February 8, 2013

If youre interested in choosing your own investments, but think that David Swensens asset allocation model takes too much work to maintain, then this simpler option might be for you.

Its called the Core Four Portfolio. It contains just four funds, as opposed to Swensens six funds.

So how do you build this portfolio?

Choose Your Bond Allocation

First, decide how much you want in bonds. Since bonds dont always move in the same direction as stocks, adding them will help balance part of your portfolio.

Dont know how much you should put in bonds?

A rough guide to follow is that bonds should equal your age. So if youre 30 years old, you should consider putting 30 percent of your money in bonds.

By the time you turn 50 years old, the bond portion of your portfolio also shouldve slowly increased — by 1 percent each year — to make up 50 percent of your portfolio. Of course, you can increase the amount you have in bonds if you dont want to take on as much risk, or decrease the amount if you want to be more aggressive.

So which fund should you include for your bond allocation?

Vanguard Total Bond Market Index Fund (VBMFX)

This is a quality bond fund thats great for most investors. Made up of about 10,000 individual bonds — most of which are U.S. Treasury, mortgage, and corporate bonds — this fund provides plenty of diversification at a low cost.

Your remaining money should be allocated towards stocks.

Subdividing Your Stock Allocation

To keep your portfolio as diversified as possible, its important that your stock allocation includes different subcategories. Heres a deeper look into the reason why.

Different types of stocks perform differently at any given time. You dont want your portfolio to have all of its stock investments in a losing asset class. Thats why you want to have as many types of stocks as is practical to own.

The following three different stock funds will provide the diversification that you need.

Vanguard Total Stock Market Index Fund (VTSMX)

This is a great fund because it closely resembles the entire U.S. stock market. What does this fund include?

Morningstars Instant X-Ray tool shows how your portfolios funds are divided between the different sizes and valuations.