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The RetireMentors

Retirement advice from experts in the business

Feb. 19, 2016, 6:50 p.m. EST

The ultimate buy-and-hold 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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"Ultimate" isn't a term to toss around lightly. But in this case it fits. I believe the investment portfolio I'm about to describe is the absolute best way to achieve long-term growth in the stock markets.

My view is based on the very best academic research of which I'm aware, as well as my own experience working with thousands of investors over the past half century.

Fortunately for you, you don't have to take my word for it. I'll show you the evidence.

I can describe this portfolio briefly: The "ultimate" portfolio starts with the S&P 500 Index, then adds small and equal portions of nine other very carefully selected U.S. and international asset classes, each one being an excellent long-term vehicle for diversifying.

When it's properly done, the result is a low-cost portfolio with massive diversification that will take advantage of market opportunities wherever they are, and at no more risk than that of the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.65% .

I'll roll this out in steps rather than all at once. That way, you'll see how it goes together.

The base "ingredient" in this portfolio is the S&P 500 Index, which is a pretty decent investment by itself. For the past 46 calendar years, from 1970 through 2015, the S&P 500 compounded at 9.25%. An initial investment of $100,000 would have grown to $5.86 million.

For the sake of our discussion, think of this index as Portfolio 1 . It's not bad, and you could do a whole lot worse than just adopting this simple asset class.

But you can do a whole lot better, too. You take the first small step by adding large-cap value stocks, ones that are regarded as relatively underpriced (hence the term value).

(The links above, and others below, are to specific articles from 2015 that focus on each asset class.)

By moving only 10% of the portfolio from the S&P 500 into large-cap value stocks (thus leaving the other 90% in the S&P 500), you create what I call Portfolio 2 .

Although only 10% of the portfolio has changed, the 46-year return changes a lot. Assuming annual rebalancing (an assumption that applies throughout this discussion), the 9.66% compound return of Portfolio 2 was enough to turn $100,000 into $6.95 million.

In dollars, that's an 18.5% increase over the index itself – the result of changing only one-tenth of the investments. The following commission-free ETFs are available at either Vanguard, Fidelity, Schwab or TD Ameritrade: iShares Russell 1000 Value ETF /zigman2/quotes/206232959/composite IWD -0.83% , Vanguard Russell 1000 Value ETF /zigman2/quotes/206196793/composite VONV -0.73% , iShares Core U.S. Value ETF /zigman2/quotes/203525188/composite IUSV -0.82%   and Schwab U.S. Large-Cap Value ETF /zigman2/quotes/207886782/composite SCHV -0.63%  

In the next step we build Portfolio 3 by putting another 10% into U.S. small-cap blend stocks, decreasing the weight of the S&P 500 to 80%. Small-cap stocks, both in the U.S. and internationally, have a long history of higher returns than the S&P 500. Here are my recommended small-cap blend ETFs: Vanguard S&P Small-Cap 600 ETF /zigman2/quotes/208323004/composite VIOO -0.77% , iShares Core S&P Small-Cap ETF /zigman2/quotes/208653303/composite IJR -0.74% , Schwab U.S. Small-Cap ETF /zigman2/quotes/205718070/composite SCHA -0.64%

This change boosts the compound return of the portfolio to 9.81%; an initial $100,000 investment would have grown to $7.4 million – an increase of $1.54 million (or 26.3%) compared with Portfolio 1.

Taking one more step, we add 10% in U.S. small-cap value stocks, reducing the influence of the S&P 500 to 70%. Here are my recommended small-cap value ETFs: Vanguard S&P Small-Cap 600 Value ETF Vanguard S&P Small-Cap 600 Value ETF /zigman2/quotes/201476524/composite VIOV -1.02% , iShares S&P Small-Cap 600 Value ETF /zigman2/quotes/208698388/composite IJS -0.94% , iShares Russell 2000 Value ETF /zigman2/quotes/202341160/composite IWN -1.01%

Small-cap value stocks historically have been the most productive of all major U.S. asset classes, and they boost the compound return of Portfolio 4 to 10.23%, enough to turn that initial $100,000 investment into $8.82 million.

Compared with Portfolio 1, that's a dollar increase of about 51%, while still leaving more than two-thirds of the portfolio in the S&P 500. To my mind, that's a mighty fine result.

In the next step, creating Portfolio 5 , we invest another 10% of the portfolio in U.S. REITs funds. Result: a compound return of 10.36% and an ending cash value of $9.32 million. Here are my recommended REIT ETFs: Vanguard REIT ETF /zigman2/quotes/202931846/composite VNQ -0.34% , Fidelity MSCI Real Estate Index ETF /zigman2/quotes/203984376/composite FREL -0.38% , Schwab U.S. REIT ETF /zigman2/quotes/204218354/composite SCHH -0.33%

/zigman2/quotes/210599714/realtime
US : S&P US
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-19.62 -0.65%
Volume: 1.74B
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$ 128.11
-1.07 -0.83%
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$ 112.28
-0.83 -0.73%
Volume: 22,592
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$ 57.18
-0.47 -0.82%
Volume: 397,747
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$ 56.51
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Volume: 321,678
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$ 141.10
-1.09 -0.77%
Volume: 32,701
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US : U.S.: NYSE Arca
$ 77.33
-0.58 -0.74%
Volume: 2.41M
July 17, 2019 8:00p
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/zigman2/quotes/205718070/composite
US : U.S.: NYSE Arca
$ 71.40
-0.46 -0.64%
Volume: 232,785
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US : U.S.: NYSE Arca
$ 126.27
-1.30 -1.02%
Volume: 9,364
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/zigman2/quotes/208698388/composite
US : U.S.: NYSE Arca
$ 146.23
-1.39 -0.94%
Volume: 254,205
July 17, 2019 8:00p
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/zigman2/quotes/202341160/composite
US : U.S.: NYSE Arca
$ 118.76
-1.21 -1.01%
Volume: 695,222
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/zigman2/quotes/202931846/composite
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$ 88.88
-0.30 -0.34%
Volume: 6.42M
July 17, 2019 8:00p
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/zigman2/quotes/203984376/composite
US : U.S.: NYSE Arca
$ 26.56
-0.10 -0.38%
Volume: 153,315
July 17, 2019 8:00p
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/zigman2/quotes/204218354/composite
US : U.S.: NYSE Arca
$ 45.34
-0.15 -0.33%
Volume: 491,107
July 17, 2019 8:00p
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