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Bogleheads 3 Fund Portfolio

Bogleheads 3 Fund Portfolio

Bogleheads 3 Fund Portfolio. I have written several articles on lazy retirement portfolios. My first article was on the Core and Satellite Portfolio also known as the Core and Explore Portfolio. My second article was on the Coffeehouse Investor Portfolio. In this article, I am going to cover the Bogleheads 3 Fund Portfolio. These lazy portfolios are decent ones to follow for 401(k) and IRA retirement accounts. You can just set your asset allocation and forget about it except to review one per year or every six months. You can rebalance your retirement portfolio if you want to once your asset allocation deviates significantly from your planned one.

Bogleheads 3 Fund Portfolio
Bogleheads 3 Fund Portfolio

History of the Bogleheads 3 Fund Portfolio

For those of you who don’t know, the Bogleheads are a group of investors that follow the investing principles espoused by the father of passive index funds and founder of Vanguard, John Bogle. He generally advocated indexing, diversifying investments, minimizing taxes, keeping it simple, and staying the course.

Taylor Larimore, a Boglehead, initially advocated the Bogleheads 3 Fund Portfolio. The portfolio consists of three total market index funds: a US stock market fund, an international stock market fund, and the US taxable investment-grade bond market fund. In 1997, the Bogleheads 3 Fund Portfolio could be implemented when a total international index fund was introduced to investors by Vanguard.

As a historical note, there was also a money market fund in the initial idea for a total of four funds in the old Vanguard Diehards forum on the Morningstar discussion boards around 1999. This initial idea seemingly developed into the Bogleheads 3 Fund Portfolio.

What is the Bogleheads 3 Fund Portfolio?

The Bogleheads 3 Fund Portfolio is a strategy that focuses on using three low-cost index funds to emphasize simplicity and tax efficiency. It also reduces the risk of style drift, tracking error, overlap, asst bloat, and a few other problems. The Boglehead 3 Fund Portfolio also reduces the risk of fund manager changes. This risk is a real risk as new fund managers can underperform their predecessors. Does anyone recall Robert Stansky at the Fidelity Magellan Fund after he followed Peter Lynch and Jeffrey Vinik?

The main idea is that you should own the most important asset classes, which are U.S. stocks, international stocks, and U.S. bonds. The main task that investors now have is to decide on asset allocation. The basic idea is to invest in uncorrelated assets using passive index funds to capture as much of the market return that you can with adequate diversification and lower volatility. These should be everyone’s goal for their retirement fund.

The table below outlines the Bogleheads 3-Fund Portfolio assuming an overall 60% stock / 40% bond asset allocation. I do not list specific low-cost index funds since one can now find these three funds at almost every major asset manager. However, historically, the three-fund portfolio has been the Vanguard Total Stock Market Index Fund, the Vanguard Total Bond Market Index Fund, and the Vanguard Total International Stock Market Index Fund. Some people prefer the Vanguard 500 Index Fund over the Vanguard Total Stock Market Index Fund.

WeightingAsset Class
40%Total Stock Market Index Fund
20%Total International Stock Market Index Fund
40%Total Bond Market Index Fund

Pros and Cons

There are several pros and cons to the Bogleheads 3 Fund Portfolio. Under pros, index funds are low-cost, diversified, and tax-efficient. In addition, the portfolio is simple to understand and implement and will outperform most active fund portfolios over time. It is well known that low-cost index funds outperforms active funds over time minus expense ratio differences and trading costs. Furthermore, investing in index funds removes the short-term trading mentality and other things investors should not care about.

I outline several cons, but these are minimal, in my opinion. First, there is a lack of control, the portfolio will only match market returns, and the portfolio will be overweight mega-cap stocks. Lack of control is a minimal con, but some people want control. I would instead set my asset allocation and look at it every six months or so. Second, some people like to beat the market, but studies have shown that most cannot do so in retirement plans. So, matching market returns is decent. The last item is a real risk. Increasingly the market is being dominated by mega-cap stocks and especially mega-cap tech stocks.

Boglehead 3 Fund Portfolio Returns from January 2000 – July 2021.

How does the Bogleheads 3 Fund Portfolio do over 20 years in a retirement plan assuming a buy and hold strategy? In this comparison, we examine Vanguard Total Stock Market Index (VITSX), Vanguard Total International Stock Index (VGTSX), and Vanguard Total Bond Market Index (VBTIX). We look at the following percentages: Portfolio 1 – 40% / 20% / 40% (blue line), Portfolio 2 – 60% / 20% / 20% (red line), and Portfolio 3 – 60% / 0% / 40% (orange line). We assume the portfolios are rebalanced annually. We focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. 

Biogleheads 3 Fund Portfolio Returns
Source: Portfolio Visualizer

The results vary for CAGR and volatility. But clearly, including a higher percentage of stocks increases returns slightly but simultaneously increases volatility.  Removing international stocks and increasing the US bond percentage increases returns little but significantly reduces volatility, and the Sharpe Ratio rises. You can change the asset allocation and see what works for you.

Interestingly, max drawdowns are worse for Portfolio 2 due to a lower percentage of bonds and a higher percentage of stocks. Furthermore, the drawdowns were longer for Portfolio 2.

Bogleheads 3 Fund Portfolio Max Drawdowns
Source: Portfolio Visualizer

Final Thoughts on the Bogleheads 3 Fund Portfolio

Most retirement plans have a mix of passive index funds and active funds. The Bogleheads 3 Fund Portfolio is one possible strategy assuming that all the asset classes are available as index funds in your retirement plan. It is pretty much a no-brainer to use passive index funds for retirement portfolios in 401(k) plans or even IRAs due to their advantages. You will capture much of the market return with good diversification, minimize your costs, and avoid many of the cons. Interestingly, there is no significant penalty for not including international stocks, but volatility is much lower. I am not advocating excluding international stocks but maybe making the percentage low.


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Chart or Table of the Week

Today I highlight Mastercard (MA). The stock price is in correction territory and was down approximately (-15%) this week from its recent and all-time high. The downward pressure is due to increasing worries about the impact of the delta virus on the global economy. Additionally, even though transaction volumes are up, cross-border transactions have not recovered as much. These have higher margins are more profitable. Mastercard is now a Dividend Contender and has raised the dividend at a double-digit rate for the past 5-years and past decade. The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of August 2021. The number of companies on the list has risen to 530. Thus, we are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There are three new companies added to the list this past month. These three companies are Eneti (NETI), International General Insurance (IGIC), and Washington Real Estate (WRE).

Market Indices

Dow Jones Industrial Averages (DJIA): 35,369 (-0.24%)

NASDAQ: 15,364 (+1.55%)

S&P 500: 4,536 (+0.58%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 35.6X and the Schiller P/E Ratio is at about 39.2X. These two metrics are up for the past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as companies in the index reported solid earnings lapping a Q2 2020 that had depressed earnings.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was flat this past week to 16.41. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The index is now Neutral at a value of 54. The Index is up 4 points this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand indicates Extreme Greed. Investors are accepting a 1.94% yield over investment-grade corporate bonds. In addition, the spread is down further from current levels indicating that investors are taking on more risk.

Put and Call Options are signaling Extreme Greed. In the last five trading days, put option volume has lagged call option volume by 59.62%. This value is amongst the lowest level of put buying in the past two years.

Market Momentum indicates Greed. The S&P 500 is 7.00% over its 125-day average. This percentage is further above the average than usual over the past 2-years.

Market Volatility is set at Neutral. The CBOE VIX reading of 16.41 is neutral.

Safe Haven Demand is Neutral. Stocks have outperformed bonds by 2.35% over the past 20 trading days. This value is near average relative to the past 2-years.

Stock Price Breadth indicates Extreme Fear as declining volume is 5.65% more than advancing volume on the NYSE during the last month. This indicator is near the lower end of its range relative to the past two years.

Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.

Source: CNN Business

Economic News

The National Association of Realtors (NAR) reported that its Pending Home Sales Index fell 1.8% after dropping a revised 2.0% in June based on contracts signed in July. Signings are down 8.5% year-over-year. Signings declined month-over-month in three of four U.S. regions led by the Northeast (-6.6%), Midwest (-3.3%), and the South (-0.9%). Conversely, contract signings increased in the West (+1.9%). All regions experienced year-over-year declines led by the Northeast (-16.9%), Midwest (-8.5), South (-6.7%), and West (-5.7%).

The Conference Board’s Consumer Confidence Index declined in August to a six-month low of 113.8 and followed a downwardly revised 125.1 for July. The Present Situation Index, based on consumers’ sentiment of current business conditions and the labor market, declined to 147.3, down from 157.2 in July. The proportion of consumers planning to purchase homes, automobiles, and major appliances all showed cooling. Finally, the Expectations Index, which measures consumers’ short-term outlook for income, business, and the job market dropped to 91.4 compared to last month’s 103.8 reading.

The U.S. Bureau of Labor Statistics reported the unemployment rate dropped slightly in August to 5.2% as only 235,000 jobs were added. This follows July’s upwardly revised 5.4% and 1.053 million jobs.  The report represents the smallest increase since January 2021. The number of unemployed decreased to 8.4M in August. Leisure and hospitality, a primary contributor to job growth, came in flat after increasing by an average of 350K per month over the last six months Leisure and hospitality is down some 1.7M jobs since February 2020. Professional Services reported (+74K) for August (-468K) since February 2020. Manufacturing came in at (+37K), helped by gains in motor vehicle and parts (+24K), and is down (-378K) over February 2020. Transportation and warehousing reported (+53K), showing a slight increase (+22K) over February 2020. Education showed mixed job results for August with private (+40K), state (-21K), and local (-6K). Overall, education jobs are down with private (-159K), state (-186K), and local (-220K) as compared to their pre-pandemic levels.

Thanks for reading Bogleheads 3 Fund Portfolio – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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