To round out the model portfolios, we have included one more model portfolio made up entirely of Vanguard Mutual Funds. This portfolio started with $10,000 on December 31, 2010. It provides asset class diversification using 11 Vanguard mutual funds. The portfolio includes US and foreign equities; large, medium, and small capitalization stocks; and U.S. REIT. The portfolio has a value bias. The only limitation in using this portfolio is that Vanguard requires a minimum amount of $3,000 per fund. (An all ETF portfolio that requires no minimum amount of funds can be found here.)
U.S. Equity Component. Here is how the asset allocation breaks down by size and style (growth, neutral, and value) for the US equity component. The market capitalization is: large cap 33%, mid-cap 33%, and small cap 33%. The style weightings: value 41%, neutral or blend 36%, and growth 22%. Thus, the U.S. equity component leans toward value with weighting equally distributed between market caps.
International Component. The international stocks have a larg-cap, value bias. They include: large cap 72%, mid-cap 19%, and small cap 7%. The styles are: value 41%, neutral or blend 29%, and growth 28%.
Using Vanguard data, the geographic coverage of the international component is Europe 51.1%, Asia, 25.9%, Emerging Markets 34.1%, and North America 6.2%. Morningstar X-ray shows the geographic coverage as: U.S. & Canada 4.16%, Europe 42.23%, Japan 13.24%, Latin America 7.07%, and Asia & Australia 26.32%.
We have added two model portfolios built with funds from Dimensional Fund Advisors. Unfortunately, DFA funds are not available to individual investors and must be purchased through a financial advisor (which typically adds a 1% fee). However, DFA funds are often held up as the gold standard for asset class investing.
DFA’s selection of securities in different asset classes is not constrained by the construction of the common indices, (e.g., the S&P, Russell, etc.). DFA’s asset class construction is based on sound academic research. DFA defines the criteria for each asset class. Thus, some of the DFA funds significantly outperform the commonly followed indices as well as competing funds in the same asset class. The important question is whether a portfolio of DFA funds outperforms a similarly constructed of widely available funds, after paying the financial advisor fee for the DFA funds. The model DFA portfolios here allow a head-to-head comparison.
The DFA – FundAdvice Portfolio uses 10 mutual funds of various asset classes from DFA. The portfolio equally weights US and foreign equities. It includes large and and small capitalization stocks, value stocks, emerging markets, and U.S. REITs. This approach reduces volatility while increasing overall return. The portfolio is described at the FundAdvice website. It also appears in the book Live It Up Without Outliving Your Money! Getting the Most From Your Investments in Retirement by Paul Merriman.
The DFA – Aggressive Portfolio uses 11 mutual funds of various classes from DFA. It includes US and foreign equities; large and and small capitalization stocks; neutral and value international stocks; emerging markets; and a U.S. REIT ETFs. This portfolio is based on the Index Fund Advisors (IFA) 100 Fund. It is their most aggressive all equity portfolio and has had the highest return of their 20 model portfolios.