Improved Portfolio Guidelines
Three pages ago we suggested an ultra-simple portfolio, of "mostly TSM plus some Small Value."
Now we're ready to refine that somewhat.
First, the reasoning process:
- A Total Stock Market index gives you maximum diversification and tax-efficiency, so it still makes sense as the core of a stock portfolio.
- The drawback of the TSM is that it puts so much of your money into the stocks of a few of the largest companies.
You can address this if you wish by adding small and mid caps, using individual indexes or combined indexes like the Wilshire 4500 or S&P Completion index.
- History shows that Small Value has beaten the rest of the market; but a Small Value index isn't very diversified or tax-efficient.
So it still makes sense to have "some" Small Value (as opposed to "a lot") and to keep it in a tax-sheltered account.
- Foreign stocks have their own advantages and problems; it makes sense to have "some" foreign stocks in your portfolio.
If you agree with the reasoning in those four points then you get the allocation strategy illustrated here:
mostly TSM (but de-emphasizing the very largest companies, and including some of the global market), plus some Small Value.