When was the last time you thought about the investments you have in your 401K or IRA account? When was the last time you performed an analysis of the performance of these investments? How certain are you that you are getting the best reward based on how much risk you are taking?

Whether you’re saving for your long term goals in a tax advantaged account or a regular brokerage account today I’m going to share with you two great long-term, passive portfolio strategies that were created by two legitimate legends of the finance world that you can implement in pretty much any retirement account you have access to.

INTRODUCTION

If you’ve been following our Portfolio Analysis series then you know we are slowing working our way up the risk scale. We kicked off the season by looking at highly stable medium risk portfolios that are best suited for more near term goals. Then we evaluated portfolios that perform especially well during market crashes. In our last episode we increased the risk and the timeline to the 10 year range by looking at two great portfolios for intermediate term goals.

Today I want to start investigating long-term portfolios. These are the highest risk to reward portfolios so they are best suited for 20 year or longer timeframes. That’s why we recommend these strategies be used for retirement savings.

Today’s portfolios are: Jock Bogle’s Three Fund Portfolio and Rick Ferri’s Core Four Portfolio.

THREE FUND PORTFOLIO

First up we’ve got Jack Bogle’s Three Fund portfolio. Jack Bogle hit up on this brilliant idea in the 1970s that it instead of having to pay extremely excessive fees to invest in a mutual fund and hope that the manager wouldn’t lose your money what if you could just buy the market itself. What if there was a mutual fund that didn’t pick stocks at all. Instead this fund would own the entire stock market by holding shares in every company in the index? As long as the mutual fund was market cap weighted there would be very little turnover and thusly very few trading fees.

He took this idea and started a company he called, The Vanguard Group and launched the world’s first Index Mutual Fund called the ‘Vanguard 500‘ ticker symbol VFIAX.

This idea of passive indexed investing was such a visionary idea that an entire community of followers sprung up online. This group called themselves The Bogleheads and they spent their free time preaching Bogle’s low-fee, fully diversified, hands-off passive investing approach.

The traditional boglehead portfolio is:

50% US Stock Market Index (VTI)
30% International Stock Market Index (VEU)
20% Aggregate US Bond Index (BND)

If you are enrolled in a retirement account that gives you access to a total world index such as Vanguard’s Total World Stock Index Fund, ticker symbol VT you could actually use that instead of the separate US and Intl funds which would make this a more traditional 80/20 portfolio.

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CORE FOUR PORTFOLIO

Next up we have Rick Ferri’s Core Four. Rick Ferri is a prolific author and advocate for modern portfolio theory. He’s also a Boglehead so these portfolios aren’t in competition with one another. The Core Four is more like a slight tweak to the Three Fund portfolio.

Rick’s portfolio adds in some US Real Estate.

The Core Four is:

48% US Stock Market Index (VTI)
24% International Large-Cap Stock Index (VEU)
8% US Real Estate Index (VNQ)
20% Aggregate US Bond Index (BND)

Real estate is typically much more volatile than stocks and usually has a higher return potential so the goal here is to juice up the returns a bit by adding a small amount of real estate into the mix.

PORTFOLIO PERFORMANCE

To analyze these portfolios we are gonna set this up a little differently than usual. Retirement savers are always going to dollar cost average into thir holdings so we don’t want to run simulations for a lump-sum investment. We are going to set the initial investment to $10,000 and assume our investor is going to contribute $500 per month every month for 20 years. The investor is going to rebalance the portfolio on the first trading day of each year.

We are going to use the mutual fund versions of these positions because most of the ETFs didn’t exist 20 years ago.

We are going to run this simulation from January 2001 thru August 2020. When you are considering long-term portfolios you need at least 2 decades to consider. In our case the decade from 1999-2009 was one of the worst decades in US stock market history and the decade from 2009-2019 is one of the best decades in US stock market history so we should get a reasonable middle ground when we average everything out across both periods.

Looking at the returns we can see that these portfolios are basically identical in terms of performance. For this analysis we need to use Money Weighted Return because this accounts for our $120K cost basis (the $500 per month we contributed for 20 years).

We can see that our return was in the 9% range, which is a great long-term result. The worst year, Max drawdown, and Standard Deviation are painful but that’s why this is a long term portfolio. Huge up and down value swings are standard operating procedure for very high risk portfolios like these.

How did these protfolios stack up against just buying the S&P500?

In this test case I have to say that the Simple Path to Wealth strategy was actually the better strategy. You took on more risk and suffered worse drawdowns but you also got a 10%+ average annual return and ended up with a lot more money overall.

In fairness, during the lost decade the Simple Path lost badly to the 3 Fund and the Core Four but then again this is a long term portfolio and the Simple Path tends to do very, very well in multi-decade scenarios.

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IMPLEMENT THESE PORTFOLIOS IN YOUR RETIREMENT ACCOUNT

So lets assume you’d like to implement one of these stratagies in your retirement account, how do you go about doing that?

Under most employer sponsered retirement plans you should be able to replicate one of these two strategies. Here’s we can see my employer’s 401K fund options. I have no access to Real Estate so I’ve implemented the Three Fund Stategy.

For the US Stocks we want either a Total US Stock Market Index or an S&P500 Index Fund. I am using the Vanguard Institutional Index Fund (which is an S&P500 index). For the International stocks you want a foreign large cap index such as this Vanguard Developed Markets Index. The bond offerings here are not great, as you know I prefer long term treasuries for my personal portfolios but there are none of those funds available so I’ve settled on the Broad Total Bond Market Index, which is actually a fund managed by my employer. I’m guess my employer doesn’t want its employees inveseting in competitor bond funds!

My wife, on the other hand, has access to a proper Aggregate US Bond Index, as well as an S&P500 Index, an international fund, and even a Global Real Estate Index in her 403B. She is using the Core Four strategy in her 403B currently but I have noticed that the global real estate fund is not nearly as good as a proper US real estate index.

FINAL THOUGHTS

So what have we learned here today. Well we learned that its actually quite easy to construct a balanced long-term retirement portfolio within most employer sponsored retirement accounts. Sadly, there are plans out there that only offer target date funds or high fee mutual funds and for those investors I recommend this, if you employer gives you a matching contribution then participate only up to the match percentage and then put the rest in a Roth IRA account available at any online brokerage or just save into a taxable account if you have no other option. Just remember this portfolio is a long term project so contribute each month and then leave it alone.

RESOURCES

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Portfolios Mentioned in this Post

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Books

Bogleheads Guide to Investing (Rick Ferri)
The Little Book of Common Sense Investing (Jack Bogle)
A Random Walk Down Wall Street (Burton Malkiel)
The Simple Path to Wealth (JL Collins)

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Core Four Portfolio vs Bogleheads Three Fund Portfolio | Jack Bogle vs. Rick Ferri