Asset Allocation · Investing

Level Up Your Asset Allocation

Disclosure: this page contains affiliate links. This means if you click on a link and make a purchase, we will receive an affiliate commission. As an Amazon Associate I earn from qualifying purchases.

As with anything investment-related, see my disclaimers. Investing involves risk. My analysis is provided solely for entertainment purposes and in no way do I recommend any course of action. Don't trust random idiots like me on the internet for investing advice. Or for anything else, for that matter.

One challenge that first time investors face is where to invest. The options are nearly infinite, with the financial industry creating new products every day. The myriad of choices are overwhelming.

I propose the following four levels of investing. A beginning investor could start at the first level and as their education and stomach for complexity increases, they could move up to the next level. Too complex at the next level? Then just go back down a level. The higher up the chart, the more complexity and time it will take, but even at the highest level, the amount of effort is still pretty minimal.

Level 1 – One Fund to Rule Them All

This is by far the easiest level. Simply select a US stock market index fund and put all of your investing dollars into it. These funds are typically labeled as “total US stock market” funds. 

Examples: VTSAX, SWTSX, and FZROX.

Advantages: As simple as it gets. No need to worry about allocation percentages or rebalancing. It’s more diversified than buying individual stocks and generally comes with lower fees and usually better returns than actively managed mutual funds.

Disadvantages: Some years will be rocky. You’ll need to keep yourself from doing anything drastic, like pulling money out during a bear market. If you’re in the accumulating phase, don’t worry when the market is down. Just tell yourself it’s on sale as you continue purchasing shares.

Because of the fluctuations, you’ll want to move out of this level and into Level 2 sometime between now and retirement.

Here’s an additional perspective on a one-fund approach.

Level 2 – A Two Fund Seesaw

The next level adds another type of index fund: a total bond market index fund. This fund is similar to the total stock market funds in Level 1 but are invested in the bond markets instead. They are generally lower return but also come with less risk and wild fluctuations as the stock market funds. There is still risk and they can lose money, but it’s generally safer.

Examples: VBTLX, SWAGX, and FXNAX.

Asset Allocation

Now that you’re investing in two funds, you have to determine what percentage you put into the stock fund and how much in the bond fund. This depends a lot on your situation. A rough rule of thumb is to subtract your age from 110 and that’s how much you should have in stocks. Are you 30? Then your allocation would be 80% in stocks, 20% in bonds. 60? 50% in stocks, 50% in bonds. To some, this rule of thumb is too conservative, and you risk running out of money in retirement. Either way, you’ll need to come up with an allocation number you’re comfortable with.


In the past, stocks have outperformed bonds. Over time, your allocation could deviate from your target allocation. You’ll need to periodically re-balance. This means selling shares of the fund that has done really well and buying shares of the fund that hasn’t done as well. 

For example, pretend your allocation was 80% in the stock fund and 20% in the bond fund. After five years your stock fund has gone up more than your bond fund and your current portfolio consists of 85% stock funds and 15% bond funds. Re-balancing would consist of selling shares of the stock fund and buying shares of the bond fund until your overall portfolio was back at 80% stocks and 20% bonds. If you are using the 110-age rule of thumb from above, you might even target 75% in stocks and 25% in bonds.

The general advice is to re-balance often enough but not too often. Many suggest re-balancing every 12 to 18 months or whenever things get too far away from your target allocation. 

Advantages: Typically less fluctuation and more diversification than Level 1. Still low fees.

Disadvantages: More than twice as complex as Level 1: twice as many funds, but now with allocation percentages and re-balancing. But still pretty simple. Typically this approach sacrifices some of the gains in return for more stability.

Here’s additional discussion about a two-fund approach, including the suggestion to substitute a total global stock fund in place of the total US market index fund from Level 1.

Level 3 – Three Funds

The next level increases the complexity by adding an international component. The idea is that while the US stock market has had a remarkable run, the next big growth areas are outside of the United States, so you better be exposed to those international markets. Counter points include the idea that the US stock market is composed of companies that already sell overseas so any US stock market fund already includes a heavy international component and targeting international funds separately isn’t necessary and actually increases your exposure to international risk.

Instead of giving examples of international index funds, I’ll just point to this helpful breakdown of the three-portfolio approach, which includes several example funds from the top brokers.

Advantages: More diversified than either level 1 or 2. Not much more complexity than Level 2 and still pretty simple.

Disadvantages: You’ll need to re-calculate your asset allocation again and you’re now re-balancing a three legged stool. Still not rocket science but it is more complex than earlier levels.

Level 4 – Targeted Funds

In 2017, I picked up a copy of The Intelligent Asset Allocator by William Bernstein. This provided a good introduction to modern portfolio theory, efficient frontiers and the value of having one’s portfolio spread among several asset classes. Some years it’s a bear market and bonds come out on top. Other years small business outperform, or maybe it’s emerging markets. By entering into multiple asset classes, you sacrifice a little bit of return in exchange for an overall less risky portfolio. 

You still invest in these areas using index funds, but it’s more like 9 or 10 different asset classes. This is what drives robo advisors like Wealthfront and Betterment.

I’m at this stage. I primarily use index ETFs, but you can find index equivalents for all of my ETFs. Below are my current allocations target. You will (and should) have different allocations because of your appetite for risk.Do not blindly copy my allocation targets. It probably won’t be a good fit.

Asset Class Tax Advantaged Taxable Example ETF Three-Fund
S&P 500 36% 34% VOO US Equities
US Small Cap 9% 9% VXF US Equities
US Large Cap Dividend 5% 7% VIG US Equities
Foreign 10% 12% VEA Foreign
Foreign, Small Cap 10% 14% VSS Foreign
Emerging Markets 10% 14% VWO Foreign
US Total Bond 10% 0% BND US Bonds
REIT 5% 0% VNQ US Equities
TIPS 5% 0% VTIP US Bonds
Municipal Bonds 0% 5% VTEB US Bonds
Natural Resources 0% 5% VDE US Equities

Converted to the three fund model, my tax advantaged accounts would be ~55% US equities, ~15% bonds, and 30% foreign. My taxable accounts are more aggressive with a target allocation of ~55% US equities, 5% bonds, and 40% foreign.

(Note: I’m grouping both REIT and Natural Resources in with US equities.They arguably behave differently)

Advantages: More diversified (i.e. less risky) than previous levels but still with a low cost and nearly the same return profile. Re-balancing from asset classes that have outperformed to those that have under-performed could lead to better returns than the single fund with no re-balancing.

Disadvantages: Possibly sacrificing some return. Much more complicated than previous levels, but still doable without hiring an advisor. As with level 2 and 3, you’ll need to re-balance periodically to avoid getting allocations that are out of whack with your targets.


I suppose there are more levels than four. Further levels could include so-called “direct indexing”, or buying securities directly and creating your own index. However, I’ve so far found that higher levels have diminishing returns and much greater complexity. Not worth it in my mind.

I personally live at level 4 because I enjoy monitoring my investments at this level. But there’s no shame in living at levels 1, 2 or 3. Each has merit.

What level are you at? I’d love to hear about it in the comments.

Hasta luego.

This is your reward for reading this far.

5 thoughts on “Level Up Your Asset Allocation

  1. I’m in the “3-fund” camp myself, though given my age I’m only a “2-camp” guy at the moment (US equity + Int Equity). I love the absolute simplicity and the ruthless tax efficiency.

      1. Maybe once a year or so. I don’t really stress out about that stuff at all.

        Usually I’ll just change my new investments towards the under-weighted fund. 2 minutes on my 401k administrators website. No selling.

  2. I am level three/four – though I should probably be level 2.

    My little MOB Reit project has grown nicely, but I will eventually close that out once I clear 20k mostly because I have lost interest in it. I am finding some of the tax deductions that come along with REITs intriguing.

    I heard a ton of retail investors signed up for brokerage accounts when the market tanked in March, and a ton of people are buying individual stock again. This has a lot of experts worried. This included some of my own family members who I generally don’t talk finance with at all. Hope they don’t lose their shirt.


    1. It’s a very crazy investing environment. I was fascinated by a Planet Money podcast about people buying Hertz stock even after they filed for a COVID-related bankruptcy. Don’t people know that in bankruptcy the stock owners get nothing? Should have gone to near zero immediately, but didn’t. Crazy stuff.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.