Monday, January 09, 2006

My Model Long-Term Portfolio Allocation

I have come up with a good long-term portfolio allocation that I believe will return somewhere around 11-13% over the long haul while providing solid dividend income. The model portfolio includes 100% stocks (no bonds) and includes both foreign and domestic stocks, as well as several styles of domestic stocks. I have a preference for low-cost mutual funds in my model portfolio so that I can avoid paying commissions when making purchases.

Going forward, I intend to maintain the % allocation listed below. To do so I will take all of the dividends I receive from each investment and invest these dividends in investments that are underweighted at the time. I will also invest all new money I am putting into the market into the underweighted investments.

My model portfolio is as follows:

22.000% VFINX
15.700% VIMSX
12.950% VDMIX
12.075% VISVX
12.075% NAESX
8.050% EEM
6.250% QQQQ
4.900% DVY
3.500% TRF
2.500% XLF

VFINX is the Vanguard Index 500 mutual fund that tracks the S&P 500 index. I chose this index for the model portfolio because it is primarily a diversified large cap domestic index of both value and growth stocks. VFINX is the largest S&P 500 index mutual fund and currently has a low expense ratio of about 0.18%. Once I have $100,000 invested in VFINX, I will contact Vanguard and have them switch my shares over to their Admiral class, which has a lower expense ratio of around 0.09%.

VIMSX is the Vanguard Midcap Index mutual fund. It tracks the MSCI US Mid Cap 450 Index, a broadly diversified index of the stocks of medium-size U.S. companies. Midcap stocks have historically returned about 1% more annually than large company stocks, but they are also more volatile. VIMSX has one of the lowest expense ratios around (about 0.22%) for a midcap index fund.

VDMIX is the Vanguard Developed Markets Index mutual fund. It tracks the performance of the MSCI EAFE index. As I wrote in a previous post, the MSCI EAFE index is the "S&P 500 index" of foreign stocks. With the current U.S. trade deficit being as large as it currently is, I believe that foreign stocks will almost certainly return more than U.S. stocks over the next 30 years or so as the global trade imbalances eventually correct themselves. VDIMX has one of the lowest expense ratios around (about 0.19%) for any foreign stock index fund.

VISVX is the Vanguard Small Cap Value Index mutual fund. It tracks the performance of a benchmark index that measures the investment return of small-capitalization value stocks. As I have previous written, small cap value stocks perform extremely well over the long haul, even though they can be volatile over short periods of time. Small cap value stocks also provide decent dividend income which can somewhat ensure that such companies don't waste their cash on foolish investments because the dividend payments must be paid out to shareholders. VIMSX has one of the lowest expense ratios around (about 0.23%) for any small cap value index fund.

NAESX is the Vanguard Small Cap Value Index mutual fund. It tracks the performance of the MSCI US Small Cap 1750 Index, a broadly diversified index of the stocks of smaller U.S. companies. NAESX has one of the lowest expense ratios around (about 0.23%) for any diversified small cap index fund.

EEM is the iShares Emerging Market Index ETF. Vanguard has an Emerging Markets Index mutual fund, but Vanguard charges an outrageous load of .5% whenever a purchase or sale is made. That is why I prefer this iShares ETF. EEM tracks the MSCI Emerging Markets Free Index, an index of stocks in various emerging markets such as India, China, Russia, Brazil, Mexico, Taiwan, South Korea, and South Africa. Emerging markets can be extremely rewarding (EEM is up around 200% since April 2003), but they are also very volatile.

QQQQ is the Nasdaq 100 ETF which tracks the Nasdaq 100, an index of the 100 largest non-financial stocks traded on the NASDAQ stock market. It is heavily weighted with technology stocks and is extremely volatile. However, over the long haul it should provide a higher return than the S&P 500.

DVY is the iShares Dow Jones U.S. Select Dividend Index Fund, an index of stocks exhibiting positive dividend-per-share growth rates over the past five years and dividend payout ratios below 60%. DVY currently has a dividend yield of around 3%.

TRF is the Templeton Russia & East European Fund, a closed end fund that invests in companies in the emerging markets of Russia and Eastern Europe. Russia and Eastern Europe are supposed to expand their economies much faster than the U.S. over the next 30 years and should be a good place to invest. As I have previously written, I chose to invest in TRF because there is no good ETF investing directly in this region.

XLF is the SPDR Financial components, i.e., an ETF of the financial stocks in the S&P 500 index. XLF provides good dividend income and has a relatively low expense ratio (~0.26%).

1 comment:

Jim said...

NAESX is the Vanugard Small Cap index fund, not the Small Cap Value index fund as I incorrected listed above.