TOTAL ECONOMY CORE-4 PORTFOLIO

TOTAL ECONOMY CORE-4 PORTFOLIO

I developed the Total Economy Core-4 Portfolio in 2012 and highlighted the Forbes 2012 Investment Guide. My idea was to create an asset allocation that tracks economic growth rather than stock and bond market growth. This concept has historically has led to better long-term investment returns.

The stock market does a fair job of representing global businesses, but not a great job. That’s because two main areas of the economy are meaningfully underrepresented in the stock market: small businesses and commercial real estate. By magnifying the allocation in a portfolio to small value companies and commercial real estate through REIT index funds, a portfolio will better track the US economy rather than the stock market. The strategy has worked in that it historically produced higher returns with less overall risk than the stock market.

The portfolio represents four broadly diversified assets classes:

Total Global Stock Market (approximately 60% US and 40% non-US)
US Small Value Stocks
US Real Estate Investment Trusts (REITs)
US Investment-grade Bonds

The global stock market is represented by broad global index funds that include US, developed and emerging markets. Small value and real estate allocations are added to push the US equity portion of the global stock allocation closer to the makeup of the US economy rather than the stock market. Small privately held companies make up over 50% of the economy but have no direct representation in the stock market. Commercial real estate makes up about 13% of the US income but only 3% is directly represented in the US stock market.

Privately held companies tend to be much smaller than publicly traded ones, and they are bought and sold at lower multiples based on known private equity transactions. Over time, the returns of private equity funds are comparable to small-cap value indices. There is a growing body of academic research supporting this view. Real estate funds are predominantly composed of real estate investment trusts (REITs). This is an efficient way to increase exposure to commercial real estate.

Tilting a global stock portfolio to private equity using a US small-value index fund and real estate using a REIT fund will, over the long term, align the US stock portion of the portfolio more with the US economy and less with the stock market – a strategy that has generated higher returns in the U.S. historically. As with all investing, however, past outperformance does not guarantee future returns.

MODERATE GROWTH TOTAL ECONOMY CORE-4 PORTFOLIO

The Moderate Growth portfolio has an allocation of 60% in equity and 40% in fixed income.

SELECTING YOUR ALLOCATION

CLICK HERE to view the asset allocation of four Total Economy Core-4 Portfolios ranging from Low-risk to Aggressive. More risk in a portfolio means greater short-term volatility and the expectation of higher long-term returns.

For assistance in selecting an appropriate risk level, use the Vanguard Risk Tolerance-Asset Allocation Tool or a similar questionnaire designed to recommend a stock and bond allocation.

FUND SELECTION

CLICK HERE to see suggested mutual funds and exchange-traded funds (ETFs) for each category in the Total Economy Core-4. The fund selection includes the largest in each asset class and three others that are appropriate. The list does not represent the complete universe of suitable funds.

ANALYZE YOUR SELECTIONS IN PORTFOLIO VISUALIZER

Here is a PORTFOLIO VISUALIZER analysis for the Total Economy Moderate Growth portfolio using funds from the Classic Core-4 FUND SELECTION page.

You can change funds by typing in different tickers or fund names from the FUND SELECTION page or your own selections. You can also change the portfolio allocation to each fund by typing in the percentages in each asset class based on the Classic Core-4 PORTFOLIO ALLOCATION page or using your own revised allocations. Simply enter the funds you choose and an asset allocation to each to make your analysis. Compare up to three portfolios at once.

The Portfolio Visualizer online portfolio backtesting tool allows you to construct one or more portfolios based on the selected mutual funds, ETFs and stocks to analyze and backtest portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns. The results include a visualization of the portfolio growth chart and rolling returns, CAGR, standard deviation, Sharpe ratio, Sortino ratio, annual returns and inflation adjusted returns. A periodic contribution or withdrawal can also be specified together with the preferred portfolio rebalancing strategy.

GETTING HELP*

Core-4 Adviser Alliance members assist individuals and small institutional investors with all aspects of investment planning, portfolio design and account management. They also provide valuable content to the Core-4 Blog. All advisers must meet strict fiduciary standards. All advisers charge a fee for their services, which vary by firm.

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