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This is a question about "Personal investing and asset allocation".

About me:

  • I earn more than I spend
  • I may retire in 15 or 20 years, and I have savings to be invested in something or managed somehow until then
  • I'm a computer programmer with a Math degree, but I'm not a finance professional/expert

In the past, people have encouraged me to invest in 'mutual funds', and I haven't been impressed with the result: I was invested during the dot-com crash, and again during the downturn of a year or two ago, and found that the supposedly 'managed' mutual funds still lose value during a down-turn (which is disappointing) and also don't go up as much as the ordinary stock market index during an upturn (also disappointing).

So I was wondering about something different: index funds, instead of mutual funds. Preferably low-cost, and diversified; and possibly small-cap, if those have a better-than-average yield.

Is something like the "The Über–Tuber" listed at the bottom of http://canadiancouchpotato.com/model-portfolios/ a sensible investment choice for me? What should I beware of, and what's the disadvantage of that as a strategy?

ChrisW
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2 Answers2

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I think you're on the right track with that strategy. If you want to learn more about this strategy, I'd recommend "The Intelligent Asset Allocator" by William Bernstein.

As for the Über–Tuber portfolio you linked to, my only concern would be that it is diversified in everything except for the short-term bond component, which is 40%. It might be worth looking at some portfolios that have more than one bond allocation -- possibly diversifying more across corporate vs government, and intermediate vs short term. Even the Cheapskate's portfolio located immediately above the Über–Tuber has 20% Corporate and 20% Government.

Also note that they mention:

Because it includes so many funds, it would be expensive and unwieldy for an account less than $100,000.

Regarding your question about the disadvantages of an index-fund-based asset allocation strategy:

  • It requires discipline to execute. If you let your actual allocation stray too far from the target allocation, you don't get all of the advantages of diversification.
  • If you select the wrong allocation you can end up with poor performance. As a rough general rule, the more poorly correlated assets you assemble into your portfolio, the lower risk you can expect for a given expected return.
  • Discipline again: if one of your assets takes a dive and you panic, sell, and let the money sit in cash, then you lose out on gains when that asset recovers in price. It takes experience and discipline to be able to buy stocks during times like November 2008 or October 2001.
bstpierre
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You can simply stick with some index funds that tracks the S&P 500 and Ex-US world market. That should provide some good diversification. And of course, you should always have a portion of your money in short/mid term bond fund, rebalancing your stock/bond ratio all the way as deemed necessary.

If you want to follow the The Über–Tuber portfolio, you'd better make sure that there's minimum overlapping among the underlying shares that they hold.

ASF
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