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The RetireMentors

Retirement advice from experts in the business

Dec. 24, 2016, 8:05 a.m. EST

If you’re under 35, this is the ultimate all-value equity portfolio

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By Paul A. Merriman

About Paul

Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website:  "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM.

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Most savvy investors (and certainly Warren Buffet) are well acquainted with the attractions of value stocks and value funds. Over long periods of time, value funds (those that invest in "unloved" and less popular stocks) have consistently outperformed popular indexes such as the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.34%

This week I'm going to show how investors with long time horizons — perhaps those in their 30s and younger — can put this fact to work for them with an all-world, all-value equity portfolio.

Where to begin

This is a simple variation on the Ultimate Equity Portfolio, which reflects the way most of my own equity money is invested. As I have written many times before, I believe this Ultimate Equity Portfolio is the best possible equity combination for most investors.

Portfolio 1 Portfolio 2 Portfolio 3
Portfolio makeup S&P 500 Index Ultimate Equity* Worldwide Value**
Years 1970-2015 1970-2015 1970-2015
46-year compound return 9.25% 11.28% 12.43%
Annual standard deviation 17.3% 18.0% 20.6%
$100,000 grew to (annually rebalanced) $5,859,979 $13,645,527 $21,950,359
Notes:
* 10% each: S&P 500, U.S. large value, U.S. small blend, U.S. small value, U.S. REITs, international large blend, international large value, international small blend, international small value, emerging markets.
** 25% each: U.S. large value, U.S. small value; 20% each international large value, international small value; 10% emerging markets value.

As noted in the table (which identifies it as Portfolio 2), this is made up of equal parts of 10 important asset classes: the S&P 500, U.S. large-cap value, U.S. small-cap blend, U.S. small-cap value, U.S. real estate investment trusts, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value and emerging markets stocks.

Over many medium-term and long-term periods, this combination has outperformed the S&P 500 without adding significant risk. Here's an article that gives a full explanation of how this portfolio is put together and why it has worked so well.

Although that portfolio is weighted toward value, it still contains a lot of growth stocks (in the blend funds), which have tended to lag behind value stocks.

Less is more?

In recent weeks I began wondering: What would happen if such a portfolio were stripped of everything except value funds?

In my column last week, I answered part of that question as it would apply to a simple four-fund U.S. equity portfolio. The answer: Investing equally in only two funds (U.S. large-cap value and U.S. small-cap value) led to significantly higher 15-year returns and 40-year returns, when compared to a four-fund portfolio that also included the S&P 500 and small-cap blend stocks.

The additional statistical risk of this change was not very significant.

So I then wondered: What would happen if we modified the 10-fund Ultimate Equity Portfolio by reducing it to only five value-oriented funds?

You'll see the answers in the table.

The time period in this comparison is shorter than the one I used to compare the U.S.-only portfolios last time. That's because historical data for some international asset classes is somewhat less reliable prior to 1970.

/zigman2/quotes/210599714/realtime
US : S&P US
3,004.04
-10.26 -0.34%
Volume: 1.74B
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