Developed World ex-US 40/60 Portfolio Overview
1. Background and Philosophy
The “Developed World ex-US 40/60” portfolio is a lazy portfolio designed to provide exposure to developed international markets while maintaining a significant allocation to fixed income. Lazy portfolios are typically low-maintenance, diversified investment strategies that aim to achieve long-term growth with minimal effort. This portfolio is particularly suited for investors seeking international diversification outside the U.S. while balancing risk with a substantial bond allocation.
The philosophy behind this portfolio is rooted in modern portfolio theory, which emphasizes diversification to reduce risk and achieve steady returns over time. By allocating 40% to international equities (via VEA) and 60% to international bonds (via BNDX), the portfolio aims to capture growth opportunities in developed markets while mitigating volatility through fixed income.
2. Asset Allocation and Holdings
The portfolio consists of two key holdings:
- VEA (Vanguard FTSE Developed Markets ETF) – 40%: This ETF provides exposure to large- and mid-cap equities in developed markets outside the U.S., including countries like Japan, the UK, and Germany. It offers diversification across multiple sectors and economies, reducing reliance on U.S. markets.
- BNDX (Vanguard Total International Bond ETF) – 60%: This ETF invests in investment-grade bonds issued by governments and corporations outside the U.S. It provides diversification in fixed income and hedges against currency risk, making it a stable component of the portfolio.
Diversification: The portfolio is well-diversified geographically and across asset classes. VEA provides exposure to international equities, while BNDX offers stability through international bonds. This combination reduces reliance on any single market or region.
Risk Level: The portfolio is moderately conservative due to its 60% allocation to bonds. It is suitable for investors with a medium to long-term investment horizon who are willing to accept some equity risk for potential growth.
Pros:
- Diversification across developed international markets reduces reliance on U.S. performance.
- Bond allocation provides stability and reduces portfolio volatility.
- Low-cost ETFs make it an affordable option for long-term investors.
Cons:
- Limited exposure to emerging markets and U.S. equities may result in missed growth opportunities.
- Currency risk remains a factor for international investments, despite hedging in BNDX.
- Lower equity allocation may limit growth potential compared to more aggressive portfolios.
3. Application for Retirement 401(k) and IRA Investors
This portfolio can be an excellent choice for retirement investors seeking a balanced, internationally diversified strategy. For 401(k) and IRA accounts, investors can replicate the portfolio by selecting funds that closely match the holdings of VEA and BNDX.
401(k) Implementation:
- Look for international equity funds in your 401(k) plan that track developed markets, such as those following the FTSE Developed Markets Index or MSCI EAFE Index.
- For the bond portion, seek out international bond funds or global bond funds that invest in investment-grade bonds outside the U.S.
- If exact matches are unavailable, consider using U.S.-based bond funds as a substitute for BNDX, though this will reduce international diversification.
IRA Implementation:
- Investors can directly purchase VEA and BNDX in their IRA accounts, making it easy to replicate the portfolio.
- For those preferring mutual funds, consider Vanguard’s mutual fund equivalents, such as VTMGX (Vanguard Developed Markets Index Fund) and VTIBX (Vanguard Total International Bond Index Fund).
This portfolio is particularly suitable for retirement investors who prioritize stability and international diversification while maintaining a moderate risk profile. Its simplicity and low maintenance make it an attractive option for long-term retirement planning.