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HomeInvesting15 Questions to Build Your Investment Portfolio

15 Questions to Build Your Investment Portfolio


By Dr. Jim Dahle, WCI Founder

Portfolio design is a big part of what we do here at The White Coat Investor. I frequently get the question, “How do I choose an asset allocation (portfolio)?” This is the ultimate analysis paralysis issue. There are so many ways to invest successfully that the most important thing is to just pick something reasonable and stick with it. I’ve listed reasonable portfolios before, and it has been one of our most successful posts ever. Maybe it was the clickbaity title “150 Portfolios Better Than Yours” (subsequently increased to 200), but it’s more likely that people liked the list of possible portfolios. Or maybe, just maybe, they understood the point of the post, which was that we have no idea in advance what the ideal portfolio will be.

 

The Investing Questions You Will Need to Answer

In reality, the selection of an asset allocation—at least a static, strategic, long-term asset allocation—is simply the sum total of the answers to 15 questions. The truth is that the answer to these questions will differ for everyone. While there are some wrong answers, there are plenty of right ones. Just because the answers are highly variable—even between successful investors—it doesn’t get you out of having to actually answer the questions to decide on an asset allocation.

I can argue with you all day that the way I answered the questions is the right way to answer them. But reasonable people can and should disagree with me on many points. In this post, I’m mostly just going to give you the questions. When you have answers you are comfortable with, you will have an asset allocation.

  1. What will be the ratio of your risky assets (like stocks) to your non-risky assets (like bonds)?
  2. What will be the ratio of your US stocks to international stocks?
  3. Will you tilt your portfolio toward factors (like small and value)? If so, which ones? How much will you tilt?
  4. Will you tilt your portfolio toward sectors (energy, tech, healthcare)? If so, which ones and how much?
  5. Will you tilt on the international side or just the domestic side?
  6. How much of your portfolio will you invest in non-publicly traded assets?
  7. Bonds, CDs, both, or neither?
  8. Cash, bonds, both, or neither?
  9. What will be the ratio of nominal bonds to inflation-indexed bonds?
  10. Will you use savings bonds (I, EE)?
  11. Will you invest in Treasuries? Muni bonds? Corporate bonds? Mortgage bonds?
  12. What will be your ratio of US to international bonds?
  13. What maturity/duration bonds will you invest in?
  14. Will you be investing in real estate? How?
  15. Will you be investing in any of the following and, if so, with how much of the portfolio?
    • Microcap stocks?
    • Cryptoassets?
    • Oil and gas investments?
    • Precious metals (gold, silver, platinum)?
    • Commodities?
    • Options and other derivatives?
    • Hedge funds?
    • Reinsurance?
    • Viaticals?
    • Mineral rights?
    • Water rights?
    • Horses?
    • Film tax credits?
    • Whole life insurance?
    • Diamonds?
    • Currencies?
    • Peer-to-peer lending?
    • Wine?
    • Farm or timberland?
    • Websites?

 

How Do You Answer These Questions?

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A lot of people simply throw up their hands when they see this list of questions.

“This is going to be impossible,” they might say. “I’ll just hire someone to answer the questions for me.”

What you don’t realize is that nobody else knows the right answers either. Your chances of choosing the right answers are probably not much worse than theirs are. Plus, you have an advantage. At least you know YOU, and since the answer to many of the questions comes down to what you’re comfortable with (and especially what you’re comfortable with in a nasty market downturn), you have an advantage over a professional.

More information here:

How to Build an Investment Portfolio for Long-Term Success

 

My Answers

Let me give you an example. It’s a very personal example. It’s my (our) portfolio. I had to choose the answers. I didn’t always know the answer, but like a good surgeon (“Sometimes wrong but never in doubt!”), I knew I had to make a decision. So, I made it and stuck with it! Long-term readers have seen my portfolio before so this won’t be particularly revelatory. But the WHY behind each piece might be.

 

#1 Ratio of Risky Assets (Like Stocks) to Non-Risky Assets (Like Bonds)?

For me, it’s 80/20. Why do I bother with 20% in non-risky assets? Two big reasons. No. 1, I’ve been an investor through five bear markets (2008, 2011, 2018, 2020, 2022), and 80/20 balances out my fear of missing out (FOMO) with my fear of loss. Having 20% of my assets in pretty darn safe stuff allows me psychologically to continue to take risks with the other 80%. I started at 75/25 and bumped it up a little over the years as I realized I could tolerate a little more but probably not too much more. No. 2, I know there is a possibility that these non-risky assets could outperform the risky ones over very long time periods.

 

#2 Ratio of US Stocks to International Stocks?

For us, it’s 2:1 (the portfolio has 40% US stocks and 20% international stocks). I expect similar long-term returns from both types of stocks, but I know I’m highly likely to be spending dollars in retirement, so having greater than a 1:1 ratio (and greater than market weight in US stocks) makes sense as it reduces my currency risk while still providing some currency and country diversification.

 

#3 Tilting Portfolio Toward Factors (Like Small and Value)? 

Yes. Small (on the US and international side) and value (on the US side), and it’s 5:3 on the US side (25%:15%) and 3:1 on the international side (15%:5%). I believe the long-term data on small and value factors will produce higher long-term returns. I think this is mostly a risk story (small and value companies are riskier) but also a behavioral story (people are naturally attracted to large growth stocks and bid them up in price more than they should due to familiarity). I think this additional complexity in the portfolio will pay off with higher returns in the long run.

 

#4 Tilting Portfolio Toward Sectors (Energy, Tech, Healthcare)? 

building a portfolio

No. I have no idea which sectors are likely to outperform going forward, so I just buy them all at market weight. I do not view real estate as “just a sector” because it acts differently from other businesses and because so much of it is held in private hands.

 

#5 Tilting on the International Side or Just the Domestic Side? 

Both, as noted above, but in slightly different ways. This is a bit of a historical accident. There were no good low-cost small value index funds when I built my portfolio. In fact, there were no good small index funds when I did so. Vanguard later added the latter, so I added the tilt. There are now good low-cost international small value ETFs but, you know, there’s inertia (and now capital gains taxes) at play. And inertia has actually served me pretty well over the years by helping me to stay the course. There might be a possible future change there, though.

 

#6 Non-Publicly Traded Assets? 

We have 15%. The benefit here is a lower correlation with my publicly traded stocks, bonds, and real estate along with a theoretical illiquidity premium.

 

#7 Bonds, CDs, Both, or Neither?

Bonds, primarily because they’re easier to buy using a diversified fund and, thus, a little less hassle to maintain. There are also a lot more varieties available.

 

#8 Cash, Bonds, Both, or Neither?

Bonds. I use cash only for short-term money, like my next quarterly tax payment, making payroll, or buying a car.

 

#9 Ratio of Nominal Bonds to Inflation-Indexed Bonds?

For us, it’s 1:1. While my preference is for inflation-indexed bonds (due to their elimination of the greatest risk to bonds—inflation), I know that most bonds are not inflation-indexed. Having a 1:1 ratio also allows me to be agnostic on the topic of whether future inflation will be higher or lower than the market predicts.

 

#10 Using Savings Bonds (I, EE)?

Yes, I Bonds. These unique inflation-indexed bonds make up part of our inflation-indexed bond portfolio and act slightly differently than TIPS. Their annoying downside? One can only conveniently purchase so much every year. We could simplify the portfolio a bit by dumping them and just using TIPS but unfortunately could not do the opposite.

 

#11 Investing in Treasuries? Muni Bonds? Corporate Bonds? Mortgage Bonds?

Only Treasuries and muni bonds. I am of the school of thought that it is best to take your risk on the equity side where it is more clearly seen and more tax-efficient, so our bonds tend to be very safe. My bond portfolio contains I Bonds, TIPS, and the TSP G Fund—all backed by the federal government with its power to tax and make war. Since I am forced to hold bonds in taxable, we also have a major holding of muni bonds due to our high tax bracket. However, if we could get enough money into the TSP, we’d still hold the G Fund as our only nominal bond holding.

 

#12 Ratio of US to International Bonds?

For us, it’s 1:0. You don’t have to invest in everything to be successful. I feel like I get enough currency diversification on the stock side that I don’t need to duplicate that on the bond side.

 

#13 What Maturity/Duration of Bonds?

Short to intermediate term. Again, I prefer to take my risk on the stock side. Consider our holdings. I Bonds (no term risk), TSP G fund (no term risk), Schwab TIPS ETF (some term risk), individual TIPS, mostly <5 years (no term risk if held to maturity), Vanguard intermediate muni bond fund (some term risk). And I’m considering swapping the TIPS and muni funds for their newer short-term brethren that were not available when I originally set up the portfolio. Like the rest of the portfolio, this is also designed with the most common deep risk (inflation) in mind.

 

#14 Investing in Real Estate? How?

Yes, with 20% of the portfolio (5% in publicly traded REITS, 10% in private equity real estate, and 5% in private debt real estate funds). I have more on the equity side for the same reason I have more on the equity side with stocks and bonds; I want higher returns, and taking on more risk is likely to lead to them. My preference is for evergreen funds because they allow for greater tax-efficiency, ease of reinvestment, and increased liquidity. Real estate has high returns like stocks. It’s more easily leveraged to provide even higher returns, and it has low to moderate correlation with stocks (which are the largest building block in my portfolio). I find stocks easy to understand; I tolerate their volatility well; and I love the simplicity, liquidity, lack of manager risk, availability, and easy diversification provided by stock index funds. Thus, my ratio of stocks to real estate is 3:1 (60% stocks, 20% real estate).

 

#15 Investing in Any of the Following and with How Much of the Portfolio?

  • Microcap stocks?
  • Cryptoassets?
  • Oil and gas investments?
  • Precious metals (gold, silver, platinum?)
  • Commodities?
  • Options and other derivatives?
  • Hedge funds?
  • Reinsurance?
  • Viaticals?
  • Mineral rights?
  • Water rights?
  • Horses?
  • Film tax credits?
  • Whole life insurance?
  • Diamonds?
  • Currencies?
  • Peer-to-peer lending?
  • Wine?
  • Farm or timberland?
  • Websites?

No, but I certainly think about it all the time! The main reason I don’t is that you don’t have to invest in everything to be successful. Mathematically speaking, you should use at least three asset classes, and there is significant benefit to using as many as seven and maybe even some benefit as you get up to 10. Beyond 10 asset classes, you’re just playing with your money, and the additional hassle and complexity probably don’t increase portfolio performance. Depending on how you count asset classes and sub-asset classes, we’re already at 9-11.

I have invested in microcaps, whole life, and peer-to-peer lending in the past, and I’ve given serious consideration to viaticals, farmland, timberland, and websites. Most recently, I looked closely at oil and gas investments. It’s a constant struggle to not reach for the latest shiny thing, and having a written investing plan helps me to stay the course with the long-term, very successful plan.

More information here:

Investing 101 for Beginners

 

Our Asset Allocation

If you put it all together, our asset allocation looks like this:

Stocks (60%)

  • US Total Market 25%
  • US Small Value 15%
  • International Total Market 15%
  • International Small 5%

Bonds (20%)

  • 10% Inflation-indexed (TIPS, I Bonds)
  • 10% Nominal (G Fund, munis)

Real Estate (20%)

  • 5% Publicly traded equity REITs
  • 10% Private equity real estate
  • 5% Private debt real estate

While this is unlikely to be the best allocation for any time period, it certainly has been and almost surely always will be “good enough” to reach our financial goals. And that’s all that matters.

 

When you can answer all 15 of the questions in this post, you will then have a real asset allocation. Feel free to ask these questions to other white coat investors in real life and in our communities. You will receive many opinions, but in the end, you’ll need to decide for yourself. If you need someone else to tell you what to invest in, we offer that, too.

 

In need of help on your financial journey? Over the years, The White Coat Investor has carefully curated a recommended list of professionals who have been thoroughly vetted and trusted by thousands of readers. Explore our handpicked selections today, and get the exceptional support you deserve.

 

What do you think? What is your asset allocation and why? How did you arrive at it? Comment below!



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