Welcome to yet another episode of lazy portfolio analysis. Today, we will be dissecting the Bogleheads 4 Fund Portfolio – a lazy portfolio comprising bonds and stocks. This guide offers a comprehensive assessment of the portfolio, its asset components and allocation, returns over time, and most importantly, why you should or should not adopt it as your go-to lazy portfolio.
Before we get to the proceedings fully, I have summarized the major talking points of the article below.
In a rush? Read through the key takeaways instead:
- The Bogleheads 4-fund Portfolio is essentially the Bogleheads 3-fund Portfolio but with the inclusion of a group of international bonds.
- In terms of asset allocation, this portfolio comprises U.S bonds and stocks, and international bonds and stocks.
- John C. Bogle (a.k.a. Jack Bogle) is the founder of the Vanguard and inspired the Bogleheads 4-fund portfolio.
- The Boggleheads 4-fund Portfolio is big on simplicity, diversification, and considerable safety of the investment.
- This portfolio can be replicated using suitable ETFs from major players like Vanguard and iShares.
- Young investors and investors with healthy risk tolerance levels can consider this portfolio for its impressive performance over time.
The Bogleheads 4 Fund Portfolio Explained
As mentioned earlier, the Bogleheads 4 Fund Portfolio is another popular lazy portfolio among investors. However, this four-fund portfolio needs little or no introduction If you are familiar with the Bogleheads 3 Fund portfolio. While the three-fund portfolio from Boglehead comprises only U.S. stocks, U.S bonds, and international stocks, the four-fund portfolio takes diversification a step further by introducing international bonds into the assets mix.
As the name suggests, the Boggleheads 4 fund portfolio was inspired by John C. (Jack) Bogle, Vanguard founder and investor advocate. According to the Bogleheads forum, the portfolio is created to ensure diversification and simplicity while helping investors stick to their investment plans irrespective of the market situations. Therefore, it is not surprising that this portfolio is easy to create and manage while giving investors a good shot at earning decent returns over time.
If you are a young investor or an investor looking to play the long-term game, you should consider the Bogleheads portfolios, especially the Bogleheads 4 Portfolio.
The Bogleheads 4 Fund Portfolio: Investment Strategy
Investors are always interested in the investment play a portfolio adopts before putting in their money. In the case of Bogleheads 4 Portfolio, the portfolio believes the most straightforward investment principles can provide investors with risk-adjusted returns that are far better than what the average investment methods or strategies offer.
It’s all about not bearing too little or too much risk. The portfolio keeps things simple by adopting four asset classes. This ensures investors do not miss out on gains in the market within a short commitment timeframe. As a result, you can trust the Bogleheads 4-fund portfolio to deliver solid performance over time.
Another play of the Bogleheads four-fund portfolio is diversification. Diversification on individual investment and asset levels mean this portfolio keeps volatility at bay and ensures investors are not exposed to excessive risks. It combines only the total U.S. and world index funds to expose investors to international and domestic markets. The allocation of a decent amount of the portfolio to safe-haven assets ensures investors are most likely to survive the hit when the global market goes sideways.
With the investment strategy out of the way, let’s talk about the asset allocation of this portfolio.
The Bogleheads 4-Fund Portfolio: Asset Allocation
If we have a four-fund portfolio, then it is only expected to have four investment-grade funds in such a portfolio. The four asset classes in the Bogleheads four-fund portfolio are the U.S. stocks, international stocks, U.S. bonds, and international bonds. The combination offers investors diversified exposure to global markets, including all market-cap sizes and market sectors for both bonds and stocks.
Here is the breakdown of the allocation of these asset classes, starting with the stocks funds;
1. U.S. Stocks (60%)
The largest allocation in this portfolio goes to the stocks of the United States market, claiming 60% of the entire collection. Many low index funds are out there offering exposure to the U.S. market. Still, it is best to go for options with low expense ratios and adequate exposure to stocks of varying market caps in different sectors.
2. International Stocks (20%)
The next largest asset class on the list after U.S. stocks is the international stocks, which account for 20% of the entire portfolio allocation. International stocks offer investors a measured exposure to international investments, including stocks outside the United States.
Considering half of the global market stocks are just U.S. stocks, having international stocks onboard offers a cushion against declining U.S. stocks. For example, the international stocks will not decline when the U.S. stocks decline, offering investors a safe haven.
It is best to go for exchange-traded funds (ETFs) with investments in highly-diversified international holdings. This ensures you have a fair representation in different regions, market caps, and international market sectors.
Now, let’s talk about the bonds.
3. U.S. Bonds (15%)
The Bogglehead 4-fund portfolio considers stability an essential element of an excellent lazy portfolio. That is why it has included fixed-income investments in the mix. The 15% allocation of U.S. bonds ensures stability and safety for investors. It is important to state here that Bogle was not clear whether the U.S. bonds should be a treasury or corporate bonds. However, a good ETF that invests in domestic bonds will get the job done.
4. International Bonds (5%)
International bonds have found their way into this portfolio for the same reasons as international stocks. In addition to being safer investment instruments, international bonds are less likely to struggle, even in challenging market conditions. Moreover, having 5% of international bonds in the mix guarantees diversified exposure to government debt in various countries around the globe. Therefore, the overall risk is minimal, and investors are more protected against adverse market forces.
Interestingly, anyone can create a traditional Boglehead four-fund portfolio for their use by combining ETFs, index mutual funds, or both. More on that later.
The Bogleheads 4 Fund Portfolio: Historical Performance
The assessment of any portfolio is incomplete without a look at his performance over time. One of the beauties of lazy portfolios is the fact that you can always count on them to deliver decently over an extended period of time. The best part – they do this with little or no adjustment over time. Is this portfolio any different? Let’s find out together.
If you put $10,000 in Bogleheads 4-fund portfolio in 2013, you would have $20,035 by now. This translates to about a 100% increase over ten years. Comparatively, if you invested $10,000 in the S&P 500 index for the same period, you would have $24,666 in total, translating to a 145.68% increase in your original capital. If we annualize the Bogleheads portfolio’s 10-year return, it becomes an 8.08% increase every year. While there is roughly a 46% difference in returns, it is safe to say that the Bogleheads portfolio has not performed poorly.
This Bogleheads portfolio comprising four funds has performed consistently over the last ten years, delivering an average of 2-3% in dividends every year since 2012. The highest dividend yield over the previous ten years was recorded in 2012, at 3..04%, while the lowest was recorded in 2020, which is 1.76%.
If you are unsure what dividend yield is, it is the expected return an investor would have gotten for holding the fund over a certain timeframe.
Sharpe Ratio and Volatility
The Sharpe Ratio helps assess the risk-adjusted performance of a fund. It determines if the excess returns a portfolio records come from higher risks or better investment decisions. In the case of this portfolio, the Sharpe ratio is -0.63, indicating a higher risk-free rate than the return.
If you are bothered about the level of volatility of this portfolio, you have nothing much to worry about. It is less volatile than our benchmark – the S&P 500. For example, the maximum volatility of the Bogleheads four-fund portfolio is 27.91%, which is lower compared to S&P 500’s 35.28%. This portfolio is less risky, and the price movements are considerably predictable.
The maximum drawdown is another top indicator of risk levels in portfolios. Investors can deduce the level of risk they are taking by assessing the Boggleheads portfolio’s drawdowns over time. The highest drawdown since January 2010 is 28.24. This was recorded in March 2020, with the recovery taking about five months.
The Bogleheads 4 Fund Portfolio: Pros and Cons
No portfolio is perfect, and the Bogleheads four-fund portfolio is not an exception. I highlighted the upsides and downsides of this portfolio to give you a clearer view of why you should or should not consider it. We start with the upsides.
Here are a few reasons to choose the Bogleheads 4-fund portfolio:
1. It offers decent performance.
You can expect this portfolio to deliver a solid performance as it has done over the years. In recent years, it has consistently performed slightly better than the S$P 500. This is no easy feat for a lazy portfolio, but the investment strategy of this portfolio has made it possible.
2. It is simple to create and maintain.
We do not see lazy portfolios with just four asset classes every day. Aside from the Boglehead 3-fund portfolio, the 4-fund Boglehead portfolio is one of the simplest you can find out there. It takes the “lazy” in its title to another level, with a seamless setup process and management that even newbie investors will have no problem handling.
3. It offers investors international exposure.
This portfolio has you covered if you are big on international exposure as an investor. With 20% international stocks and 5% international bonds, you are not limited to only the domestic market. This international exposure is one of the primary reasons the portfolio outperforms its domestic counterparts.
Here are a few reasons not to choose the Bogleheads 4-fund portfolio:
1. Investors have little or no control.
Putting your money into investment-grade funds means you have no say in the stocks you invest in. Your voting rights as a part-owner of the companies invested in are also non-existent. Investors who are big on making their votes count are better off with portfolios that are not built around ETF or index funds.
2. Investors are exposed to risk.
Despite its impressive track record, investors must be mindful of how risky this portfolio is. The portfolio allocates just 20% of its entire allocation to safe-haven assets. So, except your risk tolerance level is relatively high, you should go for portfolios that are heavier on safer assets.
3. Possible drawdowns.
There are hardly any portfolios without drawdowns. But the equity-heavy approach of this portfolio means drawdowns can be more painful than usual.
The Bogleheads 4 Fund Portfolio vs. 3 Fund Portfolio
The fundamentals are almost the same for both the Bogleheads 3-fund portfolio and the 4-fund version. For example, both are made up of U.S. stocks, international stocks, and U.S. bonds. However, the 4-fund version – as the name suggests – added another asset type to make it four types of funds instead of three.
The introduction of international bonds increased diversification and lowered volatility without taking anything away from the simplicity and simple approach of Boglehead’s investment strategy.
You can read more about the Bogleheads three-fund portfolio on the Bogleheads wiki page.
Replicating The Bogleheads 4 Fund Portfolio With Low-Cost Index Funds
According to the allocations described above, investors can replicate the Boglehead four-fund portfolio using low-expense ratio index mutual funds. They can also use ETFs or just combine both index mutual funds and ETFs.
For example, you can choose four Vanguard ETFs to create a traditional Bogleheads 4-fund portfolio as follows:
- 60% Vanguard Total Stock Market Index Fund ETF (VTI), investing in small- to large-cap stocks in different sectors.
- 20% Vanguard Total International Stock Index Fund ETF (VXUS), investing in international stocks in emerging and developed markets, excluding the United States.
- 15% Vanguard Total Bond Market Index Fund ETF (BND), investing in U.S.-dollar denominated bonds without inflation-protected securities and tax-exempt bonds.
- 5% Vanguard Total International Bond Index Fund ETF (BNDX), investing in international bonds rather than domestic bonds.
Alternatively, you can have a mix of iShares and Vanguard ETFs to create the same portfolio but with slightly different allocations:
- 50% Vanguard Total Stock Market (VTI), investing in small- to large-cap stocks in different sectors.
- 30% Vanguard FTSE All-World ex-US (VEU), investing in developed and emerging non-U.S. equity markets around the globe.
- 10% iShares TIPS Bond (TIP), offering exposure to domestic treasury inflation-protected securities of the United States, known for increasing face values during inflation.
- 10% Vanguard Total Bond Market (BND), investing in U.S.-dollar denominated bonds but without inflation-protected securities and tax-exempt bonds.
NB: It is important to rebalance your portfolio from time to time. It ensures you are not underexposed to good opportunities or overexposed to risk. Rebalancing is even more important for portfolios like this that are heavy on equities. For best results, I recommend rebalancing once a month or once every two months, depending on your strategy.
Lazy portfolios are often designed to thrive in most market conditions, with little or no adjustment over time. They usually consist of a few low-cost funds you can rebalance with no issues. The Boglehead’s 4-fund portfolio ticks these boxes – it is a lazy portfolio comprising only four low-cost index funds. An investor can create a personalized four-fund portfolio that reflects Bogleheads investment strategy using mutual funds, ETFs, or both.
Who Should Adopt The Bogleheads 4 Fund Portfolio?
It is important to mention here that this portfolio is not the right fit for everyone. For example, investors who have shorter time horizons may not get the best out of this portfolio within a limited time. This is because the risks usually outweigh the rewards in short periods. Instead, it is better suited for investors who have enough time to allow the portfolio to run its course.
If you are nearing retirement or rely on your investment for your living expenses, the Bogleheads 4-fund portfolio is not suitable for you. The same applies if your risk tolerance level is not healthy. Instead, you should consider highly diversified strategies or portfolios that favor more fixed-income funds.
Finally, you can expect a solid performance over time with this portfolio. However, this comes with some risk, considering the heavy stock allocation. Nevertheless, the historical performance indicates the Bogleheads 4-fund portfolio stands a good chance of outperforming the S&P 500 as it has done in the past.
And with that, I will be rounding up this interesting discussion about the Bogleheads 4 fund portfolio. If you enjoy this, you can read other portfolio guides here.