Comprehensive general guide to broad allocation using stock and fixed income ETFs

Step 1: Determine Your Asset Allocation

This is the most critical decision. Your split between stocks (for growth) and fixed income (for stability and income) will be the primary driver of your portfolio's risk and return. Diversifying beyond traditional assets after setting up their core portfolio (Alternatives investments) will be discussed in a separate article.

• Stocks (Equities): Higher potential returns, but much higher volatility and risk of loss.

• Fixed Income (Bonds): Lower expected returns, but provides stability, income, and reduces portfolio swings.

How to choose your allocation? Consider your time horizon and risk tolerance. We won't go into details as that's well known, in short:

• Sample Allocations:

  • Aggressive (Young investor): 90% Stocks / 10% Bonds

  • Moderate (Mid-career investor): 60% Stocks / 40% Bonds

  • Conservative (Nearing retirement): 40% Stocks / 60% Bonds

Step 2: Building the Stock (Equity) portion of your portfolio

The goal here is broad, global diversification. You can achieve this with just 1-3 ETFs.

Option A: The Ultimate Simplicity (1 ETF)

• A Total World Stock ETF. This is a true "set it and forget it" equity holding.

  • Examples: VT (Vanguard Total World Stock ETF)

  • Pros: Maximum diversification in a single ticker. Holds thousands of stocks from the U.S. and internationally, weighted by market cap.

  • Cons: You have no control over the U.S./International split (currently ~60% U.S. / 40% Int'l).

Option B: The Core Satellite (2-3 ETFs) - More Control

This approach splits the stock portion into U.S. and International holdings. A common starting split is 60% U.S. / 40% International, which roughly mirrors the global market.

1. U.S. Total Stock Market ETF: The core of your U.S. holdings.

   • Examples: VTI (Vanguard), ITOT (iShares), SCHB (Schwab)

   • What it does: Holds small, mid, and large-cap companies across the entire U.S. market.

2. International Total Stock Market ETF: The core of your ex-U.S. holdings.

   • Examples: VXUS (Vanguard), IXUS (iShares), SCHF (Schwab International Equity ETF)

   • What it does: VXUS and IXUS hold stocks from developed and emerging markets outside the U.S. SCHF is developed markets only (so you'd need an EM ETF like SCHE to complete it).

How to implement: If your target is 60% of your total portfolio in stocks, and you want a 60/40 U.S./Int'l split:

• VTI or equivalent: 0.60 * 0.60 = 36% of total portfolio

• VXUS or equivalent: 0.60 * 0.40 = 24% of total portfolio

Step 3: Building the Fixed Income (Bond) portion of your portfolio

The goal here is safety, stability, and income. Again, 1-2 ETFs can provide excellent diversification.

Option A: The Ultimate Simplicity (1 ETF)

• A Total U.S. Bond Market ETF. This is the default, core choice for most investors.

  • Examples: BND (Vanguard), AGG (iShares), SCHZ (Schwab)

  • Pros: Diversified across government (Treasury) and high-quality corporate bonds of various maturities (short, intermediate, long).

  • Cons: Limited exposure to international bonds and high-yield (junk) bonds.

Option B: Adding Layers for Specific Goals (2+ ETFs)

You can customize your bond allocation based on your needs:

• For More Stability: Add a specific Short-Term Treasury ETF (e.g., SHY, VGSH). These are less sensitive to interest rate changes.

• For Higher Income (with more risk): Add a High-Yield Corporate Bond ETF (e.g., HYG, JNK) or an International Bond ETF (e.g., BNDX, IGOV). Use these in small doses (e.g., <10% of your bond allocation).

• For Inflation Protection: Add a TIPS ETF (Treasury Inflation-Protected Securities, e.g., SCHP, TIP).

A simple, robust bond allocation could be:

• Core (90% of bond allocation): BND (Total Bond Market)

• Satellite (10% of bond allocation): SCHP (TIPS) for inflation hedging.

Step 4: Implementation & Maintenance

1. Choose a Platform: Select a low-cost brokerage (e.g., Vanguard, Fidelity, Charles Schwab, E*TRADE).

2. Execute Your Plan: Buy the ETFs according to your target allocation percentages. You don't need to do it all at once; you can dollar-cost average into the positions.

3. Rebalance:**

   • When: Periodically (e.g., once a year or once a quarter) or when your allocations drift by a certain percentage (e.g., 5% from your target).

   • How: Sell portions of the asset class that has grown beyond its target and buy more of the asset class that has underperformed. This forces you to "buy low and sell high."

   • Example: If your target is 60/40 but a stock rally pushes you to 65/35, you would sell 5% of your stock ETFs and use the proceeds to buy more of your bond ETF to return to 60/40.

Sample Portfolio Allocations

1. Aggressive Growth (90/10)

• 54% VTI (U.S. Stock)

• 36% VXUS (International Stock)

• 10% BND (Bonds)

2. Moderate Growth (60/40)

• 36% VTI (U.S. Stock)

• 24% VXUS (International Stock)

• 40% BND (Bonds)

3. Conservative Income (30/70)

• 18% VTI (U.S. Stock)

• 12% VXUS (International Stock)

• 70% BND (Bonds) // Could split this into 60% BND + 10% SCHP (TIPS)

Important Disclaimer: This is general educational guidance and not personalized financial advice. Your individual circumstances are unique. It is highly recommended to consult with a fee-only financial advisor to create a plan tailored to your specific goals, risk tolerance, and tax situation.