Comparisons of Different EFT Portfolio Models
One "rule of thumb" for portfolio composition is to have the bond part of your portfolio equal to your age. For example, if you're 70 years old, then 70 percent of your portfolio should be in bonds. I don't follow this "rule."
First, let's define portfolio for the purpose of this article. It is a collection of stocks, bonds, and other assets with the goal of sustaining a person in retirement. That is the goal of the portfolio: to supplement a retiree's income without running out of money. The amount of the portfolio depends on the needs and goals of the individual.
There are hundreds of "rules" for portfolios. They can be simple, or complicated. Very popular currently with financial managers is Modern Portfolio Theory, which is based on mean-variance analysis, a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. Wow. What a mouthful.
Ever since I studied finance in graduate school, which is heavily based on statistical models, I have a problem with the methods for estimating expected rate of returns. Change the model -- or the expectations -- and you'll have different results. Predicting the future is hard, or impossible. If you expect returns of 10 percent next year, you'll definitely make different decisions than if you expected a negative return of 10 percent.
Stay fully invested. Rebalance your portfolio. Diversify. You can't time the market. These are the mantras of financial "experts," including my own stock broker. (However, there are a few who don't follow these adages: One is Ken Moraif of Retirement Planners of America, and author of Buy, Hold, and Sell.
While there are certain principles of financial management that have held true for thousands of years, your own portfolio should be based on your own goals and financial plan. Having written goals and a written plan are two of the age-test financial principles.
Let's get to the point of all this: constructing a portfolio that works. While there a probably a hundred ways to do this, I have selected a few portfolios to test. I think planning your portfolio rather than just investing in things that seem "hot" at the time will bring you better returns, and probably less anxiety.
I've constructed a couple of test portfolios out of ETFs. What you invest in can be tricky. Just buying an ETF that tracks an index, such as the S&P500 might be one strategy, but different indexes have greatly different returns. Compare these sector areas with the actual returns of the major indexes, year-to-date (2020): S&P500: 14.81%; DJIA: 5.75%; NASDAQ: 42.16%; Russell 2000: 18.07%.
|At market bottom: Dec. 18, 2019 - March 20, 2020|
|Buy and hold: Dec. 18, 2019 - Dec. 21, 2020|