Alternative 2 Fund Portfolio

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grobertj
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Alternative 2 Fund Portfolio

Post by grobertj »

I'm contemplating moving my portfolio to 2 funds... Vanguard US Growth (VWUAX) and Vanguard intermediate-Tern Investment-Grade (VFIDX). My AA would be 40/60 stock and bonds. From my analysis, VFIDX appears to have the highest returns of any of the bond funds. I'm concerned about bond returns over the next several years. I also have a preference for Growth funds as they've had very large returns for a number of years.

Thoughts?
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Sandtrap
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Re: Alternative 2 Fund Portfolio

Post by Sandtrap »

This combination of underlying funds has more volatility than the same 40/60 allocation with Total Stock and Total Bond. You could add a % of Total Bond to the fixed side to moderate this.

Compare the depth and length of drawdowns using “Portfolio Visualizer”.
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David Jay
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Re: Alternative 2 Fund Portfolio

Post by David Jay »

The problem with “Growth” is that it has a cyclical rotation with “Value” (the opposite feature). For periods of time Growth outperforms and for periods of time Value outperforms. Picking the one that has outperformed recently would logically be choosing the one less likely to outperform moving forward. This is one of the issues with back-testing.

If Growth underperforms going forward, what will you do? Will you continue to hold Growth through 5 or 10 years of underperformance?

The default, lowest regret choice is “Total Market” because it does not “tilt” in any direction, it holds the entire market. So, by definition, it never “underperforms“ the market. That is why Total Market is the recommended US stock fund in a Boglehead 2-fund portfolio.
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dwickenh
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Re: Alternative 2 Fund Portfolio

Post by dwickenh »

If your making the decision based on performance in the last 5 years, Why not just 100% QQQ? I think the 2 fund of Total US stock(or total Global) and Total Bond has less concentrated risk. I usually am happy hitting singles instead of swinging for the fences and striking out a lot. I agree that growth looks enticing.........
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
dbr
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Re: Alternative 2 Fund Portfolio

Post by dbr »

The thought is that this is not the reasoning advised for selecting a portfolio.

You would probably be better off to go to getting started https://www.bogleheads.org/wiki/Getting_started and doing a lot of reading including some of the books. I like Larry Swedroe's books on investing and also Rick Ferri on asset allocation.

My personal suggestion is that the three fund portfolio is an excellent baseline from which to start and for most, or many, people where to end. I would advise doing something different only when you have a well understood and meaningful reason to do so. Reducing the number of funds has no particular purpose. What you hold in bonds is also not very important as there are many choices that all come to the same thing.

Don't try to overengineer investment, because it doesn't work.
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Re: Alternative 2 Fund Portfolio

Post by lostdog »

dbr wrote: Tue Aug 04, 2020 9:02 am The thought is that this is not the reasoning advised for selecting a portfolio.

You would probably be better off to go to getting started https://www.bogleheads.org/wiki/Getting_started and doing a lot of reading including some of the books. I like Larry Swedroe's books on investing and also Rick Ferri on asset allocation.

My personal suggestion is that the three fund portfolio is an excellent baseline from which to start and for most, or many, people where to end. I would advise doing something different only when you have a well understood and meaningful reason to do so. Reducing the number of funds has no particular purpose. What you hold in bonds is also not very important as there are many choices that all come to the same thing.

Don't try to overengineer investment, because it doesn't work.
+1

Based on you past posts, you seem very hands on with your portfolio which might turn into behavioral issues and making impulse decisions.

You sound like a candidate for a 3 fund portfolio or a Life Strategy/Target Date fund.
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grobertj
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Re: Alternative 2 Fund Portfolio

Post by grobertj »

I've researched what you all have said, and my analysis says you're right. I'll be investing in 3 funds: VTI, BND, & BNDX. My asset allocation will be 40/60 bonds and stocks with about 30% of bonds international. Backtesting this AA give me a higher return than Wellesley where I've been. I've concluded that while the 2 fund portfolio I wrote about above, would be way too volatile even though there's a chance it would return more.

Thanks to all of you for your patience as I struggle to find the right portfolio for me. I guess I will now qualify as a true Boglehead! :D
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Taylor Larimore
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Re: Alternative 2 Fund Portfolio

Post by Taylor Larimore »

grobertj wrote: Tue Aug 04, 2020 6:57 pm I've researched what you all have said, and my analysis says you're right. I'll be investing in 3 funds: VTI, BND, & BNDX. My asset allocation will be 40/60 bonds and stocks with about 30% of bonds international. Backtesting this AA give me a higher return than Wellesley where I've been. I've concluded that while the 2 fund portfolio I wrote about above, would be way too volatile even though there's a chance it would return more.

Thanks to all of you for your patience as I struggle to find the right portfolio for me. I guess I will now qualify as a true Boglehead! :D
Grobert:

It appears you may not understand "the 2 fund portfolio." You can make the portfolio more or less volatile by simply changing the portfolio's bond allocation (more Total Bond Market = less volatile). This link will be helpful:

Vanguard Model Portfolio Allocations

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
"Simplicity is the master key to financial success." -- Jack Bogle
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grobertj
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Re: Alternative 2 Fund Portfolio

Post by grobertj »

Taylor Larimore wrote: Tue Aug 04, 2020 7:14 pm
grobertj wrote: Tue Aug 04, 2020 6:57 pm I've researched what you all have said, and my analysis says you're right. I'll be investing in 3 funds: VTI, BND, & BNDX. My asset allocation will be 40/60 bonds and stocks with about 30% of bonds international. Backtesting this AA give me a higher return than Wellesley where I've been. I've concluded that while the 2 fund portfolio I wrote about above, would be way too volatile even though there's a chance it would return more.

Thanks to all of you for your patience as I struggle to find the right portfolio for me. I guess I will now qualify as a true Boglehead! :D
Grobert:

It appears you may not understand "the 2 fund portfolio." You can make the portfolio more or less volatile by simply changing the portfolio's bond allocation (more Total Bond Market = less volatile). This link will be helpful:

Vanguard Model Portfolio Allocations

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
I've decided to use the 3 Fund Portfolio: 42% BND, 18% BNDX & 40% VTI. Am I missing something?
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Taylor Larimore
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Re: Alternative 2 Fund Portfolio

Post by Taylor Larimore »

grobertj wrote: Tue Aug 04, 2020 9:55 pm
Taylor Larimore wrote: Tue Aug 04, 2020 7:14 pm
grobertj wrote: Tue Aug 04, 2020 6:57 pm I've researched what you all have said, and my analysis says you're right. I'll be investing in 3 funds: VTI, BND, & BNDX. My asset allocation will be 40/60 bonds and stocks with about 30% of bonds international. Backtesting this AA give me a higher return than Wellesley where I've been. I've concluded that while the 2 fund portfolio I wrote about above, would be way too volatile even though there's a chance it would return more.

Thanks to all of you for your patience as I struggle to find the right portfolio for me. I guess I will now qualify as a true Boglehead! :D
Grobert:

It appears you may not understand "the 2 fund portfolio." You can make the portfolio more or less volatile by simply changing the portfolio's bond allocation (more Total Bond Market = less volatile). This link will be helpful:

Vanguard Model Portfolio Allocations

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
I've decided to use the 3 Fund Portfolio: 42% BND, 18% BNDX & 40% VTI. Am I missing something?
grobertj:

My recommended Three-Fund Portfolio does not contain foreign bonds (BNDX). I feel that Total (U.S.) Bond Market (BND) provides sufficient safety in a U.S. portfolio.

What is your desired stock/bond allocation? This is probably your most important investment decision.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Alternative 2 Fund Portfolio

Post by dbr »

grobertj wrote: Tue Aug 04, 2020 9:55 pm
I've decided to use the 3 Fund Portfolio: 42% BND, 18% BNDX & 40% VTI. Am I missing something?
There can be lots of discussion but the more conventional consensus is to hold some international stocks but not necessarily international bonds. Maybe you didn't really mean what you have above or there is a special reason?
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Re: Alternative 2 Fund Portfolio

Post by grobertj »

I chose international bonds because when I backtested against a 40/60 AA with VTI and BND, the portfolio with international bonds had a higher yield. But when I look at Vanguard's data, it says BND outperforms BNDX in every time frame. I'm confused. Is it possible the Portfolio Visualizer is incorrect? :confused
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Re: Alternative 2 Fund Portfolio

Post by abuss368 »

grobertj wrote: Wed Aug 05, 2020 1:42 pm I chose international bonds because when I backtested against a 40/60 AA with VTI and BND, the portfolio with international bonds had a higher yield. But when I look at Vanguard's data, it says BND outperforms BNDX in every time frame. I'm confused. Is it possible the Portfolio Visualizer is incorrect? :confused
The Two Fund Portfolio, as recommended by Jack Bogle and Warren Buffett is Total Stock (or S&P 500) and Total Bond (or Treasuries).

The Three Fund Portfolio, as recommended by Taylor (to which he wrote a very educational book "The Bogleheads Guide to the Three Fund Portfolio) is comprised of Total Stock, Total International, and Total Bond.

Both portfolios are guaranteed to never be below average.

I would consider Total Bond rather than Total International Bond for simplicity. There is a good reason Total Bond is the largest bond fund on the PLANET!

Simplicity wins. Total market index investing does just that.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Alternative 2 Fund Portfolio

Post by Blue456 »

grobertj wrote: Tue Aug 04, 2020 8:44 am I'm contemplating moving my portfolio to 2 funds... Vanguard US Growth (VWUAX) and Vanguard intermediate-Tern Investment-Grade (VFIDX). My AA would be 40/60 stock and bonds. From my analysis, VFIDX appears to have the highest returns of any of the bond funds. I'm concerned about bond returns over the next several years. I also have a preference for Growth funds as they've had very large returns for a number of years.

Thoughts?
Sounds like you want to buy high and sell low. David Swensen warns about following recent winners in his book, Unconventional Success. Highly recommended read.
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grobertj
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Re: Alternative 2 Fund Portfolio

Post by grobertj »

I've taken your feedback to heart, and I've read the material in the Bogleheads wiki. I've decided to invest in the Total Stock Market ETF (VTI) and the Total Bond Market ETF (BND). I'm following the direction below to determine my AA which turns out to be 40/60 stocks and bonds.

John Bogle recommends "roughly your age in bonds"; for instance, at age 45, about 45% of the portfolio should be allocated to high-quality bonds. Bogle also suggests that, during the retirement distribution phase, investors include as a bond-like component of wealth and asset allocation the value of any future pension and Social Security payment expected to be received

Thanks for all your input. I'm learning a lot every day. :D
The only constant is CHANGE!!
rgs92
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Re: Alternative 2 Fund Portfolio

Post by rgs92 »

VBIAX (Vanguard Balanced Index) is the 2-fund portfolio that rebalances every day (for 7 basis points). This should do exactly what you want as a 60/40 allocation if you can live with this permanent asset allocation. It's really all you need without any more thought (especially if you are not interested in foreign stocks, which is probably fine).
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Re: Alternative 2 Fund Portfolio

Post by mikeyzito22 »

David Jay wrote: Tue Aug 04, 2020 8:56 am The problem with “Growth” is that it has a cyclical rotation with “Value” (the opposite feature). For periods of time Growth outperforms and for periods of time Value outperforms. Picking the one that has outperformed recently would logically be choosing the one less likely to outperform moving forward. This is one of the issues with back-testing.

If Growth underperforms going forward, what will you do? Will you continue to hold Growth through 5 or 10 years of underperformance?

The default, lowest regret choice is “Total Market” because it does not “tilt” in any direction, it holds the entire market. So, by definition, it never “underperforms“ the market. That is why Total Market is the recommended US stock fund in a Boglehead 2-fund portfolio.
VWILX is an active international growth fund that has had better than 10% returns since 1981. I would hardly call that type of return "cyclical" unless thirty years is the turn around time.
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grobertj
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Re: Alternative 2 Fund Portfolio

Post by grobertj »

rgs92 wrote: Wed Aug 05, 2020 8:09 pm VBIAX (Vanguard Balanced Index) is the 2-fund portfolio that rebalances every day (for 7 basis points). This should do exactly what you want as a 60/40 allocation if you can live with this permanent asset allocation. It's really all you need without any more thought (especially if you are not interested in foreign stocks, which is probably fine).
I'm retired and making regular withdrawals. I'll be changing my AA every year as I grow older. Having 2 funds is not that hard to rebalance as I can use my withdrawals to maintain the right ratio.
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