Rick Ferri’s The Core 4 Portfolio

Rick Ferri’s The Core 4 Portfolio – Strategy, Allocations, Performance, Returns Analysis

The Core 4 Portfolio by Rick Ferri is a “lazy” index diversified investment portfolio that allocates assets across 3 asset classes: stocks, bonds, and REITs. These 3 asset classes are divided into 4 categories: U.S. stocks, international stocks, intermediate bonds, and REITs.

The Core 4 Portfolio strategy can be implemented using 4 different index ETFs that are well diversified and have shown good performance. There is no need to pick individual stocks, bonds, and other asset classes or spend a lot of time and effort putting together the portfolio.

In this article, we will describe in detail the structure of The Core 4 Portfolio and backtest it on historical price data.

According to our backtests over the past 16 years, The Core 4 Portfolio has the following performance stats:

  • Compound annual return (CAR): 6.19%;
  • Maximum drawdown (MDD): -47.93%;
  • CAR/MDD ratio: 0.13;
  • Standard deviation: 17.61%;
  • Sharpe ratio (with a risk-free rate of 3%): 0.18.

Related reading:

Who Is Rick Ferri

Rick Ferri, CFA, is an hourly-fee adviser for cost-conscious do-it-yourself investors. Rick has over 30 years experience in the investment industry, including ten years as a financial consultant at two major Wall Street firms and the founder and former owner of a large portfolio management firm.

Rick is a financial analyst, author, mentor for young advisers. Rick graduated from the University of Rhode Island with a B.S. degree in business and an M.S. in Financial degree from Walsh College in Michigan.

Rick has published extensively including several books on index funds, ETFs, and asset allocation. Major Ferri is also a retired Marine Corps veteran and flew fighter aircraft.

What Is The Core 4 Portfolio

The Core 4 Portfolio consists of the 4 following asset classes with their respective total weights:

Asset categoryWeight in the portfolio
Total Stock Market (US stocks)48.00%
International Stocks24.00%
Intermediate Bonds20.00%
REITs8.00%

Stocks In The Core 4 Portfolio

Stocks are equity securities representing an ownership share in a corporation and giving the right to receive dividends if paid. As a shareholder, you own a part of the business.

Historically, stocks have shown the highest returns of all asset classes, outperforming all other asset classes such as bonds, gold, and real estate.

Adding stocks to a portfolio increases its overall return, but makes the portfolio more volatile and more vulnerable to drawdowns during times of crisis. Risk and reward go hand in hand.

The Core 4 Portfolio includes the following types of stocks:

  • Total Stock Market – U.S. large-cap growth and value stocks that virtually replicate the benchmark S&P 500 stock index;
  • International Stocks – non-U.S stocks that allow you to increase diversification by reducing the overall correlation of the portfolio. International stocks are located on other continents (Europe, Asia, Pacific, etc) and have historically low correlation with U.S. stocks (over many years).

For stocks, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:

Portfolio SectorETF NameETF Ticker
Total U.S. Stock MarketSPDR S&P 500 ETF TrustSPY
Total International Stock MarketiShares MSCI EAFE ETFEFA

Bonds In The Core 4 Portfolio

Bonds are fixed income debt securities that are less profitable and more reliable than stocks. As a bond owner, you are a lender and own no part of the business.

Adding bonds to a portfolio reduces its overall return but makes the portfolio less volatile and more resilient to drawdowns during periods of crisis.

Bonds also have a low correlation with stocks, which improves portfolio diversification.

The Core 4 Portfolio includes the following types of bonds:

  • Intermediate Bonds – predominantly medium-term U.S. treasury, municipal and investment-grade corporate bonds;

For bonds, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:

Asset categoryETF NameETF Ticker
Intermediate BondsVanguard Total Bond Market Index FundBND

Alternatively, you can use IEI.

REITs In The Core 4 Portfolio

Real estate investment trusts (REITs) have the same rewards and risks as “traditional” stocks but also have a historically low correlation with “traditional” stocks and various types of bonds.

Including REITs in a portfolio reduces the overall correlation of portfolio assets and makes the portfolio itself more diversified and sustainable.

For REITs, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:

Asset ClassETF NameETF Ticker
REITsiShares U.S. Real Estate ETFIYR

Backtesting The Core 4 Portfolio (investment strategy)

Let’s backtest The Core 4 Portfolio under the following conditions:

  • Simple “Buy & hold” strategy are used;
  • Annual rebalancing takes place on January 1 of each year;
  • Described ETFs with the appropriate weights are picked;
  • Historical quotes are adjusted for dividends;
  • Backtesting interval from 2007 to 2023.

Portfolio equity curve:

Backtesting The Core 4 Portfolio

Portfolio underwater curve (drawdowns, i.e. decline in value from a relative peak value to a relative trough):

The Core 4 Portfolio performance and returns

Portfolio monthly and annual returns:

YearJanFebMarAprMayJunJulAugSepOctNovDecYr%
20071.8%-1.3%1.0%3.1%2.1%-1.5%-2.6%1.1%3.6%2.0%-3.1%-1.5%4.6%
2008-4.5%-1.8%0.1%3.9%0.9%-7.0%-1.0%0.1%-7.2%-15.6%-5.0%4.6%-29.4%
2009-9.1%-9.1%6.3%9.4%6.2%-0.4%7.1%4.1%3.4%-1.9%4.8%1.4%22.0%
2010-3.1%2.0%5.1%0.9%-6.7%-3.0%6.7%-2.8%6.8%3.1%-1.4%5.3%12.6%
20111.9%2.9%-0.7%3.4%-0.8%-1.4%-1.2%-4.8%-6.5%8.3%-1.0%0.6%0.0%
20124.1%3.2%1.9%-0.4%-5.8%4.0%1.0%2.0%1.8%-0.7%0.9%1.6%14.1%
20133.6%0.5%2.4%2.8%-0.5%-1.8%3.9%-2.6%3.9%3.6%1.3%1.8%20.2%
2014-2.4%4.1%0.3%1.1%1.9%1.3%-1.3%2.5%-2.2%2.0%1.8%-0.9%8.2%
2015-0.3%3.7%-0.9%0.9%0.5%-2.3%2.1%-5.3%-2.0%6.1%-0.1%-1.3%0.6%
2016-3.8%-0.7%5.7%0.6%1.0%0.5%3.1%-0.2%0.2%-2.0%0.7%2.0%7.2%
20171.7%2.6%0.7%1.3%1.7%0.6%1.9%0.4%1.4%1.6%1.8%1.0%18.0%
20183.4%-3.7%-1.1%0.5%1.1%0.3%2.5%1.4%0.2%-5.7%1.5%-5.9%-5.8%
20196.6%2.2%1.8%2.7%-4.1%5.1%0.5%-0.5%1.7%2.0%1.9%2.2%24.3%
2020-0.2%-5.9%-11.0%8.5%3.7%2.0%3.9%4.3%-2.5%-2.3%9.4%3.2%11.7%
2021-0.9%1.8%3.0%4.1%1.3%1.2%2.0%2.0%-3.8%4.9%-1.6%4.2%19.4%
2022-4.4%-2.8%1.8%-7.0%0.4%-6.9%6.7%-4.4%-8.4%5.2%6.9%-3.7%-16.8%
20236.7%-3.0%2.9%1.7%-0.8%N/AN/AN/AN/AN/AN/AN/A7.4%

Portfolio performance statistics compared to benchmark S&P 500 Total Return index:

Statistical MetricPortfolioS&P 500 TR
Annual Return %6.19%8.95%
Exposure %99.66%100.00%
Risk Adjusted Return %6.21%8.95%
Max. drawdown-47.93%-55.19%
CAR/MaxDD0.130.16
Standard Deviation17.61%22.64%
Sharpe Ratio (3% risk-free)0.180.26

The Core 4 Portfolio – conclusion

  • The Core 4 Portfolio lags behind the S&P 500 TR index in terms of average annual return, but outperforms the index in terms of drawdowns;
  • If you want to get the highest possible return, regardless of the level of drawdowns, then allocate your funds 100% in stocks. You can mix different equity ETFs, for example, allocate 60% of the funds to US stocks and the remaining 40% to international stocks;
  • If you are sensitive to drawdowns and do not care about the maximum possible return, then add bond ETFs to your portfolio. Bonds reduce portfolio drawdowns at the cost of portfolio returns;
  • Be disciplined and strictly follow the asset allocation rules that you have chosen for yourself.

FAQ:

What is The Core 4 Portfolio?

The Core 4 Portfolio is a diversified investment strategy developed by Rick Ferri. It allocates assets across four categories: U.S. stocks, international stocks, intermediate bonds, and REITs. The Core 4 Portfolio is designed to simplify investing by using four well-diversified index ETFs, eliminating the need for individual stock picking.

How does The Core 4 Portfolio allocate assets?

The portfolio allocates assets as follows: U.S. Stocks: 48.00%, International Stocks: 24.00%, Intermediate Bonds: 20.00%, REITs: 8.00%. The allocation is structured to provide a balanced exposure to different asset classes, aiming for a mix of growth and stability.

Why add bonds to The Core 4 Portfolio?

Bonds provide stability to the portfolio, reducing overall volatility and increasing resilience during market downturns. The selected ETF for intermediate bonds is Vanguard Total Bond Market Index Fund (BND) or alternatively, IEI. According to backtests from 2007 to 2023, The Core 4 Portfolio had a compound annual return of 6.19% with a maximum drawdown of -47.93%.

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