How Can I Actually Implement the Discipline Fund in my Portfolio?
The Discipline Fund was designed to do what its name implies – help investors remain disciplined to a portfolio across time. The key to financial discipline is understanding one’s portfolio and its relation to specific time horizons. In finance parlance this is referred to as “asset-liability matching.” In essence, good financial planning involves estimating future liabilities and then applying an appropriate asset allocation that has a high probability of matching or surpassing those liability needs as they arise over time.
Every portfolio and investor is different, but as a general guide, the Discipline Fund operates best as a core holding in a multi bucket portfolio providing investors with many benefits when compared to traditional indexing strategies. For example, a moderate-risk profile investor who wants to allocate to a 50/50 stock/bond allocation might consider the following allocation:1
- 35% Diversified cash/bonds for liquidity & income.
- 30% Discipline Fund for growth and stability.
- 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 less than 0.15% (for example, 30% DSCF, 35% VCIT and 35% VOO) that provides an investor with liquidity, broad global diversification, simplicity, behavioral bias hedging and tax efficiency.
The Discipline Fund combined with other low cost ETFs creates a remarkably efficient portfolio with several benefits that are difficult to replicate in other low cost indexing portfolios:
1) Diversification – this portfolio is a highly diverse allocation thanks primarily to the 10,000+ holdings of the Discipline Fund.
2) Simplicity – this portfolio simplifies the management of the entire portfolio into just a handful of ETFs.
3) Asset-liability matching – this portfolio compartmentalizes risks across specific behavioral buckets and time horizons to help manage cash flows and behavior.
4) Tax efficient rebalancing – as the aggressive bucket grows, the Discipline Fund seeks to systematically offset this growth when it rebalances countercyclically. This would reduce the need to rebalance the aggressive component and incur capital gains taxes while also keeping a more consistent risk profile. Conversely, when the aggressive component shrinks the Discipline Fund seeks to rebalance more aggressively into stocks helping to maintain your risk profile and potentially increasing future returns.
5) Behavioral leverage – the core holding of the Discipline Fund combined with the security of a liquidity bucket helps to free up behavioral bandwidth allowing more freedom with one’s “aggressive” bucket.
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 30% DSCF, 15% VCIT & 55% VOO.
These are hypothetical portfolios and samples and not specific financial advice. Please contact your financial advisor before investing in any securities.