Developed World ex-US 60/40 Portfolio Overview
1. Background and Philosophy
The “Developed World ex-US 60/40” portfolio is a classic example of a lazy portfolio, designed to provide broad diversification with minimal maintenance. Lazy portfolios are typically constructed with a long-term investment horizon in mind, emphasizing simplicity, low costs, and passive management. This portfolio is particularly suited for investors seeking exposure to developed international markets while maintaining a balanced allocation to bonds for stability.
The philosophy behind this portfolio aligns with the principles of modern portfolio theory, which advocates for diversification across asset classes to reduce risk and enhance returns over time. By excluding U.S. equities, this portfolio focuses on developed markets outside the U.S., offering investors a way to diversify geographically and reduce home-country bias. The 60/40 split between equities and bonds is a time-tested allocation that balances growth potential with income generation and risk mitigation.
2. Asset Allocation and Holdings
The portfolio consists of two primary holdings:
- VEA (Vanguard FTSE Developed Markets ETF) – 60%: This ETF provides exposure to large- and mid-cap equities in developed markets outside the U.S., including countries like Japan, the UK, Canada, and Germany. It offers broad diversification across sectors and regions, reducing the risk associated with investing in a single country or industry.
- BNDX (Vanguard Total International Bond ETF) – 40%: This ETF invests in investment-grade bonds issued by governments and corporations outside the U.S. It provides diversification in fixed income, hedging against currency risk and offering stability during periods of equity market volatility.
Diversification: The portfolio is well-diversified geographically and across asset classes. VEA provides exposure to international equities, while BNDX adds a layer of fixed-income diversification. This combination helps mitigate risks associated with currency fluctuations, geopolitical events, and economic cycles.
Risk Level: The 60/40 allocation is considered moderate in terms of risk. The equity portion (VEA) offers growth potential but is subject to market volatility, while the bond portion (BNDX) provides income and stability. This balance makes the portfolio suitable for investors with a medium risk tolerance.
Pros:
- Broad diversification across developed international markets and bonds.
- Low-cost ETFs with expense ratios typical of Vanguard funds.
- Simple and easy to manage, requiring minimal rebalancing.
- Reduces home-country bias by excluding U.S. equities.
Cons:
- Limited exposure to emerging markets, which may offer higher growth potential.
- Currency risk associated with international investments.
- Lower growth potential compared to portfolios with a higher equity allocation.
3. Application for Retirement 401(k) and IRA Investors
This portfolio can be an excellent choice for retirement investors, particularly those with a 401(k) or IRA account, who are looking for a balanced, globally diversified investment strategy. Here’s how investors can implement this portfolio in their retirement accounts:
401(k) Accounts:
- Identify international equity and bond funds within your 401(k) plan that closely match the holdings of VEA and BNDX. Look for funds labeled as “International Developed Markets Equity” or “Global ex-US Equity” for the equity portion, and “International Bond” or “Global Bond” for the fixed-income portion.
- If exact matches are unavailable, consider using a combination of funds that provide similar exposure. For example, a U.S. total bond market fund combined with an international equity fund can approximate the portfolio’s allocation.
- Allocate 60% of your contributions to the international equity fund and 40% to the international bond fund.
IRA Accounts:
- In an IRA, investors can directly purchase VEA and BNDX ETFs to replicate the portfolio. This approach offers greater flexibility and lower costs compared to mutual funds.
- Rebalance the portfolio annually or as needed to maintain the 60/40 allocation.
By using this portfolio, retirement investors can achieve a balanced, globally diversified investment strategy that aligns with their long-term goals while minimizing costs and complexity.