Three fund portfolio 2016 update

The Taylor Larimore 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 2016 returns for the portfolio’s constituent Vanguard funds (investor class):

  • Vanguard Total Stock Market Index Fund: 12.53%
  • Vanguard Total International Stock Index Fund: 4.65%
  • Vanguard Total Bond Market Index Fund: 2.50%

Below are four portfolios with allocations devoting 30% of the stock allocation to international stocks (click images to enlarge).

The table below provides 2016 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
2016 8.63% 7.10% 5.57% 4.03%

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

Year 80/20 60/40 40/60 20/80
2016 8.63% 7.10% 5.57% 4.03%
2015 0.30% -0.54% -0.26% 0.20%
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, 15-year, and 20-year compound returns and volatility statistics for each three-fund portfolio allocation.

80/20 allocation

3-year 5-year 10-year 15-year 20-year
CAGR 4.88% 9.94% 5.50% 6.73% 6.89%
STDev 5.08% 8.45% 15.66% 15.08% 14.70%

60/40 allocation

3-year 5-year 10-year 15-year 20-year
CAGR 4.38% 8.03% 5.44% 6.38% 6.68%
STDev 4.32% 6.12% 11.63% 11.13% 10.78%

40/60 allocation

3-year 5-year 10-year 15-year 20-year
CAGR 3.87% 6.07% 5.19% 5.86% 6.31%
STDev 3.64% 3.99% 7.71% 7.26% 6.99%

20/80 allocation

3-year 5-year 10-year 15-year 20-year
CAGR 3.35% 4.08% 4.77 5.17% 5.76%
STDev 3.09% 2.60% 4.20% 3.75% 3.78%

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 2016 period.

Three-fund portfolios variance drain

Period 80/20 60/40 40/60 20/80
3yr variance drain -0.08% -0.06% -0.04% -0.03%
5yr variance drain -0.26% -0.14% -0.06% -0.03%
10yr variance drain -1.20% -0.64% -0.27% -0.08%
15yr variance drain -1.12% -0.59% -0.24% -0.06%
20yr variance drain -1.06% -0.56% -0.23% -0.07%

Addendum

Calculated returns data uses this three-fund portfolio google drive spreadsheet. The spreadsheet contains returns data for an assortment of international stock allocations (20%,40%,50% of the equity allocation).

CAGRCAGR

Allocation 80/20 70/30 60/40 40/60 20/80
20% international CAGR CAGR CAGR CAGR CAGR
3yr 5.65% 5.30% 4.96% 4.25% 3.54%
5yr 10.66% 9.62% 8.57% 6.44% 4.26%
10yr 5.97% 5.91% 5.79% 5.42% 4.88%
15yr 6.82% 6.66% 6.45% 5.90% 5.19%
20yr 7.14% 7.03% 6.87% 6.43% 5.82%
30% international
3yr 4.88% 4.63% 4.38% 3.87% 3.35%
5yr 9.94% 8.99% 8.03% 6.07% 4.08%
10yr 5.50% 5.50% 5.44% 5.19% 4.77%
15yr 6.73% 6.58% 6.38% 5.86% 5.17%
20yr 6.89% 6.81% 6.68% 6.31% 5.76%
40% international
3yr 4.11% 3.96% 3.80% 3.48% 3.16%
5yr 9.22% 8.36% 7.48% 5.71% 3.89%
10yr 5.02% 5.08% 5.09% 4.96% 4.65%
15yr 6.63% 6.50% 6.32% 5.82% 5.15%
20yr 6.62% 6.58% 6.49% 6.18% 5.70%
50% international
3yr 3.34% 3.28% 3.22% 3.19% 2.97%
5yr 8.50% 7.72% 6.94% 5.35% 3.71%
10yr 4.54% 4.66% 4.74% 4.73% 4.53%
15yr 6.53% 6.41% 6.25% 5.77% 5.13%
20yr 6.36% 6.35% 6.30% 6.06% 5.64%
About

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

Posted in Market statistics, Portfolios
January 2017
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