John Wasik has been a professional journalist and author for 30 years specializing in personal finance, the environment, investing and social issues. John has proposed a Nano plan investment portfolio which employs just a handful of index or ETFs to cover virtually the entire world of bond and stock markets. This portfolio is supposed to be rebalanced annually.

John Wasik presents a classic asset allocation strategy with simple buy and hold.

• 20% in Vanguard Total Stock Market VIPERS (VTI) – alternatives: SPY, IWM
• 20% in Vanguard Total International (VGTSX) – alternatives: EFA, VEU, EEM, VWO, ADRE
• 20% in Vanguard REIT VIPERS (VNQ) – alternatives: IYR, ICF
• 20% in iShares Lehman TIPS Bond (TIP)
• 20% in iShares Lehman Aggregate Bond (AGG) – alternative: BND

Things to note about the portfolio:

• With 40% in fixed income, this would be considered moderate risk
• With VGTSX covering both international and emerging markets (albeit in one fund) this would be something between a 4 and 5 asset class portfolio
• VGTSX is not an ETF; while VGTSX can easily be replaced by VEU (Vanguard FTSE All-World ex-US ETF) we will keep VGTSX because it has a longer history for back testing

MyPlanIQ maintains Wasik’s original portfolio here.

Wasik Nano Plan consists of the 5 ETFs  proposed in the above lazy portfolio. These funds cover 4 major assets: US Equity, Foreign Equity, REITs, Fixed Income.

As of Jan 4, 2012, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan’s available investment funds are . It has the following detailed ratings:

Diversification — Rated as below average (11%)
Fund Quality — Rated as average (64%)
Portfolio Building — Rated as above average (72%)
Overall Rating: average (51%)

Two asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA) are applied to the funds in Wasik Nano Plan to construct asset allocation portfolios.

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Fixed Income: AGG or BND
Performance chart (as of Jan 5, 2012)

Performance table (as of Jan 5, 2012)

Currently Real Estate and Fixed Income are doing well. Fixed Income and Real Estate available to Wasik Nano Plan.

This plan beats the three asset benchmark because of the additional REIT asset class. Furthermore, it did well in 2011 because of its simplicity and focus on U.S. assets.

Symbols: VTI, VNQ, TIP, AGG, VGTSX, VTSMX, VGSIX, VBMFX

Exchange Tickers: (VTI), (VNQ), (TIP), (AGG), (VGTSX), (VTSMX), (VGSIX), (VBMFX)

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.