3-fund Portfolio Modification

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Skyflyerman
Posts: 17
Joined: Sat Mar 22, 2014 10:30 pm

3-fund Portfolio Modification

Post by Skyflyerman » Mon Nov 19, 2018 12:55 am

After tinkering with the often-suggested Boglehead 3-fund portfolio, it became apparent that replacing the international portion with a more modest portion of small cap value (VIOV), but in about a 5:1 ratio with S&P500 (VOO) provides a better historical result (by a long shot) with plenty of diversification (considering the increasingly international nature of the S&P500). I know that many here are very content to keep diversification within the US borders, excluding international-specific funds altogether (ala Mr. Bogle). I know adding small cap value has been addressed many times before, but I'm not sure if in a quantitative way, but I am not up for looking at every post on SCV on this lazy Sunday eve!

VOO 55%
VIOV 11%
BND 33%

If the stock portion is a bit too much exposure, one could increase the BND portion, but keep the VOO:VIOV ratio of 5:1.

At least with back-testing (for what it's worth), one can see that Portfolio 2, compared to Portfolio 1, after 25 years provides:

$800,000 more in returns with a modestly smaller "Worst Year" and "Drawdown," which is important regarding behavior investing.


Portfolio Analysis Results (Jan 1993 - Oct 2018) Link PDF Excel


Portfolio 1 (Commonly suggested Portfolio):
Asset Class Allocation
US Stock Market 33.00%
Global ex-US Stock Market 33.00%
Total US Bond Market 34.00%

Portfolio 2 (Replacing Ex-US Global with Small Cap Value):
Asset Class Allocation
US Stock Market 55.00%
US Small Cap Value 11.00%
Total US Bond Market 34.00%


Portfolio Returns:

Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR TWRR MWRR Stdev Best Year Worst Year Max. Drawdown
Portfolio 1 $1,000,000 $2,159,303 3.02% 7.19% 7.80% 9.71% 25.01% -25.06% -37.02%

Portfolio 2 $1,000,000 $2,957,100 4.29% 8.51% 9.07% 9.59% 29.20% -22.18% -34.30%

Vanguard $1,000,000 $3,636,447 5.12% 9.38% 10.17% 14.13% 37.45% -37.02% -50.97%
500
* The number in parenthesis shows the calculated value taking into account the percentage based periodic withdrawals.

Your thoughts?

Skyflyerman
Posts: 17
Joined: Sat Mar 22, 2014 10:30 pm

Re: 3-fund Portfolio Modification

Post by Skyflyerman » Mon Nov 19, 2018 12:57 am

...on another note, can someone more graphically gifted than me tell me why the columns in my Preview are vertically correct, but after clicking on "Submit" it runs everything together, and not under the appropriate column heading?

HEDGEFUNDIE
Posts: 1225
Joined: Sun Oct 22, 2017 2:06 pm

Re: 3-fund Portfolio Modification

Post by HEDGEFUNDIE » Mon Nov 19, 2018 1:32 am

I have a better idea, replace both US and ex-US funds with DEMSX (Emerging markets small cap) and Total Bond Market with Long US Treasuries.

https://www.portfoliovisualizer.com/bac ... tion5_2=34

Over past 20 years you’ll have ended up with over 2.5x the return of a traditional 3-fund portfolio.

And if that’s too risky for you, you can try DISVX to include Developed Markets small cap as well, still beats the three fund:

https://www.portfoliovisualizer.com/bac ... tion5_2=34

With returns like these, who needs US stocks?

Valuethinker
Posts: 36684
Joined: Fri May 11, 2007 11:07 am

Re: 3-fund Portfolio Modification

Post by Valuethinker » Mon Nov 19, 2018 3:47 am

Skyflyerman wrote:
Mon Nov 19, 2018 12:55 am
After tinkering with the often-suggested Boglehead 3-fund portfolio, it became apparent that replacing the international portion with a more modest portion of small cap value (VIOV), but in about a 5:1 ratio with S&P500 (VOO) provides a better historical result (by a long shot) with plenty of diversification (considering the increasingly international nature of the S&P500). I know that many here are very content to keep diversification within the US borders, excluding international-specific funds altogether (ala Mr. Bogle). I know adding small cap value has been addressed many times before, but I'm not sure if in a quantitative way, but I am not up for looking at every post on SCV on this lazy Sunday eve!

VOO 55%
VIOV 11%
BND 33%

If the stock portion is a bit too much exposure, one could increase the BND portion, but keep the VOO:VIOV ratio of 5:1.

At least with back-testing (for what it's worth), one can see that Portfolio 2, compared to Portfolio 1, after 25 years provides:

$800,000 more in returns with a modestly smaller "Worst Year" and "Drawdown," which is important regarding behavior investing.


Portfolio Analysis Results (Jan 1993 - Oct 2018) Link PDF Excel


Portfolio 1 (Commonly suggested Portfolio):
Asset Class Allocation
US Stock Market 33.00%
Global ex-US Stock Market 33.00%
Total US Bond Market 34.00%

Portfolio 2 (Replacing Ex-US Global with Small Cap Value):
Asset Class Allocation
US Stock Market 55.00%
US Small Cap Value 11.00%
Total US Bond Market 34.00%


Portfolio Returns:

Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR TWRR MWRR Stdev Best Year Worst Year Max. Drawdown
Portfolio 1 $1,000,000 $2,159,303 3.02% 7.19% 7.80% 9.71% 25.01% -25.06% -37.02%

Portfolio 2 $1,000,000 $2,957,100 4.29% 8.51% 9.07% 9.59% 29.20% -22.18% -34.30%

Vanguard $1,000,000 $3,636,447 5.12% 9.38% 10.17% 14.13% 37.45% -37.02% -50.97%
500
* The number in parenthesis shows the calculated value taking into account the percentage based periodic withdrawals.

Your thoughts?
Historical results will not tell you the future.

Diversification always gives worse results than picking the best asset class.

You have to decide which is the most diversifying asset class, long run.

averagedude
Posts: 360
Joined: Sun May 13, 2018 3:41 pm

Re: 3-fund Portfolio Modification

Post by averagedude » Mon Nov 19, 2018 5:59 am

If US and international rate of returns were reversed over the last 5,10,15, and 20 years, im sure there would be alot of discussions on this forum about going all international since all of these international countries do business in the United States.

onourway
Posts: 1379
Joined: Thu Dec 08, 2016 3:39 pm

Re: 3-fund Portfolio Modification

Post by onourway » Mon Nov 19, 2018 6:12 am

You should not be making your future investment plans based on back-testing of certain asset classes. Adding small cap value to your portfolio does not give you nearly the same kind of diversification as adding international.

I say it repeatedly here, but the fact that US companies do a lot of business internationally is not at all the same kind of diversification you get by owning international companies domiciled outside of our borders. In a potential future where the US is no longer dominant, our stock market could potentially shrink relative to the new major economies and while American companies will still be doing business internationally, without that ex-US exposure, you will miss out on that new growth - while assuming all of the cost of a shrinking home economy.

UpperNwGuy
Posts: 1243
Joined: Sun Oct 08, 2017 7:16 pm

Re: 3-fund Portfolio Modification

Post by UpperNwGuy » Mon Nov 19, 2018 7:25 am

As a classic three-fund portfolio investor, I got excited when I saw the title of this thread, but now that I've read it, I am disappointed to find that it is just another "why invest in international" thread.

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Duckie
Posts: 6069
Joined: Thu Mar 08, 2007 2:55 pm

Re: 3-fund Portfolio Modification

Post by Duckie » Mon Nov 19, 2018 6:39 pm

Skyflyerman wrote:can someone more graphically gifted than me tell me why the columns in my Preview are vertically correct, but after clicking on "Submit" it runs everything together, and not under the appropriate column heading?
The BBCode doesn't recognize tabs or more than one space in a row. If you want a table to line up you have to use the "code" tag and do a lot of adjusting and and check it each time with the "Preview" button until it looks right in green.

For example, the following looks all lined up in green but if you look at the source (by hitting the "Reply with quote" button on the upper right) you see how unaligned it actually is.

Code: Select all

Name			      Category	     % Invested	 Balance     Cost Basis  YTD
FID 500 INDEX (FXAIX)	      Large Cap	     17.21%	 $35,980.45  $37,924.22  -4.76%
VANG DEV MKT IDX ADM (VTMGX)  International  13.01%	 $27,203.53  $25,128.16  -8.73%
TRP BLUE CHIP GR ADV (PABGX)  Large Cap	     12.87%	 $26,905.10  $18,478.97  10.82%
FID SM CAP IDX (FSSNX)	      Small Cap	     10.74%	 $22,456.25  $24,186.56  -7.21%

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