Creating A Balanced Portfolio
Creating a portfolio and deciding what stocks or assets to include is often the most exciting part about investing, but very few investors actually take the time to think through their allocations. And even if they do, they rarely execute them well. Everyone likes to buy their favorite companies or put together what they think is the winning recipe for beating the market, but the reality is we probably aren’t the next Warren Buffet or Ray Dalio and whatever random assortment of assets we put together is almost certainly not going to outperform the benchmark over a several year period. To accomplish such an impressive feat would require investing much more than money—the months of research and level of expertise needed to match the investing titans of the world is not exactly attainable for the average person and there’s no shame in that. Accepting you don’t have the time or expertise to outperform the firms on Wall St. is the first step in recognizing the importance of a well thought out and balanced portfolio. Even the greats whose job it is to create the most performance-optimized portfolios underscore the importance of meticulous balancing and rules around their allocations. This does’t mean you can’t invest in what you want to invest in or even that you have to invest in certain assets, but you should be very intentional about how you spread your money around. Attaching target allocations for sectors or types of assets is a great start, but developing a very specific plan and outline for every percent of your portfolio is the ultimate goal.
Bearing all this mind, I want to go over how a well-balanced portfolio might look. I will occasionally reference companies or tickers, but this is not meant to give you any specific investment advice. I’m simply aiming to offer a detailed template you can use to input your own ideas. By breaking down all your allocations into categories and subcategories within those allocations, you can narrow your search to find the assets you like while still holding true to a well-reasoned and diversified portfolio with a clear goal of protecting and moderately growing your wealth. Too many investors take a concentrated approach to their portfolio by investing in just a small handful of ideas all-the-while thinking they somehow found the secret to beating the market. You might have good ideas, but good ideas can still be poorly executed and will probably be outweighed by your bad ideas or faulty portfolio management, so creating a well-defined template to follow and rebalance toward is always advised. That said, a plan or template won’t be perfect and fine-tuning it over the years will be a must, but this framework will still paint a general strategy that will hopefully keep your returns consistent and, most importantly, keep your portfolio alive.
The main categories I’ll be going into as part of this model portfolio are dividend stocks, international stocks, growth stocks, commodities, bonds, and digital assets. I’ll also get into various subcategories and their allocations within each category’s larger allocation, but I’ll save that for later as I go through each one.
Dividend Stocks (25%)
This is the first category I wanted to get into because, one, it should probably be the largest allocation, but also because its importance is widely unrecognized, especially by new investors. Dividend stocks aren’t usually the most exciting or sexy investments and often underperform many or even most assets in terms of share price appreciation, but their stock performance is not the metric to focus on. No matter what the stock does, you are guaranteed a dividend payment that could easily net you a few percent or even a double digit percent per year. And although that dividend could be offset by drawdowns in the actual underlying asset, they diversify your portfolio’s returns, are a reliable means of income, and potentially a bonus on top of the underlying’s gains for the year. The point is, dividend stocks protect you against a lot of uncertainty in the market by offering a consistent stream of return.
There are a lot of companies from all sectors that issue dividends so you’ll have a lot of options to choose from, but you’ll want to make sure you aren’t only buying dividend stocks within just one or two sectors. Even though the focus is the dividend, you don’t want to risk underperformance in one area of the market offsetting the entire dividend section of your portfolio. This is where subcategories come into play. The industries with the best records of maintaining dividends are basic materials, energy, financials, healthcare, and utilities, but, as alluded to, any of the eleven SPY sectors should be fine, just pick your favorites, make sure whatever you get within that sector pays dividends, and focus on diversification.
The first step is going to be actually picking your subcategories. The easiest way to do this is to go through each of the SPY sector ETFs and narrow down your choices from there into your subcategory allocations. Once you have it down to about five to seven, I would hunt for an ETF from each of those sectors— just make sure that ETF does in fact pay dividends. This could be an any technology, energy, or utilities ETF of your choosing or even just the SPY sector ETF itself like XLK, XLE, XLU or any of the others. Having a dividend-paying ETF in addition to two or three dividend-paying stocks from each sector should give you a healthy amount of diversification and industry exposure.
As I mentioned earlier, 25% across all the sectors you choose would probably be the best approach, which would translate to 3-5% of your portfolio in each one. This would mean about 1-3% in your sector ETF of choice and about 1% in each individual company. As an example, you could have 5% of your portfolio in dividend-paying tech companies with 2% in TDV, the S&P Technology Dividend Aristocrats ETF, and 1.5% in both ORCL and AAPL. You can always mix and match those allocations to your liking and, if you’re really bullish on a sector, choose to dedicate a total of 10% of your portfolio to it. I wouldn’t recommend going higher than that and would really try to avoid committing that much to one sector in the first place, but if you really believe you should have more money in that area of the market, feel free to let it steal a few percent from one of the other sectors that don’t excite you as much. But, if you do overcommit to one sector, be careful you don’t add any more to that sector in other areas of your portfolio.
International Stocks (15%)
Exposure to emerging markets or even well-developed foreign markets is a weirdly overlooked area of investing. US investors have a tendency to only invest domestically and while that has been one of the best places if not the best place to put your money over the last decade, that won’t always be the case, especially with how rapidly the world outside the US is growing. If you live outside of the US, this is the only part of the portfolio that might be confusing to you, but the rules would still be the same. If you already mostly invest in the US, it’s definitely the same, and if you mostly invest in your native market, you can just add the US as part of your international section. Regardless of where you’re from, navigating foreign markets can be tricky so it’s probably easier to buy various international indices like the German DAX, Indian Nifty 50, Brazilian IBOV, or SPY if you’re outside the US, but there are also popular international ETFs you can get. You’re more than welcome to look for specific foreign companies, just know it can require a lot of research and you will have a harder time staying up-to-date on their company given it’s in another part of the world.
Moving into the allocations, I would recommend doing either 3% in five different foreign markets or 5% in three different foreign markets. It’s perfectly reasonable not to be interested in or willing to follow that many different countries and their markets, not that you necessarily have to, but exposure to three foreign markets is probably enough. A helpful approach could be choosing markets across different continents so you aren’t picking anything too correlated like neighboring European markets, for example, but that’s by no means a rule. A more logical approach might be to identify themes or industries certain countries are known for like Russian energy, the Brazilian service sector, or Chinese mining companies—just do your homework and always keep diversification in mind.
Now, similar to the dividend stock allocations, I would aim to have a solid ETF or index as the bulk of each subcategory allocation. You can choose to put the entire 3-5% in that index or ETF to keep things simple, but I would have at least 2% if you’re doing 3% in five different countries and at least 3% if you’re doing a 5% in three different countries. An example of how this might look if you were aiming to hold specific companies could be 3% in an index and 2% split between two companies of your choice. Or you could do 2% in two different ETFs and 1% in a company of your choice, or even all ETFs or indices with a 2%, 2%, and 1% split. That latter approach might be the safest and easiest, but as long you’re diversified in each allocation to whatever countries you choose, you should be fine with any of those options.
Growth Stocks (10%)
For a lot of people, this is the fun part of the portfolio. It’s all the promising small-cap/up-and-coming companies that you believe have a lot of potential and opportunity for growth. These companies are usually more volatile and dangerous in terms of their risk of failure and price collapse, but they are also where you’ll probably see your biggest winners. Now, given how volatile growth names can be, you definitely want to spread out your 10% over a few different sectors like e-commerce, 3-D printing, fin-tech, biotech, or whatever else interests you, but, like always, try not to put all your money in areas of the market that move in the same direction.
Though you can and maybe even should include various growth ETFs like any of Cathie Wood’s ARK ETFs, I would say this area of your portfolio is where you should mostly focus on individual stocks. If you aren’t interested in doing any research or prefer the safety of an ETF, by all means avoid individual tickers, but this is where you can add a lot of your personal flavor to your portfolio. We all have certain industries that intrigue us and finding some relatively small companies that look promising and have a business that just excites us is a great way to make investing more entertaining. Obviously you don’t want to get carried away with being entertained and just YOLO into AMC, so you still need to be realistic and have allocation rules. But your passion for a certain industry or technology can give you an edge over other investors who don’t share that passion so embrace what you love. Your interest can drive you to find companies early on before their business ascends to the economic main stage. Companies like Netflix, Tesla, or Square all started out as growth names and if you were one of those lucky few who knew about them early on because of some personal interest in the company or technology, you would have made a lot of money. This is not to say you are going to find the next Tesla, but this is the portion of your portfolio where that would happen and why you should let your niche interests lead you to companies with huge potential.
The actual allocations for this section really depend on how many early-stage companies you find that you like or if you’re taking the ETF path, but I would suggest five companies with a 2% allocation each. You could do more or less, but try to spread the percentages evenly and avoid putting more than 4% in any single name. And if you can’t get at least three individual companies, add a growth ETF into the mix and put in whatever allocation percentage you have left. Just be cognizant of the sector each stock or ETF falls within and try to avoid over exposure to any one area of the market.
Commodities (15%)
This is a great asset class to dedicate a portion of your portfolio to because it really doesn’t move with other areas of the market. Commodities kind of have a mind of their own so they’ll offer much needed balance that hopefully saves you from excessive correlation. There are a lot of ways you could break down this allocation, but I’ll be focusing on two subcategories: precious metals and commodity producers. The first category, precious metals, is very simple. I would put 5% of your portfolio in gold or split that five percent between gold and silver. You could add other precious metals like platinum if you want, but a larger gold allocation is a better approach in my opinion. If you’re splitting the 5% between gold and silver, I would either do three or four percent in gold and two or one percent in silver, but a straight 5% in gold is also perfectly fine. Both these metals have a long history of being actual money and are great hedges against fiat and inflation.
As for the commodity producers, your focus should largely be on companies not related to gold or silver to avoid over exposure, but adding one or two mining companies should be fine if you so choose. That said, the emphasis should be on producers of commodities like oil, uranium, natural gas, wheat, lumber, or even food more generally. These kinds of commodities are a little difficult to invest in directly so achieving that through strongly correlated companies or ETFs is usually the way to go. Given this will be about 10% of your portfolio, I would be very careful with how you allocate. Try not to put more than 5% in any specific commodity and try to aim for about three to five different ones. Energy includes a wide range of commodities so it would be reasonable to have two energy subcategories like oil and nuclear, but definitely don’t put the whole 10% strictly into energy. There are ETFs that include a wide range of energy companies that could give you exposure to multiple commodities within that sector and even very broad commodity indices and ETFs that give you exposure to an even wider range of commodities. Having at least one general commodity ETF or index is highly recommended and I think a general energy, mining, and agriculture ETF would also be wise. A good example of an allocation making use of this approach would be a 4% split between two general commodity indices like USCI and DBC, 2% in a broad energy ETF, 2% in a mining ETF, and 2% in an agriculture ETF. Always feel free to find individual companies within these subcategories, but using ETFs is an easier and much less risky way of allocating to commodities.
Bonds (10%)
Even though the fixed income market is guaranteed to lose you money right now—boasting real returns in the negative when accounting for inflation—it’s better than holding cash and perhaps safer than holding riskier investments that could lose you more than a couple percent. Sometimes guaranteeing a small loss slightly outperforming cash is better than risking a big loss from holding your favorite tech stock so bonds aren’t necessarily a bad course for diversification or protecting your capital despite their meager returns.
Now, traditionally, people suggest to subtract your age from 100 and have that much in equities and the remainder in bonds, which, at the age of 50, would be a 50% split. However, given the concerns already raised about bonds, I would do away with tradition and try to aim for an allocation no more than 10%. Within that 10% allocation, you can further diversify between maturity dates commonly referred to as a bond ladder and even split your allocation between regular treasuries and treasury inflation-protected securities or TIPS. Considering the inflationary decade we are likely to see as QE infinity potentially becomes the norm, it might be a smart way to slightly hedge against the regular treasuries and you can also hold varying maturities to create a TIPS bond ladder just like you would with the other bonds in your portfolio.
A simple five and five allocation for treasuries and TIPS in each respective 10y is probably perfect and you could just leave it at that, but if you’re interested in creating bond ladders, I would start at the 20Y and move your way down with roughly even allocations. I might even start at the 10Y given the uncertain future of the dollar and growing US debt because you’d hate to see the currency fail or the US default before that maturity date. Regardless of what the future holds, though, the face value of bonds will probably move in the opposite direction of many if not most of your other investments and they will give you a fixed and reliable stream of income from their coupon payments. Even if you really don’t like bonds, you should probably like cash less so it would be wise to consider adding bonds to your portfolio if you have a lot of cash sitting on the sideline.
Digital Assets (10%)
This last category is to get some exposure to the world crypto. It’s understandable to be skeptical of this one if you haven’t really dug into it, in which case I would think about lowering your allocation to 5% and dedicate that remaining 5% to either cash or whatever previously discussed allocation you feel underinvested in. That said, I think all portfolios should have a Bitcoin allocation much like all portfolios should have a gold allocation. 5% is a the go-to for something like this as it is a counterparty-free hard-money asset and somewhat of an insurance policy on fiat. As for the remaining 5%, I would spread it out over mining companies like MARA or RIOT, companies that have a significant portion of Bitcoin on their balance sheet like MicroStrategy, and then any altcoins you fancy. I wouldn’t recommend going past Ethereum unless you’re really involved in the space, but that is certainly up to you. So of that 5% not allocated to Bitcoin, I would advise a 2% split between two different mining companies, 1% in MicroStrategy, and 2% in Ethereum. You can mess around with those allocations as you see fit, just make sure you have at least 5% in Bitcoin. This will give you a healthy balance within the crypto space without taking on too much volatility characteristic of most altcoins while still likely earning you some respectable returns over the years.
With the whole portfolio now outlined, let’s recap and add some final thoughts. First, you have your dividend-paying stocks at 25% pulled from at least five different sectors. These are usually relatively safe and established companies with low volatility, but you still want to make sure they don’t overlap too much with other areas of your portfolio, including your dividend-paying section. Second, you have international investments at 15% pulled from at least three different countries. You’ll want to focus on ETFs and indices and make your investments based on strong themes and sectors within each country. Third, you have growth stocks at 10%. This will be smaller up-and-coming companies you see having a lot of potential and you will choose them based on big future trends you see or your interest-driven insight into a sector or company other investors might miss because they are not closely watching it. Fourth, you have commodities at 15%, which would be a combination of actual commodities like gold or silver and commodity producers from various sectors like energy or agriculture. Fifth, you have bonds at 10% with a potentially very simple allocation evenly split between 10y treasuries and 10y TIPS, but a bond ladder within both of those allocations is also worth considering. Sixth and last, you have digital assets comprising your Bitcoin allocation, Bitcoin-related publicly traded companies, and any altcoins you may be interested in.
Now, if not already made clear, all of these allocations are fairly open-ended and left for you to tweak to your liking. This is a template aimed at helping you figure out a reasoned approach to a portfolio, but all the specifics are for you to decide. I’ve stressed this a lot already, but it’s so important I’ll say it again: be cautious of over exposing yourself to certain industries when putting your portfolio together. It’s very easy to have the dividend-paying portion of your portfolio have a lot of correlations if you aren’t careful and it’s also very easy to have the growth portion of your portfolio include just one or two sectors because those are the sectors you happen to like. Always remember the goal is to preserve and grow your wealth, not just to invest in things that you like, so be calculated, realistic, and open to changing your approach and allocations as you find issues or develop new ideas. Also be sure to rebalance as your investments move away from your target allocations. This is often ignored, but creating a balanced portfolio only works if you keep it balanced. You can plan to rebalance once every quarter or twice a year—it doesn’t really matter as long as it gets done semi regularly. Above all, have a clear plan for all your allocations and stick to it. It isn’t always easy in the short run, but it pays in the long run. The last thing I’ll leave you with is a quote by the renowned Benjamin Graham:
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”