Portfolio allocations for direct indexing

Frec’s portfolio allocation feature gives investors more control over their direct indices by allowing them to create custom portfolio allocations and manage how they rebalance. In this guide, we’ll break down why portfolio allocations matter, how to rebalance, common allocation models, and how to set up your allocation with Frec.

What is a portfolio allocation?

A portfolio allocation determines how investments are distributed across asset classes such as cash, stocks, and fixed income. Spreading your investments over multiple asset classes can lower your risk by reducing your portfolio’s dependency on a single asset.

Frec’s allocation feature allows you to assign percentage allocations to your direct indices as well as Frec Treasury. You can also set up recurring deposits into your allocation, which will be distributed in a way that helps you get closer to your target allocations.

What happens if my allocation drifts?

Let’s say you start with a 50/50 split between small cap and large cap stocks. Over time, your allocation drifts to 60% large cap and 40% small cap. 

To get back to your target allocation, you can rebalance your portfolio. Rebalancing refers to the process of adjusting your portfolio to restore your original allocation. Traditional robo-advisors default to selling and buying assets to maintain your target allocation. However, this can trigger a taxable event which cuts into your harvested losses.

With Frec, you can choose how to rebalance: by using outside cash or sell and buy. If investors choose the sell and buy option, we’ll show you your estimated tax impact upfront.

Building your allocation strategy

Key considerations

The following factors will help you determine which allocation model best fits your needs:

• Investment goals: Are you looking to retire, buy a house, or reach another life milestone?
• Time horizon: How long do you plan to hold your investment before needing to withdraw? Are you young and willing to take more risk, or older and prioritizing stability?
• Liabilities and responsibilities: Do you have obligations like a mortgage, student loans, or paying tuition?

Once you’ve considered these factors, you’re ready to select an allocation model. 

Common allocation models

When building your investment strategy, several well-established allocation models can serve as helpful starting points. The following models can all be implemented on Frec, allowing you to combine trusted strategies with the tax advantages of direct indexing.

Total stock market portfolio

The total stock market portfolio represents one of the simplest yet most U.S. diversified allocation strategies for long-term investors. With Frec, you can implement this approach by allocating 100% to the CRSP US Total Market index, which captures the broad U.S. equity market—including large, mid, and small cap stocks across all sectors.

This allocation provides exceptional diversification with minimal effort, as it automatically adjusts to market changes and requires virtually no maintenance. It’s particularly well-suited for investors with long time horizons who can weather market volatility and seek to match overall market returns without attempting to outperform through stock selection.

Warren Buffett’s 90/10 formula

Following the 2008 financial crisis, Warren Buffett recommended a straightforward allocation for average investors that remains popular today: 90% in an S&P 500 index fund and 10% in Treasury.

On Frec, you can easily implement this strategy by allocating 90% to the S&P 500 index and sweeping the remaining 10% into Frec Treasury. This approach balances growth potential with a modest cash cushion while taking advantage of Frec’s direct indexing benefits for the equity portion. The Treasury allocation provides some stability during market downturns and can be rebalanced into stocks during corrections, potentially enhancing long-term returns.

The 60/40 portfolio

Perhaps the most classic allocation model, the 60/40 portfolio consists of 60% stocks and 40% bonds. This balanced approach has served as the foundation for retirement planning for decades, offering a middle ground between growth potential and capital preservation.

With Frec, you can create a similar portfolio by allocating 60% to an index like the S&P 500 or CRSP US Total Market and 40% to Frec Treasury. This allocation works particularly well for investors approaching or in early retirement, or those with moderate risk tolerance seeking more stability than an all-equity portfolio provides. Frec’s platform makes rebalancing between these allocations simple, helping maintain your target risk level over time.

Three-fund portfolio

The Three-Fund Portfolio, popularized by Taylor Larimore and widely embraced by Bogleheads investors, expands diversification beyond domestic markets while maintaining simplicity. 

Using Frec’s allocation tool, you can create a globally diversified portfolio by allocating:

• 33% to CRSP US Total Market index for domestic exposure
• 33% to Frec Treasury
• 17% to S&P Developed Markets ADR index and 17% to S&P Emerging Markets ADR index for international exposure

This allocation model offers an excellent balance of simplicity, diversification, and customization. The international exposure provides geographic diversification that pure domestic portfolios lack, potentially reducing risk and capturing growth opportunities abroad. With Frec’s direct indexing approach, you gain additional tax efficiency benefits across the equity portions of this portfolio while maintaining the simplicity of managing just one platform.

Each of these allocation models can be easily set up and maintained through Frec’s portfolio allocation feature, allowing you to automate your investment strategy while gaining the tax advantages and customization benefits of direct indexing.

Setting up your portfolio allocation on Frec

Once you know how you want to build your allocation, you can get started by navigating to the portfolio allocation module under “Activity” on the Overview page. Select “Set up allocation” and enter your desired percentages.

Next, you can schedule recurring deposits by choosing weekly, monthly, or on the 1st and 15th of each month from your bank or Frec Treasury. Deposits at the allocation level can help get you closer to your target allocation. You can also manage your dividends here and decide whether to reinvest them, pay off a portfolio line of credit, or invest them in cash or Treasury. 

In the event your allocation has drifted, you can choose how you rebalance either with cash or buy and sell positions. If you choose to buy and sell, we’ll show you the estimated tax impact. 

Finally, review and confirm your allocation. Once set, you can always readjust it from your overview page. If you need more assistance, check out our help center article, or reach out to us at help@frec.com. 

Smarter portfolio management starts here

Ready to get started? Set up your allocation today or reach out to us at help@frec.com for support. New to Frec? Sign up today or book a demo to learn more.