Model Portfolios

While younger investors or those with a higher risk tolerance can own a 100% stock index fund, those with larger portfolios or who need their portfolio to not fall, say 50%, in a recession, need a diversified portfolio.

Typically this is a mix of cash, bonds, and stocks. This usually means incorporating global stocks and bonds because you never really know when one is going to perform well and the other poorly. Over very long periods of time, it probably doesn't matter, but over a decade, it certainly can.

For example, in the 1990s US stocks outperformed foreign stocks, though much of this was due to currency fluctuations. In the early 2000s, foreign stocks outperformed US stocks. While ideally, you would switch between them, in practice owning a blend is the best form of diversification. Currently, foreign stocks are cheaper and offer higher dividends, but "currently" can span the last decade, as foreign companies (and countries) haven't grown as quickly as US-based ones. Additionally, US-based companies earn money abroad, making foreign stock ownership debatable. For our purposes here, we'll opt for a blend of both.

The main thing to avoid is focusing only on where the last 10 years of better returns were, as this increases your risk of being in the future dead spot.

As for cash, it really means a yield product that you can't lose money in. This doesn't just mean bank cash, as most banks offer less than 1% interest, and the risk isn't zero after you exceed the $250,000 FDIC insurance limit (although in practice, FDIC has covered accounts far beyond $250k).

Short-term government bonds (bills) are typically your best cash holdings as they offer almost guaranteed returns and yields higher than banks. The easiest way to own T-bills is through a mutual fund or ETF, although there's a fee. Another option is purchasing T-bills directly from treasurydirect.com or through broker auctions. Banks have their own higher yield online savings accounts which are a good choice compared to no yield checking and savings accounts especially when rates are 0%, but today even Marcus, American Express, and Capital One online high yield savings accounts yield about 1% less than T bills.

It's worth noting that government bonds with a term slightly longer than about a year can incur minor losses if interest rates rise significantly AND you sell. At current yields of around 5%, it's difficult to foresee a negative year, but it was certainly possible when rates were around 0.5%. That said, at maturity, you get your principal back.

Bonds are riskier than cash (but less risky than stocks) and have recently taken significant hits due to rising interest rates. The upside is that now bond index funds offer over 5% with relatively less risk compared to stocks.

Regarding stocks, they drop between 20%-50% fairly regularly, approximately every 5 years. Every 100 years or so, they might fall between 70%-90%. This volatility underscores the importance of diversification with cash and bonds.

For a zero-cost portfolio, consider Fidelity's Robo Advisor service Fidelity Go® (only free up to $25,000). Our customizable model portfolio suggests using the Fidelity Zero funds (only available at Fidelity):

- Fidelity® ZERO Total Market Index (FZROX)

- Fidelity® ZERO International Index (FZILX)

For bonds, opt for an ETF, like the BNY Mellon Core Bond ETF (BKAG) as there are no zero fee bond mutual funds.

For your cash, you can opt for no cash or consider BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF) or direct T-Bill purchases. XHLF holds 6-month T-bills at an incredibly low annual fee of approximately 0.03% (note: this is not a teaser rate). Alternatively, you can buy T-bills directly through an auction at Fidelity. I own this ETF, along with direct T-bills and floating rate notes, as well as some lower fee money market funds in my clients' cash allocations.

Determining your asset mix is personal. This site is not personalized investment advice and is free. However, you can mimic the allocations of major target date funds, such as the Vanguard Target Retirement 2040 Fund (VFORX). They recommend a split of 47% US stocks (FZROX), 30% foreign stocks (FZILX) - a total of 77% in stocks, and the remaining 23% in bond indices (BKAG).

Alternatively, base your allocation on your risk tolerance. If you can handle a 30% portfolio dip, then allocate 60% to stocks (double your risk threshold as stocks can fall 50%). The key is consistency, especially during market downturns.

One might ask why not use cash exclusively instead of bonds, especially when cash yields are slightly higher. If interest rates decrease, locking in the current rate for longer becomes beneficial. If they increase further, cash becomes the better choice due to potential bond price decreases. Use cash for any short-term needs, or as a strategic reserve to capitalize on market declines (in real estate, stocks, or bonds).

Instead of sweating over market movements, focus on minimizing fees and maintaining a consistent investment strategy. For non-Fidelity clients, considering skipping international funds due to the lack of zero-fee options, and go with the BNY bond and US Large Cap Core Equity ETFs mentioned on our ETF page.