I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
- Portfolio 1: Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or iShares Core Growth Allocation ETF (AOR) -- a globally-diversified balanced index portfolio, appropriate for investors of all ages and all wealth levels, or
- Portfolio 2: A carefully-chosen all-in-one globally-diversified index fund or ETF with a gliding or fixed asset allocation based on the investor's preferences -- low-cost Target Retirement / Target Date index fund (various providers), Vanguard LifeStrategy fund (VASGX 80/20 stocks/bonds, VSMGX 60/40 stocks/bonds, VSCGX 40/60 stocks/bonds, or VASIX 20/80 stocks/bonds), or iShares Core Allocation ETF (AOA 80/20 stocks/bonds, AOR 60/40 stocks/bonds, AOM 40/60 stocks/bonds, or AOK 30/70 stocks/bonds)
* They aren't available for free, if they're available.
As a consequence, I think that portfolio 1 is a very good default portfolio for investors of all ages and all wealth levels. This includes experienced investors who have finally realized the importance simplicity as well as the futility of trying to engineer a better portfolio, accumulating investors who want to spend their life doing other things than worrying about their portfolio, and even new investors who don't know how to choose an asset allocation. It has a fixed 60/40 stocks/bonds allocation. It's very broadly-diversified, currently holds over 25,000 securities. It's actually a very good practical proxy for Bill Sharpe's ideal Market Portfolio adapted for a U.S. investor with a moderate home bias.
Investors who desire a specific gliding or fixed asset allocation can go with portfolio 2 and choose among the various available all-in-one index funds and ETFs. This is somewhat more complex than portfolio 1 as it requires making more assumptions about assets and about the investor's preferences.
I think that these funds and ETFs are good enough to be used as a single identical investment across all of the investor's accounts (Traditional, Roth, ..., and even taxable).
I think that most tax-efficient fund placement arguments against using such funds in a taxable account are flawed because they usually ignore tax-adjusted asset allocation which is justified by mathematics:
In particular:Bogleheads wiki wrote:Your ability to take risk is determined by the consequences of losses; losing $100K in your Roth IRA will reduce your standard of living (or require more additional savings to keep the same standard) by more than losing $100K in your traditional IRA or taxable account does.
- Most analyses ignore the long-term impact of asset location. For example, while bonds get most of their growth from coupons which attract immediate taxes, unlike stock capital gains which are only taxed when realized often decades later (leading simple analyses to conclude that one should prioritize bonds over stocks in tax-advantaged accounts), a long-term view can reveal that the generally faster growth of stocks might lead to more taxes when stock dividends in taxable grow to more than bond interest in tax-advantaged. Also, prioritizing the placement of a slower growing asset in tax-advantaged leads to a slower growth of tax-advantaged space relative to the size of the entire portfolio.
- Most analyses ignore that rebalancing reduces the impact (good or bad) of prioritizing the location of specific assets into specific accounts.
- Most analyses ignore the tax advantage of rebalancing with the cash flows of other investors when using a balanced fund or ETF in a taxable account.
- Most analyses ignore that future tax laws could change, that future investor circumstances could change, and that the best asset location strategy can only be known after the fact.
** A mirrored asset allocation is inherently tax-adjusted.
The use of a single identical all-in-one index fund or ETF in all accounts greatly simplifies a portfolio, eliminates the need to rebalance, and sidesteps a long list of potential behavioral pitfalls. Many investors are likely to lose more to behavioral pitfalls with separate funds or ETFs than to save in taxes even when they're lucky enough to select an asset location strategy that beats the mirrored one (unforeseeable) in their specific long-term investing time frame.
My personal preference is for portfolio 1, representing a globally-diversified lifelong 60/40 stocks/bonds allocation because I consider that all investment assets are risky, but in different ways. I think that it's best to broadly diversify across them all lifelong***.
*** In retirement, combining variable portfolio withdrawals with Social Security (possibly delayed to age 70) and a pension (if any) often results into mild total income fluctuations. When necessary, Total Retirement Income fluctuations can be further dampened by using a small part of the portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA) instead of increasing the bond allocation above 40%.
Added: Here are links to additional posts:
- A mirrored asset allocation is good enough in presence of a taxable account : proof and explanation.
- So-called "tax-efficient" asset location strategies are a mirage; they silently increase after-tax risk (proof). In contrast, a mirrored allocation strategy delivers outcomes which are consistent with the chosen asset allocation, before and after tax, regardless of future asset returns, future tax law changes, and future investor circumstance changes: post 1 (data 1), post 2 (data 2), and post 3 (data 3).
- The simplest way to fully embrace this site's philosophy is to combine the One-Fund Portfolio with the VPW worksheet.