Mohamed El-Erian, who managed Harvard University's investments and is now at PIMCO, has been in the news recently recommending long term investors to underweight US securities. He suggests the following asset allocation:
US Stocks 15%
Developed ex-US stocks 15%
Emerging Stocks 12%
US Bonds 5%
International Bonds 9%
Real Estate 6%
Commodities 11%
Inflation Protected Bonds 5%
Infrastructure 5%
Private Equity 7%
Cash for Special Opportunities 8%
You can read more about it here.
I started a model ETF portfolio inspired by El-Erian's suggested asset allocation. The asset allocation is as follows:
US Stocks (VTI) 15%
Other Developed Market Stocks (VEU) 15%
Emerging Markets Stocks (VWO) 12%
Frontier Markets Stocks (FRN) 1%
US Bonds (BND) 5%
International Bonds (BWX) 9%
Real Estate (RWO) 8%
Commodities (RJI) 10%
Infrastructure (IGF) 5%
US Inflation Linked Bonds (IPE) 7.5%
International Inflation Linked Bonds (WIP) 7.5%
Cash 5%
The portfolio's average expense ratio is 0.33%.
Overall, the target allocation is:
Stocks (including Infrastructure and REITs) 56%
Bonds 29%
Commodities 10%
Cash 5%
The portfolio is moderately risky in its allocation, and is intended for a long investing time horizon.
RJI was chosen over the more popular DBC for commodities because it has the same expense ratio, offers exposure to a greater variety of commodities, and does not make distributions. RJI is an ETN; it matures in late October 2022. At that time, it will be replaced in the portfolio with a similar vehicle.
RWO was chosen over VNQ, because, while more expensive, it offers global real estate exposure (foreign holdings account for more than half of its portfolio). The idea behind the portfolio is that the rest of the world will outperform the US in the future. FRN was chosen in the same spirit, to add a little boost from nascent growth in places like Nigeria and Poland.
BND was chosen over the more popular AGG because it performs the same way, but with a smaller expense ratio. Same goes for IPE over TIP.
The sizable allocations in inflation linked bonds may be question begging. Many contend (correctly, in my opinion) that inflation is much higher than is reflected in government figures. Investing in TIPs thus potentially results in losing to inflation. However, it's better than keeping the allocation in cash, at least in time of low interest rates (if in the future regular bond rates become substantially higher than those of TIPs, the portfolio's target weightings may be changed to compensate). Also, TIPs can provide portfolio stability in tough times. Consider how TIPs performed vs the S&P 500 over the past year (not including monthly distributions):
In the chart above, S&P 500 is in green.
How the Portfolio Will Be Tracked
The portfolio will be tracked in the spreadsheet below. For viewing ease, it will also be available here.
The portfolio starts out with $10,000. It will be updated once a month, here, on the first Saturday or Sunday of every month that follows a trading day (e.g., if the first Saturday of the month falls on the 1st, the portfolio will be updated on the 8th or 9th).
No holding will ever be sold, unless it tracks its underlying index incorrectly or there is something wrong with the index (e.g., it diverges significantly from other comparable indexes). The portfolio will be rebalanced monthly with an additional investment of $500. Any dividends received will be reinvested along with the $500 each month. For sake of ease, dividends will be tracked by the ex-date rather than the pay date. As dividends are part of the portfolio's gain, they will not be added to the cost basis. For sake of ease, taxes will not be factored in the portfolio's performance.
Cash will not earn interest.
There are brokers that have commission free trading (Zecco, for example). There are other brokers that allow fractional share buying (Sharebuilder, SogoTrade, for example). For sake of ease, it will be assumed that the portfolio is in a brokerage account that has both these features, fractional share buying and no commissions.
Starting purchase prices were determined at market close on Wednesday, August 13, 2008. Purchase prices for future $500 monthly investments will be determined as of market close on the first trading Friday of each month.
The portfolio's performance will be compared with that of the S&P 500. A hypothetical $10,000 was invested in SPY on Wednesday, August 13, 2008. Monthly investments of $500 will be made under the same rules and assumptions as those outlined for the portfolio above. The spreadsheet will track the S&P's returns.
Disclaimer: This is for demonstration and entertainment purposes only and should not be considered investment advice.
Disclosure: At the time of posting, I do not hold any positions in the securities discussed above.
A Lazy Model ETF Portfolio Underweighting US
Posted by d | 12:55 PM | Model Portfolio | 5 comments »
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Would you suggest the same model portfolio if I am starting out on this today?
Would you suggest any chnages to the model if I am starting out on this today?
Would you suggest any chnages to the model if I am starting out on this today?
Hi Dental,
I'd probably have a smaller allocation for TIPs (closer to what El-Erian suggests), and have a position in short term bonds, like SHV or SHY. Also, if it were a real portfolio, I'd go with DBA instead of RJI. I think RJI is better in terms of commodity exposure, but because it's an ETN (exchange traded note, which is debt) there's a risk that it can go to 0 if the sponsoring bank defaults. Another change, were this a real money portfolio, would be a higher allocation to cash, which would be placed in a CD ladder (e.g., buying a 1 year CD, a 2 year CD, a 3 year CD, and a 4 year CD, etc; then, when the first CD matures, use the proceeds to buy another 4 year CD, and keep doing this every year, so that there's a CD maturing every year and you're using the proceeds to buy a 4 year CD every year, which has higher interest rates).
If you're going to do any of this using real money, I suggest (if you haven't done so already) that you first do more research on other asset allocations, find out your risk tolerance, and possibly speak to a financial professional to make sure this is right for you. I'd hate for anyone to lose money based on something I wrote. While currently 1% ahead of the S&P 500, the portfolio is down 20%.
Correction--when I wrote DBA, I intended to write DBC. DBA is agriculture only. DBC has precious metals and agriculture.