Bill Schultheis Asset Allocation Model

PAUL B. FARRELL wrote an article about Bill Schultheis. He quoted Bill: "Wall Street's most common way is to diversify with stocks by industry sector; technology, health care, transportation, financials, energy and so forth. The result is a portfolio of primarily large-cap stocks that will, in the long run, move almost identical to the S&P 500 index."

Bill Schultheis is a strong advocate of modern portfolio theory: "A more prudent way to diversify is to identify the dimensions of the market that move dissimilar to the S&P 500 in the short run, and build a portfolio accordingly." And that means a decidedly different kind of asset allocation. Instead of focusing on industry sectors, the focus is shifted to include all stock categories including small-caps and international. Here's the simple asset allocation from Bill Schultheis using just seven Vanguard index funds:

(40%) Bond Market Index;
(10%) Standard & Poor's 500;
(10%) Large-Cap Value Index;
(10%) Small-Cap Index;
(10%) Small-Cap Value Index;
(10%) International Stock Index;
(10%) REIT Index.

At surface this allocation model looks simple, but it is one of the best asset allocation models out there. Removing or adding one fund to this model would make the portfolio worse off.

This model has one weakness. Without any sector funds in this portfolio would make this model a little bit weak in a sector driven market such as the technology bull market of the 1990s or the recent energy sector bull market in the recent years. However, by adding 10 sector funds to this portfolio would make the number of funds more than doubled. Then this would not be a simple asset allocation model.