Portfolio Design

Set up your asset allocation table

Lesson 12 Module 3

This is the part of the course where you begin to apply what you've learned so far

Note: I used Excel to create my model portfolio designs, but you can use Apple Numbers, Google Sheets, or just go old school with pencil and paper. The results will be the same.

​

We begin by setting up a simple table with two columns: Asset class and allocation percentage. By now you should have a rough idea about how detailed you want to get with your design. There will be plenty of time to make changes but we need to start somewhere, and that's what this lesson is about.


We start with a "plain vanilla" portfolio.The purpose here is to give you a general framework of portfolio design choices that will help you understand the risk and return characteristics involved in each of the models. You will end up with your own model when you complete this course.

Portfolio 1. A simple 3-asset design

killer diy portfolio

Portfolio 1 has a documented return of 8.71% over the past 30 years. That's not bad for such a simple setup that's a breeze to maintain. But if it doesn't meet your MRR, it won't work for you.

Portfolio 2. A more diversified 5-asset design

model portfolio 2

Portfolio 2 has a documented return of 8.88% over the past 30 years. It has 2 more asset classes but it's still very easy to manage. Compare this to your MRR.

Portfolio 3. 

model portfolio 3

Portfolio 3 has a documented return of 9.34% over the past 30 years. It takes more time and effort to manage six positions, but the payoff is outstanding. 

What to do next

There are several great tools for putting together a well-balanced portfolio that's tailored to your needs and circumstances. One of my personal favorites is Portfolio Visualizer. Head on over there and play around with the suite of tools they offer, many of which are free. 


You can build your portfolio step-by-step, adding more asset classes as you go along. Once you find an asset allocation scheme Iinvestment policy) that meets your needs, the next step is to choose among the thousands of mutual funds, ETFs, CEFs, and individual securities to populate each of your chosen asset classes.


That sounds more daunting than it is, because you also have screening tools from Morningstar, ETFdb, and others that will do most of the heavy lifting for you.  

I think you get the idea here

I could go on adding more asset classes and showing the results but I think you get the idea. Up to a certain point, adding asset classes to the simple 3 class model portfolio 1 will boost returns in exchange for doing a little more maintenance work. 


Once you get to 10 classes, the returns begin to diminish because you are adding too much diversification to your portfolio. You will lower the variability of your yearly returns but you won't have the same horsepower as portfolio 3, for example.

  • What if you don’t have 30 yrs? This is all so easy when you’re 35 yrs old vs 73 yrs old. There’s been lots of lost decades. Sure the market came back but maybe not fast enough for me. What to do then?





    • Pen
    >