"I like to do my own number crunching and analysis," said Armbruster. "As a result, I like to use small-, mid- and large-cap funds to create my own profile to stock markets."
The former strategist at Smith Barney's equities research group became an independent portfolio adviser nearly a decade ago. "I enjoy doing research and my dad and uncle were advisers and investment managers," said the 36-year-old Armbruster. "So it's something I've grown up with. I enjoy studying all of the latest research and academic journals."
But he doesn't just focus on U.S. stock funds. "Internationally, we try to cover the whole market as we do in the U.S.," said Armbruster. "We take a total market approach using three core funds."
For developed large-cap non-U.S. markets, he uses the iShares MSCI EAFE Index (NYSE: EFA). Then, he'll typically add two DFA funds for small-cap international and emerging markets exposure.
Armbruster also breaks out real estate investment trusts as a separate asset class. On the domestic side, he uses the Vanguard REIT Index ETF (NYSE: VNQ) or the SPDR DJ Wilshire REIT ETF (NYSE: RWR). For foreign REIT exposure, Armbruster likes the SPDR DJ Wilshire International Real Estate ETF (NYSE: RWX).
"Over long periods of time, the expected return on REITs is about the same as the stock market. And the standard deviation, which is a measure of volatility, has been about the same as large-cap stocks. But the correlation of returns has been fairly low," said Armbruster.
REITs Need Patience?
He added: "Is this the right time to be invested in REITs? Probably not. But the long-term diversification benefits of adding REITs to a portfolio is tremendous. So I'm willing to be patient with this asset class—and, oh yes, they're yielding around 8% right now."
For core accounts, he hasn't gotten involved with currencies or commodities yet, says Armbruster. "From a theoretical standpoint, it makes a lot of sense. You can get higher risk-adjusted returns for your portfolio using ETFs that provide exposure to those different asset classes," he said.
But he finds that most investors don't have an appetite for "what they perceive as overly risky asset classes," added Armbruster.
With some clients, however, he does pitch the PowerShares DB G10 Currency Harvest (NYSE: DBV) and the exchange-traded note iPath Dow Jones-AIG Commodity Index (NYSE: DJP).
On the bonds side, Armbruster is slowing diversifying from the Vanguard Total Bond Market Index Fund (VBTLX) and the Vanguard Inflation-Protected Securities Fund (VAIPX). He's also adding a third type of fixed income through the Vanguard Intermediate-Term Investment-Grade Bond Fund (VFIDX).
"Treasuries are a significant component of the Total Bond Market Fund. But we can get significantly greater yields through corporate bond issues. And VFIDX is widely diversified, so if there are some defaults, it won't hammer this fund," said Armbruster. "And while risks might appear greater by diversifying around 10-15% of our bond allocations into corporates from VBTLX, it actually should lower the overall portfolio's risk profile."