If you are relatively new to investing or if you have been building a portfolio by selecting individual stocks and find you are under performing the market and wish to switch to index investing, how does one construct a portfolio? Index investing is actually much easier and less stressful than stock picking. Here are the steps to portfolio construction.
- Set up ten asset classes to cover the universe of investing.
- U.S. Equities (VTI)
- Developed International Markets (VEA)
- Emerging Markets (VWO)
- U.S. Real Estate (VNQ)
- International Real Estate (RWX)
- U.S. Bonds (BIV or TLT or TIP or AGG)
- International Bonds (PCY or BWX)
- Commodities (DBC)
- Precious Metals (GLD)
- Cash (SHY)
- Select index funds or index ETFs to populate each asset class. Examples are provided in the portfolios tracked on this blog.
- Determine what percentage to invest in each asset class. This is the most important decision one makes as an investor.
- Will the portfolio be passively managed as is the Schrodinger Portfolio?
- Or will the portfolio be actively or semi-actively managed as is the case for several portfolios tracked here at ITA?
- Dual Momentum Model
- Tranche Momentum Model
- Some combination of several models
Once a portfolio is built and operational, it is important to track the Internal Rate of Return and compare the performance against a benchmark. This is where the use of the TLH Spreadsheet comes into play. It is essential to know how well the portfolio is performing with respect to a reference and the TLH Spreadsheet provides several references.
All portfolios tracked on this blog generally follow the above guidelines.
Questions about the above process are most welcome.