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June 11, 2016

Our Perfect Portfolio

I admit, there probably isn't a perfect, one-size-fits-all portfolio out there, but I've created a portfolio that's perfect for us. Today I'm sharing our perfect portfolio, and if it sounds right for you, feel free to copy it.

Before I get into the details, I want to stress how important this portfolio is for us. These investments and their returns will be responsible for covering the vast majority of our living expenses throughout our 50+ year retirement, so it's absolutely crucial to make good decisions when picking investments.

To help make those good decisions, I came up with a few criteria our portfolio had to fulfill:
  • Healthy returns
  • Minimum risk
  • Low fees
  • Simple
I believe I stuck to those criteria with a portfolio consisting of only three mutual funds:
  • 50% - Northern Stock Index (NOSIX) - Tracks the S&P 500
  • 30% - Fidelity Extended Market Index (FSEVX) - Tracks US small- and mid-cap stocks
  • 20% - Northern International Equity Index (NOINX) - Tracks international stocks
These three funds manage to spread our money over a huge portion of the US and global economy. With that sort of diversification, risk is minimized while returns are on par with just about any other investment, despite extremely low expense ratios. All of these funds also participate in E*Trade's "No Load & No Transaction Fee" program.

I choose not to invest in individual stocks because I know myself and if I were picking stocks I would stress out over them and drive myself crazy. I also don't want to pay the fees that would come from buying and selling individual stocks. Overall, index funds are a much better choice for me.

I realize we are completely concentrated in stocks and that is no accident. My reasons for staying out of other investment options are explained below.

Returns are too low, and since we are young, we should be able to ride out just about any downturn in stocks. I will probably get some bonds at some point, but now is not the time.

Commodities are a very specialized sector, and I don't pretend to know enough about most commodities to invest in them. The people on the other side of the trade are almost certainly more knowledgeable than me, so I stay away.
There's also a great deal of speculation in commodity markets, so prices aren't always rational. That makes investing very difficult.
Finally, I figure the companies I'm invested in are playing the commodity markets to their advantage so I'm indirectly benefiting.

Real Estate
We are actually heavily invested in real estate with our house, which has given us a wonderful return (on paper), but I don't do any real estate investing beyond that. I wouldn't mind having a rental property, but the prices in our area are too high to make that workable and I'd rather avoid the hassle of dealing with tenants.
I choose not to invest in any other real estate ventures because I don't understand them very well and I suspect I will get better returns in the stock market. That said, I recently learned about REITs and am slightly tempted to invest. I'll let you know if I ever do.

Peer to Peer Lending
This is a fairly new phenomenon, and has the promise of good returns, but it is a little too risky for me.
If you're feeling frisky and want to give it a try, I've heard some good things about Lending Club recently.

Let me know what's in your perfect portfolio in the comments, or tell us why ours is far from perfect.

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  1. Have you looked into investing in individual stocks? I manage a portfolio of about 40 stocks, all dividend growth stocks including REITs. My portfolio return has been far superior than any s&p 500 index fund. Also, REITs are great for boosting the dividend yield, but you have to pick the blue chip REITs and stay away from Mortgage REITs. You can also invest in a REIT ETF such as IYR. Check it out.

    1. I don't buy individual stocks because I would stress out over them way too much. I also don't want to pay fees to buy and sell.
      I'm still mulling over the REITs, but I'm thinking real estate is going to pull back in the next couple years, so I will probably hold off.