Snapshot of Root of Good’s Diversification and Asset Allocation

I have been a little lazy on the investment front during my three months in early retirement. I haven’t bought or sold anything in my portfolio. Not that it really matters, since you shouldn’t do a whole lot to your investments anyway.  I like to sit back, prop my feet up, and let my investments grow over time.  It’s a beautiful thing, really, watching your wealth grow.  It’s like a skyscraper shooting skyward or a young child metamorphosizing into an adult.

But forget cheeky children and soaring skyscrapers.  A better way to think of your investment portfolio is as an ant colony in your backyard.  I happen to have fire ants in my backyard.  They are very industrious (and painful) little creatures.  A single tiny ant can’t do very much work by itself.  But when there are thousands of ants working in concert, the colony tends to grow.  New baby ants are born.  The colony expands to provide more housing for the new arrivals.  Every few months I’ll spread poison ant bait on the yard in order to fight off the expansion of the ant colony.  The colony shrinks.  I get my yard back temporarily.  Then a few months later, I see the ant colony has regrown.

The ants are robust and continue to regrow their colony year after year because they spread out across my whole yard.  I try to kill them all, but I invariably miss an ant hill somewhere in my yard.  These ants are unconsciously performing geographic diversification across the entire world of my yard. The result of the diversification is survival.


The Way of the Ant: Diversification

Your investment portfolio is like an ant colony.  If your portfolio is diversified like mine, then you own shares of thousands of different companies all around the world.  Each individual company you own contributes very little to the portfolio performance.  But when you have an army of companies working away in your portfolio, the investment returns add up.  If one individual company suffers financial catastrophe and goes bankrupt, your portfolio will have a tiny amount of shares worth zero.  But, like the rest of the ants in the colony, the other shares keep working hard to grow the portfolio, oblivious to the demise of their fallen brethren.

Owning the stock of thousands of different companies is one method of diversification.  The performance of a single company won’t be noticeable in your overall investment returns.  Just by the force of sheer numbers, you can own dozens of companies that do really poorly, yet in a pool of thousands of companies, the impact of poor performance of a few will be muted.

Another way to diversify your portfolio is to buy companies from all over the world.  This strategy is similar to the ants’ strategy of building nests all over my yard.  Rain may ruin their nests in one area of the yard.  I’ll kill many nests with my ant bait in many other areas.  But some nests will always survive.

Across the entire world, economies tend to perform differently from year to year.

Photo by Sujin Jetkasettakorn,
Photo by Sujin Jetkasettakorn,

Sometimes Asian economies do really well.  Other times the European Union countries outperform.  Then other years the US economy performs the best.  If you spread your investments around the world, you don’t have to make a bet on one particular country or region.  The US stock market represents between one third and one half of the total publicly traded investments in the world.  Investing only in US companies means you are ignoring half to two thirds of the investing world and making a concentrated bet on the US of A.

I don’t want to go against the rest of the world and bet only on the US, so I have a significant share of my investments in developed countries and emerging markets around the world.

You can also diversify across different sizes of companies (“market cap” or market capitalization).  Some research has shown that stocks of small companies outperform stocks of large companies.  I buy into that research and I have certain parts of my portfolio devoted to small capitalization stocks.  

Value stocks, or those stocks that have low prices compared to their earnings or book value, have a similar tendency to outperform (as suggested by some research).  I subscribe to that theory, and have a tilt toward value stocks in my portfolio.


Asset Allocation

Some people have an investment strategy of buying whatever stocks or funds their friends tell them are awesome.  Or picking last year’s best performers.  Hey, good luck with that but it’s hard to call it an “investment” or a “strategy”.

I try to spread my investments around to a number of different asset classes.  I know some asset classes will do poorly in any given year, while others will far exceed “the market’s” average return.  Spreading investments across many different asset classes means I’m going to get different results than “the market”.  The S&P 500 index, a measure of the 500 biggest publicly traded companies in the US, might generate a 20% return this year, but I might only make 15% since I’m invested in a large variety of companies that aren’t in the S&P 500 index.  Or I might make 25%.  Who knows in advance?  No one.

Here is an overview of my equities asset allocation and what it would look like with a $1,000,000 investment portfolio (let’s pretend that’s exactly what I have):

Asset allocation overview


When you look at this asset allocation, you may notice that half the assets are US investments and half are international investments.  I also play favorites with value stocks and small cap stocks (both in the US investments and overseas investments).

Real estate (held through REIT’s) comprises 11% of the portfolio.  This is my only “alternative” investment – no commodities or gold here!

There are some relatively volatile asset classes in the portfolio – US and international real estate, emerging markets, and international small cap.  Each of those volatile asset classes represents 5-6% of the portfolio.  These volatile asset classes can drop way more than the broad market, so I didn’t want to take too much risk in any one area.  They also provide out-sized returns in some years.  These volatile asset classes tend to move independently from each other (to some extent), and can sometimes dampen drops in the broad market (if real estate continues to do well, for example).



Before I close, I want to touch on a couple of subjects so my readers aren’t led astray.

My asset allocation is somewhat complex, with the aim to squeeze out maybe an extra one percent of return by taking on a little more risk.  I present my asset allocation here because readers often ask me “what does your investment portfolio look like?”.  Here it is!

If you are a beginning investor, you may want to keep it really simple and pick a target retirement date fund (check out for options).  Or get a little more complex and mix a Total US Market fund with a Total International fund.  I’ll expand on portfolio suggestions for beginning investors in the future.

You may noticed that I have presented a 100% stock portfolio.  That’s almost what I own right now, with only 5% of my total portfolio in cash or bonds.  Since I’m recently retired, I need to increase my cash and bond allocation to probably 10% at a minimum.  My cash and bond holdings are so small that I omitted them from my summary of asset allocation.  In addition, I’ve never explicitly targeted a specific percentage for cash and bonds (other than zero percent) so my current target asset allocation is presented above.

If you are risk averse at all, you’ll want more cash and bonds in your portfolio than what I have.  It can be a bumpy ride at times with nearly 100% stocks in my portfolio.


In my next post, I’ll show you how I use my asset allocation to guide my investment decisions.  Here’s a quick preview of one tool I use.  I have found the easiest way to track my asset allocation is with Personal Capital  (review here).  A peek at the Personal Capital asset allocation tool:

Asset Allocation Summary



Readers: Thoughts?  Do you have an asset allocation?  If not, what is your investment strategy?  


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  1. Interested to know why you are 95% stocks at your age (33, correct?) and not holding at least at minimum 10-20% bonds? Not a fan of age in bonds? Is this due to the fact that you can come out of ER and go back to work if your portfolio isn’t doing too hot?

    1. I’m headed towards 10% bonds/cash. You’ve got the main reasons I’m not too worried.

      I can go back to work. In fact Mrs. Root of Good is still working, for another year or so probably.

      Dividends by themselves almost cover our ~3% withdrawal rate.

      Bonds are still pretty close to historical lows, so my crystal ball says now may not be the best time to buy them. I’ll probably shift into bonds slowly. Cash interest yield vs. short term bond yields aren’t too far apart. And I take zero risk with cash.

      One thing that favors bonds/cash now are the all time highs in the stock market. Not a bad time to shift some money out of stocks (slowly).

      I think for a very early retiree, 80-90% stocks can be appropriate. Inflation is my biggest concern long term.

      1. Well said. Bonds are very expensive now, with little upside. Might consider more REITs though. Run a back test and see how they impact your beta in down markets.

        1. Since I wrote that article, I’ve been letting some money build up in cash. I get 1% which isn’t much worse than bonds, and it’s 100% liquid and FDIC insured.

          I’m at 11% REITs (US and international combined) per my allocation, and the small cap value allocation is actually 1/3 REITs or so (it’s just part of the index). Historically, REITs have been somewhat uncorrelated with the major equity indexes, which is why there’s often a recommendation to include a small portion of REITs in asset allocation. I don’t want to overweight them too much though.

      2. It’s interesting in 2021 to look back at these comments about bonds. Since November 2013, VBTLX is up 28%. Stocks of course are up way more, but bonds provided a nice ballast while returning more than cash.

        1. I saw Ur appearance with Tasha & Joseph on ‘One Big Happy Life’. So inspiring. Unfamiliar with stock world,@ 61 want to retire by 65 but have no retirement fund. Thinkn as scary as it is 4 me, stocks R only way. Social Security won’t afford me, yard 4 the dog (live n condo),Gr8 cars & travel. I want financial freedom. Is it doable ?

  2. One of the problems I see with having so many asset classes is that it is tough to gauge rebalancing decisions. Do you just constantly try to get to a specific target with new funds or do you let your aa ride a little? Great site by the way.

    1. Here’s an article that shows how I rebalance. I don’t have any hard and fast rules. Some check their allocations against their targets once a month, or once a quarter, or once a year on Jan 1. I’ve seen some vague research that said 1x a year is optimal, but it depends on how volatile markets are at the time. So I’d say it probably doesn’t matter.

      While working, I would run the asset allocation about once a month when I had a chunk of $1500 or so to invest. Then dump it into the most underweighted asset class. If I noticed something was really out of balance, I might sell something and buy something else (ever vigilant of avoiding unnecessarily realizing capital gains in taxable accounts).

      And thanks for the compliments on the site! Glad to discuss this stuff here!

      1. My portfolio is pretty simple (1/3 total stock us, 1/3 developed, 1/3 emerging market). I have looked at the historical volatility of this asset allocation to see how quickly it can get out of balance after investing for 1 year. From what I could gather, the assets that create the most volatility in the portfolio aa are the safest assets and riskiest. For me, it ends up being the total stock us and emerging market indexes. The rebalancing bands, I have in place end up being around 7% for emerging/us stock and 4% for developed markets. I have yet to see a rebalancing opportunity, (still new at this), but I will definitely be watching to see how my re balances turn over time. I expect that most of the time, it will lose me money, but then there will be times like 2008 where I will get a huge windfall. Overall, of course, it should lower the volatility of the portfolio and hopefully increase my sharpe ratio.

    1. Conventional wisdom says increase bonds as you get older. If you are comfortable picking up a little side hustle money or reducing spending in down markets, you’ll need less bonds. It also depends on your risk tolerance. If you hate losing money and prioritize principal conservation over long term higher returns, go with more bonds. I’d like to get to 10% cash/bonds at least just so I have a nice fat cash cushion (plus dividends from the 90% stocks) to make me not worry during down markets.

  3. My ideal asset allocation is similar:
    10% US large cap value
    10 % US large cap growth
    10% US small cap US
    10% US REITs
    10% European stocks
    10% Asian stocks
    10% developing country stocks
    10% US bond fund
    10% US inflation-adjusted bonds (currently all I-bonds)

    I like splitting it up like this so I can rebalance, which makes me feel happy because I’m selling high and buying low.

    I have only 20% in bonds because I have a pension and don’t need a lot of stability. But I’ve read that having a small amount of bonds can actually increase your returns.

    1. That’s only 90%! 😉

      I like this kind of allocation because it’s simple to implement your investment strategy. You don’t have to play the sucker’s game of picking the winning stock or mutual fund, you just stick to your allocation. And you don’t need to pay 1-2% to an adviser to implement this strategy.

      As for bonds – if you have a pension, that provides bond-like stability in your income stream like you say. If your stocks take a dive, you still have your pension income. I have seen in the financial literature that pensions can be treated like bonds (take something like 17x your annual pension payment and that is equal to a bond in the same amount – multiplier varies based on COLA on pension and solvency of pension provider).

      I don’t think having a small amount of bonds increases your overall return. It does increase your “risk adjusted return” which is a key concept in the world of financial planning. I’m making up these numbers, but you might expect 9.5% return with an 80% stock portfolio and 9.9% return with a 100% stock portfolio. But increasing the stock allocation from 80% to 100% means a lot more volatility, so you pay a steep price (lots more volatility) for a small marginal gain in returns.

      I’m of the opinion that my ability to earn an income is a bond-like asset that I can always employ (hah!) later to generate income if my equity heavy portfolio topples over in a crash. In other words, un-retire to work full time or part time (as needed). Moshe Milevsky (among others) has written about “human capital” as an important concept in optimal asset allocation decisions, and I recall him describing it as a bond-like entity.

      You may be referring to bonds increasing your portfolio survivability in retirement (as modeled by FIREcalc or cFIREsim). I recall 10-20% bonds does increase your odds of never running out of money if you are a very early retiree, but also reduces your average portfolio value. It comes down to a question of how much risk and potential reward do you want, would you consider working a little, and can you cut spending in tough markets.

      1. Oops! I meant 11.1% of each.

        I don’t mind a small amount of bonds, even if my expected return is slightly lower. And with rebalancing (having some bond fund money to spend on stocks whenever the market plummets), I’m not sure return would really be lower. Plus, since I lived through the ’70s, I love having something tied to inflation. (Heck, even now inflation is higher than any interest-bearing account I have, so I’m a fan even for today!) I-bonds are slightly less sickening this time because they are inflation + 0.2%!

        I’m not a big fan of my ability to earn income. Ugh. I suck at job hunting. And I prefer early retirement. So that is not a part of my strategy (if I can at all help it). Since my pension covers all my basic costs, I only need the extra money to deal with inflation, so I’m pretty sure I can handle cutting my spending from that pool of money in half (or whatever) if necessary.

  4. Hi Justin,

    Just wondering how your annual investment returns have been compared to the S&P the past few years? I think with that much international you must have underperformed the S&P pretty significantly especially since 2011.


    1. Thanks for commenting, ZK.

      Since 2011, sure, we have underperformed. I’ve never actually taken a close look at our performance versus the S&P 500, but thanks for asking the question. Curiosity got the better of me, so I had to dig deeper.

      Even over 5 years, we were a couple percent cumulatively behind the S&P 500.

      I dug back to 2005 when I started tracking rate of return. We beat the S&P 500 by 15% cumulatively, or roughly 1% per year.

      Here’s S&P 500 vs RoG annual returns (including reinvestment of dividends and cap gains):

      S+P RoG
      2005 5% 11%
      2006 16 16
      2007 5 9
      2008 -37 -37
      2009 27 37
      2010 15 19
      2011 2 -7
      2012 16 20
      2013 32 24

      Cumul. 84% 99%
      Avg Ann. 7% 8%

      For the portfolio theorists out there, we achieved a 1% annual performance boost vs. the S&P 500 by diversifying into international, small caps, value, small cap international, emerging markets, and real estate (domestic and international). Some of these investments can best be described as “rocket fuel”, but taken as a whole, they didn’t significantly increase portfolio risk. The standard deviation of annual returns for the S&P 500 was 20% over the last nine years versus 21% for the RoG portfolio.

      1% out performance was about all I was hoping for with the portfolio I composed. I expected the risk to be a little higher, and I’m honestly surprised my portfolio only had a standard deviation of 21%.

      1. Hello. I’m curious how your portfolio would have done compared to something like vtsax, as it is a little more aggressive than the S&P 500 and diversified as well. Thanks very much for your information, I’m three years out for early retirement at 40.

        1. I’m not really sure. The large international exposure means we vary quite a bit from the SP 500 returns year to year. I think in 2008 we performed 10% worse than the SP500, but some years it’s much better also.

      2. Hello Root of Good!

        I am leaning towards matching a very similar asset allocation as you have (Currently we have about 25% international). And I am wondering if you are still slightly ahead of the S&P500 when you include 2014 and 2015 data. I have been struggling with my international portion of my AA given the various suggestions (Jack Bogle, jlcollinsnh) recommending to go with US only. I really agree with your strategy of 50/50 diversification, and it makes sense both when looking at the historic efficient frontier of US vs EAFE (international) and from a stand point of owning a more accurate representation of the entire market. (I even came to the same asset allocation conclusion after reading “The Intelligent Asset Allocator”). For some reason I am still wrestling with the concern that international risks will out weigh US only.

        Given what you know would you still go with this asset allocation for someone 1/4 of the way to FI? And do you have any recommendations to help me sleep better with this choice?

        Thanks Root of Good!

        1. Everything I’ve seen (including “The Intelligent Asset Allocator” and similar books on asset allocation) suggest that having some portion of investments in international funds increases your risk adjusted returns up to an allocation of 30-40%.

          Take a look at Vanguard (who manages trillion of $) and their asset allocation/lifestrategy/target retirement type funds all carry a 60:40 ratio of US to international investments (increased from 70:30 a few years ago).

          The main thing an SP500 only portfolio has going for it is simplicity and tax efficiency (100% qualified dividends I believe). It’s not “wrong” to invest only in SP500 but you can probably do better with a more diversified portfolio.

  5. Thanks for the info. You definitely had some good bounceback years in 2009 and 2010…very impressive. I love the blog..keep up the good work!

    1. Thanks, glad you enjoy Root of Good! The bounce back starting in 2009 was crazy since it started so suddenly and is still going today. I’m afraid it will lead to investor overconfidence and another crash. All the “investors” out there will sell out at the bottom again and learn another hard lesson. Again.

  6. Hey, I heard your interview on the The Voluntary Life and thought it’s really great that you retired so young. Are you still at 10% cash&bond and 90% stock? I saw one of your other posts that you “piled money into risky investments during the 2008-2009 market crash”. Did you have cash available to invest or are you saying you sold existing funds and bought higher risk funds? I’m still adding money by dollar cost averaging each month but am struggling with finding the right allocation cash-bond-stock for existing investments, as we all know a market correction will come at some point.

    1. That Voluntary Life interview was a blast!

      I’m at a little bit less than 10% cash and bonds right now. Most of that is sitting in cash to cover our next year or two of living expenses. I try to stay fully invested in the stock market with almost my whole portfolio.

      We didn’t have any extra cash on the sidelines to invest back in 2008-09. I just kept on with the monthly 401k contributions and plowing all excess cash into IRAs and a taxable brokerage account. I briefly toyed with the idea of going deep into a margin loan or cash out refinancing the house to buy a bunch of stocks back in 2009.

      In hindsight it would have paid off ridiculously well, but it was too risky and not really necessary in order to hit our early retirement and FI goals.

      Finding that perfect asset allocation is tough. I managed to go through the Great Recession without chickening out and selling, so I think I can do it again. That first big correction will help you learn about your own risk tolerance!

      1. Great info, thanks. I didn’t sell either during the 2008 downturn either but I did not learn about good asset allocation until recently. That is awesome you are still keeping 90% in stocks. Keep the updates coming!

    1. Yes, it is! And good call, since I did actually model my asset allocation on his recommendations. Back in 2005 I perused a number of slice and dice asset allocation models and mostly used Paul Merriman’s model (at the time he was posting at the FundAdvice dot com site, since moved to with a hint of William Bernstein’s asset allocation from Four Pillars of Investing. Back in 2005, international small cap and international REIT were hard to buy at low expenses, so Merriman didn’t include those slices. Looks like we have both independently migrated to having an allocation for those asset classes, and in roughly the same proportions. Scary and cool!

      1. I just recently found your blog and am enjoying reading your articles!

        I was going to ask about this exact thing, so I was happy to see you essentially answered most of my questions with this response!

        I am also curious though – after reading about all the slice and dice asset allocation models, how did you end up deciding on what to use?

        Within the past few months I’ve read the Four pillars of investing, Paul Merriman’s advice and articles, and many other books/blogs/articles. I currently have the simple allocation of Total US and international markets, but I believe I would like to slice and dice that up. It sounds like the extra diversity can really help increase returns while decreasing risk. I’m guessing that’s why you chose to slice and dice?

        Do you have any advice on ultimate choosing an asset allocation? I was thinking about going ahead and using Merriman’s Vanguard suggestions….


        1. I got to the point where I realized I had seen just about every model asset allocation and went with one that had some relatively stable boring stuff and some exciting stuff that would hopefully be uncorrelated at times yet give a good overall return.

          The Merriman recommendation is a good one and I wouldn’t hesitate to recommend it.

  7. Justin,

    Congrats on the early retirement and thanks for providing us all with this valuable information! It looks like you invested in 10 index funds. I am curious how often you purchased these funds? Did you purcashe all 10 types of funds every month? Or did you buy these different funds at separate times? (example- US large cap in January, US large cap value in February, US small cap in March, etc)

    Just curious how we can purchase these most effectively, and limit as many brokerage fees as possible.

    Thank you!

    1. It was a mixed approach. We had the 401ks automatically investing in 5-6 different asset classes each month in the proportions we wanted according to our asset allocation. Then the other 4-5 categories, we would invest in one or two once per month with excess cash for the month. In order to maintain the target asset allocation, those monthly investments usually went into the asset class that was the most underbalanced. Occasionally I’ll rebalance to get back to the target allocations if things are really out of balance. That might mean selling an overbalanced mutual fund and buying an underbalanced one.

      In other words, we only paid a brokerage commission 1x per month at a max, and often we bought commission free ETFs at Fidelity or Vanguard mutual funds at Vanguard. I’d estimate our average brokerage fees during a year are probably $30-40 since we just don’t trade that often.

        1. Vanguard mutual fund trades (other than the 3-4 that have a purchase fee) are free at vanguard, as are vanguard ETFs. At high enough asset levels you get $2 or free trades on any ETF or stock as well.

  8. Justin,

    Well done not owning gold or commodities. They would have dragged you down!

    Do you think a case could be made to add VGPMX to a portfolio now, if one was already considering adding it? I’ve been meaning to add a PM/mining index and I don’t know how much lower the index can go…

        1. Wow, I see it’s up 15% in the last couple weeks since you bought. Now I’m jealous! 🙂 I was looking hard at the PM funds but didn’t pull the trigger.

  9. Hi Justin,

    I struggled for awhile to figure what was the best international allocation for me. I decided to go Vanguard Total World Index and Vanguard Total Bond Index for simplicity. This prevents me from tinkering with the international allocation. Such a simple portfolio. I am hoping Vanguard creates a total world bond index. Grats on your success!

    1. That’s not a bad 2 fund portfolio! Agreed on a World Bond Index – would make it much easier to include the few percent of international bonds they recommend for stock heavy portfolios.

    1. Mostly. I’ve shifted to about 7% bonds in the Vanguard Total Bond Market Index and might get to 10% bonds if the market keeps going up. The stock allocation is in the same proportions shown here though.

  10. Thanks for this wonderful article RoG. I had a sizable cash portfolio and this gives me an idea on how to create my own long term portfolio. If you were in my position would you jump in right now with all the cash(close to 800K+ that is currently in MM/CD/savings at approximately 1.5%)?

    Finally with whatever else we had invested we are over our goal of 2.1M!!! Next goal is to achieve atleast 60K a year (our yearly expenses) from our investments before considering retirement or lowering work hours.

    1. Not sure what to do with the $800k in cash/CD/MM. If it’s very long term money ($ you don’t need for 5-10+ years) then you can invest it and even if there is a crash it will likely recover within 10 years. If short term <5 years then I wouldn't invest all of it. Tricky spot to be in.

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