Portfolio building and rebalancing was a completely alien topic to me just a few months ago. When I first started on my journey to financial independence, I looked at my asset allocation and discovered that I had far too much cash just sitting around in my bank accounts.

To achieve my goal of retiring early, I needed to look at investing the money and making it work for me. One obvious option was to invest in index funds and REITs (Real Estate Investment Trusts). This is where portfolio building came into the picture.

portfolio building

Portfolio building and rebalancing. It’s mostly about making risk/reward decisions for your investments.

Portfolio building – Phase 1

When a software engineer encounters a problem, what is the first thing they do? They open their favorite search engine and begin looking for a solution. This is how I ended up reading about lazy portfolios on the Bogleheads wiki.

I knew I didn’t want to spend the rest of my life picking individual stocks, nor did I want to have the majority of my investments in individual stocks. It’s a lot of work and the risk is high.

If you think that investing in Amazon or Microsoft is a sure thing for the long run, think again. History has shown us that no company can remain on top forever. Just watch this visualization of the top 10 companies in the S&P 500 over the last 40 years. It’s really interesting to see how much the top players change.


Picking individual stocks just seems like too much time spent doing things I don’t necessarily enjoy. Reading earnings reports and looking at company valuations is not my cup of tea. I would much rather spend that time playing with my kid or lounging on the beach. I’d be fine knowing that I’ll still come out with an alright return in the long run (40+ years). I don’t need to hit it out of the park every year.

A portfolio of index funds

This is why I liked the idea of the lazy portfolios which are invested in index funds. Now that I had that sorted out, I had to decide on a stocks-to-bonds ratio for my portfolio. I started out with a 85% stocks / 15% bonds split, which seemed reasonable for my risk tolerance at first. I also wanted some REITs, thinking that they don’t move in the same direction as the stock market. Turns out I was wrong about that but more on that later.

The Core-Four portfolio looked like a good fit to me based on the assets it invested in. It had 15% allocated to bonds (same as my preference). It also had REITs and a total stock market index fund (yay, almost a perfect match). After some modifications, I came up with a portfolio that leaned more on the U.S. total stock market and real estate. It looked like this: 46.7% VTI, 15% VXUS, 23.3% VNQ, 15% BND.

Pie chart 1. Portfolio building phase 1 - 46.7% VTI, 15% VXUS, 23.3% VNQ, 15% BND

My starting taxable account portfolio

This made for one pretty looking pie chart that I’ve felt comfortable looking at for two months now. I set up my automated brokerage investment transfer of $3500 per month. I also created a spreadsheet calculator so I’d know how much of each ETF to buy each month. This way I was essentially rebalancing the portfolio with every new investment to keep the original allocation percentages.

Tax optimizations

But then I stumbled upon a comment on reddit which mentioned that apparently it’s recommended to keep bonds not in taxable brokerage accounts but in retirement accounts such as 401(k), Roth IRA, IRA, etc. This is for tax optimization purposes. Bond yields (think dividends) and portfolio rebalancing would trigger a taxable event if kept in a taxable brokerage account. This is sub-optimal. Tax optimization is an important aspect of portfolio building.

On the other hand, keeping track of different ratios across different accounts introduces more complexity. There are views that the difference isn’t that big in the end. Therefore, it might make sense to stick to the KISS (Keep it simple, stupid) design principle and just follow identical portfolios across accounts.

When it comes to bonds optimizations, I also read about municipal bonds. For a moment I considered replacing BND with VTEB as the latter appeared to perform better. However, after some further research on the topic, it seems that municipal bonds only outperform in the higher tax brackets (32%+). I’m currently in the 24% tax bracket, so switching wouldn’t be worth it. Additionally replacing a total bonds index fund with a municipal bonds fund would lower my diversification.

Portfolio building – Phase 2

Now that my portfolio seemingly had some holes poked in it, I continued to educate myself. I had to improve it. I had heard about JLCollinsnh’s popular Stock Series, so I headed over to his blog and found some portfolio building reading material.

Reading Jim’s blog post made me question my 15% allocation to bonds for the second time, after the whole tax optimization thing. Considering that I am still fairly young and still in my wealth accumulation stage, 100% stocks sounds somewhat reasonable.

Furthermore, his post led me to read about his stepping away from REITs. There are good points against keeping REITs in my portfolio. They mostly move with the rest of the market. They are not really an inflation hedge and are already represented in the total stock market index fund (VTI). In addition, eliminating REITs would also mean a simpler portfolio, which I’m highly in favor of.

The single index fund portfolio

Hypothetically, if I were to continue adding all future investments into a single basket (index fund) it would have to be as diversified as possible. Looking at VTI (the total stock market index fund), it is indeed quite diversified. It includes every single publicly traded business in the U.S. In fact, it appears that investing primarily in VTI is a popular approach for other F.I.R.E. folks.

The thing that bothers me is that it means I’d be betting on a single market (the U.S.) to continue to perform this incredibly well for years to come. As we know, past performance is no guarantee of future results. We have no way of knowing what the future holds. As Jack Bogle famously said “Nobody knows nothing.” An economic recession or depression, war, or an Act of God could completely change the picture.

A two bucket portfolio

Luckily, diversifying this risk away is as simple as allocating part of the portfolio to international stocks (VXUS). Now I have a new decision to make – how much to allocate to U.S. and how much to non-U.S. stocks.

From what I’ve read most people prefer to allocate more of their investment portfolio to U.S. stocks and somewhere between 0%-40% to international stocks. Since the U.S. has been outperforming all other markets over the last decade there are many who call for investing only in the U.S. and hoping to get a better return.

However, expecting a higher return one must also assume a higher risk. There’s no such thing as having higher return with lower risk. Risk and return are always moving together.

But the past performance charts don’t lie. It is pretty clear if we look at a comparison of U.S. (VTI) vs non-U.S. (VXUS) for the last 10 years that the U.S. total stock market index has significantly outperformed the international one. In fact, if you invested $10,000 in each index 10 years ago, today your U.S. investment would be worth more than double that of your Non-U.S. investment ($40,689 vs $17,493).

U.S. vs Non-U.S. investment over the last ten years

U.S. vs Non-U.S. investment over the last ten years. Source: PortfolioVisualizer

That said, we should keep in mind that a ten year window is really not that long. I plan on having my stocks in the market for much longer than 10 years, and probably longer than 40. If we look farther back to the 1970s we could see that these periods when one dominates the other are fairly cyclical.

U.S. vs International performance over the last 50 years shows a cyclical pattern

U.S. vs International performance over the last 50 years shows a cyclical pattern. Source: FactorInvestor

Therefore, since I’m investing almost all new money into stocks for the foreseeable future, I am willing to diversify my risk and accept a lower return by investing 50 / 50 between US (VTI) / Non-US (VXUS).

In case you are wondering what the 50 / 50 US / Non-US portfolio’s performance would look like over the same ten year period (2011-2021) here it is. With an annualized return of 10.11% (vs 14.55% for just U.S.) it doesn’t sound too bad for the added peace of mind. Plus, if the next 20 years end up being dominated by the international markets and the U.S. market underperforms I wouldn’t lose as much as if I’d been all U.S.

U.S. vs Non-U.S. vs Equal Split portfolio investment over the last ten years.

U.S. vs Non-U.S. vs Equal Split portfolio investment over the last ten years. Source: PortfolioVisualizer


Well, now my investment strategy is officially even more boring than when I started out. I guess that’s a sign I’m doing it right. Everyone says it’s supposed to be boring. This is the new plan going forward.

Pie chart 2. Portfolio building phase 2 - 50% VTI, 50% VXUS

My new portfolio in my taxable account

Simultaneously with this move I’m making another – I’m doubling down (tripling down?) and raising my monthly automated transfer to my brokerage account from $3500 to $10500. I’ve read that lump sum investments beat dollar cost averaging (DCA) 65% of the time but I’d like to keep some more cash around until I buy a primary residence for myself and my family.

Honestly, I’m still just getting started so this may change yet again in the future. The more I read, the more I realize how much there is to know and learn, and I feel like I don’t know anything!

— Finance Squirrel

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