Tag Archives: Portfolios

Harry Browne’s Permanent Portfolio

The Permanent Portfolio often sparks a passionate debate in the Bogleheads forum. For example, this epic 83 page discussion (72 pages here, continued for another 11 pages here). Why does this portfolio generate such an intense dichotomy?

Let’s start with Harry Browne’s own words:


Harry Browne (1933 -2006)

For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes. The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio… It isn’t difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.”

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David Swensen’s portfolio (from Unconventional Success)


“Individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis Such a strategy reduces the fees paid to the parasitic mutual fund industry, leaving more money in the hands of the investing public. ” The Mutual Fund Merry-Go-Round – NY Times , August 13, 2011 .

David Swensen, investment manager of the Yale University Endowment Fund, has addressed how investors should set up and manage their investments in his book, Unconventional Success: A Fundamental Approach to Personal Investment.

Swensen recommends that investors should select not for profit mutual fund companies (such as Vanguard or TIAA-CREF) to minimize investment expenses and largely eliminate conflicts of interest.

The Swensen portfolio  consists of six core asset class allocations:

  • US equity:  30%
  • Foreign developed equity: 15%
  • Emerging market equity: 5%
  • US REITS: 20%
  • US Treasury bonds: 15%
  • US TIPS: 15%


Although the recommended portfolio splits its allocation with 70% equities/ 30% fixed income, the portfolio can be adjusted to reflect alternative equity/bond allocations.

In response to a query, Swensen indicates that the treasury bond duration should be set at the market duration (see David Swensen – US Treasury Bonds duration).  This post will use an intermediate treasury fund as the vehicle for the bond allocation.

 The charts below (click images to enlarge) show portfolio allocations.

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William Bernstein’s Coward’s Portfolio


William Bernstein, investment manager and author, first introduced a version of his “Coward’s portfolio” in 1996.

The “coward” refers not to the investor’s risk tolerance but to the strategy of hedging one’s bets and having slices of a number of asset classes.

An indexed 60% equity/ 40% fixed income Coward’s portfolio would consist of the following asset classes:

  • US large blend: 15%
  • US large value: 10%
  • US small blend : 5%
  • US small value: 10%
  • US REIT: 5%
  • European equity: 5%
  • Pacific region equity: 5%
  • Emerging markets equity: 5%
  • US short-term bond: 40%

Note that the portfolio has  a value tilt to US equity, providing an even split between US blend and US value funds (20%/20%).  The US REIT and regional international allocations are all set at equal 5% slices of the portfolio.

The chart below (click image to enlarge) illustrates the 60/40 allocation.


60/40 Coward’s portfolio

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Frank Armstrong Ideal Index portfolio


“Index funds offer compelling advantages to investors in all markets where they are available. Index funds are the lowest cost, lowest risk, and lowest tax cost investment style available to investors. Importantly, these benefits translate into strong performance. Investors should confidently anticipate consistent top quartile performance over any reasonable time frame against the appropriate peer group of actively managed funds. “
Index Fund Investing | Investor Solutions – Frank Armstrong

Frank Armstrong III, investment advisor and author, offers the following seven fund “Ideal Indexed” portfolio in his book, The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio (published December 16, 2003).

The portfolio employs a 70% equity /30% fixed income split, consisting  of six equity asset class funds and one fixed income fund.

The equity slice holds a 31% portfolio allocation to international stocks. The US stock allocation has a value tilt, as the value allocations are larger than the blend and growth allocations. The asset class allocations  include:

  • US large blend stocks : 6.75%
  • US large value stocks : 9.25%
  • US small growth stocks: 6.75%
  • US small value stocks : 9.25%
  • US REITS : 8.00%
  • International stocks: 31.00%
  • US short-term bonds: 30.00%

The chart below (click to enlarge) shows the portfolio allocation (rounded values in the pie chart).


70/30 Ideal Indexed portfolio

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The Coffeehouse portfolio


” Remember, past performance is no guarantee of future returns. But a simple philosophy of creating a long term financial plan, diversifying in different baskets and capturing the entire return of each basket, has a far greater chance of serving you well than trying to keep up with the whims of the Wall Street crowd. “
Bill Schultheis at Coffeehouse Returns | The Coffeehouse Investor

The Coffeehouse portfolio is an indexed seven-fund portfolio popularized by financial planner and author Bill Schultheis. The portfolio holds the following asset classes:

  • US large cap stocks
  • US large value stocks
  • US small cap stocks
  • US small cap value stocks
  • International stocks
  • US intermediate bonds

The portfolio has a 60% equity/40% fixed income allocation and allocates a 10% slice to the six equity investments.

The Coffeehouse portfolio tilts the US stock allocation towards value stocks by devoting an equal allocation to large cap and small cap market index funds with large cap and small cap value index funds.

The portfolio uses a total international index fund for the international stock allocation, and a US intermediate-term bond index fund for bond allocations.

See the chart below (click image to enlarge).

Coffeehouseportfolio (2)

Coffeehouse 60/40 allocation

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Vanguard Total World Stock Index Fund and a two-fund portfolio

 The 2008 inception of the  Vanguard Total World Stock Index fund  makes it easy  for investors to invest in a simple two-fund portfolio, using  a combination of the total world stock index fund with a total US bond index fund. (Rick Ferri suggested  this portfolio  in Three Simple Index Fund Portfolios).

Sample two-fund allocations (click image to enlarge)

However, investors face a number of considerations in deciding whether to adopt  this two fund portfolio over other popular simple portfolios (examples include three-fund or core four portfolios as well as using a single balanced fund.)
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Three-fund portfolio returns

The 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.

We can thus look at the return history of three-fund portfolios from 1987 to 2013. Below are four portfolios with allocations modeled  upon Vanguard Lifestrategy funds (click images to enlarge). The portfolios allocate 30% of the stock allocation to international stocks.

The portfolios range from an aggressive portfolio holding 80% stocks to a conservative portfolio consisting of 20% stocks.

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Core Four portfolios

Core four portfolios are simple indexed portfolios that allocate assets across four asset class mutual  or exchange-traded funds.

Vanguard core four portfolios

Starting February 6, 2013, Vanguard began offering investors four fund portfolios, invested in four “total market” index funds through the firm’s series of low cost target date  and  target risk (called LifeStrategy)  balanced index funds. Furthermore, the firm’s on-line portfolio allocation tools now suggest similar four fund allocations.

The Vanguard  target date and LifeStrategy portfolios allocate investments across the following asset class index funds:

  1. Vanguard Total Stock Market Index Fund, holding approximately 3600 stocks,
  2. Vanguard Total International Stock Index Fund, holding approximately 5500 stocks,
  3. Vanguard Total Bond Market Index Fund, holding approximately 6300 bonds,
  4. Vanguard Total International Bond Index Fund, holding approximately 2300 bonds.

In its annual reports, Vanguard asserts that adding international bonds to its all-in-one balanced funds serves to further diversify their portfolios and dampen the volatility of their returns [see Vanguard – Global fixed income: Considerations for U.S. investors]. The large infusion of target date and LifeStrategy fund investment directed to the international bond fund has given the fund  a larger initial pool of assets to facilitate better sampling the fund’s index.

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The Three Fund Portfolio

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.

Below are some examples of three fund portfolio allocations (click image to enlarge)

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