Monday, November 6

Introducing a balanced and easily managed portfolio

I am currently reading Unconventional Success, a book written by David F. Swensen, the chief investment officer of Yale University's US$14 billion Endowment Fund. The fund has a return of 16.1% per annum over 20 years, an outstanding achievement even among the experts in the fund industry.

I will write about my thoughts on the book later, but in summary Mr. Swensen advocates the following:

  • Stick with the core asset class (stocks, bonds and real estate) for best risk/reward ratios
  • Work out the asset allocation based on your own risk appetite and be disciplined in rebalancing the portfolio based on this allocation
  • If not buying individual stocks and bonds, pick low-cost, non-profit fund managers or ETFs instead of the expensive (and often poor-performing) for-profit mutual funds

With that in mind, I have come up with a balanced portfolio consist of ETFs. The performance will be shown in the chart at the upper right hand side of this blog starting from today, and a weekly post will be written to explain the movement of the fund. Please join me in this learning experience!

An Equity-oriented, Broadly Diversified Portfolio

Our portfolio (starting at US$10,000) is made up of the following:

  • US equities 30% ($3,000): ishares S&P500 Index Fund (ticker: IVV)
  • Foreign developed market equities 15% ($1,500): ishares MSCI EAFE Market Index Fund (ticker: EFA)
  • Foreign emerging market equities 5% ($500): ishares MSCI Emerging Market Index Fund (ticker: EEM)
  • Real estate 20% ($2,000): Dow Jones Wilshire REIT Index Fund (ticker: RWR)
  • US Treasury bonds 15% ($1,500): 7-10 year T Bonds Index Fund (ticker: IEF)
  • US Treasury Inflation-Protected Securities 15% ($1,500): Lehman TIPS Fund (ticker: TIP)

Target investment return

Given the balanced approach, I believe a 8% return (5% above long-term inflation in US) per year is reasonable. To put things in perspective, if you are 35 and plan to retire at 60, a 8% return per annum in these 25 years will multiply your intial capital by more than 6 times, and much more if you keep putting fresh money into the portfolio.

For those who are looking for double-digit returns:

  • You can increase the proportion of higher risk/return investments (e.g. emerging market equities) and decrease the stable but low-yielding investments (e.g. US Treasuries). Please note that a revised portfolio may give more volatile returns.
  • Be realistic: a top-notch fund manager like Mr. Swensen delivers a 16% return every year. I guess it is rather difficult to expect ourselves to achieve, say, 20%.

You may also refer to our "When and How to Invest" workshop for more details.

What I will do

  • Daily: monitor the portfolio
  • Weekly: review portfolio and update chart / investment return data
  • Monthly: rebalance portfolio
  • Yearly: decide whether the asset allocation needs to be adjusted based on macro trends
I will explain the reason of picking each of these ETFs in the next post.


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