Three fund portfolio 2015 update

The three-fund portfolio, is a portfolio design consisting of three “total” market index funds, covering the US stock market, the international stock market, and the US taxable investment grade bond market. Investors were able to implement this portfolio beginning in 1997, when Vanguard introduced a total international index fund. The firm had introduced a total US stock market index in 1992, and a total US bond market index in 1987.

The 2015 returns for the portfolios constituent funds (investor class):

  • Vanguard Total Stock Market Index Fund: -0.29%
  • Vanguard Total International Stock Index Fund: -4.37%
  • Vanguard Total Bond Market Index Fund: 0.30%

Below are four portfolios with allocations modeled upon Vanguard Lifestrategy funds (click images to enlarge). The portfolios allocate 30% of the stock allocation to international stocks.

The table below provides 2015 returns for these portfolios. Note that returns for portfolios holding admiral shares would produce a return enhancement of approximately 0.10% and that a different weighting of international stocks would result in differing returns.

Year 80/20 60/40 40/60 20/80
2015 -1.15% -0.79% -0.43% -0.06%

Historical returns

The following tables give return data for three-fund portfolios assuming investment in Vanguard investor share index funds. Keep in mind that 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.

Note that lower cost admiral share portfolios can add approximately +0.10% annual compound return for each allocation.

Three-fund portfolio returns

2013

Year 80/20 60/40 40/60 20/80
2015 -1.15% -0.79% -0.43% -0.06%
2014 7.10% 6.76% 6.43% 6.09%
2013 21.83% 15.81% 9.79% 3.76%
2012 14.26% 11.71% 9.16% 6.60%
2011 -1.44% 0.81% 3.06% 5.31%
2010 13.52% 11.75% 9.97% 8.20%
2009 26.07% 21.04% 16.00% 10.97%
2008 -30.32% -21.47% -12.63% -3.79%
2007 8.18% 7.87% 7.55% 7.24%
2006 15.93% 13.02% 10.10% 7.19%
2005 7.57% 6.27% 4.98% 3.69%
2004 12.86% 10.71% 8.55% 6.40%
2003 28.03% 22.02% 16.00% 9.99%
2002 -13.70% -8.21% -2.72% 2.77%
2001 -9.29% -4.86% -0.43% 4.00%
2000 -7.39% -2.69% 2.00% 6.70%
1999 20.36% 15.08% 9.80% 4.52%
1998 18.82% 16.26% 13.70% 11.14%
1997 19.06% 16.65% 14.25% 11.64%

Compound returns

The tables below give 3-year, 5-year, 10-year, and 15-year compound returns and volatility statistics for each three-fund portfolio allocation.

80/20 allocation

3-year 5-year 10-year 15-year
CAGR 8.85% 7.75% 6.15% 5.43%
STDev 11.64% 10.05% 15.95% 15.72%

60/40 allocation

3-year 5-year 10-year 15-year
CAGR 7.05% 6.67% 5.99% 5.53%
STDev 8.31% 7.05% 11.85% 11.55%

40/60 allocation

3-year 5-year 10-year 15-year
CAGR 5.18% 5.53% 5.62% 5.43%
STDev 5.21% 4.29% 7.86% 7.46%

20/80 allocation

3-year 5-year 10-year 15-year
CAGR 3.23% 4.31% 5.07 5.16%
STDev 3.10% 2.68% 4.27% 3.76%

Variance drain

A higher variance of returns results in a fund having a compound return lower than its average arithmetic return. Variance drain (arithmetic return minus compound return) measures the amount of return lost due to variance. The table below gives results over the 1997 to 2015 period.

Three-fund portfolios variance drain

Period 80/20 60/40 40/60 20/80
3yr variance drain -0.41% -0.21% -0.09% -0.03%
5yr variance drain -0.37% -0.19% -0.07% -0.03%
10yr variance drain -1.25% -0.66% -0.28% -0.08%
15yr variance drain -1.20% -0.63% -0.26% -0.06%

Calculated returns data uses this three-fund portfolio google drive spreadsheet. The spreadsheet contains returns data for an assortment of international stock allocations.

About

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

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Posted in Market statistics, Portfolios
January 2016
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