Statically-Allocated Aggressive Funds

Diversified Portfolio

Building a portfolio diversified over investment classes and different markets could be not very easy for a beginner investor. Here are some ways to achieve this:

1. Use a robo-advisor (a programmatically creating and managing investment portfolio).
2. Build a three-fund portfolio of market-wide mutual funds (or ETFs), covering: US Stocks, International Stocks, and Bonds.
3. Use target-date mutual funds.
4. Use statically-allocated mutual funds (or ETFs).

Statically-allocated funds (sometimes, called: all-in-one funds or target-risk funds) are available mostly in the form of mutual funds. While less known, statically-allocated ETFs are offered by companies, like BlackRock/iShares, SPDR, and Invesco. The typical expense ratio is a little bit high (comparing to target mutual funds): 0.20-0.40%).

Target-Date vs Target-Risk Funds

A target-date mutual fund is accomplished with a target date (a year), by which, it is assumed that the capital might be required by the investor. By construction, such target-date fund becomes more conservative when the target date gets closer.

A target-risk fund (mutual fund or ETF) has a static allocation, meaning that the level of conservativeness is predefined and does not change along the way.

For tax-benefit accounts (like IRA, Roth, HSA, 401k, 529, ESA), target-date funds (and in general, mutuals funds) may work well. But for taxable accounts, ETFs are more preferable (more tax-efficient and easier portable to other brokerage firms).

Since target-date funds are not available in the form of ETFs, for taxable accounts, investors may consider using statically-allocated ETFs.

Allocation 70-85% Equity Funds

Let's consider investors of age 35-45 or ones with a high-risk tolerance profile. Such investors may consider building an investment portfolio of up to 85% of equity exposure (the rest is in fixed-income). For example, 35-50 years old may invest up to 70-85% of stocks (120 - age).

Typical classes included in investment portfolios are US Stocks, International Stocks, and Bonds. So when considering statically-allocated funds, we provide the allocation over the three classes.

AOA — iShares Core Aggressive Allocation ETF

Consists of 7 ETFs.

• 45% — US Stock Market
• 37% — International Stocks
• 18% — US & International Bonds

Expense Ratio: 0.31%

PSMG — Invesco Growth Multi-Asset Allocation ETF

Consists of 17 ETFs.

• 64% — US Stock Market
• 16% — International Stocks
• 20% — US & International Bonds

Expense Ratio: 0.36%

VASGX — Vanguard LifeStrategy Growth Fund

Consists of 4 index mutual funds.

• 48% — US Stock Market
• 33% — International Stocks
• 19% — US & International Bonds

Expense Ratio: 0.14%

FFNOX — Fidelity® Four-in-One Index Fund

Consists of 4 index mutual funds (no exposure to international bonds).

• 60% — US Stock Market
• 25% — International Stocks
• 15% — US Bonds

Expense Ratio: 0.13%

Three Fund Portfolio

• 55% — US Stock Market (VTI)
• 25% — International Stocks (VEU)
• 20% — US Bonds (BND)

Expense Ratio: 0.04%

PortfolioVisualizer shows that AOA vs FFNOX vs 55:25:20 vs VASGX are pretty close. Picking carefully one approach over others may add an annual extra of 0.30%, but it also may slightly increase the volatility.

Target-risk Funds in Tax-Benefit and Tax-Advantage Accounts

Vanguard's and Fidelity mutual funds (VASGX, FFNOX) may fit well only Vanguard's or Fidelity's (tax-benefit) accounts, correspondingly. Do not invest in the funds from different brokerage firms, without confirming that they are offered as NTF (No Transaction Fee).

The two provided above target-risk ETFs: AOA and PSMG may fit well taxable or tax-advantaged accounts. The same is applicable to the three-fund portfolio built of ETFs.

Note that in taxable accounts, muni bonds may be more tax-efficient than government or corporate bonds. For example, in the three-fund portfolio, BND may be replaced with a municipal bond ETF, like VTEB or MUB. For expensive states, muni ETFs consisting of only the state's bonds might be even more preferable. For example, for California, there is CA muni ETF: CMF (note that CMF is less diversified than general muni fund).