How to create a simple, balanced ETF portfolio in 3 steps

Customizing a portfolio today is different, but not difficult

This is the point of the investment market cycle where fortunes are made and lost. And sometimes, both by the same person, one directly to the other. That’s because markets that emerge most of the time lead to self-control.

And, with satisfaction you get satied. You feel like what you have done in the past in the future. This includes both what you invest in on a broad level (your “asset allocation”) and the securities you select in those different parts of your investment pie.

Is it that easy? (part 1) NO.

But is that all that is needed? In historically long bull markets, with the Federal Reserve protecting investors from all traditional diseases? Yes. It’s relatively simple. As they said, an increasing tide is taking up all the boats.

And, as I have written many times in this space, the current market environment is FULL of deception. The rich get richer, in that money flows into S&P 500 Index Funds. That popular strategy becomes a kind of group thinking. And for a while, it blinds you to the fact that the broader stock market has been weak for more than 2 years.

How can your future investment be rightfully sized?

All this to say that investing does not have to be difficult. ALSO, There is a great deal of risk involved in simplifying the process.

I do not have the space here to detail all the problems with this, so I will try to do it piece by piece in this column. What I can do here is give you the tip of the iceberg, in a good way.

That is, I can take the basic approach that many people use to invest their savings in their lives, tell them how it is full of risk after years of success, and suggest an alternative. That, at least, is a start.

The 3-ETF portfolio

I will assume that you have switched from mutual funds to ETFs. But you can also apply this to mutual funds.

A very popular strategy is a 3-fund portfolio. It goes something like this: buy a US index fund, buy an international index fund, buy a bond fund. Then rest comfortably as the markets rise and bring you to retirement.

Is it that easy? (part 2). STIL NO.

This works great in volatile stock and bond markets, which we have more often than not had in the lives of today’s investors. However, we have reached the point of the long cycle of markets where bonds and stocks may not behave as we are used to seeing them.

In particular, bonds are likely to be a zero- or negative-yield class for a while. Rates on securing everything nearby in the tire world are virtually zero. So, the math is decided against you.

Equities are the ‘obvious’ counterpart to bonds, but in a vast, narrow market executed by only a handful of equities, this also runs the risk of breaking. A correction is a bump in your road. But a bear market can last from now until well into your retirement. That is not a given. But it is certainly a risk to take!

The 3-ETF portfolio: an intro

I’ve been this for a long time. I remember when theories for allocating assets were first sent to the investing public by academics. That I believe I know the strengths and weaknesses of them.

The biggest weakness is the bond part. It is DOA (without attractiveness). There is not much to like in bonds as a long-term investment at these rate levels. Sa put buy-and-hold bonds that invest on the board for a while. You will not miss much income, and the main fluctuations can eventually become uncomfortable.

Acts, however, will be volatile. That’s how it works. And there is no such thing as “stocks with low volatility.” There are stocks and stock market segments that have lower volatility than others. But if you are with 30% instead of 40%, do you feel great? I doubt it.

Tie it together

Sa the first 2 legs of your 3-legged portfolio are a core stock ETF, and an ETF that highlights the risk of major stock declines. For the time being, I will leave the details of those to future articles. That’s just letting go for now. Equity portfolio, hedge portfolio. Right there, you have cut some volatility and improved your chances of success, rather than owning bonds or bond funds, in the long run.

That leaves the third piece. This is the most esoteric, because it involves some work. Or you can outsource this part. Anyway, the goal is to find a fund that is ‘tactical’. That is, it does not sit still and let “the market” happen.

It can rotate market segments as sectors, it can be an asset allocator (so if short-term bonds make sense, they can be included). This is part of a portfolio that just hasn’t been much needed for the last 10 years. But with hedge funds, computerized trading systems, a recession, Covid, and all the other things out there right now, investing is different.

So the stock and hedge portfolio combine with the tactical piece. That is your portfolio for 3 parts, so to speak.

Be customized!

All of this does not mean you should leave the simplicity, as that is what you favor in your portfolio. It also does not mean that you have to source everything you own.

However, it is the duty of every investor, professional or otherwise, to take into account the climate in which we are, and to adapt their investment strategy to the realities of today. I will give more detail on this concept in the coming weeks. Feel free to “ping” me with questions in the meantime.

Comments are informal only, not individual advice or investment recommendations. Sungarden provides advisory services through Dynamic Wealth Advisors.