Core four portfolios are simple indexed portfolios that allocate assets across four asset class mutual or exchange-traded funds.
Vanguard core four portfolios
Starting February 6, 2013, Vanguard began offering investors four fund portfolios, invested in four “total market” index funds through the firm’s series of low cost target date and target risk (called LifeStrategy) balanced index funds. Furthermore, the firm’s on-line portfolio allocation tools now suggest similar four fund allocations.
The Vanguard target date and LifeStrategy portfolios allocate investments across the following asset class index funds:
- Vanguard Total Stock Market Index Fund, holding approximately 3600 stocks,
- Vanguard Total International Stock Index Fund, holding approximately 5500 stocks,
- Vanguard Total Bond Market Index Fund, holding approximately 6300 bonds,
- Vanguard Total International Bond Index Fund, holding approximately 2300 bonds.
In its annual reports, Vanguard asserts that adding international bonds to its all-in-one balanced funds serves to further diversify their portfolios and dampen the volatility of their returns [see Vanguard – Global fixed income: Considerations for U.S. investors]. The large infusion of target date and LifeStrategy fund investment directed to the international bond fund has given the fund a larger initial pool of assets to facilitate better sampling the fund’s index.
Vanguard allocates 40% of a portfolio’s stock allocation to international stocks and allocates 30% of a portfolio’s bond allocation to international bonds. The charts below show the portfolio allocations for four stock/bond allocation splits. (Click charts to enlarge).
Rick Ferri Core Four
Investment author and advisor Rick Ferri proposes a four fund portfolio that adds a US equity REIT fund to a portfolio consisting of US stocks, International stocks, and US bonds.The asset allocation menu holds the following positions:
- A US total market index fund
- An international total market index fund
- A US REIT index fund
- A US total bond market fund
Rick proposes that investors first determine their bond allocation. With the remaining funds, allocate 60% to US stock, 30% to international and 10% to REITs. For example, this formula would provide the following allocations (click charts to enlarge):
Using Vanguard funds
Rick suggests using these Vanguard index funds/etfs for implementing the Core Four portfolio. Vanguard offers lower cost admiral shares for investors having a minimum fund balance of $10,000.
Core-4 Investor Class share funds are:
|Vanguard Total Stock Market Index Fund Investor Shares||VTSMX||0.17%|
|Vanguard Total International Stock Index Fund Investor Shares||VGTSX||0.22%|
|Vanguard REIT Index Fund Investor Shares||VGSIX||0.24%|
|Vanguard Total Bond Market Index Fund Investor Shares||VBMFX||0.22%|
Core-4 Admiral Class share funds are:
|Vanguard Total Stock Market Index Fund Admiral Shares||VTSAX||0.05%|
|Vanguard Total International Stock Index Fund Admiral Shares||VTIAX||0.14%|
|Vanguard REIT Index Fund Admiral Shares||VGSLX||0.10%|
|Vanguard Total Bond Market Index Fund Admiral Shares||VBTLX||0.10%|
Core-4 Investor ETF Class share funds are:
|Vanguard Total Stock Market ETF||VTI||0.05%|
|Vanguard Total International Stock ETF||VXUS||0.14%|
|Vanguard REIT ETF||VNQ||0.10%|
|Vanguard Total Bond Market ETF||BND||0.10%|
The rationale for adding equity REITs to a portfolio is quite simply the size of commercial real estate as an asset class in the economy. Advice on investing in real property is as old as the ancient Talmud: “Let every man divide his money into three parts, and invest a third in land, a third in business, and let him keep a third in reserve” and as current as David Swensen, the investment manager for the Yale endowment fund, who advises investors to include commercial real estate in his model portfolio.
If you work in the real estate business, or if you are already directly own and manage real estate rental properties, you may not want or need added exposure to equity real estate.
The following tables provide return data for Rick Ferri’s Core Four portfolio assuming investment in Vanguard investor share index funds. Now past returns are no guarantee of future returns, but the history reveals how each portfolio allocation has performed over both the 2000 -2002 and 2008 bear markets and ensuing recoveries
Rick Ferri Core Four portfolio returns
The tables below provide 3-year, 5-year, 10-year, and 15 year compound returns and volatility statistics for each Rick Ferri Core Four allocation.
Return figures are calculated using Rick Ferri’s Core Four portfolio google drive spreadsheet.