capital preservation. Like AOM. this fund is primarily invested in fixed income products, but does allot some of its assets to foreign bonds. In addition, GTAA provides some exposure to emerging market equities as well as leveraged exposure to the U.S. dollar. The price tag for this unique fund is rather steep, however, with its expense ratio coming in at a hefty 1.59%.
Morningstar Multi-Asset Income Index Fund (IYLD A- )
This ETF offers multi-asset class exposure to high-yielding securities, delivering a diversified, balanced portfolio that is capable of paying a meaningful distribution yield. The goal of IYLD’s underlying indexes is to represent an allocation strategy that leans towards fixed income but also offers some yield-focused equity holdings. Currently, IYLD allocates nearly 20% of its total assets to the iShares iBoxx $ High Yield Corporate Bond ETF. as well as significant weightings towards an emerging market bond fund and a U.S. long-dated Treasury ETF [find ETFs for every investment objective with the ETF Screener ].
Multi-Asset Diversified Income Index Fund (MDIV A+ )
For those looking for more diversification and a tilt towards high income producing securities, First Trust’s MDIV is an intriguing and relatively inexpensive pick. The fund’s underlying index invests in over 100 different holdings, including dividend-paying equities, REITs, preferred securities, MLPs and exchange-traded products. Unlike the other funds on this list, MDIV is not a “fund of funds” and actually only holds one ETF. which currently is a high-yield corporate bond ETF .