Bogleheads 3 and 4 Fund Portfolio: Backtest and Performance Analysis

Jack Bogle’s famous advice was to avoid searching for individual stocks, sectors, or markets that may perform better and simply invest in the entire market. This means using index funds to build a diversified portfolio. The Bogleheads 3 Fund Portfolio (global stocks, U.S. bonds) and Bogleheads 4 Fund Portfolio (global stocks, global bonds) are good examples of the approach. Let’s find out what they are about.

Boglehead 3 Fund Portfolio is a simple, low-cost investment strategy that consists of three index funds: a U.S. Total Stock Market Index Fund, an International Stock Market Index Fund, and a U.S. Total Bond Market Index Fund. Boglehead 4 Fund Portfolio adds Total International Bond Market Index Fund to the mix. Both portfolios aim to provide diversification and long-term growth, with a focus on minimizing costs.

In this post, we take a look at the Bogleheads 3 Fund Portfolio (global stocks, U.S. bonds) and Bogleheads 4 Fund Portfolio (global stocks, global bonds). We end the article with backtests of both portfolios.

What is the Bogleheads 3 Fund Portfolio?

The Bogleheads 3 Fund Portfolio is a low-cost investment strategy that was popularized by the Bogleheads, a group of investors who follow the philosophy of investing legend Jack Bogle. The strategy involves investing in three index funds that provide broad exposure to the stock and bond markets. The three funds are:

  • U.S. Total Stock Market Index Fund: This fund provides exposure to the entire U.S. stock market, including small, mid, and large-cap stocks.
  • International Stock Market Index Fund: This fund provides exposure to stocks in developed and emerging markets outside of the U.S.
  • U.S. Total Bond Market Index Fund: This fund provides exposure to the entire U.S. bond market, including government and corporate bonds.

The Bogleheads 3 Fund Portfolio is designed to be a simple, low-cost, and diversified investment strategy. By investing in the three funds, investors can potentially capture the long-term growth of the stock and bond markets while reducing the risks associated with investing in individual stocks or bonds. The strategy is based on the idea of “buy and hold” investing, which involves making regular contributions to the portfolio and holding the investments for the long term.

How to Invest in a Bogleheads 3 Fund Portfolio

To invest in a Bogleheads 3 Fund Portfolio, follow these steps:

  1. Open a brokerage account: Open an account with a brokerage firm that offers the index ETFs you need to construct your portfolio.
  2. Choose your funds: Select a U.S. Total Stock Market Index Fund (such as Vanguard Total Stock Market- VTI), an International Stock Market Index Fund (such as Vanguard FTSE All-World ex-US – VEU), and a U.S. Total Bond Market Index Fund (Vanguard Total Bond Market – BND).
  3. Determine your asset: Decide how much of your portfolio you want to allocate to each of the three funds. A common allocation is to have 50% of your portfolio invested in the U.S. stock market, 30% invested in the international stock market, and 20% invested in bonds.
  4. Start investing: Start by investing a lump sum or setting up a regular contribution plan. If you’re starting with a small amount, consider using dollar-cost averaging to reduce the impact of market volatility.
  5. Monitor and rebalance: Over time, the values of your index funds may change and your asset allocation may become imbalanced. Consider periodically rebalancing your portfolio to maintain your target allocation.

What are the Benefits of a Bogleheads 3 Fund Portfolio?

The Bogleheads 3 Fund Portfolio has several benefits, including:

  • Diversification: The portfolio provides exposure to multiple asset classes and markets, reducing the risk of investing in any one individual stock or market.
  • Low costs: By investing in low-cost index funds, investors can minimize the impact of expenses on their returns. This can result in a higher return over the long term.
  • Ease of use: The Bogleheads 3 Fund Portfolio is simple and straightforward, making it easy for investors to understand and implement.
  • Long-term growth potential: The strategy is based on the idea of “buy and hold” investing, which can potentially provide long-term growth for investors.
  • Consistency: The strategy is consistent with the philosophy of investing legend Jack Bogle, who advocated for low-cost and diversified investing.

What are the Risks Involved with a Bogleheads 3 Fund Portfolio?

While a Bogleheads 3 Fund Portfolio has several benefits, there are also some risks involved, including:

  • Market risk: The stock and bond markets are subject to fluctuations, so investing in a Bogleheads 3 Fund Portfolio does not guarantee a profit or protect against loss.
  • Inflation risk: The value of the portfolio can be eroded over time by inflation, especially if the portfolio is not regularly rebalanced.
  • Currency risk: The international stock market fund exposes investors to currency risk, which is the risk that changes in currency exchange rates will negatively impact the value of the portfolio.
  • Interest rate risk: The bond market is subject to interest rate risk, which is the risk that changes in interest rates will negatively impact the value of the bond portion of the portfolio.
  • Political risk: The international stock market fund exposes investors to political risk, which is the risk that changes in government policies or political events will negatively impact the value of the portfolio.

What Assets Does the Bogleheads 3 Fund Portfolio Include?

The Bogleheads 3 Fund Portfolio typically includes three types of low-cost index funds:

  • Total Stock Market Index Fund (for example, the ETF with the ticker code VTI): This fund provides exposure to the entire U.S. stock market and includes all types of companies, regardless of size or sector.
  • Total International Stock Market Index Fund (for example, the ETF with the ticker code VEU): This fund provides exposure to the global stock market and includes companies from developed and emerging markets.
  • Total Bond Market Index Fund (for example, the ETF with the ticker code BND): This fund provides exposure to the U.S. bond market and includes a variety of bonds with different maturities and credit qualities.

The goal of the Bogleheads 3 Fund Portfolio is to provide broad market exposure and diversification while minimizing costs and reducing the risk of investing in individual stocks. By investing in low-cost index funds, investors can potentially achieve long-term growth and reduce the impact of expenses on their returns.

How to Select the Right Funds for the Bogleheads 3 Fund Portfolio

To select the right funds for a Bogleheads 3 Fund Portfolio, consider the following steps:

  • Look for low-cost index funds: Choose funds with low expense ratios to minimize the impact of fees on your returns.
  • Choose a Total Stock Market Index Fund: Select a fund that tracks the entire U.S. stock market and includes a broad range of companies.
  • Choose a Total International Stock Market Index Fund: Select a fund that tracks the global stock market and includes companies from both developed and emerging markets.
  • Choose a Total Bond Market Index Fund: Select a fund that tracks the U.S. bond market and includes a variety of bonds with different maturities and credit qualities.
  • Consider the fund’s size and liquidity: Select funds that are large enough to be easily traded, and have a high level of liquidity to ensure that you can buy and sell shares without affecting the price.
  • Consider the fund’s tax efficiency: Select funds that are tax-efficient to minimize the impact of taxes on your returns.

All this considered, we believe VTI, VEU, and BND might be suitable.

Boglehead 3 allocations

John Bogle didn’t give specific recommendations on allocating the three different assets. In this article, we allocate 50% to US stocks, 30 to international stocks, and 20% to bonds.

What is the Bogleheads 4 Fund Portfolio?

The Bogleheads 4 Fund Portfolio is an investment strategy that includes four low-cost index funds to provide broad market exposure and diversification. The portfolio includes:

  • Total Stock Market Index Fund (for example, the ETF with the ticker code VTI): This fund provides exposure to the entire U.S. stock market and includes all types of companies, regardless of size or sector.
  • Total International Stock Market Index Fund (for example, the ETF with the ticker code VEU): This fund provides exposure to the global stock market and includes companies from developed and emerging markets.
  • Total Bond Market Index Fund (for example, the ETF with the ticker code BND): This fund provides exposure to the U.S. bond market and includes a variety of bonds with different maturities and credit qualities.
  • Total International Bond Market Index Fund (for example, the ETF with the ticker code VXUS or IXUS): This fund provides exposure to the global bond market and includes bonds from both developed and emerging markets.

The goal of the Bogleheads 4 Fund Portfolio is to provide even greater diversification and include a mix of U.S. and international bonds. By investing in low-cost index funds, investors can potentially achieve long-term growth and reduce the impact of expenses on their returns.

How to Invest in a Bogleheads 4 Fund Portfolio

To invest in a Bogleheads 4 Fund Portfolio, follow these steps:

  • Determine your investment goals: Consider your risk tolerance, investment time horizon, and financial goals.
  • Choose low-cost index funds: Select funds with low expense ratios to minimize the impact of fees on your returns.
  • Allocate your investments: Decide how much of your portfolio to allocate to each of the four funds based on your investment goals and risk tolerance.
  • Make regular contributions: Consider making regular contributions to the portfolio to take advantage of dollar-cost averaging.
  • Monitor and rebalance: Regularly review and rebalance the portfolio to ensure it remains aligned with your investment goals and risk tolerance.

We believe VTI, VEU, BND, and VXIS/IXUS might be suitable.

What are the Benefits of a Bogleheads 4 Fund Portfolio?

The Bogleheads 4 Fund Portfolio offers several benefits, including:

  • Global diversification: The portfolio includes exposure to both U.S. and international stocks and bonds, reducing the impact of any single market or sector on your returns.
  • Low-cost investing: By investing in low-cost index funds, you can minimize the impact of fees and expenses on your returns.
  • Ease of management: The portfolio is relatively simple to manage and does not require frequent monitoring or rebalancing.
  • Potential for long-term growth: By investing in a diversified portfolio of low-cost index funds, you can potentially achieve long-term growth.

What Assets Does the Bogleheads 4 Fund Portfolio Include?

The Bogleheads 4 Fund Portfolio typically includes the following assets:

  1. Total U.S. Stock Market Index Fund (VTI): This fund tracks the performance of the U.S. stock market as a whole, offering exposure to large, mid, and small-cap stocks.
  2. Total International Stock Market Index Fund (VEU): This fund tracks the performance of international stocks, offering exposure to international companies and economies.
  3. Total U.S. Bond Market Index Fund (BND): This fund tracks the performance of the U.S. bond market, offering exposure to a variety of U.S. bonds.
  4. Total International Bond Market Index Fund (VXUS/IXUS): This fund tracks the performance of international bonds, offering exposure to bonds issued by international governments and corporations.

This portfolio typically seeks to provide exposure to a variety of asset classes and markets, allowing for diversification and the potential for long-term growth.

How to Select the Right Funds for the Bogleheads 4 Fund Portfolio

When selecting funds for the Bogleheads 4 Fund Portfolio, consider the following:

  • Type of fund: Choose the total stock market, bond market, international stock market, and international bond market funds.
  • Expense Ratio: Look for low-cost index funds with an expense ratio under 0.10%.
  • Fund Provider: Consider reputable and established fund providers with a strong track record.
  • Fund Objective: Make sure the funds align with your investment goals and risk tolerance.
  • Fund Performance: Review the historical performance of the funds, but keep in mind that past performance is not a guarantee of future results.

Boglehead 4 allocations

John Bogle didn’t give specific recommendations on allocating the four different assets. This article allocates 50% to US stocks, 30 to international stocks, 10% to bonds, and 10% to international bonds.

What is the Difference Between the Bogleheads 3 and 4 Fund Portfolios?

While both portfolios seek to provide diversified exposure to a variety of asset classes and markets and are based on the principle of passive investing and low-cost index funds, they differ in terms of the number of funds they include and the specific assets they hold.

The Bogleheads 3 Fund Portfolio consists of three funds: a Total U.S. Stock Market Index Fund, a Total International Stock Market Index Fund, and a Total U.S. Bond Market Index Fund.

On the other hand, the Bogleheads 4 Fund Portfolio consists of four funds: a Total U.S. Stock Market Index Fund, a Total International Stock Market Index Fund, a Total U.S. Bond Market Index Fund, and a Total International Bond Market Index Fund.

The Bogleheads 4 Fund Portfolio includes an additional fund that provides exposure to the international bond market, whereas the Bogleheads 3 Fund Portfolio does not.

Which Bogleheads Portfolio is Best for a Global Investor?

The Bogleheads 4 Fund Portfolio may be a better option for a global investor as it includes exposure to the international stock and bond markets. This provides a more diversified portfolio compared to the Bogleheads 3 Fund Portfolio, which only includes exposure to the international stock market.

However, both portfolios have their advantages and disadvantages, and the best option for a global investor will depend on their individual investment goals, risk tolerance, and other factors. It is important to consider the asset allocation, expense ratio, and historical performance of each fund in the portfolio before making a decision.

How to Create a Balanced Investment Mix with the Bogleheads Portfolios

To create a balanced investment mix with the Bogleheads portfolios, it is important to consider your individual investment goals, time horizon, and risk tolerance.

For a balanced mix, allocating a portion of your portfolio to each of the funds in the Bogleheads 3 or 4 Fund Portfolio is recommended, depending on which one you choose. A common allocation strategy is to invest in a ratio of approximately 60% stocks and 40% bonds.

How Market Conditions Affect the Boglehead Portfolios

Market conditions can have a significant impact on the performance of the Bogleheads portfolios, as they are invested in a mix of stocks and bonds, both of which can be affected by changes in market conditions. For example, in times of economic uncertainty or market volatility, stock prices may fall, which can negatively impact the stock components of the portfolios. Conversely, when the economy is growing and the market is stable, stock prices may increase, providing positive returns for the portfolios.

Bonds can also be affected by changes in market conditions, with changes in interest rates significantly impacting bond prices. In general, rising interest rates can lead to lower bond prices and lower returns, while falling interest rates can boost bond prices and returns.

It is important to keep in mind that the Boglehead4s portfolios are designed for long-term investing and market fluctuations are a normal part of the investment process. By staying disciplined and avoiding reactive decisions, investors can weather short-term market conditions and benefit from the long-term returns of a well-diversified portfolio.

Bogleheads 3 And 4 Fund Portfolio Backtest – Do They Work?

Let’s backtest both portfolios using the ticker codes mentioned in the article. We start with the Bogleheads 3 portfolio:

Bogleheads 3 portfolio backtest and performance

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Bogleheads 3 portfolio backtest and performance

The annual return is 7.6%, dividends are included and reinvested, and max drawdown is 28%.

Bogleheads 4 portfolio backtest and performance

We allocated 50% to VTI, 30% to VEU, 10% to BND, and 10% to IXUS. We got the following equity curve:

Bogleheads 4 portfolio backtest and performance

The annual return was 7.8%and max drawdown was 31%.

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How do I invest in a Bogleheads 3 Fund Portfolio?

The Bogleheads 3 Fund Portfolio is a low-cost investment strategy popularized by Jack Bogle. It consists of three index funds: U.S. Total Stock Market, International Stock Market, and U.S. Total Bond Market. Steps include opening a brokerage account, choosing specific index funds (e.g., VTI, VEU, BND), determining asset allocation, starting investments, and monitoring for periodic rebalancing.

What is the Bogleheads 4 Fund Portfolio and its benefits?

The Bogleheads 4 Fund Portfolio adds international bonds to the 3 Fund Portfolio, offering global diversification, low-cost investing, ease of management, and potential for long-term growth. The Bogleheads 4 Fund Portfolio adds international bonds to the 3 Fund Portfolio, offering global diversification, low-cost investing, ease of management, and potential for long-term growth.

How do market conditions affect Bogleheads portfolios?

Market conditions can impact performance; for instance, economic uncertainty or volatility may affect stock prices, and changes in interest rates can impact bonds. The backtest showed an annual return of 7.6%, dividends included and reinvested, with a maximum drawdown of 28%.

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