Frank Armstrong’s Ideal Index portfolio

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“Index funds offer compelling advantages to investors in all markets where they are available. Index funds are the lowest cost, lowest risk, and lowest tax cost investment style available to investors. Importantly, these benefits translate into strong performance. Investors should confidently anticipate consistent top quartile performance over any reasonable time frame against the appropriate peer group of actively managed funds. “
Index Fund Investing | Investor Solutions – Frank Armstrong

Frank Armstrong III, investment advisor and author, offers the following seven fund “Ideal Indexed” portfolio in his book, The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio (published December 16, 2003).

The portfolio employs a 70% equity /30% fixed income split, consisting  of six equity asset class funds and one fixed income fund.

The equity slice holds a 31% portfolio allocation to international stocks. The US stock allocation has a value tilt, as the value allocations are larger than the blend and growth allocations. The asset class allocations  include:

  • US large blend stocks : 6.25%
  • US large value stocks : 9.25%
  • US small growth stocks: 6.25%
  • US small value stocks : 9.25%
  • US REITS : 8.00%
  • International stocks: 31.00%
  • US short-term bonds: 30.00%

The chart below (click to enlarge) shows the portfolio allocation (rounded values in the pie chart).

image23

Ideal Indexed portfolio

Fund Ticker Expense ratio
500 Index VFINX 0.17%
Value Index VIVAX 0.24%
Small Growth Index VISGX 0.24%
Small Value Index VISVX 0.24%
REIT Index VGSIX 0.24%
Total International Index VGTSX 0.22%
Short-term Bond Index VBISX 0.20%

Returns

The tables below gives returns for the portfolio, using Vanguard investor share index funds. Investors with larger fund balances can use lower cost admiral shares, and exchange-traded funds are available at potentially lower cost. The returns period includes  portfolio performance during the two bear markets in the 2000 – 2010 decade, as well as subsequent recoveries.  Keep in mind that past performance does not forecast future performance.

Annual returns

Year Portfolio
2013 15.66%
2012 12.80%
2011 -3.22%
2010 13.35%
2009 23.93%
2008 -26.11%
2007 5.95%
2006 17.84%
2005 8.23%
2004 14.70%
2003 27.25%
2002 -8.14%
2001 -3.23%
2000 2.04%
1999 13.60%

Compound returns

Period Return
3yr CAGR 8.08%
5yr CAGR 12.14%
10yr CAGR 7.34%
15yr CAGR 6.77\5%

Standard deviation

Period Standard deviation
3yr standard deviation 10.17%
5yr standard deviation 9.85%
10yr standard deviation 14.14%
15yr standard deviation 13.68%

See Frank Armstrong Ideal Indexed portfolio, google drive spreadsheet for return computations.

About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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