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Four Buy-and-Hold Portfolios
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by Paul A. Merriman
Publisher and Editor
We’ve been managing money for clients since 1983, and the best way we have ever found to build a buy-and-hold portfolio is using no-load asset-class index funds managed by Dimensional Fund Advisors (DFA). These funds were created to help investors pinpoint the most productive types of assets, as identified in academic research.
This research shows that certain kinds of assets are likely to provide premium rewards for investors who take prudent risks. In a nutshell, the researchers found that over long periods of time, the best returns are likely to come from having just the right balance of large-cap and small-cap stocks, value stocks and growth stocks, U.S. stocks and international stocks.
Investing in those assets isn’t hard. In Table 3 we show four buy-and-hold portfolios that contain the asset classes you need. Any of them will get you moving in the right direction. But there’s a big difference between hitting the ball into in the ballpark and hitting it over the fence.
The best way to hit the ball over the fence is with DFA funds. They do a superior job of pinpointing the assets that are likely to give the best returns (See "The Best Mutual Funds in the World")
There are a couple of drawbacks to DFA funds. First, they are available to individuals only through investment advisors. That means paying an annual management fee. The DFA advisory fees with which we are familiar range from 0.25 percent to 2 percent annually. Second, advisors who offer DFA funds normally require a minimum account size of $50,000 or more.
But if you can get past those hurdles, we think you’ll do best over the long term with DFA funds.
For investors with less than $50,000, and for those who simply don’t want to hire investment advisors, we have established three suggested do-it-yourself portfolios available at Fidelity, Schwab and Vanguard.
How should you choose among these portfolios? First and most important, look for funds that invest in preferred assets with as much accuracy as possible. If you’re after small-cap performance, don’t invest in a fund that buys mid-cap stocks along with small-cap ones. Second, look for funds with low expenses. Every dollar a fund pays in expenses is a dollar its shareholders never get.
We believe DFA is the hands-down favorite in both respects.
Of the three do-it-yourself portfolios, we think Vanguard is the best choice. Vanguard is legendary for offering low-cost index funds.
Our second-place choice for do-it-yourself investors is at Schwab, which offers funds from many families. We believe the Fidelity buy-and-hold portfolio will be the least effective of those that we show. But some investors may need or want to stay at Fidelity, and the funds in our Fidelity portfolio should do a reasonably good job for patient investors.
Merriman DFA Portfolio
Equity %
12.5 U.S. Large Company
12.5 U.S. Large Company Value
12.5 U.S Micro Cap
12.5 U.S. Small Cap Value
10.0 Large Cap International
10.0 International Value
10.0 International Small Company
10.0 International Small Cap Value
10.0 Emerging Markets
Fixed income %
50.0 Global Fixed Income
50.0 2-year Global Fixed Income
Merriman Fidelity Portfolio
Equity %
12.5 Spartan 500 Index
12.5 Equity-Income
12.5 Small Cap Stock
12.5 Low-Priced Stock
40.0 Spartan International Index
10.0 Emerging Markets
Fixed income %
50.0 Short-Term Bond
50.0 Intermediate Bond
Merriman Schwab Portfolio
equity %
12.5 Schwab 1000
12.5 PIMCO Value D
12.5 Schwab Small Cap Index
12.5 Babson Shadow Stock
10.0 Schwab International Index
10.0 Oakmark International
10.0 Amer. Century Int'l Opp
10.0 Tocqueville International Value
10.0 Dreyfus Emerging Markets
Fixed income %
50.0 PIMCO Short-term D
25.0 Schwab Short-term Bond Mkt.
25.0 Pimco Foreign Bond D
Merriman Vanguard Portfolio
equity %
12.5 500 Index
12.5 Value Index
12.5 Small Cap Index
12.5 Small Cap Value Index
13.3 Developed Markets Index
13.3 International Explorer
13.4 International Value
10.0 Emerging Mkt. Stock Index
Fixed income %
100.0 Short-term Corp.
Our ideal equity allocation is split 50-50 between international and domestic stock funds. On the domestic side, we seek an even four-way split among large stocks, small stocks, value stocks and growth stocks. We prefer a five-way division on the international side, adding a slice of emerging markets to the international counterparts of our four preferred U.S. asset classes.
Our ideal fixed-income allocation is equally weighted between one-year and five-year bonds. This combination provides the best balance of stability and return, when it’s used to temper the volatility of an equity portfolio.
Here’s how to use the percentage allocations in the table. First, figure out what percent of your portfolio should be in equity funds and what percent in fixed-income funds. Many people nearing retirement or already retired find a 50/50 mix provides the right balance. But some investors prefer a much more aggressive approach and others prefer to be more conservative. This is an extremely important decision, so treat it as such.
Once you know how much to invest in equity funds, use the percentages in the table to build that part of your portfolio. Then do the same with your fixed-income investments.
Source: http://www.fundadvice.com.
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