Know what you own
Taylor likes the above five funds because they create a broadly diversified portfolio which, while not perfectly negatively correlated, contains asset classes "that tend to zig when the others zag," he says.
The key to constructing a portfolio from the ground up is to choose ETFs with broad objectives that do not overlap, he says.
"An ETF that tracks all non-U.S. stocks will typically include exposure to emerging market stocks," he says. "So a separate ETF that tracks emerging market stocks can be used, but it is not necessarily needed."
However, investors need to be aware of what a fund holds. For example, Treasury inflation-protected securities are bonds, but they typically are not found in an aggregate bond index fund. Buying a separate TIPS fund can help diversify the portfolio, he says.
"TIPS as an asset class tend to have low correlation to the bond market as a whole, and will react differently than the aggregate bond index in most years," he says, adding that TIPS also do not tend to be highly correlated to stocks.
Taylor says sticking to the five core funds he recommends offers a broad selection of complementary asset classes. While there is an ocean of different ETF possibilities, novice investors who buy too many funds risk inadvertently tilting their portfolios too heavily in any one direction.
"Too much flexibility can be a bad thing if an investor doesn't fully understand the exposure they may be taking on," he says.