Every single day, investors are bombarded by market noise that
leads to horrible investment decisions.
The biggest victims of market noise are professional investors.
I've walked into many trading desks at hedge funds, and most of the
time you see CNBC on the TV. If I was running the desk, the first
thing I would do is turn off that junk.
When professors at business schools teach their students about
investing, they should reference the expression "can't see the
forest for the trees" frequently, because it explains the behavior
of most investors. In fact, if you focus on the forest and ignore
the trees, in my opinion you will have a portfolio that can build a
secure financial future.
Trees like the "fiscal cliff", the Euro meltdown, Greece, etc.
are just mere distractions that should be ignored but instead can
cause individuals to make decisions that result in great long-term
harm to their portfolios. I've seen people cash out all their
assets from the market when they have a twenty year time horizon,
tilt their portfolios towards foolish (in my opinion) allocations
to gold and commodities, invest in "guaranteed" products that
deliver low returns with high fees, or just stay frozen in cash for
years as inflation eats away at their assets.
Even worse, people who have unrealistic expectations of risk and
reward fall prey to the legions of financial con artists (Madoff,
etc.) who have been and always will be out there.
Another bad decision is to look to tactical funds or managed
accounts that essentially promise to have you in the market when
things are going well and out when things are going bad, or shift
you in and out of sectors to capture the best sector performance.
This frenetic activity only increases trading costs and taxes, and
generally lags the market return. Don't do it.
So how do you get into the forest and avoid the trees? Your
first step is to invest 100% of your equity allocation into the
Vanguard Total World Stock Market Index ETF (
). I suggest this ETF because I believe that it is very important
to be diversified globally, and VT is invested across the globe in
over 40 countries in proportion to their market capitalization. I
don't know of another ETF that has such broad, global market
exposure at a cost of .22%. You can also avoid the cost of
rebalancing multiple equity holdings by having just one ETF, and
automatically avoid being over-concentrated in one country.
You could conceivably own 10-20 individual
that in total might come close to replicating the holdings and
broad diversification of VT. There is just no reason to do this,
and that is another reason why I find VT to be unique and worthy of
100% of your equity exposure. Just because you only own one ETF
does not mean that you are not diversified. With VT I would argue
you have the greatest possible diversification available to
individual or institutional investors.
Your next step is to apply the same broad, global philosophy to
your bond holdings. The investment community often talks at length
about global equity diversification, but surprisingly little about
global bond diversification, even as global bonds represent the
largest component of global capital markets (33% of global capital
markets in 2012, according to Vanguard). Unfortunately I have not
found one ETF that owns a representation of all global bonds at a
low cost, so you must own two ETFs.
The first is the Vanguard Total Bond Market Index ETF (
). This ETF will give you total and complete exposure to the US
bond market at a cost of .10%. The other ETF is the Vanguard Total
International Bond Market Index ETF (Ticker unknown: launching Q2
), with a projected cost of .20%. This ETF applies the same
philosophy to international bonds. You can invest 50% of your bond
allocation to each ETF.
That is your dumb portfolio. I realize that it seems too simple
to be effective, but the elegance is in the simplicity. Overlay a
stock/bond allocation that lines up with your age and risk
tolerance, and rebalance yearly. Spend the rest of your time
actively ignoring the financial news and don't change course when
things are going very well or very badly.
This portfolio delivers stunning global diversification at a
very low cost. This is the first time in the history of the
financial markets you can be so globally diversified. Take
advantage of this gift. Get into the forest and stop running into
I am long [[BND]], [[VT]]. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it.
I have no business relationship with any company whose stock is
mentioned in this article.
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