William Bernstein Sheltered 10/90 Allocation: Overview
1. Background and Philosophy
The William Bernstein Sheltered 10/90 Allocation is designed by Dr. William Bernstein, a renowned neurologist-turned-financial theorist and author of books like The Intelligent Asset Allocator and The Four Pillars of Investing. Bernstein advocates for low-cost, passive investing with a focus on diversification and risk management. This portfolio is part of his “Sheltered Sam” series, tailored for tax-advantaged accounts like 401(k)s and IRAs. The 10/90 refers to a conservative allocation: 10% bonds (implied but not listed here) and 90% equities, with heavy emphasis on value stocks and global diversification.
2. Asset Allocation Analysis
Diversification: The portfolio spans U.S. large-cap (VTV, VV), small-cap value (IJS), real estate (VNQ), international developed markets (EFV, VGK, VPL), emerging markets (EEM), and commodities (GLTR). This broad exposure aims to reduce concentration risk.
Risk Level: The portfolio is aggressive (90% equities) but mitigates risk through value tilts (historically less volatile than growth) and global diversification. The small allocation to precious metals (GLTR) acts as a hedge against inflation.
Pros:
- Low-cost ETFs minimize expenses.
- Value focus may outperform over long horizons.
- Global diversification reduces U.S.-centric risk.
Cons:
- High equity allocation may be too volatile for conservative investors.
- Small-cap and international holdings can underperform in certain markets.
- Commodities (GLTR) add complexity with limited historical returns.
3. Practical Application in Retirement Accounts
For 401(k) or IRA:
- Step 1: Identify equivalent funds in your plan. For example:
- Step 2: If a specific ETF (e.g., IJS) is unavailable, allocate to U.S. small-cap or broad international equity funds.
- Step 3: For commodities (GLTR), which are rarely in 401(k)s, reallocate to stocks or omit entirely.
Rebalancing: Adjust annually to maintain target allocations, especially after market shifts.