The Four (not Three) Fund Portfolio

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The Four (not Three) Fund Portfolio

Post by Doc »

For a long time the three fund portfolio has been sort of a mainstay for Boglehead's primary thought process. The three funds are Total Us Stock Market, Total International Stock Market and Total Bond Market. Most of us use some kind of variations on this idea in one form or another.

Based on the recent market kerfuffle I suggest that we use a four fund portfolio instead. Use two funds for the bond portion instead of only one. An Intermediate Treasury fund plus an intermediate Treasury Corporate fund instead of only one TBM fund.

If we did that we could gain a lot in stock market crashes rebalncing by selling the Treasury component to buy equities as this price chart illustrates.

Image
BND (Total Bond) Orange, VFICX (Corporate) Green, VGIT (Treasury) Yellow

After the stock market recovers just rebalnce the bond portfolio back.

Using a bond protfolio with 2 parts Treasuries and one part Corporates has come pretty close to matching a TBM portfolio over the last ten years.

Image
BND Blue, VFICX Orange, VGIT the lower blue

Image


Any thoughts?


(For those of you that only rebalance on your mother in laws birthday or just turned off their TV in March and April please ignore this thread.) :D
Last edited by Doc on Mon Sep 07, 2020 4:12 pm, edited 1 time in total.
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Re: The Four (not Three) Fund Portfolio

Post by arcticpineapplecorp. »

you're looking at a price chart not a growth chart. it makes a difference. try this link for starters instead:
http://quotes.morningstar.com/chart/fund/chart?t=VTSAX

get back to you in a sec regarding what portfolio visualizer shows (which combines the portfolio you suggest rather than showing 4 squiggly lines which morninstar does):
https://www.portfoliovisualizer.com/

morning star is good for comparing funds.
portfolio visualizer is good for comparing portfolios.

ok, back now. did you miss me?

on portfolio visualizer I looked at a 60/40 portfolio based on https://www.bogleheads.org/wiki/File:60 ... 50x150.png using the three fund. then I compared that to 60/40 with the four funds (intermediate treasury 50% of the fixed income). Here's the results (only back to May 1996, as far back as we can (used the same funds but different tickers/class shares at earlier dates):

https://www.portfoliovisualizer.com/bac ... tion4_2=20

the 4 fund did slightly better but not a game changer necessarily:

Image
Last edited by arcticpineapplecorp. on Mon Sep 07, 2020 3:46 pm, edited 2 times in total.
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Re: The Four (not Three) Fund Portfolio

Post by retiredjg »

Doc wrote: Mon Sep 07, 2020 3:33 pm Based on the recent market kerfuffle I suggest that we use a four fund portfolio instead. Use two funds for the bond portion instead of only one. An Intermediate Treasury fund plus an intermediate Treasury fund instead of only one TBM fund.
An intermediate Treasury fund plus what? :happy
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Re: The Four (not Three) Fund Portfolio

Post by Kevin M »

retiredjg wrote: Mon Sep 07, 2020 3:42 pm
Doc wrote: Mon Sep 07, 2020 3:33 pm Based on the recent market kerfuffle I suggest that we use a four fund portfolio instead. Use two funds for the bond portion instead of only one. An Intermediate Treasury fund plus an intermediate Treasury fund instead of only one TBM fund.
An intermediate Treasury fund plus what? :happy
I think Doc meant intermediate-term corporate fund for one of them.

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Re: The Four (not Three) Fund Portfolio

Post by Doc »

arcticpineapplecorp. wrote: Mon Sep 07, 2020 3:38 pm you're looking at a price chart not a growth chart. it makes a difference. try this link for starters instead:
I was looking at both. I've been getting messed up with M*'s new and improved??? charts.
arcticpineapplecorp. wrote: Mon Sep 07, 2020 3:38 pm portfolio visualizer is good for comparing portfolios.
That's good for portfolios as you suggest and it could be used to balance the Corp+Treasury vs. TBM idea. I wasn't trying to do that with any precision. Only to say that you could get close. The Corp and Treasury funds I used and their relative amounts are not necessarily ideal. I was just trying to present the idea that you don't need TBM.

The problem I have with Portfolio Visualizer when you are trying to find what can be done during a market crash is that PV isn't helpful. It's giving you two sigma results when what you want to know is what happens in that other 5%? Then a price chart is more useful.

(I actually thought of using PV for the long term split comparison but figured someone more familiar with it would do it for me. Thanks.)
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Re: The Four (not Three) Fund Portfolio

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Kevin M wrote: Mon Sep 07, 2020 3:57 pm
retiredjg wrote: Mon Sep 07, 2020 3:42 pm
Doc wrote: Mon Sep 07, 2020 3:33 pm Based on the recent market kerfuffle I suggest that we use a four fund portfolio instead. Use two funds for the bond portion instead of only one. An Intermediate Treasury fund plus an intermediate Treasury fund instead of only one TBM fund.
An intermediate Treasury fund plus what? :happy
I think Doc meant intermediate-term corporate fund for one of them.

Kevin
Thanks. Typo. I fixed it.
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Re: The Four (not Three) Fund Portfolio

Post by Peter Foley »

Four Fund was always my basic approach. Total Stock, Total International, Total Bond, and stable value.

My addition of stable value was because it had a guaranteed rate that was not tied to inflation.
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Re: The Four (not Three) Fund Portfolio

Post by cottonseed1 »

If we sell treasuries and buy stocks our allocation then has a higher weight in corporates and is thus riskier than using only total bond. It seems logical that we would expect this strategy to outperform the 3 fund portfolio. I think if we are making an apples to apples comparison we would need to increase the equity weight on the 3 fund portfolio when we rebalance in down markets. This would account for the backdoor equity exposure we are getting via the increased allocation to corporates.

A simpler strategy would be to use a 3 fund portfolio, but slightly increase our equity allocation in down markets. I'd imagine this produces roughly the same result as selling treasuries and buying corporates.
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Re: The Four (not Three) Fund Portfolio

Post by prk »

my 4th fund is a small value fund

the TSM fund is mostly large growth

a SV fund adds diversity
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Re: The Four (not Three) Fund Portfolio

Post by DaufuskieNate »

Is this just saying that Treasuries are a better diversifier for global equities than Corporate Bonds? Why not use a 3-fund approach with Treasuries? You can always increase the equity allocation to offset the loss of yield from Corporate Bonds.
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Re: The Four (not Three) Fund Portfolio

Post by Doc »

cottonseed1 wrote: Mon Sep 07, 2020 5:38 pm If we sell treasuries and buy stocks our allocation then has a higher weight in corporates and is thus riskier than using only total bond.
You would rebalnce your FI portfolio as soon as the crisis passes. In the recent case about in July. So your "higher risk" FI portfolio only exists for a few months.
DaufuskieNate wrote: Tue Sep 08, 2020 7:00 am Is this just saying that Treasuries are a better diversifier for global equities than Corporate Bonds? Why not use a 3-fund approach with Treasuries? You can always increase the equity allocation to offset the loss of yield from Corporate Bonds.
That is a viable alternative. The "downside" is that you don't need all that amount of FI to rebalance your equities in a stock market crash. So you are losing income during the non-crash periods.
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Re: The Four (not Three) Fund Portfolio

Post by Doc »

arcticpineapplecorp. wrote: Mon Sep 07, 2020 3:38 pm you're looking at a price chart not a growth chart. it makes a difference. try this link for starters instead:
The price/growth problem in the new Morningstar charts was corrected some time ago.

From my prior post:
Image

From Vg site today Ten year growth:

BND 14217
VFIDX 16066
VGIT 13526
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Re: The Four (not Three) Fund Portfolio

Post by arcticpineapplecorp. »

Doc wrote: Tue Sep 08, 2020 8:47 am
arcticpineapplecorp. wrote: Mon Sep 07, 2020 3:38 pm you're looking at a price chart not a growth chart. it makes a difference. try this link for starters instead:
The price/growth problem in the new Morningstar charts was corrected some time ago.

From my prior post:
Image

From Vg site today Ten year growth:

BND 14217
VFIDX 16066
VGIT 13526
thanks. not used to the new(er) format.
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Re: The Four (not Three) Fund Portfolio

Post by Doc »

arcticpineapplecorp. wrote: Tue Sep 08, 2020 9:18 am not used to the new(er) format.
Yeh. I actually like the old format better. I find the rolling return charts very enlightening.
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Re: The Four (not Three) Fund Portfolio

Post by Kevin M »

Doc wrote: Tue Sep 08, 2020 8:29 am
cottonseed1 wrote: Mon Sep 07, 2020 5:38 pm If we sell treasuries and buy stocks our allocation then has a higher weight in corporates and is thus riskier than using only total bond.
You would rebalnce your FI portfolio as soon as the crisis passes. In the recent case about in July. So your "higher risk" FI portfolio only exists for a few months.
I have suggested something similar in the past, but using direct CDs instead of corporate bonds, due to comparable yield premiums over Treasuries, but no credit risk if you stay within federal deposit insurance limits.

However, there is recency bias in expecting a V-shaped recovery in corporate bonds. What if we enter an extended bear market, in which corporate bonds don't recover for some years? This criticism has been raised in the past, and I don't have a good answer for it.

One advantage of CDs over a corporate bond fund is that a CD will mature at some point, at which time you can rebalance into Treasuries. Another advantage is that your downside with a CD is limited to the early withdrawal penalty, which could be much less than the loss in corporate bonds, so if you don't have a CD maturing soon enough, you could do an early withdrawal, eat the relatively small penalty, and rebalance into Treasuries.

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Re: The Four (not Three) Fund Portfolio

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Three bad, four good? Got it.
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Re: The Four (not Three) Fund Portfolio

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Kevin M wrote: Tue Sep 08, 2020 2:23 pm I have suggested something similar in the past, but using direct CDs instead of corporate bonds, due to comparable yield premiums over Treasuries, but no credit risk if you stay within federal deposit insurance limits.
With VCSH (short corp) and VCIT (intermediate corp) having sec yields of 0.87% and 1.67% respectively is it worth the hassle?

For a 1-10 Gov/Credit bogey a $1M bond portfolio would only have $200k and $100K in each. And I don't anywhere near a $1M fixed income portfolio.
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Re: The Four (not Three) Fund Portfolio

Post by Kevin M »

Doc, the more important point is what are you going to do if corporate bonds don't recover for a long time after stocks and corporate bonds both tank?

And what do you do if you use all of your Treasuries to rebalance into stocks, and then stocks drop a lot more, but corporate bonds haven't recovered yet?

Finally, what if Treasuries also drop when stocks drop, as has happened in the past. That's what I meant by recency bias--I wonder if we are overly influenced by the more recent stock downturns.

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Re: The Four (not Three) Fund Portfolio

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Kevin M wrote: Tue Sep 08, 2020 9:13 pm Doc, the more important point is what are you going to do if corporate bonds don't recover for a long time after stocks and corporate bonds both tank?

And what do you do if you use all of your Treasuries to rebalance into stocks, and then stocks drop a lot more, but corporate bonds haven't recovered yet?

Finally, what if Treasuries also drop when stocks drop, as has happened in the past. That's what I meant by recency bias--I wonder if we are overly influenced by the more recent stock downturns.

Kevin
Do you think that the Fed's policy of bond buying that now includes corporate bonds might have changed the riskiness of corporate bonds and for that matter Treasuries? It is impossible to say if in the future the Fed will continue this policy but it seems more than likely to me. What would cause Treasuries to tank and stay down?
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Re: The Four (not Three) Fund Portfolio

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Kevin M wrote: Tue Sep 08, 2020 9:13 pm Doc, the more important point is what are you going to do if corporate bonds don't recover for a long time after stocks and corporate bonds both tank?
Cross that bridge when you come to it. But with separate T's and C"s at least you have control of the draw span. Buying C's at a low price is not necessarily a bad thing.
Kevin M wrote: Tue Sep 08, 2020 9:13 pm And what do you do if you use all of your Treasuries to rebalance into stocks, and then stocks drop a lot more, but corporate bonds haven't recovered yet?
Same answer. You sell some of your C's but you have the choice.
Kevin M wrote: Tue Sep 08, 2020 9:13 pm Finally, what if Treasuries also drop when stocks drop, as has happened in the past. That's what I meant by recency bias--I wonder if we are overly influenced by the more recent stock downturns.
Then I probably have no need to rebalance but having one bond fund instead of two doesn't help.

In any of these cases its your choice to sell both T's and C's if you have separate funds. If you only have TBM you have no choice you have to sell them both in about a 2 to 1 ratio.
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Re: The Four (not Three) Fund Portfolio

Post by Kevin M »

jimkinny wrote: Wed Sep 09, 2020 7:06 am
Kevin M wrote: Tue Sep 08, 2020 9:13 pm Doc, the more important point is what are you going to do if corporate bonds don't recover for a long time after stocks and corporate bonds both tank?

And what do you do if you use all of your Treasuries to rebalance into stocks, and then stocks drop a lot more, but corporate bonds haven't recovered yet?

Finally, what if Treasuries also drop when stocks drop, as has happened in the past. That's what I meant by recency bias--I wonder if we are overly influenced by the more recent stock downturns.

Kevin
Do you think that the Fed's policy of bond buying that now includes corporate bonds might have changed the riskiness of corporate bonds <snip>
There certainly appears to have been an impact, but based on corporate to Treasury yield spreads, the perceived risk is at least as high as the historical average, if not higher. Here's a chart of the last year:

Image

The spread peaked on March 23, and then declined, presumably because of Fed intervention, but it still is higher than before the recession began.

Zooming out to as much history as is available:

Image

Just eyeballing the chart, it appears that the current spread is as high as or higher than the historical average.
jimkinny wrote: Wed Sep 09, 2020 7:06 am and for that matter Treasuries?
I think the main impact on Treasuries of Fed intervention was to resolve liquidity issues, which interestingly hit even Treasuries for a week or so during March. Other than that, I don't see how Fed intervention has impacted price risk, which is historically high due to historically low yields, and my guess is that the market continues to view Treasuries as having little credit risk.
jimkinny wrote: Wed Sep 09, 2020 7:06 am It is impossible to say if in the future the Fed will continue this policy but it seems more than likely to me.
As with Treasuries, I think the main impact was to ease liquidity concerns. Default concerns (credit risk) remain, as we see in the yield spreads.
jimkinny wrote: Wed Sep 09, 2020 7:06 am What would cause Treasuries to tank and stay down?
I didn't say stay down, but just that they tank (yields increase) when stocks also tank, as happened for quite a few months in 1974, for example (and even for more than a week in March, but that wasn't an extended period). I know that there is a very vocal minority here that says that changes to Fed policy make it highly unlikely that we'll see anything like this again, but I'd be wary of overconfidence bias regarding this.

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Re: The Four (not Three) Fund Portfolio

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Kevin, thanks
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Re: The Four (not Three) Fund Portfolio

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Kevin M wrote: Wed Sep 09, 2020 5:55 pm I didn't say stay down, but just that they tank (yields increase) when stocks also tank, as happened for quite a few months in 1974, for example (and even for more than a week in March, but that wasn't an extended period).
Intermediate Treasuries vs. Corps in March (Price):

Image

The Intermediate Treasury ETF price dropped a little over 1%. I missed it completely since my Intermediate Treasuries already had gone bye-bye a few days before. Unbelievable market timing on my part. (And totally completely fortuitous. :D )
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Re: The Four (not Three) Fund Portfolio

Post by Kevin M »

Doc wrote: Thu Sep 10, 2020 10:28 am
Kevin M wrote: Wed Sep 09, 2020 5:55 pm I didn't say stay down, but just that they tank (yields increase) when stocks also tank, as happened for quite a few months in 1974, for example (and even for more than a week in March, but that wasn't an extended period).
<snip>
The Intermediate Treasury ETF price dropped a little over 1%. <snip> )
Yeah, "tank" was too strong of a word for intermediate-term Treasuries last March, and I don't mean to make a big deal out of this, but I was a bit surprised that Treasury prices generally fell for more than a week while stocks generally fell too, and extended-duration Treasuries really did tank. Returns for the 9-day period of 3/9 to 3/18:

VFITX (NAV): -2.36%
VGIT (NAV): -2.40%
VGIT (Price): -2.31% (so a bit of a price premium to NAV)
VCIT (NAV): -9.62%
VCIT (Price): -12.14% (so a significant discount to NAV)
EDV (NAV): -17.7% (extended duration Treasury ETF)
EDV (Price): -18.14% (a slight price discount to NAV)
VTSMX (NAV): -14.52% (US stocks)

So by any measure intermediate-term Treasuries fell more than 1% during this 9-day period, but of course nowhere near as much as stocks or intermediate-term corporate bonds. But extended duration Treasuries fell even more than US stocks!

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Re: The Four (not Three) Fund Portfolio

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Kevin, I think the drop in T prices might just have been a volume thing.
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Re: The Four (not Three) Fund Portfolio

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Doc wrote: Thu Sep 10, 2020 7:23 pm Kevin, I think the drop in T prices might just have been a volume thing.
I think it was a liquidity thing (maybe that's what you mean), which is part of why the Fed stepped in, but surprised that liquidity hit Treasuries this way, since they typically are the most liquid asset in a crisis. On the other hand, we also can cherry-pick periods in late 2008 when US stocks and long-term Treasuries both ended up down. For example, for the 25-day period from 10/6/2008 to 10/31/2008:

VTSMX: -8.41%
EDV (NAV): -8.24%

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Re: The Four (not Three) Fund Portfolio

Post by Doc »

Kevin M wrote: Thu Sep 10, 2020 7:50 pm
Doc wrote: Thu Sep 10, 2020 7:23 pm Kevin, I think the drop in T prices might just have been a volume thing.
I think it was a liquidity thing (maybe that's what you mean), which is part of why the Fed stepped in, but surprised that liquidity hit Treasuries this way, since they typically are the most liquid asset in a crisis. On the other hand, we also can cherry-pick periods in late 2008 when US stocks and long-term Treasuries both ended up down. For example, for the 25-day period from 10/6/2008 to 10/31/2008:

VTSMX: -8.41%
EDV (NAV): -8.24%

Kevin


Volume = Liquidity yeh.

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Re: The Four (not Three) Fund Portfolio

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Doc wrote: Tue Sep 08, 2020 10:38 am I actually like the old format better. I find the rolling return charts very enlightening.
Here are charts from 2008 and 2020 using the previous version of the Morningstar charts. You can select Growth, Price, or Rolling Returns.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I like your idea of using the Intermediate Term Treasury and Corporate bond funds. This appears to add an element of Slice and Dice but with special rules for equity rebalancing. If it was pure Slice and Dice one would also rebalance into the Corporate bond fund.
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