Anyone try the Five Fund Portfolio? (2024)

I see a lot of argument for the Three Fund Portfolio, but has anyone tried a Five Fund Portfolio? The Three Fund Portfolio is pure Boglehead simplicity and works better than most investment strategies out there.

I prefer the Five Fund Portfolio. It only makes sense if you're 60% or more equities, if you're conservative and 50% or less, then the three fund is all you need.

But lets say you're mostly equities, then a 5 FP would look like:
0-40% Bonds - Total Bond Index
60-100% Equities

Of the Equities:
20-40% International
60-80% Domestic

Of the International:
50-75% Total International Index
25-50% Emerging Markets Index

Of the Domestic:
50-75% Total Stock Index
25-50% Small Cap Index (OR small cap value index OR small cap tax managed)

One example 5 fund portfolio could be:
20% Total Bond Index
15% Total Intl Index
10% Emerging Markets Index
35% Total Stock Market Index
20% Small Cap Value Index

Key to this working properly would be the periodic rebalancing, either annual or when the ratios get off too far. This captures periodic outperformance of an asset class. It is possible to slice and dice more, but that gets more complicated and would likely have very little added benefit. This works surprisingly well on Portfolio Visualizer.

If this portfolio is what you feel is best for you, there's nothing wrong with doing it this way. By adding additional small-cap and emerging markets, you're essentially making a bet that those sectors will outperform going forward versus a straight total-market allocation, but if that's what you want, go for it. I don't have any opinion as to whether any particular sector will outperform, so I don't try to tilt away from a plain old three-fund portfolio. But to each his own.

(I didn't check it personally, I accept your statement that your five-fund allocation outperformed in Portfolio Visualizer. But that just means that it outperformed in the past, not that it will in the future. Past Performance Does Not Guarantee Future Results.)

oldcomputerguy wrote: ↑Sat Jan 26, 2019 7:39 pmIf this portfolio is what you feel is best for you, there's nothing wrong with doing it this way. By adding additional small-cap and emerging markets, you're essentially making a bet that those sectors will outperform going forward versus a straight total-market allocation, but if that's what you want, go for it. I don't have any opinion as to whether any particular sector will outperform, so I don't try to tilt away from a plain old three-fund portfolio. But to each his own.

(I didn't check it personally, I accept your statement that your five-fund allocation outperformed in Portfolio Visualizer. But that just means that it outperformed in the past, not that it will in the future. Past Performance Does Not Guarantee Future Results.)

I agree that past performance doesn't guarantee future results. I am making the following assumptions which is why I like the 5 fund portfolio:
- While emerging markets and small cap (or SCV) have outperformed the broader markets, there's no guarntee they will in the future, but there's no guarantee they will not.
- It is very highly likely that some years Intl will perform better than domestic and vice versa.
- It is very highly likely that some years EM will perform better than total intl and vice versa.
- It is very highly likely that some years SCV will perform better than total domestic and vice versa.
- I do not know what years what will perform better, but it is likely some will zig more while others zag more at any given time.
- The five fund portfolio is the simplest portfolio that allows to capture the zig zag within the broader international and domestic markets
- Periodic rebalancing is the key. Total risk adjusted returns (sortino ratio) should be better with periodic disciplined rebalancing than just letting sit in the original asset classes.

OldSport,

I am personally a 3-fund portfolio guy, but do find your rationale compelling. Do you have a link for the 5-fund portfolio backtest in Portfolio Visualizer?

OldSport wrote: ↑Sat Jan 26, 2019 7:52 pm

oldcomputerguy wrote: ↑Sat Jan 26, 2019 7:39 pmIf this portfolio is what you feel is best for you, there's nothing wrong with doing it this way. By adding additional small-cap and emerging markets, you're essentially making a bet that those sectors will outperform going forward versus a straight total-market allocation, but if that's what you want, go for it. I don't have any opinion as to whether any particular sector will outperform, so I don't try to tilt away from a plain old three-fund portfolio. But to each his own.

(I didn't check it personally, I accept your statement that your five-fund allocation outperformed in Portfolio Visualizer. But that just means that it outperformed in the past, not that it will in the future. Past Performance Does Not Guarantee Future Results.)

I agree that past performance doesn't guarantee future results. I am making the following assumptions which is why I like the 5 fund portfolio:
- While emerging markets and small cap (or SCV) have outperformed the broader markets, there's no guarntee they will in the future, but there's no guarantee they will not.
- It is very highly likely that some years Intl will perform better than domestic and vice versa.
- It is very highly likely that some years EM will perform better than total intl and vice versa.
- It is very highly likely that some years SCV will perform better than total domestic and vice versa.
- I do not know what years what will perform better, but it is likely some will zig more while others zag more at any given time.
- The five fund portfolio is the simplest portfolio that allows to capture the zig zag within the broader international and domestic markets
- Periodic rebalancing is the key. Total risk adjusted returns (sortino ratio) should be better with periodic disciplined rebalancing than just letting sit in the original asset classes.

Well, I'm not that much of a slice 'n' dicer myself, but some do, and with (I assume) satisfactory results. I think it probably will be most important, as you say, to have discipline in rebalancing back to the target allocation in order to capture those zigs 'n' zags. Good luck. Come back in ten or fifteen years and let us know how you did.

Like you I do not prefer a 3 fund. I use a 1 fund portfolio (Target Date). Least likely to result in performance chasing and FOMO, just set it and forget it.

By seeking market returns, you are outperforming 80% of portfolios. Average isnt so average afterall.

Ping Pong wrote: ↑Sat Jan 26, 2019 8:49 pmThis looks like someone took the six fund portfolio and removed the TIPS fund.

What's next? 8 funds?!?!

OldSport wrote: ↑Sat Jan 26, 2019 7:52 pm- It is very highly likely that some years Intl will perform better than domestic and vice versa.
- It is very highly likely that some years EM will perform better than total intl and vice versa.
- It is very highly likely that some years SCV will perform better than total domestic and vice versa.
- I do not know what years what will perform better, but it is likely some will zig more while others zag more at any given time.

I could say this about almost any random fund. "It is very highly likely that some years Fidelity Contrafund will perform better than total stock market and vice versa. I do not know what years what will perform better, but it is likely one will zig more while the other zags more at any given time." Therefore I need Contrafund in my portfolio? I don't think so. Something's missing here.

I'm a bit confused what this accomplishes vs. just using VTI (US total stock) and VTIAX (total international).

In VTIAX Emerging markets is currently near the range you mentioned: 21.80%

If I were using this strategy I'd be clear it was a tilt vs. a further diversification of the 3 fund approach.

Wouldn't the ~20% target of Emerging Markets within VTIAX accomplish the rebalancing you mention?

I'm no pro ....just asking what I'm missing beyond the ability to further tilt to EM above the 20% in VTIAX.

Someone around here just recently said, quite astutely I thought, that anything less than about 30% of your portfolio isn’t going to make much of a difference to your returns one way or the other.

“Strive for simplicity” is what I keep reading. I’ve got three funds (not those three) and could probably roll them down to one and end up somewhere in the same spot. I probably should do that; then again, I don’t spend time rebalancing.

Rebalancing five funds seems like herding cats.

Olemiss540 wrote: ↑Sat Jan 26, 2019 8:51 pm

Ping Pong wrote: ↑Sat Jan 26, 2019 8:49 pmThis looks like someone took the six fund portfolio and removed the TIPS fund.

What's next? 8 funds?!?!

Sure.

Scott Burns’ Couch Potato Portfolios range from 2 fund to 10 fund, obviously more slicing and dicing as you add funds.

I use a variation of his “6 Ways from Sunday” portfolio for our retirement accounts.

I have not done a back test comparison to a 3 fund portfolio though.

Interesting comments. Adding Contrafund would not be the same because it is a higher cost actively managed funds. The 5 Fund Portfolio uses passively managed low cost index funds with 2 subclasses within domestic and international to capture periodic outperformance either of the broader market or the subclass.

For example on Portfolio Visualizer backtested Jun 1998 - Dec 2018 (20 years).

Portfolio 1 (3 Fund Portfolio)
- 20% Bonds
- 55% Total US
- 25% Total Intl

Portfolio 2 (5 Fund Portfolio)
- 20% Bonds
- 35% Total US
- 20% SCV
- 15% Total Intl
- 10% EM

All Vanguard Index Investor Shares to get the 20 year history.

Portfolio 1: 5.61% CAGR with 0.37 Sharpe and 0.52 Sortino

Portfolio 2: 6.80% CAGR with 0.45 Sharpe and 0.64 Sortino

OldSport wrote: ↑Sun Jan 27, 2019 7:24 amInteresting comments. Adding Contrafund would not be the same because it is a higher cost actively managed funds. The 5 Fund Portfolio uses passively managed low cost index funds with 2 subclasses within domestic and international to capture periodic outperformance either of the broader market or the subclass.

For example on Portfolio Visualizer backtested Jun 1998 - Dec 2018 (20 years).

Portfolio 1 (3 Fund Portfolio)
- 20% Bonds
- 55% Total US
- 25% Total Intl

Portfolio 2 (5 Fund Portfolio)
- 20% Bonds
- 35% Total US
- 20% SCV
- 15% Total Intl
- 10% EM

All Vanguard Index Investor Shares to get the 20 year history.

Portfolio 1: 5.61% CAGR with 0.37 Sharpe and 0.52 Sortino

Portfolio 2: 6.80% CAGR with 0.45 Sharpe and 0.64 Sortino

Back testing does not provide any evidence of upcoming over performance. As a matter of logic, previous over performance in the financial markets would lead me to believe it caused a rush of funds to those sectors which would lead to the likelihood of underperformance in the nearer term.

http://www.vanguard.com/bogle_site/sp20020626.html

This is good reading with regards to this phenomenon. I am not intelligent enough to out strategize those in the market, so I stick to the only free lunches in investing (low cost and diversified) and focus my efforts on the most likely way to wealth (LBYM and savings rate).

OldSport wrote: ↑Sat Jan 26, 2019 7:31 pmOne example 5 fund portfolio could be:
20% Total Bond Index
15% Total Intl Index
10% Emerging Markets Index
35% Total Stock Market Index
20% Small Cap Value Index

Dont forget that Small Cap Value is already 3% of Total Stock market --> so you have now >10 times as much SCV than the neutral position, this is a very strong tilt.
Dont forget that Emerging is already 1/5 of Total Intl market --> so you have now 2.5 times as much EM than the neutral position, this is a strong tilt.

Consider using https://portfoliocharts.com central-portfolio-station/ for your AA backtesting.
This allows gives you a more complete view looking at all aspects of a portfolio and independent from starting date.
What numbers do you get there?

You can find recipe books full of every variety of portfolios for every taste. The usual theory is the pernicious idea that more sophisticated investors should own the more sophisticated portfolio (the one with more funds in it).

A better approach, if one wants it, is to consider the possible rationale for either adding asset classes or concentrating in certain asset classes. Swedroe has a book on factor investing and also a book on alternative investments. One could start by reading both. There is plenty of discussion on this forum regarding REITs, commodities, gold specifically, adding emerging markets, microcaps, or whatever. One can make up one's mind.

My conclusion is that it is very difficult to establish that there is a way to pick a universally consistently superior portfolio over all other portfolios. Remember that the actual results a person will get will come from such a wildly variable range of possible outcomes that differences on prospective average among choices are not going to mean very much.