If you have been heavily invested in U.S. stocks, likely your portfolio has
performed extremely well of late, particularly since Donald Trump's surprising
win in the presidential election. Following an initial overnight drop in
futures in the early-morning hours on November 9, the markets rocketed upwards
once they opened and, more or less, have not stopped since. At their closing
prices on March 31, the Dow was up 12.7%, the S&P 500 up 10.4% and the
Nasdaq up a whopping 13.8% from their respective closing prices on November 8,
2016.
At the same time, while the Nasdaq managed a small gain in March, both the
Dow and S&P 500 actually declined slightly for the month. Several market
commentators have discussed the stretched valuations in U.S. stocks. Additionally,
a combination of increased utilization of technology, aging populations in the
developed world, and the rise of globalization point to a high probability of
muted returns for the remainder of the year, and indeed possibly several years
into the future.
Positioning Your Portfolio
Given all of this, how should an investor with a moderate risk profile, and
for whom capital preservation must be balanced against the possibility of
future returns, manage their portfolio?
In a recent note to financial advisors, Vanguard offered some suggestions.
While the note did not list exact percentages, I did some extrapolating and
came up with the following:
As can be seen, diversification is the key. Based on recent strong U.S.
returns, domestic stocks are fairly moderately weighted in the portfolio, with
foreign stocks assuming a key role. Risk in these areas is managed by an
allocation to both domestic and foreign bonds, with a small allocation to TIPS
for a little inflation protection, in case growth comes in a little higher than
the expectation for 'muted returns.'
Suggested ETFs
Of course, one easy way to implement an overall portfolio strategy is to use
ETFs to do so. These tools allow you to get very precise with your allocations,
ensuring diversification while keeping costs low.
Domestic Stocks - A simple way to get exposure to the overall U.S.
stock market is to select a quality total-market ETF. My favorites are the
Vanguard
Total Stock Market ETF (VTI), the
iShares Core S&P Total U.S. Stock
Market ETF (ITOT), and the
Schwab U.S. Broad Market ETF (SCHB). All
of these ETFs have expense ratios of .05% or less, assets under management
(AUM) in the multiple billions of dollars, and even offer commission-free
trading depending on your choice of brokerage. Please see this detailed
review
and comparison if you are interested in diving in a little deeper.
If you wish to focus on large-cap stocks, while still getting solid exposure
to the U.S. market, you might also consider a
top-quality
S&P 500 ETF.
Foreign Stocks - To venture abroad, your simplest option is to select
a quality international total-market ETF. My favorites are the
iShares Core
MSCI Total International Stock ETF (IXUS),
Vanguard FTSE All-World ex-US
ETF (VEU), and the
Vanguard Total International Stock ETF (VXUS).
Again, I offer a nice
review
and comparison for those who wish to dig a little deeper.
Bonds - An easy way to get broad overall coverage of the U.S. and
foreign bond markets is via the
Vanguard Total Bond Market ETF (BND) and
the
Vanguard Total International Bond ETF (BNDX). I cover BND
here
along with a couple of worthy alternates. I have not yet had a chance to do a
detailed review of BNDX, but it offers exposure to several countries, with the
greatest exposure being to Japan, France, Germany, Italy and the United
Kingdom. A majority of the fund’s investments are in sovereign bonds with AA
rating or better.
TIPS - My recommendation here is the
iShares TIPS Bond ETF (TIP).
With $23 billion in AUM, it offers a solid basket of TIPS along with great
tradeability.
Summary and Conclusion
With the U.S. market at or near all-time highs, now is a good time to give a
little thought to whether your portfolio is
as
well diversified as it should be. Given the current level of political and
other uncertainty in the world, unless you feel you have a crystal ball as to
how this will all play out, it pays to ensure you have built a portfolio that
will deal well with a variety of potential future outcomes.
What are your thoughts? Please feel free to start the discussion in the
comments section below.
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