Model Portfolio #2: The Boglehead’s Guide To Investing

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(This is the second in my series of Model Portfolio Comparisons.)

This next portfolio comes from The Boglehead’s Guide To Investing by Larimore, Lindauer, and LeBoeuf. Taylor Larimore and Mel Lindauer are frequent and respected contributors at the Vanguard Diehards Forum. While obviously they are Bogle fans, they do present their own views on things. Four different model portfolios are given, but I will focus only on two of them.

Young Investor Model Portfolio

Asset Allocation Pie Chart, Young Investor

Asset Allocation for 80% Stocks/20% Bonds
55% Domestic Large Cap Stocks
25% Domestic Mid/Small Cap Stocks
20% Intermediate-Term Bonds

The domestic stock component of 70% Large and 30% Mid/Small Cap is actually how the entire U.S. stock market is broken down on a cap-weighted basis. Thus, you only need one US Total Market fund to cover both.

Investor in Early Retirement Model Portfolio
30% Diversified Domestic Stocks
10% Diversified International Stocks
30% Intermediate-Term Bonds
30% US Inflation-Protected Securities, or TIPs

The other two portfolios are for the Middle Aged Investor (30% US Large-Cap, 15% US Mid/Small-Cap, 10% International, 5% REITs, 20% Intermediate-Term Bonds, and 20% TIPs) and the Late Retirement Investor (20% Diversified Domestic, 40% Short/Intermediate-Term Bonds, 40% TIPs).

Overall, another simple but diversified portfolio – easy to build, easy to maintain. The risk profile is adjusted with age, going from more aggressive to less so with time. There is not very much international exposure.

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  1. This portfolio seems fairly conservative for a young investor. Domestic large caps? That’s about as riskless as it gets on the stock market.

  2. Income Trust says

    Would you happen to have any Dividend oriented portfolios? With the latest news on Canadian Income Trusts, that being the 2011 tax might end up getting renigged. So if you might have any Income Trust portfolios please throw them into the series.

  3. Just curious – What age range do they (or you) consider to be a “young” investor?

  4. Well, risk is relative. Domestic large cap stocks have historically lost 43% in one year, and have lost the equivalent of 12% every single year for 5 years in a row. They’ve even managed to lose the equivalent of 1% every year for 10 years in a row.

    While a young investor could theoretically ride that out, they would have to have great confidence during a time when people would be yelling “the sky is falling! bonds bonds bonds!” Can you imagine your portfolio really losing money for 10 years in row, while inflation is rising and other safer investments (even bank accounts) are earning 5%+?

    Overall, I think people are taking more risk than they really should, buoyed by the bull market of the last few years. Adding at least 10-20% bonds really smooths out the ride will not hurting performance by that much.

    Of course, some people really can handle it all and have very long horizons. I’ve had 16-year old’s email me about what to do about their Roth IRA!! I’ll pull up some more numbers later.

  5. The term “young investor” is simply taken from the book. All of these portfolios are meant as guidelines so the book doesn’t go more into it than that.

    I would estimate it as people who have at least 30 years before retirement, when you would start making withdrawals.

  6. Do they explain the rational for why international is in the early-retirement portfolio, but not the young investor portfolio?

  7. How do you make those fancy graphs?

    Also, I think people tend (by far) to take less risk than they should.

    Indicies with more volatility don’t necessarily have more risk, depending on your investing timeline. For example, if you have a 40-year horizon, it’s LESS risky to be fully invested in small-value than large caps. Over the last 80 years, the range of S&P 500 returns for 40-year periods has been 2741%-10548% (adjusted for dividends but not inflation. Small value on the other hand has a return range of 8610%-83402%.

  8. “and have lost the equivalent of 12% every single year for 5 years in a row. They?ve even managed to lose the equivalent of 1% every year for 10 years in a row.”

    Are you sure this is true? I’m looking at the S&P 500 data now and that doesn’t appear to be right.

  9. way toooo conservative.

  10. Heather – I can’t find it right now, but maybe it is an attempt to maintain simplicity? In the efficient frontier way of thinking, international funds don’t add much return, but are usually added to reduce risk/volatility as they aren’t well correlated. The back-testing optimized percentage is around 20% international, not a whole bunch. Some people like Bogle have argued that you don’t even need international at all, for a bunch of reasons (see Common Sense book). Other thing you should have 50/50 Domestic/International as that is the world’s cap-weighted ratio right now. We’ll see more of this as I track down more model portfolios.

    Big – Graphs made with Macromedia Fireworks. Thanks for the article, I’ll read it after football 🙂 Those data are straight from the Bogleheads book (p. 94) for time period 1935-2004 for large domestic stocks (not just S&P 500).

  11. These are a bunch of interesting articles. It got me interested in investing in Vanguard funds, but I wondered if you had advice as to where one should open an account? The cheapest and easiest one?

  12. International makes much more sense to me than domestic stock.

    What’s the rationale behind a home bias? Would you recommend that all Germans invest 80%-100% in the US Market?

    On another note, to me, there are four levels of simplicity:

    1. Have a financial advisor manage it.

    2. Invest in a fund of funds (like the XXXX 2050 funds)

    3. Invest in international, US, emerging markets, and possibly bonds.

    4. Complex asset allocation with a small and value tilt.

    I think option 4 produces the best returns, and most people who can afford it should select option 1, and that option 2 is a good lazy simple option. The portfolios you’re looking at seem to most closely resemble option 3.

  13. While there may be a “home bias” (I’m not sure), one fact is simply that the US economy has done very well for the last 50+ years, outperforming most other countries on a risk-adjusted basis.

    I’m trying to do the model portfolios roughly in a simple-to-complex order, but don’t worry, there will be plenty that try to take advantage of historical size and style premiums (IFA, Merriman). For now you can feel free to criticize my portfolio 🙂

  14. I really disagree with the Young Investor model. If you’re young, you should invest in a good amount of your portfolio in small Cap Stocks.

    The younger you are, the more risk you can take on. So why not invest in smaller companies that have lots of room to grow? 55% is an absurd amount to place in large cap stocks. Many of the S&P 500 companies have seen their best days of growth. Young investors should take the opportunity to grow with smaller companies, just like our parents did.

    I’m not saying avoid all large caps. I like to buy undervalued large cap stocks when I find a bargain. But I spend most of my time searching for smaller companies that haven’t been “discovered” yet.

    That’s where I’ll make the big money in the long run, not from MSFT stock that may go up $10 bucks in the next 5 years.

    Not to mention, there is zero reference to international stocks. What’s up with that?

  15. Sorry, I did not mean to criticize. I was just typing as I was thinking and then added the last sentence as an afterthought. I actually like recommending option 3 because it is simple and allows you to still tax loss harvest and benefit from AA.

    The home bias puzzle (also called international diversification puzzle) is an interesting one. Personally, I’m a big fan of international investment because it hedges against dollar fluctuations and the US economy (which US investors are very exposed to). Also, international investment seems to be less exposed to currency and geographical and political risk factors. The argument of the US’ relatively large capitalization isn’t a good one, in my opinion (I do not mean to imply you made this argument).

  16. No need to be sorry, I guess criticize has a negative connotation. I just meant evaluate, as I think my portfolio would be more up your alley.

  17. I only want to take issue to Bigfoot’s “lazy” #2 option :). One thing I often suggest to people is to keep it simple and automatic so they can focus on other things that give them a much, much greater return than option 1 may give over 2, or 3 over 4, or whatever. One of your greatest focal points at a young age should be to increase your earning power. A portfolio that allows you to walk away, as the lifestyle funds do, serves the possible purpose of letting the young investor do this.

    But I think I may have mentioned this elsewhere before. And if it’s a hobby/passion of yours, this portfolio allocation, then by all means, go for it.

  18. The 70% Large Caps to 30% Mid/Small Caps for the young investor equity portion is not conservative — it’s overweighted on small/mid caps when compared with the domestic market. See Vanguard’s Key Benchmarks page: link

  19. Pleas advise on 401K Selections. can provide list of choices. 41 yrs old

  20. Any recommendations to help me build a portfolio of 3to 4 ETFs portfolio instead of 6?
    This is the portfolio:
    Voo vanguard s&p 500 40%
    Vtv vanguard Large Cap Value 10%
    Vioo vanguard s&p 600 small cap 10%
    Viov vanguard s&p 600 small cap value 10%
    Vwo vanguard emerging markets 20%
    VEA vanguard developed markets 10%
    I’m 39 years old. This is a buy and hold portfolio.

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