Three fund portfolio using inflation indexed bonds – 2017 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.  Newspaper columnist Scott Burns has suggested a three fund portfolio (called the Margarita portfolio) that uses inflation-indexed treasury bonds for the bond allocation in the portfolio.

Investors were able to implement this portfolio beginning in 2001, when Vanguard introduced an inflation-indexed treasury bond fund.  The firm had introduced a total US stock market index fund in 1992, and a total international index fund in 1997.

The 2017 returns for the portfolio’s constituent Vanguard funds (investor class):

  • Vanguard Total Stock Market Index Fund: 21.05%
  • Vanguard Total International Stock Index Fund: 27.40%
  • Vanguard Inflation Protected Securities fund : 2.81%

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

The table below provides 2017 returns for these portfolios. Note that returns for portfolios holding lower cost admiral shares would produce a return enhancement of approximately 0.10% and that a different weighting of international stocks would result in differing returns.

Three-fund portfolio returns

 Year 80/20 60/40 40/60 20/80
2017 18.93% 14.90% 10.87% 6.84%

Historical returns

The following tables give return data for three-fund portfolios assuming investment in Vanguard investor share 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  2008 bear market and ensuing recovery.

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

 Year 80/20 60/40 40/60 20/80
2017 18.93% 14.90% 10.87% 6.84%
2016 9.04% 7.91% 6.78% 5.65%
2015 -1.25% -1.40% -1.54% -1.69%
2014 6.71% 5.99% 5.27% 4.55%
2013 20.50% 13.15% 5.79% -1.56%
2012 14.81% 12.80% 10.79% 8.79%
2011 -0.31% 3.08% 6.47% 9.85%
2010 13.47% 11.65% 9.82% 8.00%
2009 27.05% 22.99% 18.92% 14.86%
2008 -31.90% -24.63% -17.37% -10.11%
2007 9.12% 9.74% 10.35% 10.97%
2006 15.17% 11.48% 7.80% 4.11%
2005 7.60% 6.35% 5.10% 3.84%
2004 13.67% 12.32% 10.97% 9.62%
2003 28.84% 23.63% 18.42% 13.21%
2002 -12.03% -4.87% 2.29% 9.45%
2001 -9.46% -5.19% -0.92% 3.34%

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 yr 5 yr 10 yr 15 yr
CAGR 8.59% 10.49% 6.35% 9.04%
STD DEV 10.09% 9.02% 16.54% 14.44%

60/40 allocation

3 yr 5 yr 10 yr 15 yr
CAGR 6.93% 7.95% 5.84% 8.03%
STD DEV 8.18% 6.45% 12.90% 11.31%

40/60 allocation

3 yr 5 yr 10 yr 15 yr
CAGR 5.24% 5.36% 5.15% 6.88%
STD DEV 6.32% 4.48% 9.61% 8.50%

20/80 allocation

3 yr 5 yr 10 yr 15 yr
CAGR 3.53% 2.69% 4.29% 5.60%
STD DEV 4.62% 4.08% 7.16% 6.44%

Sharpe  Ratios

The table below provides Sharpe ratios for the four portfolios with allocations devoting 30% of the stock allocation to international stocks.

Sharpe ratio 80/20 60/40 40/60 20/80
3yr 0.89 0.88 0.85 0.76
5yr 1.20 1.27 1.23 0.64
10yr 0.37 0.39 0.42 0.45
15yr 0.55 0.58 0.62 0.62

Addendum

Calculated returns data uses this three-fund portfolio using inflation protected bonds google drive spreadsheet. The spreadsheet contains returns data for an assortment of international stock allocations (20%, 30%, 40%, or 50% of the equity allocation).

Allocation 80/20 70/30 60/40 40/60 20/80
20% international CAGR CAGR CAGR CAGR CAGR
3yr 8.78% 7.93% 7.06% 5.33% 3.57%
5yr 11.15% 9.81% 8.45% 5.69% 2.86%
10yr 6.86% 6.56% 6.22% 5.40% 4.41%
15yr 9.15% 8.64% 8.11% 6.93% 5.63%
30% international
3yr 8.59% 7.76% 6.93% 5.24% 3.53%
5yr 10.49% 9.23% 7.95% 5.36% 2.69%
10yr 6.35% 6.12% 5.84% 5.15% 4.29%
15yr 9.04% 8.56% 8.03% 6.88% 5.60%
40% international
3yr 8.40% 7.60% 6.79% 5.15% 3.49%
5yr 9.82% 8.65% 7.45% 5.02% 2.52%
10yr 5.83% 5.67% 5.46% 4.90% 4.16%
15yr 8.93% 8.46% 7.96% 6.84% 5.58%
50% international
3yr 8.20% 7.43% 6.65% 5.06% 3.44%
5yr 9.16% 8.06% 6.95% 4.69% 2.36%
10yr 5.31% 5.22% 5.07% 4.65% 4.04%
15yr 8.81% 8.37% 7.88% 6.79% 5.56%
About

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

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