Products of the Pros: Index Funds

08/11/2010 Share 0 comments

Jennifer Saranow Schultz of the New York Times talked to Richard Ferri, founder of Portfolio Solutions to find out where he invests.

Mr. Ferri, 52, keeps his emergency funds (a couple of years’ worth of living expenses) in the Vanguard Short-Term Bond exchange traded fund. It tends to return about 2 percent.

Meanwhile, since he has a pension and defined-benefit plans from former employers and thus can handle some risk, he’s more aggressive when it comes to his own retirement savings. He puts 80 percent in stocks and 20 percent in bonds in the same funds he picks for clients who want to invest aggressively. So what’s his exact mix of funds?

One quick caveat before we share that: he says  what’s more important than the exact funds you use, assuming you’re in globally diversified low-cost index funds and not expensive actively managed funds, is the asset allocation. “Let’s think of it as baking a cake. The cake is 80 percent equity and 20 percent fixed-income. Those are the two ingredients,” he said. “How you get to that allocation and what the funds are doesn’t matter very much. It’s the icing on the cake.”

As for his exact funds, 48 percent is in United States stock: 34% Vanguard Total Stock Market Exchange Traded Fund, about 10 percent is in the iShares SmallCap 600 Value Index Exchange Traded Fund and about 5 percent is in the Bridgeway Ultra Small Company Market fund.

About 8 percent of the portfolio is in the Vanguard REIT Exchange Traded Fund because it’s cheap and captures the entire traded-property REIT spectrum in the United States.

As for the rest of his equity portion, he has it in international equity, specifically 7 percent each in the Vanguard Pacific Index Exchange Traded Fund and Vanguard European Index Exchange Traded Fund and 5 percent each in the DFA International Small Cap Value and DFA Emerging Markets Core funds.

Mr. Ferri splits his international holdings evenly between Asia and Europe rather than trying to guess which one is going to do better. You can generally only buy DFA funds through a financial adviser, but he said that buying the Vanguard Emerging Market Exchange Traded Fund fund would be a good substitute for the DFA Core fund.

As for bonds, he has 60 percent of his bond allocation (about 12 percent of his portfolio) in the Vanguard Total Bond Market fund and 20 percent (or about 4 percent of the portfolio) each in the Vanguard Inflation-Protected Securities and the Vanguard High Yield Corporate Bond funds. The Vanguard Total Bond Fund, he said, covers all of the investment grade bonds that trade in the United States so “you’ve got the whole bond market right there.” It does not, however, contain the two parts he covers with the other two funds. All of the bond funds he picked are Vanguard, again, because they are inexpensive.

Finally, Mr. Ferri says he rebalances once a year to get back to these percentages around the same time that he makes an annual big contribution to his retirement savings.

MyPlanIQ's observation is that this is a four asset class portfolio (Bonds, US, international and real estate) with a strategic asset allocation. With our SIBs, and an agressive portfolio (20% fixed income) we would expect to see returns along the lines of:

Note that a tactical asset allocation strategy would do better:

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Tags:, Investment, retirement, 401K, IRA