The Investment Scientist

Asset Allocation Return Report: 40/60 Portfolio Model

Posted on: July 22, 2011

MZ Capital 40/60 Portfolio Model

This report shows the construct and performance of a 40/60 model portfolio.

Asset Classes and Fund Selection

There are six asset classes in this portfolio model. The asset allocation is implemented using DFA funds, as shown in the table 1. I explained why DFA funds are better than Vanguard funds here. 

Table 1: Asset Class Funds
Asset Class Percentage Funds
US Equity 10% DFFVX – US Targeted Value Fund
International Equity 10% DISVX – International Small Cap Value Fund
Emerging Markets 10% DFEVX – Emerging Market Value Fund
REIT 10% DFREX – Real Estate Securities Fund
TIPS 20% DIPSX – Inflation-Protected Securities Fund
Treasuries 20% DFIHX – Short-Term Treasuries Fund
Muni Bonds 20% DFSMX – Short-Term Muni-Bond Fund

Note that the equity allocation is tilted toward small cap value, while bond allocation stays clear of credit and duration risks.

Performance Stats

The tables below summarize performance stats for the trailing year and since inception on 1/1/2007.

Table 2: Performance Stats for Trailing Year
Report Date 1-year ret vs. S&P 500 Turnover Volatility Beta Alpha
6/1/2011 15.07% -12.37% 4.31% 6.01% 0.57 +3.58%
Table 3: Performance Stats Since Inception 1/1/2007
Report Date Annual ret vs. S&P 500 Turnover Volatility Beta Alpha
6/1/2011 5.14% +4.32% 6.38% 11.27% 0.52 +4.15%


Turnover is the annualized percentage of portfolio sold during the period. Turnover has a direct bearing on capital gains tax. The lower the turnover, the more tax efficient the portfolio is. Note how low the turnover of this model portfolio is!

Beta measures the market risk of the portfolio with the S&P 500 index as the proxy for the market. The portfolio has about 90% of the market risk.

Alpha measures the access return of the portfolio given its beta.

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2 Responses to "Asset Allocation Return Report: 40/60 Portfolio Model"

Love the blog in general. However I have a question. Wouldn’t including the international and corporate bond finds make the above allocation more diversified, especially given the potential of downgrade in the US gov rating and possibility of higher interest rates?

The answer is yes. The portfolio is a simplified version of what i actually implement for my clients. I can’t show my hands completely.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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