Best Short-Term Investments – 6 ETF Portfolios for One Year Investment Plan

One Year Investment Plan using a two ETF Portfolio Strategy in 4 Easy Steps

Table of Contents

one year investment plans - S&P 500 and Bond portoflio etf index investing suggested
Source: Bankeronwheels.com, Bloomberg. Simple estimation based on calendar years from 1988 until 2020

What is your Risk Profile?

Choose how aggressive you want to be in your investing:

  • In the table above choose one of  6 Profiles from Very Defensive to Very Aggresive (understand why knowing yourself matters most)
  • The Projected Return is an estimation of the expected returns based on currently available information 
  • Historical numbers show you how much you can potentially gain and lose from such a portfolio
  • Below is the full spectrum of historical returns but remember returns may be currently lower due e.g. low yield environment (read below)
  • You can be 100% in Stocks but remember that Bonds can help you re-balance when you need it the most and buy cheap Equities during a crisis. They also tend to increase in price during volatile periods (AGG ETF performance during major downturns)

Given the relatively Short Investment Time Horizon it would be prudent to choose only from Portfolios 1 to 4 (4 being for someone who would choose 6 if he/she would be investing for a very long time period)

BoW Suggestion

How much can I lose?

Put bluntly – no one knows, especially given the very short investment horizon (assumed one year here) but you can use historical data for broad guidance

The longer the investment horizon the lower the return ranges hence it makes sense to consider lenghtening your time horizon if possible (read why time horizon matters)

What were Historical One Year Investment Plan Return Ranges and what can I Expect Now?

Here is what you need to know: 

  • From 1988 to 2020 portfolios composed of the 2 ETFs that are suggested in the one year investment plan have generated on average from 6.1% to 10.2% (before fees). However, accounting for current low Bond Yields and using past Equity returns as guidance the projected returns vary from 1.8% to 10.2% before fees
  • The more Bonds you have (ETF #2) the safer is your portfolio but the lower the average return will be
  • Grey bars are maximum and minimum annual returns that occurred at best/worst point between 1988 and 2020
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Expected Return and Historical Ranges

Source: Bankeonwheels.com, Bloomberg

Check the allocation of the two ETFs

The portfolios in the first table are categorized by Risk you are willing to take. Let’s say you would like to park cash and capture some market upside but limit downside risks you may choose Portfolio #2 – Capital Protection (with some upside potential) portfolio. You would therefore need:

  • 20% of ETF 1
  • 80% of ETF 2
example of two portfolio selection ishares agg vanguard VOO one year investment plan best short term investment strategy

Buy the selected ETFs

For a one year investment plan you now need to buy the two selected ETFs:

  • ETF #1 is a broad market index e.g. S&P 500 with low costs We would suggest to start with Vanguard (VOO) for S&P 500 exposure (with costs as low as 0.03%) or iShares Core S&P 500 (IVV) (same low 0.03% expense ratio)
  • ETF #2 is a broad market Bond ETF. We suggest iShares Core US Aggregate Bond ETF (AGG) for Bonds (expense ratio of 0.04%). You can also pick Vanguard Total Bond Market ETF (BND) with slightly lower fee (expense ratio of 0.035%). To understand the difference you can also have a quick comparison of main Aggregate Bond funds here.

Understand that choosing an ETFs is also about fees. You can pick other ETFs that are tracking the same index but fees will eat up into your returns. For one year investment horizon you just need to subtract the difference. If you were to invest for longer you can see the impact using this ETF calculator. 

Rebalance periodically

Rebalancing periodically is necessary to maintain the risk profile you have chosen. Here the investment horizon is one year so rebalancing is not as important as for long term investing.

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You may do it once a quarter. If your Bonds perform better buy more stocks to have the same 80% 20% allocation over time

Why are Projected Portfolio Returns much lower than historical ones?

  • Current Bond Yields are best indicators of future returns if held to maturity but given that you may sell the ETF in a year from now, the price can also fluctuate (as seen in the graph above)
  • Bond yields are close to their historical lows which means future returns will be much lower than in the past
  • While historical Equity returns are used for guidance, Bond returns are updated based on current environment 

Expect a volatile Market

There is no doubt that the investing landscape is more challenging than it has been historically, (at least) for two reasons:

  • As mentioned, Bond yields are at close to their historical lows which means future returns will be much lower than in the past. Treasury Bonds may be a diversifier but at an expense of no yield – read what you can expect from these ETFs going forward
  • The outlook for Stocks is also highly uncertain given the economic issues and impact it will have on corporate profits. Some investors expect a possible lost decade ahead. We have assumed a more optimistic scenario above with the assumptions that historical averages will continue

Use historical performance as broad guidance only

Given the current challenges described above you may want to look at Projected Returns rather than Historical figures. Also remember that current market is volatile and may diverge from historical figures. 

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DISCLAIMER – the views expressed here are my own personal views. The above is a simplistic generic scenario analysis. The information provided is general in nature only and does not constitute personal financial advice. You should consider the appropriateness of the information having regard to your objectives. You should consider your financial situation and needs. Seek professional advice where appropriate. This website is not affiliated with any of the investment firms for which products are described here.  

DELIVERING QUALITY GUIDES FOR YOUR FINANCIAL INDEPENDENCE

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KellyGR
KellyGR
2 months ago

Thank you for this article

Pmurdreemz1
Pmurdreemz1
2 months ago

I finally got to it. Seems like a good straightforward idea! Gotta love the simplicity. I might just add some bonds to my portfolio since i already have some broad etfs and random things im playing with. Thanks again!