Courtesy of Richard Ferri

In this installment of a new feature at Bucks, where we ask personal finance experts in a particular area to share the strategies they use in their own lives, we turn to Richard Ferri. He is the founder of low-cost investment adviser Portfolio Solutions and a proponent of investing in index funds.

So what does he have in his own account?

Mr. Ferri, 52, keeps his emergency funds (a couple of years’ worth of living expenses) in the Vanguard Short-Term Bond exchange traded fund. It tends to return about 2 percent.

Meanwhile, since he has a pension and defined-benefit plans from former employers and thus can handle some risk, he’s more aggressive when it comes to his own retirement savings. He puts 80 percent in stocks and 20 percent in bonds in the same funds he picks for clients who want to invest aggressively. So what’s his exact mix of funds?



One quick caveat before we share that: he says what’s more important than the exact funds you use, assuming you’re in globally diversified low-cost index funds and not expensive actively managed funds, is the asset allocation. “Let’s think of it as baking a cake. The cake is 80 percent equity and 20 percent fixed-income. Those are the two ingredients,” he said. “How you get to that allocation and what the funds are doesn’t matter very much. It’s the icing on the cake.”

As for his exact funds, 48 percent is in United States stock. Specifically, about 34 percent is in the Vanguard Total Stock Market Exchange Traded Fund, about 10 percent is in the iShares SmallCap 600 Value Index Exchange Traded Fund and about 5 percent is in the Bridgeway Ultra Small Company Market fund. He picked the Vanguard fund, he said, because it is “dirt cheap,” with a .07 percent annual fee, while still capturing the returns of the entire United States stock market.

Meanwhile, Mr. Ferri has the small-cap funds to capture the fact that small businesses make up more of the economy than are represented in the broader stock market index. “I want to have diversification so my portfolio looks a little more like the economy than the stock market,” he said.

He picked the iShares fund in particular, he said, because it is broadly diversified in small stocks, it’s cheap and includes stocks that are smaller than other small-cap value index funds. He also picked the Bridgeway fund because it covers very small stocks.

Meanwhile, Mr. Ferri includes extra real estate in his portfolio for the same reason he has extra small stocks: to magnify the impact of real estate so his portfolio is more reflective of the general economy. Specifically, he has about 8 percent of the portfolio in the Vanguard REIT Exchange Traded Fund because it’s cheap and captures the entire traded-property REIT spectrum in the United States.

As for the rest of his equity portion, he has it in international equity, specifically 7 percent each in the Vanguard Pacific Index Exchange Traded Fund and Vanguard European Index Exchange Traded Fund and 5 percent each in the DFA International Small Cap Value and DFA Emerging Markets Core funds.

Mr. Ferri splits his international holdings evenly between Asia and Europe rather than trying to guess which one is going to do better. You can generally only buy DFA funds through a financial adviser, but he said that buying the Vanguard Emerging Market Exchange Traded Fund fund would be a good substitute for the DFA Core fund.

As for bonds, he has 60 percent of his bond allocation (about 12 percent of his portfolio) in the Vanguard Total Bond Market fund and 20 percent (or about 4 percent of the portfolio) each in the Vanguard Inflation-Protected Securities and the Vanguard High Yield Corporate Bond funds. The Vanguard Total Bond Fund, he said, covers all of the investment grade bonds that trade in the United States so “you’ve got the whole bond market right there.” It does not, however, contain the two parts he covers with the other two funds. All of the bond funds he picked are Vanguard, again, because they are inexpensive.

Finally, Mr. Ferri says he rebalances once a year to get back to these percentages around the same time that he makes an annual big contribution to his retirement savings.

How would you tweak Mr. Ferri’s approach, assuming an identical asset allocation?