Strategic Asset Allocation Model
Investors looking for a stable and easy to manage portfolio need look no further than the Copernicus or any of the other three passively managed portfolios. This management style is known as the Strategic Asset Allocation Model (SAAM) and it is this methodology that is recommended by William J. Bernstein, Richard Ferri, Burton Malkiel, Charles Ellis and many others. Check out my top ten investment books for more background on this management style.
Here are some of the advantages and disadvantages I see to the SAAM.
- Managing a Strategic Asset Allocation oriented portfolio requires almost no attention. Rebalance back to the target percentages (percentages with white background) every one to three years.
- Capital gains are taxed at long-term rates since securities such as VTI, VEA, VWO, etc. are held for longer than one year. Holding a security for over one year adds between one and two percent to the portfolio return when taxes are factored into the equation.
- The return has a high probability of matching the broad market as measured by Vanguard’s Total World ETF, VT.
- Market timing is avoided.
- There is no protection in a deep bear market such as we experienced twice in this century. Think about what happened to retirees in 2000 and 2007.
- There is little to do except watch the portfolio reflect market action. This might be an advantage.
Every portfolio needs a plan of some sort. To have no plan is to have a plan, but not a good one. Passively managed portfolios definitely have a plan and the one for the Copernicus is laid out in the Dashboard shown below.
Copernicus Dashboard: Several asset classes are out of balance as the Copernicus is undergoing a rebalancing process. This should soon be complete. Here are the critical ETFs used for the different asset classes.
- Large-Cap Blend (VTI)
- Mid-Cap Value (VOE)
- Small-Cap Value (VBR)
- Bonds & Income (Either BIV, TLT, TIP, BND, or AGG)
- Developed International Equities (VEA)
- U.S. Real Estate (VNQ)
- Emerging Market Equities (VWO)
- Commodities (DBC)
- International Real Estate (RWX)
- International Bonds (Either PCY or BWX)
- Gold (GLD)
Once all the asset classes are in balance, all that is required is to reinvest dividends. This is accomplished each quarter. Dividends are invested in the asset classes most under target. Almost no selling is ever required unless money is withdrawn from the portfolio.