The Efficient Frontier Portfolio
Investing for retirement is not easy mostly because we are trying to create a portfolio which is aggressive in the earlier years while more conservative when we approach the retirement age.
In the model we have created we have a list of 42 ETFs to choose from. Depending on the customer requirements, we typically consider only ETFs with at least 15 years of life. This is because we would like to include events like: the 2007-2009 recession, 18Q4, 20Q1 and 2022. After this initial screening, we also eliminate high correlated ETFs (more than 75% correlation).
With our assumptions, a portfolio that invests in a mix of bonds and equities can expect to perform as follow:
Assuming you start investing when you are 20 years old and by 60, you would like to be 95% in fixed income, then the ideal splice between equities and fixed income is:
This is just an example and the actual results will change depending on each individual situation and risk tolerance that impacts the CAGR.
If you would like to maximize your rate of return for a given risk, in the Product page, I am making available a spreadsheet that defines the optimal portfolio allocation based on your targeted CAGR and the Efficient Frontier portfolio optimization approach; link here.
Disclaimer: This is not an investment advice. The numbers are provided as is. The theoretical analysis presented in this article will not mirror what happens in real life because the returns of the equity and bond market can and will fluctuate year over year.