Smart ETF Portfolio that you will ever own

JC Project Freedom Journey Towards Financial Freedom

Updated on 23rd October 2021

Recently, I am finding more time to read after my children sleep, there are lots of gold nuggets in books. They present the best ideas, help you to crash your time to acquire the relevant knowledge and experience. Last evening, I finish reading this book “The Wall Street Journal Guide to Investing in the Apocalypse”. I had read this in 2017 but must have forgotten most of it. When I revisit this, it explains what you can do as an investor during a pandemic and other black swan events. If I have read this in February 2020, I would have reacted better and gained more profit.

I finished another book “The Smartest Portfolio you will ever own”. There is different agenda by different authors but to a great extent that I agree with the sharing in the book. Firstly, most of us will not be able to beat the market year on year. It may not be relevant for us to beat the market every year but as long as it fulfills the requirement to create the retirement fund you desire, that will suffice right? Let’s pause for a while. If we cannot achieve the average return of the market, might as well buy the index fund?

Not all investors beat the market. A large portion of investors’ portfolios lags the S&P500 over the long run. Investors underestimate the time needed to develop the detailed knowledge required to identify the most attractive stocks in a particular industry. Many individuals, do not have the option to spend so much time researching stocks because they require an income in the short run. Other individuals have commitments such as family, they are unable to commit what is essentially an extra day’s work per week to discover the most appealing stocks.

“If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”

Warren Buffet

If you are not financially inclined, you do not want to spend more time studying companies, you want to have more time on your family, friends, and hobbies, then don’t need to actively stock pick. Or if you are like me, you can be very hardworking at studying and research companies but still fall short on investment returns. It may make more sense to revert to passive investing.

The Smartest Portfolio you will ever own

Super Smart Portfolio

In the book, they introduce components of the Super Smart Portfolio which exposures to seven stock asset classes. They are as follow:

20% U.S. Large Cap
20% U.S. Large Value
20% U.S. Small Value
10% U.S. Real Estate
10% International Value
10% International Small
10% Emerging Markets

The fixed-income portion of the portfolio is divided evenly between a short-term U.S. government and a short-term foreign government portfolio.

The Super Smart Portfolio consists of stock and bond funds from Vanguard and iShares based on a determination that those funds were the most tax-efficient, with the lowest expense ratio.

The Super Smart Portfolio consists of Vanguard Large Cap Index Admiral Fund (VLCAX), Vanguard Value Index Admiral Fund (VVIAX), Vanguard Small Vap Value ETF (VBR), Vanguard REIT Index Admiral Fund (VGSLX), iShares MSCI EAFE Value ETF (EFV), iShares MSCI EAFE Small Cap ETF (SCZ), Vanguard Emerging Markets Stock Index Admiral Fund (VEMAX), iShares Barclays Short Treasury Bond ETF (SHV) and SPDR Barclays Captial Short-Term International Treasury Bond ETF (BWZ).

Smartest ETF Portfolio

Vanguard Total World Stock Index ETF (VT) holds 9299 stocks (based on 17th October when I wrote this) which is significant because its competitors hold a sampling of the stocks in the index. The expense ratio 2021 is 0.08% which is very low.

iShares MSCI ACWI Index Fund (ACWI) is the other all-world ETF worthy of consideration. Its benchmark tracks the MSCI All Country World Index, which consists of approximately 2304 stocks and an expense ratio of around 0.33%.

The Smartest ETF Portfolio suggests the following:

  1. Invest 100% of your stock portfolio in either the Vanguard Total World Stock Index ETF (VT) or the iShares MSCI ACWI Index Fund (ACWI).
  2. Invest 50% of your bond portfolio in the iShares Barclays Short Treasury Bond ETF (SHV) to gain exposure to the domestic bond market. Invest the other 50% of your bond portfolio in the SPDR Barclays Capital Short-Term International (BWZ) for exposure to the international bond market.
  3. Rebalance annually or semiannually

Smartest Index Fund Portfolio

The Smartest Index Fund Portfolio is very simple to understand and implement, consisting of only three index funds from Vanguard and Fidelity. In this portfolio, 70% of your stock allocation is in U.S Index Fund, and 30% is in the international fund. You can adjust this if you want more international exposure. The Smartest Index Fund Portfolio consists of Vanguard Total Stock Market Index (VTSMX), Vanguard Total International Stock Index (VGTSX) and Vanguard Total Bond Market Index (VBMFX).

Standard Deviation

Standard deviation is a measure of the volatility of the portfolio, it is a measurement of the risk of the portfolio. When returns are very volatile, annual rebalancing can result in moderate-risk portfolios delivering higher returns than either low- or high-risk portfolios. Higher returns at lower risk, are the holy grail of investing.

What’s my plan?

I am going to sell away the main position when it is at my ideal price then I am going to plow the profits into Vanguard Total World Stock Index ETF (VT). I already have a position in VT but a relatively small one. In the future, I will start to divert all the dividends from other stocks into accumulating more VT. Will I start to buy more bonds ETF? Yes, later on when I am slightly older and nearer to my retirement age to reduce the volatility of the portfolio. Remember high return at lower risk is the holy grail of investing.

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