Uncommon Cents

I first learned of The Coffeehouse Portfolio while reading The Lazy Person’s Guide to Investing by Paul Ferrell, one of the better beginning investor books I’ve read. While this portfolio has more funds than my personal model portfolio, I liked its diversification and performance enough to study it and discuss it with many of my friends.

The Coffeehouse Portfolio consists of seven different funds, each of which is a bit different than the others.

Fixed income represents 40% of the portfolio; the remaining 60% of the portfolio is divided equally (10% each) among six funds: large cap U.S. stock market, large cap value U.S. stock market, small cap U.S. stock market, small cap value U.S. stock market, international stock index, and real estate investment trust. As you can tell, this is a pretty widely diversified portfolio, including both domestic and international exposure and also includes exposure to the real estate market (which is not doing well right now but was going gangbusters a few years ago).

Appropriate funds for this portfolio from Vanguard would include:

Fixed income: Total Bond Market Index (VBMFX), Total Bond Market ETF (BND) or GNMA Fund (VFIIX)

Large cap: Large Cap Index (VLACX) or Large Cap ETF (VV)

Large cap value: U.S. Value Fund (VUVLX) or Value ETF (VTV)

Small cap: Small Cap Index Fund (NAESX) or Small Cap ETF (VB)

Small cap value: Small Cap Value Index (VISVX) or Small Cap Value ETF (VBR)

International: Total International Stock Index (VGTSX) or International Equity Index ETF (VEU)

REIT: REIT Index Fund (VGSNX) or REIT ETF (VNQ)

There are, of course, other options, like the T. Rowe Price GNMA Fund (PRGMX) for fixed income or Fidelity Spartan International Index (FSIIX) for an international fund.

I like the diversification offered by this fund, especially the REIT exposure, although REITs have not performed well in the current housing market. While the portfolio didn’t do so well in 2007, its average over three and five years beats the S&P 500 handily. I also like the fact that the portfolio can be comprised entirely of ETFs, both in terms of low cost and low barrier to entry. On the downside, seven funds are more to look at than the three in my personal model portfolio, and can result in a few more trading costs when it’s time to rebalance. Still, it’s hard to argue with the performance of this portfolio over the last few years. I would strongly consider this model if I was assembling my own model portfolio–in fact, I did, and the main reason I did not go with it was that I could not replicate the funds in my 403(b) plan. The Coffeehouse Portfolio might help you afford relaxing mugs of iced latte in your retirement future.

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