How To Create A Simple, Balanced ETF Portfolio In 3 Steps – Forbes

Constructing 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 right after the other. That’s because markets that rise most of the time lead to complacency.

And, with complacency, you get satiated. You feel like whatever you have been doing in the past will work in the future. That includes both what you invest in at a broad level (your “asset allocation”) and the securities you select within those different slices of your investment pie.

Is it that easy? (part 1) NO.

But is that all it takes? In historically-long bull markets, with the Federal Reserve protecting investors against all traditional ills? Yeah. It is relatively straightforward. As they say, a rising tide lifts all boats.

And, as I have written in this space many times, today’s market environment is VERY deceiving. The rich get richer, in that money flows into S&P 500 Index funds. That popular strategy becomes a sort of group-think. And for a while, it blinds you from the fact that the broader stock market has been weak for over 2 years.

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This is all to say that investing does not have to be difficult. HOWEVER, there is a major risk of oversimplifying the process.

I do not have the space here to detail all of the issues with this, so I 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 many folks use to invest their life’s savings, tell how it is fraught with risk after years of success, and suggest an alternative. That’s at least a start.

The 3-ETF portfolio

I am going to assume that you have moved on from mutual funds to ETFs. But you can apply this to mutual funds as well.

A very popular strategy is a 3-fund portfolio. It goes something like this: buy a U.S. Index fund, buy an International Index fund, buy a bond fund. Then, rest comfortably as the markets rise and get you to retirement.

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

This works great in bull markets for stocks and bonds, which we have had more often than not during the lifetime of today’s investors. However, we have reached the point of the long-term market cycle where both bonds and stocks may not behave the way we are used to seeing them.

In particular, bonds are likely to be a zero or negative return asset class for a while. Rates on anything close to secure in the bond world are practically nil. So, the math is decidedly against you.

Stocks are the “obvious” counterpart to bonds, but in a stretched, narrow market that is being carried by just a handful of stocks, that too is at risk of breaking. A correction is a bump in your road. But a bear market can last from here to well into your retirement. That’s not a given. But it sure is a risk to account for!

The 3-ETF portfolio: an intro

I have been at this a long time. I remember when asset allocation theories were first thrust on the investing public by academics. So I believe I know the strengths and weaknesses of them.

The biggest weakness is the bond portion. It is DOA (devoid of attractiveness). There is little to like in bonds as a long-term investment at these rate levels. So put buy-and-hold bond investing on the shelf for a while. You won’t be missing out on much income, and the principal fluctuations could eventually become uncomfortable.

However, stocks are going to be volatile. That’s how it works. And there is no such thing as “low volatility stocks.” There are stocks and stock market segments that are low-er volatility than others. But if you are down 30% instead of 40%, do you feel great? I doubt it.

Tying it together

So the first 2 legs of your 3-legged portfolio are a core stock ETF, and an ETF that hedges the risk of major stock market declines. For brevity, I will leave the details of those to future articles. So for now, just let the concept sink in. Stock portfolio, hedge portfolio. Right there, you have cut some volatility and improved your chances of success versus owning bonds or bond funds, long-term.

That leaves the third piece. This is the most esoteric, as it involves some work. Or, you can outsource this part. Either way, the goal is to find a fund that is “tactical.” That is, it doesn’t sit still and let “the market” happen.

It might rotate market segments or sectors, it might be an asset allocator (so that when bonds make sense for short periods of time, they can be included). This is a part of a portfolio that just was not needed much the last 10 years. But with hedge funds, computerized trading systems, a recession, Covid, and all the other things out there now, investing is different.

So the equity and hedge portfolio combine with the tactical piece. That’s your 3-piece portfolio suit, so to speak.

Be Adaptive!

All of this does not mean you have to abandon simplicity, if that’s what you favor in your portfolio. It also does not mean you have to uproot everything you own.

However, it is incumbent upon any investor, professional or otherwise, to take account of the climate we are in, and adapt their investment strategy to the realities of today. I will provide more detail on this concept in the coming weeks. Feel free to “ping” me with questions in the interim.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.

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How To Create A Simple, Balanced ETF Portfolio In 3 Steps – Forbes

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