The bulk of my assets is invested in low cost index funds, as all the experts recommend. That should be good enough for most people out there, but if you want to gain an extra edge over the market, there are a few options. I discourage trying to time the market or to bet on individual securities. Rather, if you must deviate from indexing, the safest is to practice strategic reallocation.
What this means is to skew the composition of your index funds towards a mix that fits with your investment thesis. For instance, an aggressive investor may stick with Warren Buffett’s recommended mix of 90% S&P 500 index tracker, and 10% short term US treasury bonds, implemented like this using iShares ETF tickers:
- 90% IVV
- 10% SHY
Whereas a more conservative posture with a higher allocation towards bonds may look like this:
- 40% IVV
- 20% SHY
- 40% AGG
There are of course a myriad of other strategies in allocation that can be done. Some popular ones include splitting between growth vs value stocks, international vs domestic, and mixes of various types of bonds (domestic, international, short-term, long-term, TIPS, municipal, business, high-yield). Generally speaking, you get the most diversification when choosing between major categories such as stocks vs bonds rather than within a category.
My own inclination is not to mess around too much with these sub-categories, as they generally have higher fees without adding to extra return. I stick with the tried and true basics to minimize the temptation of tinkering with the portfolio.
However, if you were to force me to make a bet on the future and to structure my portfolio against a macro trend, I would bet against the US dollar. If there’s one thing we can all do to prepare it’s for a slow drop in the value of the US dollar relative to the rest of the world. With soaring deficits and entitlement obligations, declining prestige, tariffs/trade wars, I don’t see how the dollar can rise in the next few decades. At best it will tread water. The implications for quality of life in the US are profound. We can anticipate more costly imports, especially electronics. For food we should be self-sufficient, but overall prices will rise as food is now sold on the world market, and farmers would have incentive to export their hogs and corn instead of keeping them for domestic consumption. While there may be more low-end jobs such as manufacturing and textiles, the country will also be beset by wealthy foreigners
How can we best position our portfolios to benefit from this trend? I would diversify outside of the dollar with a splash of international equities and bonds (especially in Asia). However, note that with the S&P 500 companies already having significant international operations, even if you invest purely in “domestic” companies you’ll automatically have some international exposure. This is also why when the dollar falls, the earnings (measured in dollar terms) of S&P 500 companies generally rise. No wonder foreign personal finance bloggers look on with envy at the cheap, mature, and diversified American stock market.
This would look something like:
- 50% IVV
- 40% IXUS
- 10% SHY
Which actually is close to my own allocation.