The Amish portfolio

One of the biggest arguments I hear for having a professionally managed account runs like this:

“Hey, it’s a big, complex world. You have so many investment choices: Emerging markets bond funds! Long/short funds! Bank loan funds!You need me to tell you what to invest in, because only I can figure out the right proportion of all these funds for you.”

What’s not usually mentioned, of course, is that much of this complexity is an invention of the financial services industry. No one ever went broke because they didn’t have 2.3% of their portfolio in a long/short fund. Did you miss the runup in REITs last year? Most managers did, too.

An Amish buggy in Lancaster, Pa.
An Amish buggy in Lancaster, Pa.

There are plenty of good reasons to hire professional financial help, but this big old complex world really isn’t one of them. In fact, there’s virtue in Amish-like simplicity. You can construct a low-cost, extremely diversified portfolio with three funds.

We’ll use Vanguard funds because they’re cheap. You could probably construct a similar portfolio with offerings from other companies, although you might not be able to match on cost. The portfolio:

* Vanguard Total World Stock Index fund (ticker: VTWSX). The beauty of this fund is that you don’t have to fret about how much to have in international stocks and how much to keep at home. It’s all in there, according to market capitalization: 54.1% North America, 22.1% Europe, 14.2% Pacific, and 9.4% emerging markets. Cost for the investor shares: 0.27% a year, or $2.70 per $1,000 invested.

* Vanguard Total Bond Index fund (VBMFX). You get broad exposure most types of U.S. bonds. Current yield: 1.9%. Cost: 0.20%, or $2.00 per $1,000.

* Vanguard Prime Money Market. Hey, it’s a money fund. It yields 0.02% after its 0.2% expenses.

That’s it. A conservative mix would be 60% Total World Stock, 20% Prime Money Market and 20% Total Bond Index. You can adjust your stock portion up or down, depending on your risk tolerance. Rebalance whenever the stock portion is 10 percentage points higher or lower than your target.

If you want to add other funds to this basic portfolio, go right ahead. But as any Amish person would tell you, the more you tinker with it, more likely it is to be a little buggy.

One thought on “The Amish portfolio

  1. […] According to — well, just about everyone — it’s nearly impossible to beat the Standard and Poor’s 500 stock index for any prolonged period of time on sheer cunning alone. Those who do may owe more to chance than to skill. And for that reason, your best investment bet is a low-cost index fund, such as the ones in the Amish Portfolio. […]

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