Bogle's Common Sense 5 fund portfolio

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neomutiny06
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Bogle's Common Sense 5 fund portfolio

Post by neomutiny06 » Wed May 18, 2016 8:44 am

I am reading John Bogle's "Common Sense On Mutual Funds" and I love it.

In it, he presents "A Simple Five-Fund Portfolio" for the investor seeking active equity management.

Large-cap - 50%
Mid-cap - 10%
Small-cap - 20%
Specialty (i.e. Healthcare) - 10%
International - 10%
Total - 100%


What if one wanted to use this portfolio for indexing? Thoughts on this asset allocation in general? 10% in a specialty fund seems high...

I also know that Bogle is not big on international, but other authors recommend 50% in foreign stocks.

LittleD
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Re: Bogle's Common Sense 5 fund portfolio

Post by LittleD » Wed May 18, 2016 12:40 pm

You should be able to index this portfolio pretty easily. Most fund families have
a healthcare mutual fund or etf available at reasonable expenses. The
international EFA indexes have lagged the U.S. for year's now and I don't know
if their economies can produce growth higher than the U.S. going forward so
10% seems reasonable.

If you can find the right one, I would choose a fully diversified healthcare fund
that has biotech, pharma, hospitals, & extended care. The boomers are getting
older and will need to consume more healthcare so I like the investment.

In the international, I would choose one that has a large percentage of far east
including China since that region of the world is projected to grow far faster
than Europe & South America.

EdLaFave
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Re: Bogle's Common Sense 5 fund portfolio

Post by EdLaFave » Wed May 18, 2016 12:50 pm

I read that book and remember it as a pretty passionate case against active funds, tilting, and especially sector funds. Where in the book can I find him recommending that portfolio?

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RyeWhiskey
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Re: Bogle's Common Sense 5 fund portfolio

Post by RyeWhiskey » Wed May 18, 2016 1:16 pm

neomutiny06 wrote:I am reading John Bogle's "Common Sense On Mutual Funds" and I love it.

In it, he presents "A Simple Five-Fund Portfolio" for the investor seeking active equity management.

Large-cap - 50%
Mid-cap - 10%
Small-cap - 20%
Specialty (i.e. Healthcare) - 10%
International - 10%
Total - 100%


What if one wanted to use this portfolio for indexing? Thoughts on this asset allocation in general? 10% in a specialty fund seems high...

I also know that Bogle is not big on international, but other authors recommend 50% in foreign stocks.
That allocation is basically 70% Total US Stock Market with a 10% SC tilt, an additional 10% sector tilt, and 10% to international: unnecessarily complicated and not adequately diversified, if you ask me. A 100% Total World Stock Index portfolio would be simpler, easier, and--in all likelihood--more successful in the long run.
This post was brought to you by Vanguard Total World Stock Index (VTWSX/VT).

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Electron
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Re: Bogle's Common Sense 5 fund portfolio

Post by Electron » Wed May 18, 2016 1:59 pm

EdLaFave wrote:Where in the book can I find him recommending that portfolio?
See page 103 in the first edition of the book.
Electron

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patrick013
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Re: Bogle's Common Sense 5 fund portfolio

Post by patrick013 » Wed May 18, 2016 2:09 pm

neomutiny06 wrote:
Large-cap - 50%
Mid-cap - 10%
Small-cap - 20%
Specialty (i.e. Healthcare) - 10%
International - 10%
Total - 100%

Seems like a rational idea to me.

I'd go :

500 index - 50%
Mid-cap index - 10%
Small-cap index - 10%
Specialty index - 10%
Total International stock index - 10%
Intermediate Term bond index - 10%
Total - 100%

For specialty I'd go Utility index mostly for a low beta defensive investment,
and Interm Bond index for diversification and less risk. International
index includes developed and emerging also for diversification.

But this would work just as well for a growth oriented portfolio :

500 index - 50%
Mid-cap index - 25%
Small-cap index - 25%

Just set it once and forget it. Alot of guessing otherwise.
age in bonds, buy-and-hold, 10 year business cycle

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PeteyDink
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Re: Bogle's Common Sense 5 fund portfolio

Post by PeteyDink » Wed May 18, 2016 2:54 pm

I assume this is just the stock portion of the asset allocation? I don't have the book myself to look it up...

This allocation doesn't look optimal if one is to split up the 3 or 4 fund portfolio. It's too low on international, which misses the growth potential of emerging markets as well as diversifying outside the US. This is important because no one country, especially the US, is number 1 for return year after year. Many large international companies are so common place that they may seem domestic but are not (e.g. Nestle). 10% of stocks, lower for a portfolio, is too low.

If one is to split up the 4 fund, then they better try to maximize returns by tilting rather than just re-indexing the market, otherwise what's the point? There's a ton of data out there supporting small and value tilt, low PE ratios, etc. So, drop that 50% large cap for international, small value, and mid value. REIT is also an excellent way to diversify and deserves some of the slice from that large cap. I personally also like tilting towards a few optimistic sectors (healthcare one of them). Investing in one of these funds will also help shore up the base market capitalization that is modified when tilting towards small and value.

What we are left with is something like this for a 60/40:

Total Stock 20
mid value 5
Small value 10
Sector 5
International 15
REIT 5
Total bond 40

There's a lot of room there to add +-5 to any of those assets per preference. Bonds could also be split with TIPS, corporate, municipal if needed.

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Re: Bogle's Common Sense 5 fund portfolio

Post by abuss368 » Wed May 18, 2016 4:31 pm

EdLaFave wrote:I read that book and remember it as a pretty passionate case against active funds, tilting, and especially sector funds. Where in the book can I find him recommending that portfolio?
I do recall the portfolio he provided and at first was a little confused as it was not the Two Fund Portfolio. The chapter is near the end of the book and is a few pages of pie charts with the allocations.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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abuss368
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Re: Bogle's Common Sense 5 fund portfolio

Post by abuss368 » Wed May 18, 2016 4:32 pm

I have that book and have purchased the 10th Anniversary updated edition to read.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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neomutiny06
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Re: Bogle's Common Sense 5 fund portfolio

Post by neomutiny06 » Wed May 18, 2016 5:43 pm

abuss368 wrote:I have that book and have purchased the 10th Anniversary updated edition to read.

Best.
After you read it, please post your detailed thoughts. Interested to see.

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Taylor Larimore
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Re: Mr. Bogle has changed to broad market index funds

Post by Taylor Larimore » Wed May 18, 2016 6:04 pm

neomutiny06 wrote:I am reading John Bogle's "Common Sense On Mutual Funds" and I love it.

In it, he presents "A Simple Five-Fund Portfolio" for the investor seeking active equity management.

Large-cap - 50%
Mid-cap - 10%
Small-cap - 20%
Specialty (i.e. Healthcare) - 10%
International - 10%
Total - 100%


What if one wanted to use this portfolio for indexing? Thoughts on this asset allocation in general? 10% in a specialty fund seems high...
neomutiny06:

Your quote is from the first edition of Common Sense on Mutual Funds. In his updated edition, published 10-years, later he writes:
"While I've left my simple five equity-fund portfolio unchanged, I'm increasingly convinced that all--or virtually all--portfolios should carry a substantial commitment to broad market index funds based on the total U.S. stock market or the S&P 500 Index."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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SeeMoe
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Re: Bogle's Common Sense 5 fund portfolio

Post by SeeMoe » Wed May 18, 2016 8:16 pm

I like it. Like the 500, 500 growth, extended market and total international at 40% of the stock folio. Bonds have some high yield, intermediate corporate and short term corporate and some total bond index and 30% total international bond index.
SeeMoe.. :mrgreen:
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Electron
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Re: Bogle's Common Sense 5 fund portfolio

Post by Electron » Thu May 19, 2016 1:08 pm

The Five Fund Portfolio should be viewed in the context of Rule 7 as discussed in the book. The chapter is entitled "On Simplicity" and eight different rules are discussed.

Rule 1 - Select Low Cost Funds
Rule 2 - Consider Carefully the Added Costs of Advice
Rule 3 - Do Not Overrate Past Fund Performance
Rule 4 - Use Past Performance to Determine Consistency and Risk
Rule 5 - Beware of Stars
Rule 6 - Beware of Asset Size
Rule 7 - Don't Own Too Many Funds
Rule 8 - Buy Your Fund Portfolio - And Hold It

The section discussing Rule 7 includes a graph entitled "Reducing Risk by Owning Multiple Funds". The plotted curve shows the risk level (Standard Deviation) for holdings ranging from one fund to thirty funds. The knee in the curve suggests holding four to five funds rather than a larger number. Table 4.4 showing "A Simple Five Fund Portfolio" is presented at the end of that section.
Electron

razeus
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Re: Bogle's Common Sense 5 fund portfolio

Post by razeus » Thu May 19, 2016 1:46 pm

I have something similar, but I call it the Schwab 7, via my SEP IRA I just started.

It's ETF's, which I find to be stupidly cheap. My overall cost is .07%. Take that Vanguard!

20% Schwab US Large-Cap Value ETF
20% Schwab US Small-Cap ETF
20% Schwab International Equity ETF
10% Schwab US Mid-Cap ETF
10% Schwab US TIPS ETF
10% Schwab Intermediate-Term US Trs ETF
10% Schwab US REIT ETF

That's a good 80/20 mix. Since I only contribute once a year (after filing taxes so I don't get caught over contributing), I plan on knocking international down to 10% (since international hasn't performed worth a damn in over 10 years) and adding it to large value.

This is a set it and forget it portfolio.

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