How Can I Implement the Discipline Fund in my Portfolio?

The Discipline Fund operates best as a core holding in a diversified portfolio because of its diversification and tax efficient countercyclical rebalancing approach. While it can comprise an entire portfolio on its own, it’s best utilized in combination with other diversified holdings to help the investor meet all of their financial needs. We prefer to use the Discipline Fund inside our Defined Duration strategy because its multi-asset structure is similar to a 10 year duration instrument. This is optimal for a core moderate duration holding in a more diversified portfolio because of its tax efficient countercyclical rebalancing methodology.  

As an example, let’s pretend that Jenna has a moderate risk profile, but needs some liquidity for a house down payment at some point in the next 5 years. This means she needs a liquidity bucket for her short-term expenditures and house down payment, but she also wants a diversified portfolio to remain consistent with her moderate profile. She could create a highly diversified portfolio using as few as 3 buckets. Specifically, she could maintain a short-term bucket comprised of cash and Treasury Bill bucket for short-term expenditures and Vanguard Short-term Government Bond ETF (VGSH) for the house down payment bucket. Her moderate duration bucket could allocate the Discipline Fund as a tax efficient countercyclical core holding and her long-term bucket could allocate to a diversified stock ETF for the long-term growth bucket. This could look similar to a 50/50 stock/bond allocation as follows:¹

• 35% Diversified cash/bonds for liquidity & income.
• 30% Discipline Fund for medium-term growth/stability & tax/behavior efficient rebalancing.
• 35% Diversified stocks for aggressive longer-term growth.

This portfolio can be implemented with as few as three ETFs with a total expense ratio of just 0.16% (for example, 30% DSCF, 35% VGSH and 35% VT) that provides an investor with liquidity across specific time horizons, broad global diversification, simplicity, behavioral bias hedging, low fees and tax efficiency. 

The primary advantage of this allocation relative to using traditional diversified core index funds is that the Discipline Fund’s countercyclical rebalancing approach improves behavioral alpha by helping you behave better, it improves tax efficiency by inverting the core and satellite positions AND potentially improves risk adjusted returns by trying to maintain a lower average standard deviation than today’s balanced indexing options. In a traditional core and satellite approach you have to rebalance the satellites when they outperform the core. The Discipline Fund allows you to maintain a diversified core holding, but rebalances within the single ETF against the predominant trend in the aggressive satellite holding without distributing capital gains, which means you don’t have to rebalance your other holdings as often. This not only means improved behavior and better risk profile consistency, but it also improves tax efficiency relative to traditional core index funds.

¹ – This analysis assumes an average asset allocation of 50% stocks and 50% bonds in the Discipline Fund, although it could rebalance between a band of 30-70 stocks-bonds and 70-30 stocks-bonds. 

² – The 0.14% total expense ratio assumes an aggressive sample allocation of low cost Vanguard ETFs combined with a 30% weighting in DSCF. 

These are hypothetical portfolios and samples and not specific financial advice. Please contact your financial advisor before investing in any securities.