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“A comfortable old age is the reward of a well-spent youth. Instead of its bringing sad and melancholy prospects of decay, it would give us hopes of eternal youth in a better world.”–American Abolitionist, Lydia M. Child.

And so it is with investing, too. In your 20s and 30s, you have a significantly long investing horizon that enables you to take more risk. For this reason, all investment books and articles I’ve ever read recommend an asset allocation weighted toward stocks. Bonds simply won’t produce the long-term returns most need to achieve a comfortable retirement. So let’s take a look at two actual portfolios, both recommended by Richard A. Ferri, CFA, in his book All About Asset Allocation.

How Much Stock Versus Bonds?

This is the first question to ask when building any portfolio. To help answer that question for yourself, look back at the chart in the stock and bond article in this series. It will show you what you may lose in a single year depending on your stock and bond mix. Ferri describes three stock/bond mixes: 85% stocks/15% bonds (aggressive), 70% stocks/30% bonds (moderate), and 55% stocks/45% bonds (conservative). Of these three, Ferri recommends the moderate allocation. I use the aggressive allocation. There is no one-size-fits-all, and what stock/bond mix an investor should use at this age will vary based on many factors, including risk tolerance and financial goals.

The Basic Portfolio

Now let’s look at some actual portfolios. Ferri’s basic portfolio for young investors uses just four mutual funds:

Asset ClassPercentSample Low-Cost Funds and Symbols
US Equity40%Vanguard Total US Stock Market Index (VTSMX)
International Equity20%Vanguard Total International Portfolio (VGTSX)
Real Estate10%Vanguard REIT Index Fund (VGSIX)
Fixed Income30%iShares Lehman Aggregate Bond Fund (AGG)

In my view, this is a good, basic portfolio with low expenses that covers all of the major asset classes. I should add that I own shares in the real estate fund (VGSIX). If you don’t have access to Vanguard funds in your 401(k), most any major mutual fund company would offer similar funds.

Multiple Asset Class Portfolio

Ferri also recommends a more detailed portfolio that includes 12 mutual funds. Before I list those for you, it raises the question is 12 better than 4? Like anything, there are advantages and disadvantages to both. Managing four mutual funds is a lot less work than managing 12. On the other hand, the multiple asset class portfolio gives you exposure to asset classes (e.g., emerging markets) that a basic portfolio will not. The point is, it’s really up to you. So here is his multiple asset class portfolio:

Asset ClassPercentSample Low-Cost Funds and Symbols
US Equity
Core US Equity25% Vanguard Total US Stock Market Index (VTSMX)
Small Value10%iShare S&P 600 Berra Value (IJS)
Micro Cap5%Bridgeway Ultra Small Company Market (BRSIX)
Real Estate10%Vanguard REIT Index Fund (VGSIX)
International Equity
Pacific Rim - Large5%Vanguard Pacific Stock Index (VPACX)
Europe - Large5%Vanguard European Stock Index (VEURX)
Small Cap5%Vanguard International Explorer Fund (VINEX)
Emerging Markets5%DFA Emerging Markets (DFEMX)
Fixed Income
Investment-Grade10%iShares Lehman Aggregate Bond Fund (AGG)
High-Yield10%Vanguard High Yield Corporate Bond (VWEHX)
Inflation-Protected5%Vanguard Inflation-Protected Securities (VIPSX)
Emerging Markets5%Payden Emerging Markets Bond (PYEMX)

There are a couple of things to point out here. First, the investments with three-letter symbols are ETFs, which trade like stocks. You can substitute mutual funds for these investments if you prefer. Second, the DFA Emerging Markets fund can only be purchased through a financial advisor, which will cost you up to 1% or more. You can find other, less expensive investments. Third, the Vanguard Explorer fund is now closed to new investors, but alternatives are available. And finally, I should note that I own shares of VINEX, BRSIX, VGSIX and VIPSX.

Finally, as will all investment choices, you have to decide what is best for you. Take what Mr. Ferri has to offer, consider it along with any other information you have, and then make your own choices.

Author Bio

Total Articles: 1120
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

KCLau says:

Great tips. I will include your article in my upcoming blog carnival. Well done.

Super Saver says:

Although I am not a financial advisor, it seems the proportion in fixed income is a bit high for people in their 20’s and 30’s.

Here via KCLau’s Carnival

Super Saver says:

Although I am not a financial advisor, it seems the proportion in fixed income is a bit high for people in their 20’s and 30’s.

Here via Carnival of Personal Finance Tips

DR says:

Super Saver, I tend to agree. Ferri offers a conservative, moderate and aggressive portfolio, and the moderate is the one he then uses to build the portfolio. The aggressive has only 15% bonds. When I was in my 20s & 30s (many moons ago), I had 0% bonds. Thanks for visiting.

Chris Newhouse says:

Great article. I have a Rick Ferri inspired portfolio with 20 percent bonds, 25 percent international stocks, and 10 percent REITs. I just “rebalance” through contributions. I can’t allocate exactly as I want with my limited 401(k) options, but your podcast on 401(k) helped me get pretty close and minimize fees.

Ethan says:

My wife and I (34 & 39) are 100% equities. Stocks far outpace bonds historically. With 20+ years before withdrawal, why do bonds have any place in a portfolio? Maybe 10-15 years from now we’ll incorporate 10-20% bonds into the mix, but it just seems silly now.