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Four Pillars, part 5

We’ve covered Bill Bernstein’s Four Pillars. Now, let’s put them together.

A few things to keep in mind:
1) The future is uncertain – there are no sure things in investing (or life).
2) To have a chance of earning high returns, you’ll have to take large risks.
3) There are no perfect portfolios – only reasonable ones you can stick with.
4) Investing can only get you so far; you must also save enough.

What’s the goal of saving and investing for retirement? To cover any and all expenses (at a minimum). Bernstein recommends accumulating at least 25 years of residual living expenses. This is what you need each year after deducting any other sources of income (e.g., social security, pension payments). Assume you need $130,000 per year (adjusted for inflation) and will receive $30,000 in social security each year. Your residual living expenses are $100,000 per year. That means you need at least $100,000* x 25 or $2.5 million (adjusted for inflation) at the time you retire.


The key building blocks of a portfolio are U.S. stocks, international stocks, and short-term bonds or cash. Keep in mind: “your stocks…should take risks and consequently offer high expected (but not always realized) returns. Your bonds should…let you sleep.” Bernstein advocates only owning bonds with a government guarantee (e.g., U.S. Treasuries) and shorter durations (less than 3 to 5 years**). He also suggests that U.S. investors consider allocating 30 to 50% of their equities to international markets.

Here are some example portfolios (not investment advice!):

Simplest portfolio: a Vanguard target date fund.

This should correspond to your risk tolerance, not necessarily your age. If you panicked or lost sleep during 2000-02, 2008-09, or spring 2020 (or haven’t lived through a real downturn yet), consider a lower equity allocation. If big market downturns haven’t bothered you, consider a higher equity allocation.

3-fund portfolio: total U.S. stock market index fund, total international stock index fund, short-term bond index fund.

You could divide your portfolio evenly across the three funds and call it a day. Or you can adjust the mix based on your risk tolerance (e.g., more or less of the bond fund) and preferences. If you use Vanguard’s index funds (or ETFs), you’ll pay management fees of less than 0.1% per year (less than 10 basis points).

4-12 fund portfolio: start with the 3-fund portfolio and split international markets into developed ex-U.S. and emerging. That’s now four funds. You can then add exposure to value and other evidence-based factors. For example, if you add three value funds (one for each geography), that takes you to seven funds. If you want to go further, consider adding ancillary asset classes such as real estate (e.g., REITs).

Could you use more than 10-12 funds? Yes, but you really don’t need to. And, as mentioned in Part 4, I would be suspicious of advisors offering complex portfolios (more funds ≠ better or higher returns).


It is easy to stay the course when things are going well. It is hard after long market downturns or when the financial system is teetering on the edge (e.g., late 2008). And that’s when it matters. “Most of your long-term investment return will be determined by how you behave in the worst 2% of the time.” You need “a clearly defined asset allocation policy you can stick with come hell or high water.”

There’s a lot more in the book.


*you’d need to consider taxes as well. For example, U.S. investors with a rollover/traditional IRA are subject to ordinary income taxes upon withdrawal.
**you can, most of the time, earn higher returns by owning longer duration bonds. Sustained periods of high inflation can devastate the value of long bonds, though. They are, in other words, quite risky.

Related posts: Part 1 (on theory), Part 2 (on financial history), Part 3 (on psychology), Part 4 (on the investing industry).

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