Diversification is one of the most important things to get right when managing a portfolio.
When done properly, diversification can increase the rate of return you can expect from a given amount of total risk, or decrease the risk required to achieve a given rate of return.
When some assets are rising in price, usually other ones are declining, which creates opportunities for contrarian investors to cycle capital into those undervalued assets.
In my opinion, having a small allocation to precious metals like gold and silver is a useful part of diversification, because they are partially uncorrelated with stocks and bonds and have different and unique risks and opportunities.
There may be times where a larger allocation is tactically useful as well.
Aggressive portfolios potentially offer higher-returns, but in exchange for more volatility and risk. Conservative portfolios typically have lower volatility and can protect capital more reliably. This usually comes down to how large their stock allocation is, and what types of stocks they have.
The sample portfolios (only given as examples, not recommendations, please do your own research!) below share certain traits that are not common in other popular model portfolios. Namely, they all have a small gold allocation, they all overweight emerging markets to varying degrees (because that’s where most global growth is coming from currently and over the next few decades), and they all use some factor ETFs to enhance stock quality for a portion of the portfolio.
All three portfolios have very low total expense ratios, ranging from 0.10% to 0.12%. This is because they use a variety of low-cost ETFs, but any platform commissions or fees will need to be taken into account.
One is rather aggressive, one is somewhat conservative, and one is moderately in the middle.
Aggressive Portfolio
This aggressive portfolio has 80% invested in a variety of equity funds, 10% in bonds, 5% in real estate, and 5% in gold.
The portfolio has 45% in U.S. equities, with 35% being in the broad Vanguard Total Stock Market ETF (VTI), and another 10% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength.
Then, it has 35% in foreign equities, including 15% in emerging markets (VWO), 10% in developed markets (VEA), and 10% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 10% in bonds (BND), 5% in gold (IAU), and 5% in real estate investment trusts (REITs (VNQ)).
Moderate Portfolio
This moderate portfolio has 70% invested in a variety of equity funds, 20% in bonds, 5% in real estate, and 5% in gold.
The portfolio has 40% in U.S. equities, with 30% being in the broad Vanguard Total Stock Market ETF (VTI), and another 10% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength.
Then, it has 30% in foreign equities, including 15% in emerging markets (VWO), 10% in developed markets (VEA), and 5% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 20% in bonds, 5% in gold, and 5% in real estate equity trusts (REITs).
Conservative Portfolio
This conservative portfolio has 60% invested in a variety of equity funds, 26% in bonds, 7% in real estate, and 7% in gold.
The portfolio has 39% in U.S. equities, with 25% being in the broad Vanguard Total Stock Market ETF (VTI), 7% being in the iShares MSCI Quality Factor ETF (QUAL), which filters companies for earnings stability and balance sheet strength, and 7% invested in the dividend aristocrats ETF (NOBL) which is equally-weighted into companies with 25+ year streaks of consecutive annual dividend growth.
Then, it has 21% in foreign equities, including 7% in emerging markets (VWO), 7% in developed markets (VEA), and 7% in an international dividend growth fund (VIGI).
Lastly, the portfolio rounds out its diversification with 26% in bonds, 7% in gold, and 7% in real estate equity trusts (REITs).
If you want to generate a higher investment income yield from a conservative portfolio, then adding some safe high dividend stocks can potentially help.
How Aggressive/Conservative Should You Be?
Figuring out how aggressive or conservative you should be is probably the single most important investment decision you can make. It dictates everything else and has a major impact on your investment returns and volatility.
These portfolios can be used as starting points, but you may want to tailor them to your unique goals, preferences, and needs.
No portfolios are perfect, but these model portfolios reduce some of the problems I see with a lot of common portfolios. Mainly, they spread out international equity allocations rather than concentrate them into slow-growth high-debt countries (which most international funds do), they include some quality factors to avoid pure market-cap weighting, and they include small allocations to gold and real estate.