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AAII Asset Allocation Models Asset Allocation Level3 Passive Portfolio Portfolio Strategies

Level3 Passive Portfolio Transitions to Asset Allocation Models

Combining elements of AAII’s fund models to capture factor, style and objective tilts that work for you.

by John Bajkowski, Charles Rotblut | August 2022

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

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Six years ago, AAII founder James Cloonan introduced the Level3 Passive Portfolio. While the portfolio continues to be an alternative to simply tracking the S&P 500 index, it does not match the allocation needs of all individual investors. We are therefore transitioning our focus to demonstrating how the broader AAII Asset Allocation Models can be personalized to help you meet your unique goals.

The Level3 Passive Portfolio as an Alternative to the S&P 500

The need for a simple, basic long-term approach for those who do not want to be active investors prompted AAII founder James Cloonan to develop the Level3 Passive Portfolio while writing his book “Investing at Level3.”

The Level3 Passive Portfolio was intended to be a simple approach for investors who do not want to be active investors. As noted by Cloonan, it was not expected to be among the best-performing portfolios, particularly over shorter one- to five-year horizons. However, it was expected to outperform the average investor who simply follows market-capitalization-weighted indexes such as the S&P 500 over the long term. The Level3 Passive Portfolio is an index approach that takes advantage of some of the factors that have historically led to better long-term returns.

We started tracking the actual portfolio on May 31, 2016, as shown in Figure 1. The Level3 Passive Portfolio has underperformed the S&P 500 as measured by the SPDR S&P 500 ETF (SPY) since its inception. The actual Level3 Passive Portfolio has a compound annual total return of 8.9% since May 31, 2016, compared to a return of 12.2% for the SPDR S&P 500 ETF over the same period.

As noted in the performance table in Figure 1, the Level3 Passive Portfolio is composed of four exchange-traded funds (ETFs). The Level3 Passive Portfolio is titled toward value and smaller firms relative to the S&P 500. These are segments that have underperformed the S&P 500 until recently. The Level3 Passive Portfolio also has a 10% exposure to the real estate sector. Real estate shined in 2021 but has otherwise underperformed the S&P 500 over the seven years that the portfolio has been in existence.

Figure 1. Level3 Passive Portfolio Performance Through 6/30/2022

Figure 1. Level3 Passive Portfolio Performance Through 6/30/2022

Figure 1. Level3 Passive Portfolio Performance Through 6/30/2022

Two of the holdings in the Level3 portfolio employ equal-weight approaches: Invesco S&P 500 Equal Weight ETF (RSP) and Invesco Russell 1000 Equal Weight ETF (EQAL). In contrast, the S&P 500 is market-cap weighted. In a market-cap-weighted index, the proportional weight of each company in the index is determined according to the total market value of its outstanding shares. With a market-cap-weighted index, popular stocks can become overweighted, leaving the less popular and potentially underpriced stocks underweighted.

In contrast, equal-weighted indexes are tilted toward smaller companies. With regular rebalancing, they tend to sell the latest winners and invest in stocks that have underperformed recently. The performance of equally weighted indexes more closely reflects the performance of the average company, not just the largest firms.

The Level3 Passive Portfolio also holds the Vanguard Mid-Cap Value ETF (VOE). Historically, mid-cap value stocks have had higher returns than large-cap stocks or mid-cap growth stocks.

The fourth holding in the Level3 portfolio is the Vanguard Real Estate ETF (VNQ), which has a 10% portfolio weight. It was included to provide some diversification while taking advantage of the strong historical returns of real estate investment trusts (REITs).

While the holdings of the Level3 Passive Portfolio continue to be attractive, there is considerable overlap within the equity segments, the portfolio lacks exposure to the smallest segment of domestic companies and it is without any direct exposure to foreign firms. While Cloonan was a strong advocate of small and micro-cap stocks, he preferred active management for this asset class and the direct control of managing a portfolio of small-cap stocks (as evidenced by AAII’s Model Shadow Stock Portfolio, which Cloonan started in 1993 and managed until his retirement).

With foreign companies, Cloonan preferred active instead of passive management, especially for funds that target specific investment areas such as emerging or frontier markets. It was for these reasons that small-cap and foreign segments were not included in a portfolio that was focused on passive index ETFs.

AAII Asset Allocation Models

Many AAII members wish to only hold funds and look to our Asset Allocation Models for guidance on reasonable asset allocations that take into account their time horizon and ability to withstand short-term market volatility.

The AAII Asset Allocation Models have long provided such guidelines (Figure 2). The models incorporate three key building blocks to a successful allocation strategy: stocks, bonds and cash. Allocation may be the most important decision an investor makes. The mix of assets held—and the percentage of the portfolio allocated to each asset class and categories within each asset class—primarily determines the returns you will realize. One study put the influence that allocation has on portfolio returns at 90%.

Figure 2. Breakdown of the Three Asset Allocation Models

Figure 2. Breakdown of the Three Asset Allocation Models
Source: www.aaii.com/asset-allocation.

Aggressive Allocation Model

The aggressive allocation uses a 90% stock weighting. It should realize the highest level of return but will also incur the greatest level of volatility. The key to the model is to maintain a heavy allocation to stocks. Investors intending to use it should have both a high level of risk tolerance and a lengthy investment time horizon.

Moderate Allocation Model

The moderate allocation uses a 60% stock weighting and a 40% bond weighting. This model is based on the traditional 60/40 allocation but provides more diversification on both the stock and bond sides. It is intended to provide long-term growth with more income, less volatility and lower returns than the aggressive allocation model.

Conservative Allocation Model

The conservative allocation uses a 40% stock weighting and a 60% bond weighting. It places a greater emphasis on preservation of capital and reduction of portfolio volatility. A sizable weighting to stocks is still included to provide growth in excess of the rate of inflation. The expected rate of return is lower than either the aggressive or moderate models.

Expanding on the Models

Going forward, we will focus on using the allocation models as relatively neutral starting points for portfolio construction and focus on identifying funds and ETFs that capture factor, style and portfolio objective tilts.

Following the AAII Asset Allocation Models

Individual investors can easily implement the AAII Asset Allocation Models by using mutual funds, ETFs or a combination of the two.

We use seven Vanguard mutual funds to track the allocation models (see the box below). Index funds were purposely selected to minimize expenses and limit the influence of decisions made by active managers. The Vanguard funds chosen are widely available and have generally low investment minimums.

Sample Mutual Funds and ETFs for Implementing the Asset Allocation Models

As of December 2020, the following mutual funds used to track the models are:

  • Large-cap stocks: Vanguard 500 Index Admiral Shares (VFIAX)
  • Mid-cap stocks: Vanguard Mid-Cap Index Admiral Shares (VIMAX)
  • Small-cap stocks: Vanguard Small Cap Index Admiral Shares (VSMAX)
  • International stocks: Vanguard Developed Markets Index Admiral Shares (VTMGX)
  • Emerging market stocks: Vanguard Emerging Markets Stock Index Admiral Shares (VEMAX)
  • Intermediate-term bonds: Vanguard Intermediate-Term Treasury Investor Class (VSIGX)
  • Short-term bonds: Vanguard Short-Term Treasury Admiral Shares (VFISX)

Other mutual funds that can be used for implementing the allocation models can be found in AAII’s mutual fund guide.

Exchange-traded funds (ETFs) that can serve as proxies for the allocation models include, but are not limited to:

  • Large-cap stocks: Vanguard S&P 500 ETF (VOO)
  • Mid-cap stocks: Vanguard Mid-Cap ETF (VO)
  • Small-cap stocks: Vanguard Small Cap Index ETF (VB)
  • International stocks: Vanguard Developed Markets ETF (VEA)
  • Emerging market stocks: Vanguard Emerging Markets ETF (VWO)
  • Intermediate-term bonds: Vanguard Intermediate-Term Treasury ETF (VGIT)
  • Short-term bonds: Vanguard Short-Term Treasury ETF (VGSH)

Other ETFs that can be used for implementing the allocation models can be found in AAII’s ETF guide.

Source: www.aaii.com/asset-allocation.

An alternative to mutual funds is ETFs. We’ve listed the corresponding ETFs in the box as well. In most, but not all, cases the listed Vanguard ETFs are just different share classes of the same fund. This is a trait that is unique to Vanguard.

Just because we use Vanguard funds to track the models doesn’t mean you are limited to them; there are other options. For example, instead of holding the Vanguard S&P 500 ETF (VOO), the iShares Core S&P 500 ETF (IVV) or the Invesco S&P 500 Equal Weight ETF could be used. Mutual fund investors can consider the Fidelity 500 Index fund (FXAIX) or T. Rowe Price Equity Index 500 fund (PREIX), among others, as alternates.

In the small-cap arena, the choices are vaster. The average market cap of stocks held by the Vanguard Small Cap Index Admiral fund (VSMAX), which tracks the CRSP U.S. Small Cap index, is $5.3 billion. The Schwab Small-Cap Index fund (SWSSX), which tracks the Russell 2000 index, has an average market cap of $2.4 billion. The iShares Core S&P Small-Cap ETF (IJR), which tracks the S&P SmallCap 600 index, has an average market cap of $1.9 billion.

Which funds you choose will depend in part on the type of account you are using and your preference for active or passive management. Investors using brokerage accounts have broad access to the universe of exchange-traded funds. (ETFs are commonly offered on a commission-free basis.) Many no-load mutual funds are offered on a transaction-free basis, though the exact funds included on these lists vary by broker.

If you are using a workplace retirement plan such as a 401(k), 403(b) or 457(b) plan, your options will be more limited. The same applies to 529 plan accounts as well as many health savings accounts (HSAs). In such instances, you will need to select funds that best match the desired asset class categories you wish to have exposure to.

In all cases, we suggest paying attention to costs. High expense ratios, loads, fees and transaction costs will reduce the return you will realize. Most index funds have low tax-cost ratios, but you should still check if you’re holding a mutual fund or ETF in a taxable account.

Volume and size matter for ETFs. As a general rule, the ETFs offered by BlackRock (iShares), State Street (SPDR) and Vanguard that track well-known indexes have more than adequate size and trading volume. When looking at an ETF tracking an unfamiliar index and/or offered by a smaller ETF provider, seek a minimum asset size of at least $100 million. Also, ensure that the tracking error—the difference between the net asset return and the price return—is very small. Tracking error is shown on AAII’s ETF Evaluator page (look for the rows labeled (NAV +/- Price Return).

Adding in Factor, Style and Objective Preferences

Broad-based index funds work well for a wide variety of investors. But not every investor wants to track the performance of the major indexes for each asset class category. You may prefer to have greater exposure to value or seek a higher level of income, for instance.

All allocation models can be followed in a manner that tilts the portfolio toward certain factors, styles or objectives. You simply use different mutual funds or ETFs to fill the various components of each model.

Tilting With Factors

Factors are characteristics associated with higher long-term risk-adjusted returns. Two of the oldest and most established factors are value and size.

The value factor calls for buying stocks trading at below-median valuations. Value-oriented mutual funds and ETFs can be found in the large-, mid- and small-cap domestic asset class categories. (There are not many small-cap value ETFs; just nine were in existence of as June 30, 2022.)

Internationally, exposure to foreign large value stocks from companies domiciled in developed markets can be attained by using either mutual funds or ETFs. There are only a handful of emerging market value mutual funds. A value investor could consider combining the developed and emerging market allocation weightings in such cases. The Vanguard International Value fund (VTRIX), for instance, has a 21% allocation to emerging market stocks.

Regarding size, the asset allocation models already tilt toward this factor with the inclusion of mid- and small-cap weightings.

You could enhance your exposure to the size factor by following the Level3 Passive Portfolio’s approach and use equal-weighted ETFs for the large- and mid-cap allocations. There would be some overlap between the Invesco S&P 500 Equal Weight ETF and the Invesco Russell 1000 Equal Weight ETF, so keep that in mind. Then, you may wish to hold a mutual fund or ETF with a lower average market cap than, say, the Vanguard Small Cap Index mutual fund and ETF.

On the international side, there are both mutual funds and ETFs that target foreign small-cap stocks. For emerging markets, you would need to focus on mutual funds.

Adjusting for Growth or Income Preferences

Growth is not a factor, but it is a popular investing style. Getting exposure to growth is similar to value. Instead of holding, say, the Vanguard Value Index fund (VVIAX), you would hold, say, the Vanguard Growth Index fund (VWUSX). On the ETF side, you might favor the iShares Russell 1000 Growth ETF (IWF) instead of the iShares Russell 1000 Value ETF (IWD).

Again, there are fewer choices among foreign mutual funds and ETFs, but there are options.

Applying a preference for portfolio income without altering your overall stock/bond allocation requires seeking out dividend-focused mutual funds and ETFs. Unfortunately, Morningstar does not have a separate “income” or “dividend” category. (AAII uses Morningstar’s mutual fund and ETF classifications.)

Dividend-oriented funds tend to be classified in the value category. The SPDR S&P Dividend ETF (SDY), for instance, is a large value ETF. Invesco International Dividend Achievers (PID) is a foreign large value ETF.

There is only a small number of small-cap dividend mutual funds and ETFs. The WisdomTree US SmallCap Dividend ETF (DES) is one. Proportionately fewer small-cap stocks pay dividends than large-cap stocks.

On the fixed-income side, higher yields can be achieved by targeting funds with longer durations (meaning greater interest rate sensitivity) and/or issuers with weaker credit ratings than their peers. The category risk index—which can be found in our mutual fund and ETF guides, evaluator pages and in our A+ Investor screeners—can be used to help identify funds that are taking on more risk than their category peers. High-yield bond funds can also be used.

Keep in mind that bonds are included in the asset allocation models to reduce the overall volatility of the portfolio. When you take greater risk on the bond side, you increase the overall volatility of the portfolio’s returns. Furthermore, credit risk in bonds is largely asymmetric. There is limited upside to a bond’s price when its credit rating is upgraded. The potential downside for any bond is a complete loss of capital should the issuer go bankrupt. (Investment-grade bonds rarely default. Default rates rise significantly at the lower rungs of the credit ratings scale.)

Looking Ahead

In future articles, we will go into more detail about how AAII members, like you, can implement the asset allocation models into real-world portfolios. We’ll compare and contrast both mutual funds and ETFs for the various asset allocation categories. We will also go into more detail about the options for personalizing the models with options for investors favoring value, smaller size, growth or income.

In doing so, we’ll also provide helpful suggestions for differentiating among mutual funds and ETFs to help you choose the right fund for your needs.

Discussion

NATHAN M from MT posted over 3 years ago:

AAII abandoned it's ETF portfolio some years ago. Now it looks like it is leaving the Level Three as well. For me a detailed article showing a plan to transition from level three to factor portfolios would be helpful. Also, what evidence is there that in five or six years AAII will not say "A look back has shown that ..." and so here is our new portfolio. I make changes slowly so from my perspective AAII is whipsawing.


JOHN J M from WA posted over 3 years ago:

I moved to Level 3 after a period of active trading that left me not very far ahead. This was based on the fact that I became attached to gainers and held them too long. As an active trader I did succeed in scrubbing my losers (with stop orders) But once I had a gain I became irrational about a security. So I read the Cloonan book and did the simplest thing - RSP, EQAL, VNQ, VOE and SHY. Then I stopped trading at all. My gains were less than the average of DOW, S&P and NASDAQ, but I expected that. My losses (for Nov21-Jul22) are also less than market average. So Level 3 did what I wanted with less effort than scouting the market for potential gainers, so far. I believe I have gotten most of the available gains, and experienced less than the common recent losses. I have no doubt that some incremental approach such as the allocation method described, could outperform the standard Level 3 approach. But to implement that, I would need more information. All I need for Level 3 is the assurance that the ETFs I already hold are not experiencing any unusual events that threaten their recent usefulness. A small base of generally proven ideas (Level 3) is enough for me. I am not trying to beat the market, just co-exist with it. You can always ask for more, and "allocate". Done right, success. But a broader base of information, correctly interpreted, is needed, unless you are very lucky. For those who have the smarts, or luck, to do that, a tip of the cap. For those who don't, and try, thanks for making it a liquid market. What gains there are have to come from somewhere...


ROBERT A from NC posted over 3 years ago:

If I were going to choose somebody else's asset allocation model, I think I'd shoot for one like Buffet's--or at least a model used by someone who has made a huge fortune by following their own model. While I have plenty of respect for James Cloonan and the gurus at AAII, I'm not about to get sucked into following any of their fancy formulae. For 40+ years I've been charting my own course, picking up bits and pieces of wisdom here and there and learning a lot by making my own stupid mistakes. My evolved "formula" is simple: buy a reasonably diverse set of good equities at good prices and hang onto them until (1) I find something SUBSTANTIALLY better or (2) something goes SUBSTANTIALLY wrong with an asset's fundamentals. If I didn't know anything else to do, I'd buy three low-expense-ratio domestic-equity index ETFs (one growth-oriented, one dividend-oriented, and one broad-market; say, SCHG, SCHD, and SCHB) and sit on them for the rest of my life. And I think I'd still come out ahead of those who follow the latest catchy formula.


JOHN L from NJ posted over 3 years ago:

The level 3 passive portfolio strategy was dependent on equal weighted indexes and real estate (REITS) out performing the market over the long term. As 6 years is hardly the long term; it is possible that the level 3 passive portfolio could still be a long term winner. But the latest AAII fad is factors. The AAII keeps coming up with new ways they claim will beat the market. If the AAII were serious about educating investors; they might confess to past promising market beating schemes that failed rather than slickly selling the next promising but not yet proven market beating scheme. But that would not sell newsletters and memberships.


BERT M from AZ posted over 3 years ago:

I have loosely followed the level 3 philosophy with a 3-5 year spending as the cash position with the cash in money markets and/or a 3-4 year bond ladder if bonds are paying anything. this equates to a 70/30 equity/bond allocation. I have still managed to get close to the S&P 500 return despite the drag of near zero cash /bond returns. I have a mix of ETF's and funds roughly aligned with the level 3 allocations of large/mid/small/REIT and foreign. I still question the value of International as I have never had much of a return on these over 16 years. I also have 33% in stocks.Initially the small/mid caps outperformed but now lag... and they may well return to outperformance. I have been quite happy with the level 3 advice and the returns are what I would expect given the large cash position over the last 6 years of zero interest.My large cap funds have outperformed the S&P500 but the others currently lag. This is the downside of allocation: diversity reduces volatility and also the average gain, but minimizes the need to sell equities at a loss to fund my retirement. I am unlikely to change my fund investments if they continue to perform as expected. The level 3 approach seems to be working for me even though my stock picks frequently underperform.


KEVIN S from MA posted over 3 years ago:

What was the point of this article? I agree with the previous commenters that the Level 3 approach has not been evaluated over a long-term and may still provide a competitive option as originally proposed by Cloonan. Has AAII defined "long-term" as 6 years? If so, will you be proposing additional changes to the Model Portfolios as well? My takeaway is that AAII is preparing "new and improved" choices to be determined , but I also hope they continue to track the Level 3 portfolio as designed.


Sean O from TX posted over 3 years ago:

This is a poorly structured article and on an important enough topic such that it should be re-done after vacation. I wonder if it's because the authors don't want to come right out and say, "L3P hasn't worked as well as was foreseen and we think that that's because there's a better approach" because they're wanting to not irritate James. It was a bad idea to co-mingle questions of allocation to non-equity asset classes with the question of the choice of equity vehicles. L3 is inherently an "aggressive" concept in the language of the AAII model portfolios. It's true that The Level 3 Passive Model's component equity funds involves a semi-opaque overlap of underlying holdings. The L3 Model effectively doubles up on the 500 largest (domestic) stocks with the Invesco vehicles then back-fills the mid-cap weighting with whatever Vanguard decides is 'value'. Inelegant. But, is there really a better way to execute against the opportunity presented by the 'size' and 'value' anomalies? The article discusses other options to the (cap-weighted) tracking funds but is silent on whether those alternatives are 'better', implicitly backing away from factors, perhaps because of L3P's underperformance in past 6 years. That silence is unhelpful. James had also been clear that he thought that successful small cap investing required at least a semi-active approach (e.g., Shadow Stock) if only due to the inherent problems of running a passive vehicle in the space - that's why there are so few 'small cap value' funds, often closed. Do you now think that he was wrong and that a small cap capitalization weighted index fund will contribute to expected returns? (It won't lower volatility...) If yes, come right out and say so, please. Similar thought for inclusion of international equities: James' claim was that holding a non-domestic equity fund did not add to long run returns. He didn't put much energy into explaining why he thought this; yes, currency swings will even out over time but the thesis for emerging markets is 'fast growth on the cheap'. Still, if you disagree, then say so. Perhaps the answer is found in the thought that "One study put the influence that allocation has on portfolio returns at 90%". Then the article should have been structured around that idea with the consideration of what goes into the equity bucket - in any of the model portfolios - as secondary. 'Secondary', but not necessarily unimportant in the absolute sense. So then, (i) stake a position on factors - are you still convicted that factor-driven investing should lead to better long run returns?, and then (ii) if yes, discuss easiest and cleanest ways to execute for domestic equities (alternatives for mid-market and up better than James' funds?, alternative to Shadow for small caps?, and then (iii) consider whether you think that James' was wrong about a passive approach to non-domestic equities. Then consider how AAII is adding value for members. I don't think that tracking model portfolios grounded in cap-weighted index funds adds value. If you continue to believe that individual investors have an advantage due to ability to do things that institutional investors cannot due to their inability to get in/out of positions cleanly, the temptation to shadow index, etc, then the AAII feature portfolio (for equities anyway) should reflect that philosophy, however imperfectly.


MARY E. S from OH posted over 3 years ago:

Wow! This is quite a shift, and there is no specific guidance given for those who have been following the Level 3 Passive Portfolio. The discussion here is both complicated, and ranges into a whole lot of variations, with not a lot of help for actually making those decisions. Nor does it even address how to make these shifts in the midst of this huge market volatility. I have a lot of questions: What do you recommend for those who are invested primarily in the Level 3 Passive Portfolio? Will you recommend a specific allocation, as James Cloonan did (or in this case, 3 separate specific allocations for the respective models)? Will you also give some direction as to how people can make this transition simply and easily? And what about making this transition at this particular time of great volatility? What factors into selling and buying into an entirely new asset allocation in this financial environment? You allude to holding on to at least some of the Level 3 ETF's, but most of your article is actually focused on mutual funds. I thought that the philosophy of AAII was that what works for individual investors is different than the traditional corporate models, but these asset allocations look exactly like what I've found everywhere else, beginning with TIAA-CREF, and Vanguard, and more. This is also much more a traditional level 2 portfolio. And I have to tell you that my results are way above that, and are even above the LRE portfolio. Can you explain how this differs, and why this is a better alternative to following the Level3 Passive portfolio? Can you also explain why you’re making the move away from it, especially given that the results (or at least mine) are so much better? Is there any way that you can also continue to track and recommend for this portfolio?


ERIC A from WA posted over 3 years ago:

I am very disappointed that AAII is moving away from the Level 3 portfolio, and find the current asset allocation models an inadequate replacement for Dr. Cloonan's recommendations.


THOMAS S from OR posted over 3 years ago:

Unlike some of the others who commented on this article, I don't see that John and Charles, both of who's opinions I have come to respect, are suggesting abandonment of the Level3 passive portfolio. As I read this article, they are providing, and in future articles will be providing, recommendations on how investors can personalize their portfolios. If one is new to investing, as with many other endeavors in life, start with a simple, basic plan like the 4-fund option of the Level3 passive portfolio. As one's knowledge grows its natural to start developing more complex plans. My takeaway from this article is that a starting point for creating these more complex and personalized plans is by starting with the 3 allocation models and over some number of future Journal issues we'll read about ideas on how each person can tweak them to create a unique portfolio for one's return goals and risk tolerance. Regarding the fact that the passive portfolio has underperformed the S&P 500 over the past 6 years, at this point, I'm not going to abandon the rationale for the Level3 approach. In his book, Dr. Cloonan provided stock performance trends over a much longer horizon as the basis for the approach. Historically, we know some style will be performing better than all others for periods of time, and those periods can last years. I'm going to stick with my personal plan based on the Level3 approach. After all, past performance is not a guarantee of future returns.


CHARLES R from IL posted over 3 years ago:

Those of you who have been using the Level3 Passive Portfolio and are happy with it should continue to do so.

As we noted in the article, the portfolio doesn’t match the needs of every investor. Hence, the shift in focus. The AAII Asset Allocation Models provide a framework that a wide variety of investors can use to build personalized portfolios. We will provide suggestions for how to do so in future articles.


WILLIAM S from ID posted over 3 years ago:

In Dr. Cloonan's 2016 book (Intro and pp 188-191), he suggested the most simple Level3 passive approach was "Plan Z". Plan Z entails putting 100% of your portfolio in (what was then) Guggenheim S&P 500 Equal Weight ETF (RSP), now Invesco S&P 500 Equal Weight ETF (RSP). His Figure 6.2 (pg 189) shows the tremendous outperformance of RSP over SPY from early 2003 to the end of 2015 (total return 242.67% RSP vs 186.05% SPY with dividends reinvested). Extend that trend series to June 2022 and the outperformance continues (601.83% RSP vs 495.17% SPY, 4/30/2003 to 6/30/22 from Morningstar). Annualized over the entire 19-year time period, RSP (10.7%) outperformed SPY (9.7%) by a full percentage point. Investors including myself should be aware of time-frame error. That said, were he still living I'm confident Dr. Cloonan would agree that six years is too short of a time frame to evaluate long-term performance of the Level3 Passive Portfolio.


THOMAS M from IL posted over 3 years ago:

I've been following the L3P approach since June 2016, with 68% in the four ETFs and 32% in Shadow Stock and Stock Superstars equities. A few years ago, I added SPY - in equal proportion to RSP, EQAL, VOE - so my L3P approach has five ETFs. Two years ago, I began to accrue my safe fund investments - less than L3P's 5% because I don't need that much to live on in retirement - using iShares iBonds Term High Yield and Income funds dated four years in the future (plenty of volatility there, too, unfortunately). I lowered my LRE return to 10.3% to account for the allocation to safe funds. There has been plenty of volatility since 2016, but as of the middle of August 2022, my portfolio is less than 1% off of my expected LRE return - above sometimes and below sometimes. I'm quite comfortable with this approach, and I rely on my individual equity investments to provide incremental lift to my LRE return, not the L3P ETFs. I like with their Steady-Eddie market returns - it's the consistency that provides the foundation on which the other third of my investments sit - the active investing that Cloonan anticipated would provide incremental returns. On the subject of equities, I'm been investing in Stock Superstars since it began and Shadow Stocks since its second year. In the past few years I've become more selective about how I follow those recommendations. Stock Superstars are not performing any longer as superstars, and I'm choosing not to follow certain segments of the portfolio. Shadow Stocks have become so popular that the swings in stock price following the quarterly recommendations all but mask the market value of the selected equities. I've been gradually getting out of Shadow Stocks and following a different path for micro-cap stocks - less popular, perhaps more profitable, and just as fun. I'm an amateur investor. Professionally, I understand a fair bit about judgment and decision-making. I know that picking a sensible approach and following it in a disciplined way puts my return a percent or two - or more - above the return of someone else following the same approach as me, but allowing more of their intuition to influence their decisions. I see Cloonan's book as a way of thinking about retirement investing as much as it is a specific investment recommendation.


BARRY J from TX posted over 3 years ago:

Once again the comments to this article reinforce the intrinsic value of my AAII lifetime membership: having access to the brilliant minds and vast experience of the other AAII members. It matters not if I agree or disagree with their specific approaches on how they implement Cloonan’s L3 or other AAII “model” portfolios. Of course, the comments differ. What’s right for me is not right for everyone (on maybe even anyone). This is real diversity inaction. (I kinda wanna hum God Bless America right now. Feel free to join in.) I counted 10 or so comments before mine. I noted that I learned A LOT MORE from the longer comments where each member explained (1) what they gleaned as the gist (basic lessons) from reading “Investing at Level3,” (2) what their expectations were, (3) how they used L3 and other AAII resources to implement a portfolio RIGHT for them, (4) how they used AAII resources to “tweak” the L3 base lessons over time to make their portfolio “fit” their evolving lives and changing needs over time, and, (5) how they measured their results. It was the comments on step 5 where the variation in satisfaction (and process) revealed itself. It was curious that the less satisfied members provided the least information on their approach, deployment, evaluation and improvement process. I do not know if these variations resulted from a preference for brevity, personal data secrecy, or from a capacity and capability to explain WHAT and HOW they implemented Cloonan’s Model(s). Either way, I learned a lot from every comment. The gist off my L3 journey is that I only actually read Cloonan’s book in 2021 after being an AAII member for over 20 years. I had unknowingly evolved along the Cloonan glidepath: L1 (2000-2008) and L2 (2012-2021), L3 (2022-lifetime), a trajectory like an old 3-stage Saturn V rocket from the Apollo days. I burned a lot of fuel just to get to L2. Like Cloonan, I have issues with the efficaciousness of MPT, FA and TA, but they too, educated me on the snares and traps laid by “professionals” in the “institutional-investing industries complex.” I rebalanced toward a L3 strategy after my 2021 year-end review. Since then, I have 7 ETFs tilted toward value and small caps, no bonds (since I do NOT understand them) and 40% in money markets funds and cash. I am sitting tight waiting for the “know unknowns” lurking in 2Q22. Then I plan to make a few “tweaks” – reshuffle the weightings of a few ETFs -- based on what I learned in these comments. Thank you very much for sharing your stories. I how I can return the favors.


FOSTER N from VA posted over 2 years ago:

Many years ago I asked myself, “What do you want in retirement?” My answer was cash flow from my investments with equity growth. I decided on a dividend / dividend growth based investment strategy. 20+ years later I can report it worked. I find that I get enough dividends to fund my needs so that I don’t have to sell in down markets. I still have to do some weeding, pruning and planting, but largely I sit in the shade and enjoy the fruits. And I frequently remember my Father’s sage advice to generally avoid trading as it is the principal cause of actual (not paper) losses. All of the managed portfolios trade too much for my taste.


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