For the purposes of this article, “easy-to-own” means there is at least one low-cost mutual fund or ETF available (preferably an index fund).

Easy-To-Own Alternative Asset Classes

Real Estate

Real estate is an obvious one, but until relatively recently only the wealthy could afford to own a diversified portfolio of income-producing real estate. Then REITs came along in the 1960′s. Now, pretty much anybody can own an interest in commercial real estate all over the country in the form of one of several very good REIT mutual funds, the Vanguard REIT Index Fund (VGSIX) being my favorite. My personal belief is that at least a token 5% of most people’s portfolios belong in REITs. I devote a full 10% of my portfolio to REITs.

International Real Estate

Okay, so international real estate rightfully belongs under the “real estate” category above; however, I’ve listed it separately here for two reasons.

1. Until very, very recently there weren’t many reasonably-priced mutual funds that focused on owning the stocks of foreign real estate companies. It’s only been a few months now since Vanguard launched its Global ex-US Real Estate Index Fund (VGXRX).
2. Most foreign countries don’t have the legal equivalent of the Real Estate Investment Trusts so popular with American investors. Because of this, it remains to be seen whether international real estate, as it is currently available to American investors, will behave more like real estate or more like stocks.

I’m not suggesting you go out and buy the new international real estate fund. In fact, I would lean towards advising against it (for now). But it is a traditionally alternative asset class that is now easily owned by small individual investors and so I’ve included it here.

Inflation Protected Securities

Inflation Protected Securities (TIPS) have been around for almost 15 years now and are widely owned, so it may seem odd at first that I would include it in a list of alternative asset classes. There are a number of very good inflation protected securities funds out there (Vanguard’s is excellent) and governments all over the world have been jumping on the inflation-protected bandwagon. Still, I think TIPS are under-owned and since they have explicit inflation protection, they tend to behave differently from nominal bonds, making them an excellent team. Like REITs above, I believe TIPS belong in most portfolios.

Commodities

Commodities are still the most difficult-to-own of the asset classes listed not because there are no options but because there are no truly low-cost options. This is one asset class that Vanguard has yet to offer, probably because it involves investing in futures contracts rather than equities. Yes, they do offer a Precious Metals and Mining fund (VGPMX), but that’s not quite the same thing. The best options in this asset class currently are probably the iShares S&P GSCI Commodity Index ETF (GSG, ER: 0.75%) and PowerShares DB Commodity Index ETF (DBC, ER: 0.85%). Expenses would need to be about half what they currently are before I would unequivocally recommend them for most investors. Still, investors with very large portfolios (we’re talking $500k+) would probably benefit from a small 5-10% allocation to this asset class. Just enough to gain some mild long-term inflation protection and to hopefully capture the occasional rebalancing bonus.

What About The Rest?

There are plenty of other asset classes out there:  hedge funds, private equity, foreign currencies, and venture capital just to name a few. But all of those other asset classes suffer from either high expenses, lax regulation, low transparency, or all three. In a world where the best investment advice anyone could ever receive is “never invest in something you don’t understand,” these alternative asset classes are just too dangerous for small investors. Besides between the four asset classes mentioned above and the more traditional domestic/foreign stocks and bonds, you really don’t need any more diversification.

How Many Asset Classes Is Enough?

There are no tried-and-true rules regarding when you should stop adding additional asset classes to your portfolio.  Certainly if you get to the point where you have too many to keep track of easily you’ve gone too far.  But how do you know when you’re diversified enough barring a logistical nightmare?  In my opinion, you can and should own as many asset classes as meet the following criteria, assuming their management isn’t prohibitively time-consuming.

Returns Commensurate With Risk

Many asset classes such as domestic equities, short-term treasury bills, and real estate offer adequate returns in exchange for the risks of owning them.  Others, such as junk bonds (and arguably corporate investment-grade bonds) do not.  Yale endowment fund manager David Swensen devotes an entire chapter to these core asset classes in his highly-recommended book Unconventional Success.  You should obviously only own asset classes that adequately compensate you for their risk factors.

Some asset classes that meet this requirement:

1. Domestic and Foreign equities
2. Short-term Treasury bills
3. Real Estate (Preferably REITs)
4. Treasury Inflation Protected Securities (TIPS)
5. Commodities (in low-cost ETF form, never via direct ownership)

And some that do not:

1. Private Equity
2. Hedge Funds
3. Junk Bonds
4. Most Real Estate Partnerships
5. Venture Capital Funds
6. Many Corporate Bonds Regardless Of Credit Quality

Traded On Highly Liquid, Public Markets

Markets require a relatively high trading volume in order to set prices efficiently.  While experts in a given field may be able to take advantage of illiquid, non-public markets to find good deals, 99% of investors can’t and shouldn’t try, as they are far more likely to get ripped off.  Liquidity also helps you get a decent price if you need to sell out for some reason (an emergency medical bill, perhaps).  Chances are, if there isn’t a low-cost mutual fund (preferably an index fund) or ETF available, an asset class doesn’t meet this requirement.

Sufficiently Regulated

Recent crisis notwithstanding, the Securities And Exchange Commission (SEC) does a very good job of protecting the little guy from the big guy.  Owners of publicly-traded stocks and bonds can at least be certain that somebody has vouched for the quality of the accounting practices of a given company.  It’s not perfect, but it is surprisingly good.  Unfortunately, the media undermines the public’s trust in the SEC regulations by focusing obsessively on their exceedingly rare failures.  Enron was a very, very rare exception, not the rule.

Inexpensive And Convenient Way For Small Investors To Gain Access

Mutual funds and ETFs fit this criteria, hedge funds, private equity, and illiquid private partnerships do not.  It takes all of 3 seconds to sell an ETF for very close to the current market price.  With private equity and hedge funds, you are often restricted from withdrawing your investment to just a few predetermined times per year at a highly unpredictable price.

Provide At Least One Specific Diversification/Investment Benefit

In order to be worth owning, an asset class should possess at least one redeeming characteristic be it low correlation to the other asset classes of your portfolio (e.g. large-cap domestic vs small-cap international stocks), being a mostly-reliable inflation hedge (TIPS, commodities), or providing some other significant benefit.  If an asset class brings only a small additional diversification benefit, I wouldn’t bother.

Asset Allocation In Action

For a practical example of a reasonably-diversified portfolio in action, check out my current Roth IRA asset allocation.  For a list of recent changes I made to my allocation and my reasons for making them, you should also check out my post on the subject.

While not perfect (I plan on adding commodities and TIPS eventually), I think it is a simple, diversified, easy-to-implement asset allocation without going overboard.  If you have no idea where to start, you could do much worse than to start with my portfolio and adjusting the bond allocation to suit your own risk tolerance (I’m still in my 20′s).

Investors, unfortunately, are far too quick to abandon winning strategies after short periods of under-performance, and the financial media shares no small part of the blame.  Consider the sensationalist pornography recently published by Vanity Fair,  hardly a bastion of level-headed financial news, regarding the Harvard endowment’s recent poor showing.

No Strategy Works All The Time

Harvard’s endowment, by far the largest in the nation, returned an average of 14.1% per year from 1990 through 2008, only to lose 30% of its value last year.  That 30% loss, according to Vanity Fair editor Nina Monk, was the result of excessive risk-taking and represent an unacceptable loss.  But is it really?  Even factoring in last year’s massive loss, the Harvard endowment has returned an average of 12.08% per year over the past 19 years.  Looked at from a long-term perspective, last year was hardly a catastrophe and Harvard’s long-term returns remain quite impressive.

So what’s wrong with Harvard’s strategy (the same one followed by David Swensen, manager of the Yale endowment and author of the groundbreaking book Unconventional Success)?  Nothing, it turns out, as Harvard’s long-term record clearly demonstrates.  So why all the bad press?  Simple, investors are obsessed with meaningless fluctuations in short-term performance and the financial media is more than happy to give the people what they want.

In A Crisis, Correlation Goes To One

I think Harvard’s plight illustrates an important concept most people ignore:  in a true crisis, the correlation of many normally-uncorrelated asset classes suddenly goes to one.  That is, asset classes whose returns normally bare very little resemblence to each other tend to all drop at once in a crisis.

This phenomenon has happened many times before, most notably during the drop of 1987 and The Great Depression, when many (though of course not all) otherwise unrelated asset classes dropped in tandem.  Unfortunately, it seems diversification fails us just when we need it the most.

The solution?  Stay the course, keeping in mind that no strategy, not even one as sound as the highly-diversified strategy the Harvard endowment was following will work all the time.  In investing, there is always risk and sometimes the chips simply won’t fall your way.  But that’s no reason to change a working strategy.

My Old Roth IRA Asset Allocation

Early last year, I posted my Roth IRA asset allocation in response to a few inquiries from curious readers.  My previous allocation was:

• 10% Vanguard 500 Index fund (VFINX)
• 10% Vanguard Value Index fund (VIVAX)
• 10% Vanguard Small Cap Index fund (NAESX)
• 10% Vanguard Small Cap Value Index fund (VISVX)
• 10% Vanguard REIT Index fund (VGSIX)
• 10% Vanguard Total Bond Market Index fund (VBMFX)
• 20% Vanguard Total International Index fund (VGTSX)
• 20% Vanguard International Value fund (VTRIX)

This allocation is a good one and I would recommend it to any young, aggressive investor with a high risk tolerance and long time horizon.  However, I took my ever-growing account balance as an opportunity to further diversify (well, ever-growing with the exception of 2008).

My New Roth IRA Asset Allocation

• 10% Vanguard 500 Index fund (VFINX)
• 10% Vanguard Value Index fund (VIVAX)
• 10% Vanguard Small Cap Index fund (NAESX)
• 10% Vanguard Small Cap Value Index fund (VISVX)
• 10% Vanguard REIT Index fund (VGSIX)
• 10% Vanguard Short Term Treasury fund (VFISX)
• 10% Vanguard FTSE All-World ex-US Index fund (VFWIX)
  
• 10% Vanguard International Value fund (VTRIX)
• 10% Vanguard Emerging Markets Index fund (VEIEX)
• 10% Vanguard FTSE All-World ex-US Small Cap Index fund (VFSVX)

Why I Changed What I Changed

The allocation looks pretty similar but with four important changes:

1. Swapped Total International Index for FTSE All-World ex-US Index – True, total international has a slightly lower expense ratio, but it completely lacks exposure to the Canadian stock market.  As one of the wealthiest nations in world, I feel exposure to Canada is important.  Besides, Vanguard has a reputation for lowering its funds’ expenses as their assets grow.  I feel confident the price tag on FTSE will eventually come down and in the meantime, I’m comfortable paying marginally more for Canada.
2. Swapped Total Bond Index for Short Term Treasury fund – David Swensen convinced me to make this move in his book Unconventional Success.  In it, he argues short-term U.S. Treasuries have superior risk-return characteristics and better diversification characteristics than corporate or foreign bonds.  I couldn’t argue with his logic and since the total bond index holds approximately 50% of its assets in corporate bonds, decided to go ahead and make the switch.
3. Added Emerging Markets Index – Previously, I held about 8% of my portfolio in emerging markets (through total international and international value) and thought that was a bit light considering emerging markets are likely to drive global economic growth over the next century.  Thus, I decided to dedicate 10% of my portfolio to emerging markets which, in addition to the emerging market portions of my other international funds, pegs my total exposure at around 16%-17% of assets.  It’s an aggressive move, but not an imprudent one, I think.
4. Added FTSE All-World ex-US Small Cap Index – I finally got around to adding small-cap international exposure, which I had been craving for a long while.  Again, this particular fund’s expense ratio is a bit on the high side (for Vanguard), but I fully expect it to come down as its assets grow and Vanguard passes on economies of scale to fund owners.  At only 10% of assets, the absolute size of this holding is actually pretty small, so the additional expense won’t add up to much in dollar terms.

Would I Recommend This Portfolio To Others?

Honestly, I would not recommend this portfolio to most investors.  It is extremely aggressive and requires a steadfast belief in the buy-and-hold philosophy to stay the course.  It is tailored entirely to my own circumstances and thus probably isn’t appropriate for all but the most risk-tolerant and financially-stable young investors.  Remember, the most important determinant in your own ideal asset allocation is going to be your risk tolerance followed closely by your time horizon and need to take risk.  Just because this allocation works for me doesn’t mean it’s appropriate for anybody else.  After determining your own ideal asset allocation, do your own research on a reputable financial website (such as Morningstar, using a free Morningstar account) to research specific fund options.

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The Old Rule Of Thumb

The first asset allocation “rule of thumb” most people used to be exposed to was that you should invest 100 minus your age in the stock market with the rest going to bonds.  That is, if you are 60 years old, you should have approximately 100 – 60 = 40% of your portfolio in stocks and the rest in bonds or cash equivalents.  That was all well and good 50 years ago, but in this day and age, most professional financial advisers would argue 40% is a bit light for a 60 year old, who may have a good 20-30 years left to live.  Unless you have huge quantities of money socked away, a 40% stock allocation just isn’t going to churn out the returns you need to be reasonably certain you won’t run out of money.

The New Rule Of Thumb

In response to lengthening life expectancies, the old rule-of-thumb was modified to be 120 minus your age in stocks.  Under this rule, that same 60 year old would now have 60% of his portfolio invested in stocks and an 80 year old a full 40% in stocks.  Some might complain that’s too aggressive an allocation for an 80 year old, especially in light of the recent market turmoil.  But let’s take a look at a real-life mutual fund with approximately the same asset allocation as our hypothetical 80 year old and see how it would have turned out.  The Vanguard Target Retirement 2005 Fund (VTENX)  invests approximately 40% of its portfolio in stocks, 35% in bonds, and 5% in cash equivalents.

The Vanguard fund performed admirably in 2008, losing only 15.8% of its value.  Think that’s a big deal for an 80 year old?  Maybe, but the fund actually posted a gain of 8.1% in 2007 and is up 4% year-to-date 2009 (as of 5-31-2009).  Overall, the fund has posted an average annual compound return of 1.12% per year over the past 3 years.  I don’t know about you, but I consider a 1% average gain in one of the worst markets since the great depression a resounding success.  It may not have kept up with inflation, but it wouldn’t have resulted in massive losses like many would assume either.  All in all, an 80 year old would have been just slightly worse off having been 40% invested in stocks in over the last few years than avoiding stocks altogether.  Keep in mine, however, that in 80% of the 3 year periods out there, this same 80 year old would have come out far ahead in stocks than in bonds or cash.  Overall, it’s a risk well worth taking that has continually paid off in the past and is likely to continue doing so in the future.

Recessions Can Be Good For Young Investors

For older investors with relatively short time-horizons, this isn’t a particularly pleasurable situation.  There’s no way getting around that, but I think for young investors (say 35 or younger) the financial crisis will turn out to be a net gain.

Allow me to explain.  If knowing your risk tolerance is integral to being a good investor, it makes sense that it would be better to learn exactly what that is sooner rather than later and the current crisis offers a way to do that while our portfolios are still relatively small.  If you panicked at losing 50% of your $10,000 401k account, chances are you’d react at least as negatively when your portfolio reaches $100,000 or even $1,000,000.  If that’s the case, you’ve learned a valuable lesson:  whatever your current allocation happens to be is too aggressive for your risk tolerance and should be scaled back.  After all, the negative consequences of making emotional portfolio adjustments are far smaller with a $10,000 portfolio than one many times that size.

But It’s Not All Positive

Unfortunately, there’s a downside to all this risk-tolerance-awareness hoopla, as best articulated by Ron Lieber in this article I found on Yahoo Finance:  many young people are likely to over-compensate  by taking on far too little risk, creating a generation of ultra-risk-adverse investors that could have severe negative consequences for the nation.  Just as excessive risk-taking often ends in tragedy, so too can excessive risk avoidance.  After all, economic growth is an inherently risky business:  who’s going to take the chance to start that business, labor away to invent the next generation computer technology, or invest in that new factory if society discourages taking risk?  While I think this is an extreme example and very unlikely, it’s something we need to guard against.  The trick is to strike the proper balance.

Has Your Risk Tolerance Changed?

I asked a few fellow personal finance bloggers, admittedly a more financially-savvy lot than most, their thoughts on the subject and whether or not their risk tolerances have changed at all.  The results were somewhat surprising and run contrary to what many people would assume them to be:  overwhelmingly, the people I polled are sticking to their guns and maintaining their previous asset allocations and I count myself as part of that group.  Others, however, have used this as an opportunity to increase their allocation towards risky assets like stocks and real estate, reasoning that today’s low prices represent a bargain and will fuel long-term returns for decades to come.  Of all the respondents, not a single one had gotten more conservative with their investments and three had gotten less conservative.  I think this tact will serve them well over the coming decades.

On the flip side, several respondents commented that while they themselves had not become more risk-adverse, many around them (family, friends, acquaintances, etc) had scaled back on their allocation to risky assets considerably.  While I have no empirical evidence to back this up, I think it’s true that the less financially savvy you are, the more likely it is you’ve become more risk-adverse over the last year.

What about you?  Has the recent market turmoil affected your risk tolerance at all?

Special Thanks to those who responded to my little poll:

NCN at No Credit Needed
Four Pillars at Four Pillars and ABCs of Investing
Stephanie at Poorer Than You
Matthew at Fine Tuned Finances
Pinyo at Moolanomy
The guy behind Dividend Growth Investor
Jeremy at Generation X Finance
Tough Money Love at Tough Money Love and Go To Retirement
Blunt Money at Blunt Money
The guy behind Pragmatic Sage Weekly
Ashley at Wide Open Wallet
Plonkee at Plonkee.com
David at Pimp Your Finances

As a comment on that post (there are several good ones, check it out) I offered up a plausible reason for never going 100% stocks, namely due to the law of diminishing returns.  While adding more and more stocks will increase returns over the long term, once you get past a certain point, perhaps around 80-90% stocks, the incremental return begins to be outweighed by the additional volatility.  Thus, a 10% bond stake can be seen as a cheap insurance policy since it decreases returns only a slight amount but decreases volatility significantly.

The Numbers

I was going to run the numbers myself, but as it turns out JLP of All Financial Matters has already done that.  His results are interesting.  Over the period 1926 – 2006, a 100% stock portfolio would have returned 10.42% per year while a 90/10 split would have returned 10.10%, or a 0.32% per year difference.  Of course, 0.32% per year is pretty big over an 80 year period, but what about a more reasonable time-horizon of 30 years?

Over the 30-year period ending 2006, JLP found the performance spread between a 100% stock portfolio and 90/10 portfolio to be a narrower 0.22% per year.  Assuming you started with $10,000, the 100% stock portfolio would have an ending balance of $413,344.38 and the 90/10 portfolio would have an ending balance of $387,204.88, or about $26,000 less.  That’s not an insignificant sum by any means.  The problem is, the data shows time periods as long as 10 years in which the 90/10 portfolio actually out-performs, so this out-performance isn’t guaranteed.

The conclusion?  If you are a risk-taker, there is nothing wrong with a 100% stock portfolio.  Over the very very long term (30 years at a minimum) you will likely out-perform a slightly less-aggressive portfolio.  That said, your out-performance will probably be much less than you may have expected.  Also, keep in mind that JLP found the 90/10 portfolio to be much less volatile than its 100% stock cousin.  In essense you are trading a great deal of certainty for a small incremental return.  If you’re comfortable with that, so be it, but go in with your eyes wide open.

Times Have Changed

Due in large part to foreign stocks’ superior returns over the last decade, international investing has never been more in vogue.  Where 20% used to be the maximum recommended foreign allocation, many financial experts are now using 20% as a minimum.  While this change of heart is almost certainly due to a certain amount of performance chasing, there’s a lot of solid research backing up this shift in favor of international equities.  Over the period 1970-2007, it appears as though a 60/40 U.S./Foreign allocation has produced the ideal combination of lower risk and higher return, providing an annual return of 11.45% over the period compared to the 11.17% you would have gotten with the more traditional 80/20 portfolio.  While it may not seem like much, that extra 0.28% adds up over the years.

Some argue markets have become more correlated over the years as globalization brings us closer together, diminishing the need for international investing.  While this hypothesis makes intuitive sense, there’s little empirical evidence of it.  Correlations between markets shift constantly:  just because they happen to be correlated this year doesn’t mean they will next year, or 7 years from now.  Even if we assume this to be true, however, there’s still one huge argument for international investing:  currency diversification.  The owner of foreign stocks will actually benefit by the falling dollar.  Since currency movements are expected to more or less equalize over long periods of time, holding significant portions of foreign currency-denominated investments should dampen volatility.

How Much Is Enough?

That’s the $64,000 question.  Theoretically, a 20% allocation would be the minimum necessary to achieve significant diversification benefits while a good theoretical upper bound would be 58%, which is the percentage of global market capitalization represented by all stocks outside the U.S.  So which do you choose?  I say whatever makes you comfortable.  If allocating more than 20% of your portfolio to international equities keeps you up at night, allocate no more than 20% of your portfolio to them.  If you can stomach putting 50+% in foreign equities, by all means do so.  It’s impossible to predict what exact allocation will be optimal over the next few decades, but it’s a fairly safe bet any allocation along the continuum between the suggested min and max will do better than an all-American portfolio.

Only after you’ve decided how much of your equity portfolio to devote overseas should you look into finding the best international mutual funds for your portfolio.

“…an individual’s assessment of his or her risk tolerance should play second (or maybe third or fourth) fiddle to other considerations–such as time horizon, the size of your nest egg, your savings rate,  and the expected returns from various asset classes…”

This, of course, runs counter to a lot of advice you’ll hear about how to construct a long-term investment portfoliol.  I’ve written previously about risk tolerance and risk avoidance but nowhere have I addressed to what extent an investor’s risk tolerance should play in their asset allocation.  In fact, I’ve always kind’ve taken for granted that risk tolerance should determine asset allocation, but now that I think about it, I think Christine has an excellent point.

Young Investors Are Too Conservative

I’ve always had a high risk tolerance.  Coupled with the fact that I’m still in my mid-20′s and have decades before retirement, I have no trouble sleeping at night even though I have a fairly aggressive portfolio.  Most unexperienced investors (which probably constitutes the vast majority of investors), however, aren’t so comfortable with risk.  In fact, according to US News, 401k investors invest much too conservatively.  Investors in their 20′s, who should theoretically be at least 80% to 90% invested in the stock market, invest a relatively modest 50% in stocks mutual fund and another 19% in balanced funds with the rest either in company stock (at 10%, that’s probably too much) and bond/stable value funds.  While a 50% stock allocation is better than nothing, these young investors are taking the much larger risk of not having enough money to retire comfortably in return for reducing short-term portfolio volatility.  I agree with Christine that this isn’t an intelligent trade-off to make.

Base Your Asset Allocation On Hard Facts, Not Your Gut

Of course, nobody is going to tell you risk tolerance isn’t important.  It is.  But at a certain point, practical considerations have to take precedence.  There is simply no way a young investor will be able to retire comfortably without the growth stocks provide.  Extremely risk-advers individuals should go the extra mile educating themselves about the risk and return characteristics of various asset classes to help quell your stomach in hard economic times.  In instances of extreme risk adversity, I think it makes sense to push yourself a bit beyond your comfort zone and deal with the consequences.  For example, if you’re comfortable with having 30% of your portfolio in stocks, you might force yourself to invest 50% of your assets in equities based on a well-researched and informed understanding their superior risk/return characteristics.  Over time, I think the logical, well-informed part of your brain will begin to take over and you’ll gradually become more comfortable with risk, allowing you to raise your stock allocation to perhaps 60% of your portfolio and so forth.  You may never be totally comfortable with market gyrations, but knowing how the market works will help quiet the panicky voice in your head every time the DOW drops.  Your 401k balance will thank you.

Nobody Loves The IRS

Excepting congress, which needs huge sums of tax dollars for important projects like building bridges to nowhere and llama farms for orphan llamas, nobody likes the IRS. I am no exception and if you too share my raw hatred of the IRS you would be wise to think long and hard about asset location.

Asset location is the art of placing different asset classes in different types of accounts depending on a combination of the tax-efficiency of that asset class and the tax characteristics of the type of account in question. Here’s an example to make what I just said make sense. Suppose you have a target asset allocation for your retirement portfolio of 50% stocks and 50% bonds. Furthermore, about half of that portfolio is in your 401K at work and half is in either a regular taxable account or a Roth IRA. The best course of action would be to put the bonds in your 401K and stocks in your taxable account or Roth. The reason for this is that bond interest is taxed as regular income and stock dividends and long-term capital gains are taxed at lower capital-gains rates. Since everything in your 401K will eventually be taxed at normal income tax rates when you liquidate, putting stocks in it would amount to intentionally paying more taxes than necessary. In contrast, bond interest is taxed as income so you lose nothing by putting them in your 401K. Proper asset location can make a huge difference in your long-term returns so it’s well worth paying attention to.

Here is a list of asset classes and the optimal type of account they should be placed in, if possible.

Least tax-efficient
place in tax-deferred account (401k, traditional IRA, etc)

High-yield bonds
TIPS
Taxable Bonds

Medium tax-efficiency
place in tax-free account (Roth IRA, Roth 401k)

REITs
Balanced Funds
Small-cap stock funds
Actively-managed stock funds
Value stock funds
International Stock funds

Most tax-efficient
fine to place in taxable account

Broadly diversified stock index funds
Tax-managed stock funds
I/EE savings bonds
Tax-exempt municipal bonds