2019 Portfolio performances: 2 vs 3 fund

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theorist
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2019 Portfolio performances: 2 vs 3 fund

Post by theorist »

I just stumbled across the bogleheads blog — great new source of information. I found the following post about performance of various portfolios:

https://www.bogleheads.org/blog/2020/01 ... s-in-2019/

Scrolling down, it includes some helpful information about the performance of 70/30 vanilla 2 fund and 3 fund portfolios (among others). I was surprised to see that in the past 3-5-10 year periods, the 3 fund has outperformed the 2 fund in terms of having higher CAGR, lower standard deviation, and higher Sharpe ratio. As just an example for the past 3 year period


3 fund 10.56 14.79 .65
2 fund 10.08 15.39 .61

where the first data point is CAGR, the next is standard deviation, and the third is Sharpe ratio in each row.

There is similar data for 5 year and 10 year periods. Similar data also governs performance of the 60/40 portfolios with 3 vs 2 funds.

I had expected from the various debates I see raging here that the 3 fund — in recent years — would lose on the first count, while winning on the 2nd and perhaps the third.

Now I am genuinely confused. If in a period of international underperformance the three fund is still doing better, what is the debate? Or more likely I am just mis-interpreting the data in the blog post.
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steve roy
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Re: 2019 Portfolio performances: 2 vs 3 fund

Post by steve roy »

It often depends (always depends?) what the start and end points are. Depending on the time frame 2-fund could out-perform 3- fund and the reverse.
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theorist
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Re: 2019 Portfolio performances: 2 vs 3 fund

Post by theorist »

steve roy wrote: Sat Feb 08, 2020 1:22 pm It often depends (always depends?) what the start and end points are. Depending on the time frame 2-fund could out-perform 3- fund and the reverse.
Agreed, and thanks for your reply. What is confusing me is that this has been a pretty bad era of underperformance for international, so I’d have thought this (the last 3, 5, or 10 years) would NOT be a great period for 3 fund. But it is still doing better than just avoiding international. So the latter position looks more mysterious to me.
Alaric
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Re: 2019 Portfolio performances: 2 vs 3 fund

Post by Alaric »

On that page, click on the two-fund and three-fund links. You will see that in the two-fund (total world stock market and total US bond market) the stocks are represented by a cap-weighted global stock fund (which would be ~45% US, 55% ex-US).

But in the three-fund options, US stocks outweigh international by about 70-30. So your intuition was correct; the strategies with more US outperformed those with more international. The nomenclature misled you, as it did me until I ran through the details.
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theorist
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Re: 2019 Portfolio performances: 2 vs 3 fund

Post by theorist »

Alaric wrote: Sat Feb 08, 2020 1:27 pm On that page, click on the two-fund and three-fund links. You will see that in the two-fund (total world stock market and total US bond market) the stocks are represented by a cap-weighted global stock fund (which would be ~45% US, 55% ex-US).

But in the three-fund options, US stocks outweigh international by about 70-30. So your intuition was correct; the strategies with more US outperformed those with more international. The nomenclature misled you, as it did me until I ran through the details.
Thanks! That completely clears it up. I assumed 2 fund meant US only equities, based on common usage here. Then you can see why I was confused :-).

I’ll stick with my international allocation, but I can feel virtuous again for not market timing when I do it.
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steve roy
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Re: 2019 Portfolio performances: 2 vs 3 fund

Post by steve roy »

theorist wrote: Sat Feb 08, 2020 1:38 pm
Alaric wrote: Sat Feb 08, 2020 1:27 pm On that page, click on the two-fund and three-fund links. You will see that in the two-fund (total world stock market and total US bond market) the stocks are represented by a cap-weighted global stock fund (which would be ~45% US, 55% ex-US).

But in the three-fund options, US stocks outweigh international by about 70-30. So your intuition was correct; the strategies with more US outperformed those with more international. The nomenclature misled you, as it did me until I ran through the details.
Thanks! That completely clears it up. I assumed 2 fund meant US only equities, based on common usage here. Then you can see why I was confused :-).

I’ll stick with my international allocation, but I can feel virtuous again for not market timing when I do it.
Ah. This helps. From your post I thought you meant U.S. equities vs. Global. But it was actually Global with more or less U.S. equities.
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