The CHERISH Model Portfolio: A Comprehensive Guide for Long-Term Investors

Introduction

As an investor, it is crucial to develop a diversified portfolio that aligns with your financial goals and risk tolerance. The CHERISH Model Portfolio is a well-established framework that provides a comprehensive approach to portfolio construction. By embracing the principles of this model, investors can enhance their chances of achieving long-term financial success.

What is the CHERISH Model Portfolio?

The CHERISH Model Portfolio is an acronym that stands for:

• Cash
• High-Yield Bonds
• Emerging Markets Bonds
• Real Estate Investment Trusts (REITs)
• International Stocks
• Small Cap Stocks
• Hedges

This portfolio is designed to provide investors with a balanced allocation across different asset classes, thereby reducing risk and enhancing returns.

Benefits of the CHERISH Model Portfolio

The CHERISH Model Portfolio offers numerous benefits for investors:

Diversification: By investing in a wide range of asset classes, the CHERISH Model Portfolio reduces the impact of any single asset's performance on the overall portfolio.

Risk Management: The inclusion of hedges, such as gold or inflation-linked bonds, provides a cushion against market volatility and unexpected events.

Return Enhancement: The portfolio's exposure to emerging markets, small cap stocks, and high-yield bonds offers the potential for higher returns compared to traditional asset allocations.

Key Features of the CHERISH Model Portfolio

Asset Allocation: The CHERISH Model Portfolio typically allocates assets as follows:
- Cash: 10-20%
- High-Yield Bonds: 10-20%
- Emerging Markets Bonds: 10-20%
- REITs: 5-15%
- International Stocks: 20-30%
- Small Cap Stocks: 10-15%
- Hedges: 5-10%

Rebalancing: Regular rebalancing is essential to maintain the desired asset allocation. As asset values fluctuate, the portfolio should be rebalanced to ensure that the proportions of each asset class remain within the target ranges.

Time Horizon: The CHERISH Model Portfolio is designed for long-term investors. It is not a short-term trading strategy and requires patience and discipline.

Common Mistakes to Avoid

When implementing the CHERISH Model Portfolio, it is important to avoid these common mistakes:

• Chasing Returns: Avoid chasing high-performing asset classes. Asset allocation should be based on long-term goals and risk tolerance, not market momentum.
• Overtrading: Frequent trading can erode portfolio returns. Focus on holding your investments for the long term and avoid unnecessary transactions.
• Ignoring Risk: While the CHERISH Model Portfolio is designed to manage risk, it is not immune to market fluctuations. Investors should always consider their own risk tolerance and make adjustments as necessary.

CHERISH Model Portfolio vs. Traditional Portfolios

The CHERISH Model Portfolio differs from traditional 60/40 stock/bond portfolios in several ways:

Higher Risk: The CHERISH Model Portfolio has a higher potential for volatility due to its exposure to emerging markets, small cap stocks, and high-yield bonds.

Higher Return Potential: Historically, the CHERISH Model Portfolio has outperformed traditional 60/40 portfolios over the long term.

Greater Diversification: The CHERISH Model Portfolio provides a more diversified allocation across asset classes, including real estate and hedges.

FAQs

1. What is the recommended time horizon for the CHERISH Model Portfolio?
The time horizon should be at least 10 years, preferably 15+ years.

2. Can I customize the CHERISH Model Portfolio to my specific needs?
Yes, you can adjust the asset allocation based on your individual goals and risk tolerance.

3. How often should I rebalance my portfolio?
Rebalancing is recommended at least annually or when the portfolio deviates significantly from its target allocation.

4. What types of hedges should I consider?
Gold, inflation-linked bonds, and commodities are common hedging instruments.

5. What is the role of cash in the CHERISH Model Portfolio?
Cash provides a buffer against market volatility and serves as a source of liquidity.

6. How do I track the performance of the CHERISH Model Portfolio?
You can use online portfolio tracking tools or work with a financial advisor to monitor your performance.

Conclusion

The CHERISH Model Portfolio is a valuable tool for long-term investors seeking a diversified and potentially high-return portfolio. By following the principles outlined in this guide, you can enhance your financial well-being and reach your long-term goals. Remember, investing is a journey, and patience and discipline are key.

Table 1: Historical Returns of the CHERISH Model Portfolio and Traditional 60/40 Portfolio

Source: Morningstar Direct

Table 2: Asset Class Returns in the CHERISH Model Portfolio

Source: Morningstar Direct

Table 3: Asset Allocation in the CHERISH Model Portfolio