Best Practices for Building Your Own Ben Felix Model Portfolio: A Step-by-Step Guide

Building your own Ben Felix model portfolio: a step by step guide doesn’t have to be complex. This guide will walk you through understanding his strategy, choosing the right funds, and diversifying your investments. Let’s get started on creating a portfolio that aligns with evidence-based practices for long-term success.

Key Takeaways

• The Ben Felix model portfolio emphasizes simplicity and optimization, focusing on low-cost, globally diversified index funds and factor investing to enhance returns.
• Key components include Canadian and international index funds, small-cap value ETFs, and fixed-income securities, promoting diversification across asset classes and geographies to mitigate risk.
• Regular rebalancing, tax efficiency, and performance monitoring are crucial for maintaining alignment with investment goals and enhancing long-term portfolio performance.
• Ben Felix Model Portfolio

Understanding the Ben Felix Model Portfolio

Ben Felix’s investment strategy is a harmonious blend of simplicity and optimization, grounded in the principles of index investing and academic research. This approach, championed by Felix and his team, is designed for DIY investors who seek to build wealth through evidence-based investing. The core philosophy revolves around using low-cost, globally diversified index funds or ETFs to achieve long-term financial goals.

One of the standout features of the Ben Felix model portfolio is its incorporation of factor investing. This method involves targeting specific characteristics such as size, value, and profitability, aiming to enhance potential returns. Leveraging these factors allows the portfolio to capture premiums linked to specific risks, thereby increasing expected returns.

The primary objective of the Felix Five Factor model portfolio is to boost expected returns by capturing premiums linked to specific risk factors. These include the market, size, value, profitability, and investment factors. Strategically targeting these risk factors aims to deliver superior performance over time.

Structured to provide diversified exposure across various asset classes, the Ben Felix model portfolio includes a mix of low-cost index funds that cover both stocks and bonds. This diversified approach not only enhances potential returns but also mitigates risk, making it a robust choice for investors seeking long-term growth.

Most investors are advised to choose low-cost, globally diversified, risk-appropriate, and automatically rebalancing investment products for passive investing. This ensures that the portfolio remains aligned with the investor’s goals and risk tolerance, providing a hassle-free investment experience.

Key Components of a Ben Felix Model Portfolio

The Ben Felix model portfolio is primarily composed of low-cost diversified funds, ensuring that investment expenses remain minimal while maximizing returns. This includes a significant allocation to Canadian index funds, with 30% of the portfolio dedicated to the iShares Core S&P/TSX Capped Composite ETF. This fund provides broad exposure to the Canadian equity market, offering a solid foundation for the portfolio.

In addition to Canadian index funds, the portfolio includes a 10% allocation to the Avantis U.S. Small Cap Value ETF. This ETF provides exposure to small cap growth stocks and small cap stocks, which have historically outperformed their larger counterparts, especially in terms of growth potential. Focusing on small caps aims to capture the size premium, a key risk factor in the Ben Felix strategy.

International markets also play a crucial role in the Ben Felix model portfolio. Funds like the iShares Core MSCI EAFE IMI offer exposure to developed markets outside of North America, while a portion of the portfolio is allocated to emerging markets to enhance potential returns and provide geographical diversification. International exposure mitigates risks tied to investing in a single market and enhances portfolio resilience.

Fixed-income securities are another essential component of the Ben Felix model portfolio. These investments provide stability and reduce overall portfolio risk, balancing the higher volatility associated with equity investments in emerging markets. Incorporating bonds and other fixed-income assets helps achieve a balanced risk-reward profile, catering to diverse investor risk tolerances.

Overall, the key components of the Ben Felix model portfolio work together to create a diversified and well-structured investment strategy.

The components include:

• Canadian index funds
• Small cap value ETFs
• International stocks
• Fixed-income securities

Combining these elements creates a comprehensive approach to long-term financial goals.

Step 1: Defining Your Investment Goals

Before diving into the specifics of asset allocation and fund selection, it’s crucial to define your investment goals. This foundational step sets the stage for a successful investment journey. Assessing both your willingness and financial capacity to take risks is essential. Your risk tolerance will heavily influence your investment strategy, so understanding it from the outset is vital.

Your financial situation and time horizon significantly impact your risk tolerance. For instance, a young investor with a stable income and a long time horizon might be more willing to take on higher risks compared to someone nearing retirement. The significance of your financial goals also plays a role. If your goals are critical, such as funding your child’s education or buying a home, you might adopt a more conservative approach.

Consideration of risk tolerance, time horizon, and the costs associated with downside risk protection strategies is necessary. Long-term investments generally allow for higher risk-taking since there’s more time to recover from market fluctuations. This is why understanding your time horizon helps in setting clear and achievable investment objectives.

Once you’ve assessed your risk tolerance and time horizon, the next step is to set clear and achievable investment objectives. These objectives should align with your financial goals and risk tolerance. Whether you’re aiming for capital gains, steady cash flow, or both, having well-defined goals will guide your asset allocation and investment choices.

Defining your investment goals is a critical first step in building a successful portfolio. Understanding your risk tolerance, time horizon, and financial objectives enables the creation of a tailored investment strategy that fits your unique needs and aspirations.

Step 2: Asset Allocation Strategy

Asset allocation is the cornerstone of any successful investment portfolio. It involves diversifying your investments across various asset types, such as stocks, bonds, and cash, to achieve a balance that aligns with your financial goals and risk tolerance. Regularly reviewing asset allocations ensures it remains in sync with evolving goals and risk tolerance, including considerations for each asset class.

The proposed asset allocation for the Ben Felix model portfolio includes 30% XIC (iShares Core S&P/TSX Capped Composite ETF), 30% VUN (Vanguard U.S. Total Market Index ETF), 10% AVUV (Avantis U.S. The allocation includes 16% in XEF (iShares Core MSCI EAFE IMI). Additionally, there are 6% in AVDV (Avantis International Small Cap Value ETF) and 8% in XEC (iShares Core MSCI Emerging Markets IMI). This diversified mix aims to provide broad market exposure while capturing specific risk premiums.

Including assets from both developed and emerging markets can lead to better growth potential during different economic cycles. Developed markets, such as those represented by the XEF and VUN, offer stability and consistent growth, while emerging markets (XEC) provide higher growth potential but come with increased volatility. This combination ensures a balanced risk-reward profile.

Currency diversification is another critical aspect of asset allocation. Investing in assets denominated in different currencies mitigates risks associated with local currency fluctuations. Geographical diversification, which involves spreading investments across various countries, further enhances this risk mitigation. Global investment opportunities also provide access to innovative sectors that may not be available in your home country.

Tactical asset allocation adjusts the distribution of assets based on current market conditions, helping to reduce exposure during downturns. Regularly reviewing and adjusting asset allocation maintains a diversified and resilient portfolio aligned with your financial goals.

Step 3: Selecting the Right Index Funds and ETFs

Selecting the right index funds and ETFs is crucial for building a cost-effective and high-performing portfolio. The Ben Felix model portfolio emphasizes the importance of low-cost index funds and ETFs to keep investment expenses minimal and maximize returns. Choosing funds with lower expense ratios significantly enhances long-term investment performance.

One of the key factors in selecting the right funds is to focus on globally diversified index exposure through globally diversified index funds. These funds provide broad market exposure, reducing the risk associated with investing in a single market or sector. For example, the iShares Core MSCI EAFE IMI and iShares Core MSCI Emerging Markets IMI offer exposure to international and emerging markets, respectively, ensuring a well-rounded portfolio.

When selecting index funds and ETFs, it’s also essential to consider their alignment with your investment goals and risk tolerance. For instance, if your objective is to capture the size premium, you might include a small cap value ETF like the Avantis U.S. Small Cap Value ETF (AVUV). Similarly, for those interested in dividend investing, selecting ETFs that focus on dividend stocks can be beneficial.

Ultimately, the goal is to create a diversified portfolio that aligns with your unique investment objectives. Carefully selecting low-cost, globally diversified index funds and ETFs builds a robust, enduring portfolio.

Step 4: Implementing Factor Tilts

Implementing factor tilts is a sophisticated strategy to enhance your portfolio’s returns. The Ben Felix model portfolio utilizes factor-based investing, targeting specific characteristics like size and value to boost returns. Allocating parts of your portfolio to these factor strategies capitalizes on expected returns less prevalent in traditional asset allocation.

One effective way to capture better historical returns is by focusing on small cap value stocks, which represent the Size premium. The value factor, which involves investing in undervalued stocks, has also shown to yield better returns compared to more expensive stocks. Emphasizing these factors enhances expected returns.

Combining uncorrelated factors in your portfolio increases diversification and reduces the chances of significant losses. A balanced and diversified multi-factor allocation involves adding uncorrelated, positive expected return sources, which can improve your portfolio’s overall performance.

Adjusting risk profiles by allocating more or less to specific factors based on their exposures can help tailor your portfolio to your risk tolerance and investment goals. Implementing factor tilts creates a more resilient and potentially higher-performing portfolio.

Step 5: Diversification Across Geographies

Diversification across geographies is a fundamental principle in building an effective portfolio. Geographical diversification is essential for reducing portfolio risk and improving performance. Spreading investments across various regions mitigates the impact of localized economic downturns.

The Ben Felix model portfolio emphasizes the importance of diversifying across geographies and asset classes. This approach helps achieve a more resilient portfolio, capable of weathering market volatility. For instance, the inclusion of international stocks through funds like the iShares Core MSCI EAFE IMI and emerging markets via the iShares Core MSCI Emerging Markets IMI provides broad market exposure.

Incorporating multiple geographies in your investment strategy can help achieve long-term financial stability. Investing in both developed and emerging markets captures growth opportunities across various economic cycles. This geographical diversification enhances your portfolio’s resilience and potential for higher returns.

Overall, the diversification benefit of investing across geographies cannot be overstated. It not only reduces risk but also improves your portfolio’s ability to achieve long-term financial goals.

Step 6: Tax Efficiency and After-Tax Asset Allocation

Tax efficiency is a critical aspect of building a successful investment portfolio. Asset location helps investors select the best accounts for different investments to minimize tax liabilities. A balanced portfolio benefits most from asset location, especially when including both equity and fixed-income investments.

Holding tax-efficient investments, such as stocks, in taxable accounts can yield lower tax rates on gains and dividends. Conversely, fixed-income securities, which generate taxable income, are better placed in tax-deferred accounts to avoid higher ordinary income tax rates. This strategic placement can significantly enhance your portfolio’s overall tax efficiency.

Investors sometimes place tax-inefficient assets in taxable accounts, missing opportunities for tax optimization. To avoid this pitfall, consider using tax-advantaged accounts for rebalancing, which can minimize potential capital gains taxes.

For retirees, the benefits of asset location become more prominent as they begin withdrawing from tax-deferred accounts. Carefully considering tax efficiency and after-tax asset allocation maximizes portfolio returns and improves financial goal achievement.

Step 7: Regular Rebalancing and Portfolio Maintenance

Regular rebalancing is a key technique in maintaining the desired asset allocation and minimizing risk exposure. Over time, market performance can cause your portfolio to drift from its target allocation, necessitating rebalancing to realign it with your goals. Regular rebalancing helps manage risk levels by ensuring your portfolio does not become overly aggressive or conservative.

There are two main methods of rebalancing: calendar-based and threshold-based. Calendar-based rebalancing involves adjusting your portfolio at regular intervals, such as quarterly or annually. Threshold-based rebalancing, on the other hand, occurs when your asset allocation deviates from the target by a certain percentage. Both methods can be effective, depending on your personal preferences and market conditions.

Automatic rebalancing tools available on many platforms can simplify the process, making it easier to maintain your desired asset mix. These tools can automatically adjust your portfolio, ensuring it remains aligned with your investment strategy without the need for constant monitoring.

Regular rebalancing and portfolio maintenance slightly boosts expected returns and ensures alignment with financial goals.

Risk Management Techniques

Effective risk management is crucial for any investment strategy. Downside risk refers to the chance that an asset’s price will decline, representing potential losses from market fluctuations. A commonly used method to assess downside risk is the semi-variance, which focuses solely on negative deviations from expected returns.

The Treynor ratio is another valuable tool for assessing portfolio performance. It considers excess returns relative to market risks, providing a risk-adjusted perspective. Similarly, the Sharpe ratio measures performance by taking into account the total risk of the portfolio, rather than just market risk.

Jensen’s alpha indicates how much of a portfolio’s return is due to the manager’s skill, by comparing actual returns against expected returns based on market risk. Consistently positive alphas suggest that a portfolio manager is generating returns above the expected market return after adjusting for risk. Regularly updating the risk-free rate and market return assumptions is crucial when calculating Jensen’s alpha over time.

Diversified multi-factor portfolios reduce risks, helping to mitigate short-term downsides. Employing these risk management techniques ensures portfolio resilience and capability for long-term financial success.

Performance Monitoring and Adjustments

Monitoring and adjusting portfolio performance is a critical aspect of successful investing. Effective portfolio evaluation requires using multiple performance metrics, such as the Treynor, Sharpe, and Jensen ratios. These metrics provide a comprehensive view of your portfolio’s performance, considering both returns and risks.

Historically, the performance of Ben Felix’s portfolio has outpaced the S&P 500, with a compound annual growth rate of 8.18% compared to 7.37% for the S&P 500. This impressive performance underscores the effectiveness of the Ben Felix model portfolio in achieving superior returns.

Monitoring and adjusting portfolio performance is essential for responding effectively to changing market conditions. Regularly reviewing your portfolio allows you to make necessary adjustments, ensuring it remains aligned with your investment goals and risk tolerance.

Based on performance evaluations, adjustments may be necessary to better align with your investment objectives or to respond to market shifts. Staying vigilant and proactive maintains a high-performing portfolio that meets financial aspirations.

Common Pitfalls to Avoid

Avoiding common pitfalls is essential for maintaining a successful investment portfolio. One such pitfall is portfolio sprawl, characterized by excessive accounts and holdings, which can lead to redundancy and complexity. Streamlining your portfolio can help reduce unnecessary complexity and improve overall efficiency.

Another common mistake is maintaining a portfolio of individual stocks that mirror the holdings in mutual funds or ETFs. This approach increases risk without providing any additional benefit. Instead, focus on selecting a diversified mix of funds that complement each other.

Neglecting to review your mutual funds regularly is another pitfall. Allowing underperforming funds to persist in your portfolio over time can drag down your overall returns. Regular reviews and adjustments are crucial to ensure your portfolio remains high-performing.

Awareness of these common pitfalls and proactive avoidance maintains a robust and efficient investment portfolio.

Summary

In conclusion, building a successful Ben Felix model portfolio involves several key steps. Defining your investment goals is the first and most crucial step, setting the foundation for your entire investment strategy. Understanding your risk tolerance, financial situation, and time horizon will guide your asset allocation and fund selection.

Asset allocation is the cornerstone of your portfolio, ensuring a balanced mix of stocks, bonds, and other assets that align with your goals. Selecting the right index funds and ETFs, focusing on low-cost, globally diversified options, is essential for maximizing returns and minimizing expenses.

Implementing factor tilts can enhance your portfolio’s performance by targeting specific factors like size and value. Geographical diversification further improves resilience against market volatility, providing a balanced and well-rounded portfolio.

Tax efficiency and regular rebalancing are critical for maintaining your portfolio’s alignment with your goals and minimizing tax liabilities. Effective risk management techniques and performance monitoring ensure your portfolio remains robust and capable of achieving long-term financial success.

By following these best practices, you can build a resilient and high-performing Ben Felix model portfolio that meets your financial aspirations and provides peace of mind.

Frequently Asked Questions

What is the Ben Felix Model Portfolio?

The Ben Felix Model Portfolio employs an evidence-based investment strategy focused on simplicity and optimization through low-cost, globally diversified index funds or ETFs, while incorporating factor investing to potentially enhance returns by targeting specific risk factors. This approach aims to provide a balanced and effective investment solution.

Why is asset allocation important?

Asset allocation is essential as it diversifies investments across different asset classes, balancing risk and potential returns. This strategy aligns your portfolio with your financial goals and risk tolerance, fostering long-term growth.

How do I select the right index funds and ETFs for my portfolio?

To select the right index funds and ETFs for your portfolio, prioritize low-cost, globally diversified options that align with your investment goals and risk tolerance. Aim for funds with lower expense ratios and consider varying regions and asset classes for optimal diversification.

What are factor tilts, and how do they enhance returns?

Factor tilts enhance returns by strategically allocating portions of your portfolio to specific factor strategies, such as small cap value stocks, which have historically outperformed traditional asset allocation methods. This targeted approach allows investors to capitalize on the potential of certain risk factors that drive higher returns.

What are common pitfalls to avoid when building a portfolio?

To build an effective portfolio, avoid pitfalls such as portfolio sprawl and redundant holdings by streamlining your investments and ensuring diversification. Regular reviews of your holdings are essential for maintaining optimal performance.