Do you remember the Classic financial 60/40 portfolio by John C. Bogle, the founder of Vanguard? Now, I will present to you some evolutions about it.
The classic 60/40 financial portfolio
The Three-Fund Portfolio
Other portfolios based on three founds
Conclusions
The classic 60/40 financial portfolio
The composition of the 60/40 portfolio is based on an extremely simple structure: the division between Stocks (60%) and Bonds (40%).
Classic 60/40 portfolio asset allocation:
60% U.S. Stock Market
40% U.S. Intermediate Bonds
Author's elaboration – Source: Google Sheets.
This portfolio invests only in US funds. Is this a good idea? NO, period.
Bogle himself affirms that every investor should hold both domestic and international stocks.
From this thought was born the Three-Fund portfolio by Taylor Larimore (Bogleheads-Taylor Larimore Three-fund portfolio).
The Three-Fund Portfolio
This portfolio maintains a great simplicity in its structure, too. Larimore says: “After a lifetime of investing since 1950 trying to “beat the market,” I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated, is an ideal portfolio for most investors. There are many advantages to taking a three-fund portfolio approach.”
I agree with this last statement: this portfolio is easy to build and maintain and performs well over time.
Look at the asset allocation.
Three-Fund portfolio asset allocation (suggested):
40% U.S. Stock Market
20% International Stocks Market
40% U.S. Bonds
Author's elaboration – Source: Google Sheets.
There’s another typical Three-Fund portfolio asset allocation:
48% U.S. Stock Market
12% International Stocks
40% U.S. Bonds
Author's elaboration – Source: Google Sheets.
As you can see above, these percentual are only a suggestion; we can obtain many different portfolios (more or less aggressive/conservative) by varying them.
Other portfolios based on three founds
Here we have some examples:
Three-Fund portfolio 20/80 asset allocation (very conservative — less risk):
14% U.S. Stock Market
6% International Stock Market
80% U.S. Bonds
Author's elaboration – Source: Google Sheets.
Three-Fund portfolio 40/60 asset allocation (conservative — less risk):
32% U.S. Stock Market
8% International Stock Market
60% U.S. Bonds
Author's elaboration – Source: Google Sheets.
Three-Fund portfolio equal weights (aggressive — more risk):
34% U.S. Stock Market
33% International Stock Market
33% U.S. Bonds
Author's elaboration – Source: Google Sheets.
Three-Fund portfolio 80/20 (very aggressive — more risk):
64% U.S. Stock Market
16% International Stock Market
20% U.S. Bonds
Author's elaboration – Source: Google Sheets.
Conclusions
Takeaways:
- The classic 60/40 financial portfolio can be an excellent starting point for many other portfolios, with less or more significant risk.
- These portfolios are based on three funds only, so they are straightforward to build and manage, even if you are not an expert.
- Despite their simplicity, they perform very well over time.
A sincere wish of good work to all!
Written by F. GRAMOLA (*).
(*) Member of S.I.A.T., the Italian Society of Technical Analysis (member society of I.F.T.A. – International Federation of Technical Analysts).
Warning
We merely cite our personal opinions for educational purposes only.
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Initial photo by Carlos Muza on Unsplash.
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