Investing is scary because the world of finance is the ultimate confusopoly. There are so many options from which to choose that many people are willing to pay perhaps 1% of their portfolios per year for experts to manage their money. And those experts might invest your money in managed mutual funds (managed by yet other experts) that charge you another 1% to pick stocks for you. And this is despite the fact that on average, experts can't beat a monkey with a dartboard when it comes to picking stocks. Every study has shown this to be true. As far as I know.

Worse yet, actively managed funds will generate more tax liability for investors than necessary because managers need to churn stocks to maintain the appearance of usefulness.

There once was a time when most experts agreed, roughly, in how a typical portfolio should be allocated. If you were young, you should own mostly stocks. If you were nearing retirement, you should have mostly bonds. But lately, even that assumption is being questioned. Some experts now say you need a healthy percentage of stocks even if you're nearing retirement, because you might live another 30 years.

This made me wonder if you and I could come up with the world's simplest portfolio that is better than what the average money managing expert might concoct. I'll toss out some suggestions here, and you can improve on them in the comments section, keeping within some simple guidelines.

First, let's assume the hypothetical money is invested entirely for retirement, so we don't need to worry about keeping any of it liquid for college or buying a house. That assumption is just to keep things simple.

Second, we're only talking about investments up to 10 years prior to your planned retirement. When you near retirement, you would typically and gradually convert as much of your stock portfolio into bonds as necessary to get the monthly income you need. That's a more complicated scenario than what I want to discuss here.

I suggest, as a starting point for our discussion, that a perfectly adequate simple portfolio for young(ish) people might involve putting 50% of your money in an ETF from Vanguard (VTI), which captures the entire Wilshire 5000. In other words, you'd buy one financial instrument and own a little bit of just about every public company in the United States. That's all the diversification you can get within one country, and the U.S. is still considered a relatively safe place to invest even if it doesn't have the best growth potential. The fees for the ETF are a low .015% per year, and because ETF managers don't do much buying and selling within the portfolio, it doesn't generate much taxable income to pass along to investors.

I picked 50% to allocate to this investment because I contend that no expert has a good reason for picking a different figure. Some experts might tell you 25% is the right allocation for U.S. stocks, and some might say 75%. I contend that most allocation recommendations of that sort are no more defensible than horoscopes.

For the remaining 50% your investments, let's say you buy the Vanguard Emerging Market ETF (VWO) with a .27% expense ratio. That gives you a play on the best companies in emerging markets around the world, at low cost, with excellent diversity, and low taxes.

Disclosure: Vanguard has licensed Dilbert in the past. I don't have any financial interest in them now, nor do I have any investment with them. I only use Vanguard as an example because they are a familiar and trusted name, in case you aren't familiar with ETFs and you wonder if they are sketchy. ETFs are as close as you can get to a commodity, and there are lots of companies from which you can get them.

Now it's your turn. How could my sample simple portfolio be any better than 50% in VYI and 50% VWO? You have to defend your viewpoint. No fair just telling us what you do now. Tell us what data you have to suggest you could do better with a different portfolio than I described.

And remember that your suggested portfolio needs to be simple enough for the average person to understand and obtain without expert advice and without excess risk.

(I should note here that it would be extraordinarily unwise to base any of your investments on what you read in a cartoonist's blog. This is just a mental exercise.)
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May 7, 2010
One thing to consider when determining portfolio allocation between domestic and foreign investments is that one of the largest assets young people typically have is their future earnings, whose value is heavily tied to the domestic economy. Thus, people start out long domestically which may encourage them to expand foreign investments at the expense of domestic investments.
May 6, 2010
I am even less of an economist than Scott but here is the thing I worry about - all the baby boomers putting money into their retirement accounts has kept the indexes on a generally upward trend through most of our lifetimes. What happens when they retire and start taking money back out?
May 6, 2010
You can graph VTI vs. VMO using, for example, Google Finance, and compare performances year by year. VMO has out performed VTI in 3 of the years since it started at the end of 2004. It underperformed VTI in 2008 and so far this year. But the mmain thing is, the two graphs are amazingly parallel. Buying VMO, like buying VTI, is a bet on worldwide economic growth. VMO provides no hedge against crashes, recessions, depressions, wars, or even plumes of volcanic ash.
May 5, 2010
Even simpler.

Step 1: buy this - Vanguard Total World Stock Index Fund Investor Shares (VTWSX)
Step 2: go to sleep

This fund owns nearly every stock in the world (50% U.S., 15% emerging, the rest in developed intl. stocks). Expense ratio 0.50% which according to Vanguard is 67% lower than average in this asset type).
May 5, 2010
Well, if you want simple, why not just pick the Vanguard Retirement 2040 fund? (VFORX) %0.2 fees, and it automatically rebalances the mix for you as you get closer to retirement. If you prefer something more agressive, just pick a retirement fund farther in the future than you plan to retire, so it doesn't remix to a safer stance earlier than you'd like it to.
May 5, 2010
oy, ok sub situations I guess for c i r c u m s t a n c e s ?
May 5, 2010
Whazzup with the blog filters?
" right set of !$%*!$%*!$%*! the "
Seems to selectively not like !$%*!$%*!$%*!$%*!$% something...

Buy Lotto tickets and hope for the best
About as safe and sound as any other "strategy"
I believe the Pointy-Haired Boss used that method for the company 401k a few years back, didn't he?
Or was that "Shoe" ?

+3 Rank Up Rank Down
May 5, 2010
Well, if simplicity is the goal then I would say 100% of your portfolio should go into the Vanguard Total World Stock Index Fund (VT) It has about 2,900 stocks of companies located in 47 countries, including both developed and emerging markets. It has an expense ratio of .30% which isn't too bad at all.

You could invest in this sucker, leave your money alone, and with the assumption that world markets will continue to grow over time; expect a fairly good return on your investment eventually.
May 5, 2010
I'd take 10% to 20% of your portfolio and buy gold maybe through an etf like GLD, but I'd prefer owning 1 ounce gold eagles and keeping them myself. The reason is that the money in your pocket is a piece of paper backed backed by the full faith and credit of the United States (boy, that's reassuring. Our gov. just spent trillions to keep our banks afloat. - In a bank all your money is but a number conjured on some computer; it's not even backed by paper!) and, as the gov. has throughout time, it will simply print more of money to pay their tremendous debt. The thing about gold is that sometimes owning it can make you rich... And sometimes not, but nobody has ever gone hungry that had a safe full of gold when there were riots in the streets (like in Greece now) due to the debasement of the national currency.
-2 Rank Up Rank Down
May 5, 2010
This sounds like you're pulling numbers out of your...

It only says the one thing.
May 5, 2010
Let me see.....humm....short-sell the Chinese currency sometime in the future. Someone said the China government protects it and would never let it rise no matter what...

If this is too confusing (don't worry, I didn't mean it ...just cooked it up...), just invest in developing countries like, India. US and other developed countries are stagnated now. And yes, ofcourse, don't invest in Pakistan. There funds get easily diverted to terrorism...
May 5, 2010

The reason it's a "confusopoly" is because the "stock market" started as a legitimate investor-business model, and became converted into the largest gambling operation disguised as "investing" or "trading". And it's legal. Conventional wisdom tells everyone that you should invest your money... to make free money without doing any work! "Investing" is best left to professional investors who work at it. Also I can tell you from personal acquaintances that successful professional traders and professional gamblers have almost the exact same attitude, not just in methodology but also in how they view 90% of the people playing their game as nothing but marks to be fleeced (which they are).
May 4, 2010
I think you should add a warning to posts like this: ***Only valid in USA***.

People from other countries also read this.
-1 Rank Up Rank Down
May 4, 2010
One of the problems with the "move money into bonds when you retire" part of the equation is bonds no longer pay significant interest. Interest rates have cratered thanks to the Feds leaving the rate at zero. My mom provides tax advice to retirees, and it's sad to see how many she's seen have their nest eggs rendered useless by pathetic interest rates.
May 4, 2010
If you're a guy married to a female, you know that women are generally way more risk averse than men and think anyone dumb enough to marry them couldn't possible manage INVESTMENTS. Since I started paying one per-cent a year to the guys with the suits and secretaries, my life has been a lot easier, except for the part about realizing I did just as well without them.
+11 Rank Up Rank Down
May 4, 2010
I'm betting big on Baby Boomer incontinence. Accordingly, I have invested heavily in companies that make products to help them deal with it. Twenty years from now I plan to move that money into publicly traded companies that specialize in opulent Baby Boomer-esque funerals.

Incidentally my mother is not a fan of my strategy.
May 4, 2010
Scott, my portfolio is up for renewal and my poor monkey has a cold and doesn't feel like throwing darts, do you mind if I use your recommendations for the next year? I'll put you down for 1% of the profits, but remember, if this goes down, I'll be submitting you an invoice for 1% of the loss...
+1 Rank Up Rank Down
May 4, 2010
Buy gold and bury it in your backyard. Then create a treasure map and attach it your will. Place the will in a safety deposit box and put the key to the safety deposit box in the vault in the floor of your basement.

Or just spend it as you get it and hope you get hit by a bus when it runs out. The upside to this scenario is that it is totally possible to control the date you get hit by the bus. (plus or minus a certain variables). and if you step in front of the bus in the right set of !$%*!$%*!$%*! the resulting lawsuit will supply your heirs with some nice income.

Or and here's the theory I am currently working on - assume that the market will go up and down, and buy diversified stock funds as Scott has suggested. And keep them. Forget the bond theory. Even at retirement, with inflation bonds won't keep up.
+3 Rank Up Rank Down
May 4, 2010
@Tinyhands - If you want to know why all of your reading list is wrong, read Taleb.
0 Rank Up Rank Down
May 4, 2010
Also must agree with rambis, a person 64 years old and contemplating retirement "real soon now" is going to want a different level of risk than the kid just starting out.
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