How The Model Portfolio Sausage Is Made

Josh Brown had a very long post declaring "the war is over the human advisors won" and the robo advisors lost. Josh lumped robo in with direct indexing and ESG in terms of being failed ideas or maybe even fads. He also mentioned that there was fear in the advisor community that the robos were going to take jobs away from advisors and it actually turns out there is now a shortage of advisors. I don't know where he got that there is a shortage but I've seen that mentioned elsewhere. 

This is not something I wrote too much about, I certainly was never worried but I doubt I thought it would wither on the vine either. That I don't remember is an indication of how little I care. It seems logical that there is some demand for a simple portfolio that gets rebalanced for you at a cheap price. There is a generalization that this was a better solution for younger investors which could be the case, sure. 

It's not clear to me that robo portfolios are much different than the proliferation of ETF model portfolios, they are all over the place. A big difference is that the models are typically chosen by advisors, a form of outsourcing portfolio management where as the robos are an alternative to using an advisors. 

I asked Grok to find the most common model on the Wealthfront, one of the big robo names, platform and it came up with the following;

US Stocks (VTI): 45%

Developed International Stocks (VEA): 18%

Emerging Markets Stocks (VWO): 16%

Corporate Bonds (LQD): 12%

TIPS (SCHP): 6%

Dividend Growth Stocks (VIG): 3%

Comparing it to VBAIX and the Vanguard 2045 Target Date Fund (VTIVX).

VTIVX is a useful comparison based on its current equity weighting and mix between domestic and foreign. There's nothing wrong with the Wealthfront model but I don't know what investors are getting for their fee (the Wealthfront fees are low). I am less hung up on the performance and more interested in the lack of differentiation. An investor who is comfortable with hands off and very simple could go through the process of getting the Wealthfront model or just buying one target date fund. I don't see the advantage of the model. If there's no advantage, why do it?

We've seen this sort of thing frequently. A lot of models look very similar to the broad market on the way up and on the way down. The model is valid, it will get the job done with an adequate savings rate and no catastrophic behavioral mistakes, same the VBAIX and same as the target date fund. I would say they are not optimal, but they are definitely valid. 

An acquaintance who is also an advisor told me he wants to transition his practice to use index funds because of the potential simplicity. He's not really a portfolio manager so he went to ChatGPT and got this list but with no weightings.

• STOCKS
• SPLG     SPDR Portfolio S&P 500 ETF
• VTI         Vanguard Total Stock Market ETF
• SPMO   Invesco S&P 500 Momentum ETF
• SCHB    Schwab U.S. Broad Market ETF
• SPTM    SPDR Port S&P 1500 Comps Stk Mkt EFT
• BBUS    JPMorgan BetaBuilders U.S. Equity ETF
• VOO      Vanguard S&P 500 ETF
• GSUS    Goldman Sachs MarketBeta U.S. Equity ETF
• SCHM   Schwab US Mid Cap
• ACWX   iShares MSCI ACWI ex US ETF

• BONDS
• BND      Vanguard Total Bond Market ETF
• BIL         SPDR Blmbg 1-3 Mth T-Bill EFT
• SPSB     SPDR Portfolio Short Term Corp Bd ETF
• AGG      IShares Core U.S. Aggregate Bond ETF
• BNDX    Vanguard Total International Bond ETF

This is not to bash on ChatGPT, I don't know what exactly was asked and all of the AI interfaces are going to improve so this is just useful example of how to look at models in general. Seven of the ten equity ETFs track essentially the same thing. SPMO differentiates as does SCHM and of course ACWX is foreign. BND and AGG on the bond side track the same thing. 

For someone who really wants a portfolio of nothing but index funds, I'd say the Bogleheads are closer to having the answer than what ChatGPT spat out for my friend. It is my understanding that the Bogleheads gravitate to a three fund portfolio; domestic equity, foreign equity and a bond fund. That would be valid but at times very painful. I personally thing the answer for a very simple indexed portfolio is maybe four or five funds but I would not buy an aggregate bond fund. 

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