The Simplest And Most Effective Way To Build Your Own Investment Portfolio

Across the entire landscape right now, I believe Meb Faber has done more than anyone to bring some of the most important developments in asset management to individual investors. He has recently published a number of books that distill some of the secrets of the top investors in the world into easy-to-understand concepts that can be applied by even the most finance-phobic.

The book referenced above, “Global Asset Allocation,” really tackles two major mistakes investors regularly make. First, most investors fall prey to “home country bias.” Because U.S. stocks are highly overvalued currently, based on their own history and against almost every other equity market on the planet, this is a real problem especially relevant to today’s markets.

Second, while they may be well-diversified within certain asset classes most individual investors are not nearly well-diversified enough across multiple asset classes. This serves to create unneeded volatility in portfolios over the course of longer-term cycles. And unneeded volatility just makes it that much harder to stick to your plan when sticking to your plan may be single most important thing you can do.

To demonstrate the value of greater diversification, I built the simple ETF allocation shown below based on the concepts in Meb’s book. I also compared it to the typical 60/40 portfolio along with one invested entire in U.S. stocks.

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Below are the backtested returns since 1973 (the first date makes available). Notice that the returns are fairly comparable across all three but the more diversified portfolio (#1) greatly reduced your “worst year” and “maximum drawdown” when compared to the other two. Not bad, eh?

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Now this is not in any way designed to be specific advice. These are, however, terrific tools for individual investors to use in designing a portfolio allocation that suits their own unique goals and risk tolerance. Combine this with commission-free ETFs at places like Schwab, Vanguard and Fidelity and it amounts to an incredibly low-cost and effective way to build your own investment portfolio and in a way that the greatest minds in the business would approve of.

Many thanks to Meb for putting this all together. It’s very exciting to me to see that individual investors now have these sorts of tools, knowledge and opportunities that were previously only available to institutional investors. If you’re interested in learning more about this stuff, buy Meb’s latest book and you’ll get “Global Asset Allocation,” among others, for free.