Have you ever wondered if there is a strategy to invest for several decades on the road, that it is consistent, quiet, and does not give much work?
Much of the answer is in this post.
I’ll post here an article from Market Watch and comment on it.
Here’s the link: http://www.marketwatch.com/story/the-ultimate-buy-and-hold-portfolio-2016-02-18?dist=lcountdown&link=sfmw_fb
THE ULTIMATE BUY-AND-HOLD PORTFOLIO
“Ultimate” is not a term to toss around lightly. But in this case, it fits. I believe the investment portfolio is the best way to achieve long-term growth in the stock markets.
My view is based on the very best academic research of which I am aware, as well as my own experience working with thousands of investors over the past half century.
Fortunately for you, you do not have to take my word for it. I’ll show you the evidence.
I can describe this portfolio briefly: The “ultimate” portfolio starts with the S & P 500 Index, then adds small and equal portions of nine other carefully selected the US and international asset classes, each one being an excellent long-term vehicle for diversifying.
When it’s inquiry.c done, the result is a low-cost portfolio with massive diversification cue will take advantage of market opportunities wherever They are, and at no more risk than that of the S & P 500 SPX + 0.00%
I’ll roll this out in steps rather than all at once. That way, you’ll see how it goes together.
The base “ingredient” in this portfolio is the S & P 500 Index, which is a very decent investment by itself. For the past 46 calendar years, from 1970 through 2015, the S & P 500 compounded at 25.9%. An initial investment of $ 100,000 would have grown to $ 5.86 million.
For the sake of our discussion, think of this index the Portfolio 1. It’s not bad, and you could do a lot worse than just adopting this simple asset class.
But you can do the whole lot better, too. You take the first small step by adding large-cap value stocks, Que ones are Regarded the underpriced Relatively (hence the term value).
(The links above, and others below are specific articles from 2015 that focus on each asset class.)
By moving only 10% of the portfolio from the S & P 500 into large-cap value stocks (Thus leaving the other 90% in the S & P 500), you create what I call Portfolio 2.
Although only 10% of the portfolio has changed, the 46-year return changes a lot. Assuming annual rebalancing (an assumption that applies throughout this discussion), the 9.66% compound return of Portfolio 2 was enough to turn $ 100,000 into $ 6.95 million.
In dollars, that’s an 18.5% increase over the index itself – the result of changing only one-tenth of the investments. The Following commission-free ETFs are available at either Vanguard, Fidelity, Schwab or TD Ameritrade: iShares Russell 1000 Value ETF IWD, -0.18% Vanguard Russell 1000 Value ETF VONV, -0.25% iShares Core US Value ETF IUSV, -0.14% and Schwab US Large-Cap Value ETF SCHV, -0.25%
In the next step, we build Portfolio 3 by putting another 10% into US small-cap blend stocks, decreasing the weight of the S & P 500 to 80%. Small-cap stocks, BOTH in the US and Internationally, have a long history of higher returns than the S & P 500. Here are my recommended small-cap blend ETFs: Vanguard S & P Small-Cap 600 ETF VIOO, + 00:49% iShares Core S & P Small -Cap ETF IJR, +% 0:40 Schwab US Small-Cap ETF SCHA, +% 00:31
This change boosts the compound return of the portfolio to 9.81%; An initial $ 100,000 investment would have grown to $ 7.4 million – an increase of $ 1.54 million (or 26.3%) compared with Portfolio 1.
Taking one more step, we add 10% in US small-cap value stocks, reducing the influence of the S & P 500 to 70%. Here are my recommended small-cap value ETFs: Vanguard S & P Small-Cap 600 Value ETF Vanguard S & P Small-Cap 600 Value ETF VIOV, + 00:13% iShares S & P Small-Cap 600 Value ETF IJS, + 00:14% iShares Russell 2000 Value ETF IWN , + 00:28%
Small-cap value stocks historically Have Been the most productive of all major US asset classes, and They boost the return of compound Portfolio 4 to 10.23%, enough to turn cue initial $ 100,000 investment into $ 8.82 million.
Compared with Portfolio 1, that’s a dollar increase of about 51%, while still leaving more than two-thirds of the portfolio in the S & P 500. To my mind, that’s a mighty fine result.
In the next step, creating Portfolio 5, we invest another 10% of the portfolio in US REITs funds. Result: a compound return of 10.36% and an ending cash value of $ 9.32 million. Here are my recommended REIT ETFs: Vanguard REIT ETF VNQ, + 0.57% Fidelity Real Estate Index ETF MSCI Frel, + 0.24% Schwab US REIT ETF Schh, + 0.65%
Let’s pause for a moment to recap.
- First, Portfolio 5’s increase in return on Portfolio 4 was less than 0.2%, but over 46 years it produced an additional half a million dollars. This is a lesson I hope you will not ever forget: Small differences in return, given enough time, can add up to huge differences in dollars.
- Second, every one of these portfolios, 2 through 5, had a lower standard deviation, thus less risk, than the S & P 500 Index. Higher returns came bundled with lower volatility. I think it has to be a win-win.
Some investors may want to stop here and do not invest in international stocks. If that’s the limit of your comfort level, that’s fine. The combination of asset classes in Portfolio 5 is an excellent one that I expect will do well in the future.
But I believe that any portfolio worth being described as the “ultimate” must venture beyond the US borders. And the rewards are definitely there.
Accordingly, in building the ultimate equity portfolio I add four important international asset classes: international large-cap blend stocks, international large-cap value stocks, international small-cap blend stocks and international small-cap value stocks.
Giving each of these to 10% reduces the influence of the S & P 500 to 20%. If that sounds frightening, think about this: Over 46 years, that increased the compound return to 11.1%, and the portfolio value to $ 12.61 million.
That is more than double the payout from the S & P 500 alone. And Portfolio 6 produced quo result while reducing risk.
The end step, Resulting in Portfolio 7, is to add 10% to emerging markets stocks, representing countries with expanding economies and prospects for rapid growth.
This increases the compound return to 11.28% and the final dollar payout to $ 13.65 million. It is only this last step that increases volatility above that of the S & P 500. That increase, by the way, is so slight that it would most likely never be noticed.
You will find these figures and more details in Table 1. Incidentally, all these performance figures assume an investor paid at 1% annual management fee. That assumption is probably more than adequate to cover the expenses of investing in these asset classes through mutual funds or ETFs.
This ultimate combination, Portfolio 7, is a result of my long-standing commitment to finding higher expected rates of return without taking additional risk.
Investors who build this portfolio using low-cost index funds, as I recommend, do not rely on anybody’s ability to choose stocks or make any short-term economic predictions.
The perceptive reader will no doubt have noticed that all these performance statistics are based on the past. I am often asked if I expect to return to the future.
Obviously, the only honest answer is that I can not know.
However, every academic I’m familiar with expects that, over the long term, stocks will continue to have higher returns than bonds, small-cap stocks will continue to have higher returns than large-cap stocks and value stocks will continue to have higher Returns than growth stocks.
I believe these are reasonable expectations, and Portfolio 7 is the best way I know how to put them to work for you.
For more on this combination of Investments, check out my podcast ” 10 lessons from the ultimate buy and hold portfolio .”
Finally, it is important to note that most investors should include fixed-income funds in their portfolios. Just how much is a very important question with an answer that depends on several important factors. I’ve written about that topic before and I’ll tackle it again in the coming weeks.
Richard Buck contributed to this article.
Market Watch is a very cool site with lots of high quality information. Come on.
We have seen that investing in ETFs in the US or by an international brokerage firm is feasible and simple. This study shows that each different asset class reduces your risk, the Sharpe index increases diversification and returns are even better.
A lot of people only think about buying the SP500 ETF (which we have in Bovespa, it’s the IVVB11) is enough to diversify abroad. The most complicated step is to be able to open an account and transfer funds to the brokerage abroad, done that the rest is simple just like here. This is a simple and passive investment strategy for the long term or infinite term as I call it, or rather, simply term-free.
Instead of investing everything in SP500, the author tested 7 hypotheses: 100% SP500, 90% SP500 + 10% large capital, 80% SP500 + 10% large value + 10% small cap, repeats and places 10% more small Cap, then 10% REITS, then + 10% international.
From the table, it is very simple to understand the difference between the studies.
Look at the last column in the first table, it is the most diversified portfolio possible, what most appreciated (what, do not they say that diversification worsens the results?) – here an MYTH falls.
This portfolio 7 that has a return of 11.28% per year (in dollars) proved to be excellent, remember that US inflation is around 3-5% per year, so they averaged 6-9% Year bigger THAN INFLATION, that was the return, it’s more or less what the notorious Treasury Direct titles promise you.
Not to mention that these ETFs pay dividends (but do not expect too much, it’s somewhere between 2-4% a year, with REITs ETF being 4%). So what do you think? Is it better to be diversified into THOUSANDS OF FIRMS and REAL ESTATE RENTALS in the first world by receiving strong currency and stellar diversification dividends or relying solely on the payment of the title of a third world country with a weak currency and high and sometimes fraudulent inflation?
The idea of this article is more or less what I already thought of my planned strategy. I will consider my investments in Brazil as being part of shares abroad and put some 20% in 28 shares of bovespa, 20% in SP500, 20% of REITs ETF, 10% ETF Switzerland, 5% Hong Kong, 5% Singapore , 10% Real Estate Fund in Brazil (20 different) and 10% fixed income in Brazil (TD) mainly, plus 12 months of paid accounts divided into savings, DI fund with daily liquidity and LFT.
This my emergency reserve does not enter into the 100% account of my capital and my physical real estate. You see, I’m protected in the US dollar (20%), Swiss franc (10%), Hong Kong dollar and Singapore (5% each) – (these two represent and sell all Asian companies including China and the Pacific ) And I will have income and cash flow in Fiji from here in Brazil and the US and also in fixed income.
One of my few doubts is if I divide this 20 % of the SP 500 into 10% SP500 and 10% shares of American companies or of other countries, this I will solve gradually.
My table of my portfolio under construction:
20% Bovespa stock
10% RF Brazil (TD)
20% REITs ETF
10 ETF% Switzerland
5% Hong Kong
See that I got very focused with 40% in Brazil but with time and the increase of my age and the equity I am decreasing this allocation, because I will also have real estate here. But I believe in the Brazilian stock exchange and I think there is a lot of good company and a lot of bargain around here, so let’s go ahead.
It has 40% in the USA, which is a mature market and which is still growing due to high innovation and investment in technology of the companies (that are of global reach), 10% in Switzerland that catches a mature market and very strong currency, as well as institutional security ( More than the US or Brazil) and 10% Asia Pacific which is a part of portfolio growth and is where the world will grow the most in the coming decades.For now is to work, study and contribute!