Guideline Managed Investment Portfolios
When you first enroll in your Guideline 401(k), you’ll be asked to tell us when you plan to retire, and how comfortable you are with investment risk, so we can recommend a suitable investment portfolio. You may select our recommended portfolio, or any of our other model portfolios, which are professionally managed at no additional cost.
If you are an experienced investor (or working with your own personal financial advisor), you can design your own custom portfolio from our fund lineup instead of using a one of our six managed portfolios.
Learn more about Guideline’s managed portfolios below.
What is an Investment Portfolio?
An investment portfolio is a collection of different types of investments (or asset classes). Guideline’s managed investment portfolios all contain assets from the same basket of funds, including US and international stocks and bonds, and real estate. Our portfolios differ only in the proportion of assets allocated to each fund, depending on how aggressive or conservative they are intended to be. This strategy is aptly named asset allocation and is used under the broader context of Modern Portfolio Theory.
What is Modern Portfolio Theory and How Does It Benefit My Investment?
Modern Portfolio Theory (MPT) assumes that any given investor can maximize returns by holding a diversified portfolio of assets with their desired amount of risk. A single asset’s return shouldn’t be judged alone, but should be considered in the context of the overall portfolio.
MPT is premised on the expectation that if one or two assets within your portfolio dip in the short-term, this shouldn’t be cause for panic because other uncorrelated assets in your portfolio can drive returns. As long as there is appropriate diversification of assets, the combination of assets would be expected to perform well over the long term. This theory was developed primarily by Nobel Prize winning economists, Harry Markowitz and William Sharpe, and serves as the basis of Guideline’s investing philosophy.
In short, don’t put all your eggs in one basket!
Research has indicated that the driving force for investment returns comes from asset allocation – and not the actual choice of underlying securities in a portfolio. In other words, the market is difficult to beat, and those who do manage to beat it are either lucky or taking above-average risk. Because of this, asset allocation is a critical component of Guideline’s portfolios.
Active vs. Passive Investment Management
To understand how MPT affects the investments Guideline chooses for your portfolio, it is important to know the difference between active and passive investment management.
Active investment managers buy and sell individual securities (e.g. stocks or bonds in a specific company) based off of information they believe will generate above market returns. Because of the level of labor involved, active managers tend to charge significantly higher expense ratios.
Passive investment managers, on the other hand, generally view the market as basically efficient and unexploitable. Passive managers buy investments that correspond to a market index and let them grow long-term. Because passive managers simply replicate the underlying index and buy and sell the stocks and bonds within their mutual funds less frequently (usually only when the underlying indices are adjusted), they are less costly to administer than actively managed funds and can pass those savings on to their investors with much lower expense ratios.
Guideline uses low cost, passively-managed index funds for our managed portfolios. Since asset allocation tends to drive long-term returns and the capital markets are pretty efficient, it is hard to justify paying the premium for active management.
To take advantage of the benefits of diversification, Guideline divides your portfolio between stocks and bonds, based on how aggressive or conservative you want your portfolio to be. The percentage of your assets allocated to each category represents your target allocation.
Generally, investments held for retirement are intended to grow your portfolio long-term, despite short-term risk. Stocks are referred to as more aggressive because they tend to be higher risk, higher reward and generate the greatest investment returns over the long haul.
In contrast to stocks, bonds may provide steady income regardless of market changes, or may hold up better in the short-term when the stock market does poorly. Bonds are generally more conservative because they are lower risk, lower reward, and less likely to generate lower investment returns than stocks over the long haul.
Guideline’s Six Managed Portfolios
Guideline offers six different managed investment portfolios, designed to suit investors with varying appetites for risk and retirement goals. The asset allocation of our portfolios range from aggressive to more conservative.
Our most aggressive portfolio contains 95% stocks and 5% bonds and is best for investors comfortable with risk and with longer time frames (e.g. more than 25 years out from retirement). In contrast, our most conservative portfolio contains 45% stocks and 55% bonds, and is best for conservative investors and those near or in retirement.
Your Recommended Investment Portfolio
Guideline recommends a managed portfolio for each participant, with a target allocation suited to a combination of your:
- Estimated time horizon until retirement, and
- Risk tolerance
Want to learn more about these concepts? Check out “Which portfolio should I choose?”
Rebalancing is the act of selling shares of a holding that has done particularly well, and using those funds to buy shares of a holding that has not, to keep your overall portfolio allocation on target.
This enables you to maintain the desired portfolio for your risk tolerance and ensures you stay on track towards your future financial goals.
If you were to just set your initial allocation and then let the portfolio run its course, over time your allocation would be very different from your intended target, because certain asset classes will perform better than others during some cycles (in general, stocks will perform better than bonds in the long-term).
However, this means a disproportionate amount of your portfolio will be in the most recent winners, and less will be allocated to the losers. While counterintuitive, the remedy is to invest proactively into the lower performing asset classes. This approach allows you to buy low and sell high over time.
Your portfolio will regularly earn dividends and interest from your investments and you will typically be making regular deferrals into your 401(k) account. Guideline automatically invests these proceeds to keep your asset allocation on target. Therefore, your account may have minimal need for rebalancing.
However, in major market dislocations or extended bull or bear markets where stocks appreciate or depreciate significantly, your asset allocation can deviate meaningfully from your target allocation. Any time your entire portfolio has a “drift”* of 5% or more, Guideline will automatically rebalance your investments back to your target allocation. This will ensure that your portfolio remains close to your target allocation over time and is properly working towards your retirement goals.
Performance of Your Portfolio
After you’ve decided which type of portfolio to invest in, you’ll be able to see how that portfolio is performing on the “Your Portfolio” section of your dashboard. Here’s an overview of the performance markers we track for you:
- Last 7 Days: Your portfolio’s performance (total return) over the last seven days.
- Your All Time: Your portfolio’s performance (total return) since you started investing.
- Current Weight: Represented as a percentage, this shows the proportion of the portfolio that the asset represents.
- Number of Shares: The number of shares you own in the mutual fund.
- Market Value: The value of your holdings in the asset.
*“Portfolio drift” is calculated as the sum of each investment’s absolute deviation from its targeted allocation, divided by 2. For example, a portfolio has a target allocation of 50% Fund A, 30% Fund B, and 20% Fund C. The current allocation is 40% Fund A, 36% Fund B, and 24% Fund C. Portfolio drift will be (10+6+4)/2 = 10% and will trigger a rebalance according to Guideline’s rebalancing methodology.