Merriman's Ultimate Buy and Hold Portfolio

In the previous post, I pointed to an article by Paul Merriman on setting up an "ultimate buy and hold portfolio."

I'd like to lay out the portfolio, then build on that by comparing to some of his suggested portfolios.

The Portfolio:
(60% equities/40% bonds)
6% S&P 500
6% U.S. large cap value stocks
6% U.S. small cap value stocks
6% U.S. micro-capitalization stocks
6% U.S. REIT
6% international large cap stocks
6% international large cap value stocks
6% international small cap stocks
6% international small cap value stocks
6% emerging market stocks
40% divided between short and intermediate term bonds

What's good:
Annualized performance over 37 years (1970 - 2006): 13.1%. This handily beats, for instance, a 60/40 split between an S&P 500 fund and a bond index fund, which returned 10.4% over the 37 years and has more risk.

LOTS of diversification

Significant international exposure

What's bad:
There are a lot of pieces here. You may not know how to get all the pieces to this portfolio.

This isn't a trivial portfolio, and will require work for an investor to create and re-balance periodically.

50% of the equities in this portfolio are in international stocks. Are you ready for that?

Over the next few posts, I'll examine a few of his suggested portfolios, using Vanguard funds and ETFs, and compare/contrast them to this model portfolio.

The Big Picture - Portfolio Diversification

How does one go about diversifying one's portfolio?

Is it as simple as buying a small percentage of total international index stock fund? That's a great start; an evaluation of that index might reveal that you're getting very few small cap stocks or little to no exposure to volatile emerging market stocks.

I've found an article by Paul Merriman that does a great job of showing you why you should diversify and exactly how to go about it. He starts with an S&P 500 index and adds different pieces of the market one at a time. As he goes along, he shows you the affect on performance (it usually goes up) and volatility (it usually decreases). This is a perfect way to show how diversification increases your portfolio performance over time while decreasing risk- the chance that your investments will do terribly over some period of time.

What's bad about this article:
1. It's very in-depth and can be a bit dry.

What's good about this article:
1. It explains why you diversify.
2. It starts with a single investment - the S&P 500 - and walks you step by step through a complete portfolio diversification.
3. It goes back to 1970, so it includes a long bear market. Many past-performance type analyses go back to 1980 or so; therefore they include 2 long bull markets but no long bear markets.

Merriman gives specific examples of portfolios, which I'll look at in the next post.