“Index funds offer compelling advantages to investors in all markets where they are available. Index funds are the lowest cost, lowest risk, and lowest tax cost investment style available to investors. Importantly, these benefits translate into strong performance. Investors should confidently anticipate consistent top quartile performance over any reasonable time frame against the appropriate peer group of actively managed funds. “
Index Fund Investing | Investor Solutions – Frank Armstrong
Frank Armstrong III, investment advisor and author, offers the following seven fund “Ideal Indexed” portfolio in his book, The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio (published December 16, 2003).
The portfolio employs a 70% equity /30% fixed income split, consisting of six equity asset class funds and one fixed income fund.
The equity slice holds a 31% portfolio allocation to international stocks. The US stock allocation has a value tilt, as the value allocations are larger than the blend and growth allocations. The asset class allocations include:
- US large blend stocks : 6.25%
- US large value stocks : 9.25%
- US small growth stocks: 6.25%
- US small value stocks : 9.25%
- US REITS : 8.00%
- International stocks: 31.00%
- US short-term bonds: 30.00%
The chart below (click to enlarge) shows the portfolio allocation (rounded values in the pie chart).
Ideal Indexed portfolio
| Fund | Ticker | Expense ratio |
|---|---|---|
| 500 Index | VFINX | 0.17% |
| Value Index | VIVAX | 0.24% |
| Small Growth Index | VISGX | 0.24% |
| Small Value Index | VISVX | 0.24% |
| REIT Index | VGSIX | 0.24% |
| Total International Index | VGTSX | 0.22% |
| Short-term Bond Index | VBISX | 0.20% |
Returns
The tables below gives returns for the portfolio, using Vanguard investor share index funds. Investors with larger fund balances can use lower cost admiral shares, and exchange-traded funds are available at potentially lower cost. The returns period includes portfolio performance during the two bear markets in the 2000 – 2010 decade, as well as subsequent recoveries. Keep in mind that past performance does not forecast future performance.
Annual returns
| Year | Portfolio |
|---|---|
| 2013 | 15.66% |
| 2012 | 12.80% |
| 2011 | -3.22% |
| 2010 | 13.35% |
| 2009 | 23.93% |
| 2008 | -26.11% |
| 2007 | 5.95% |
| 2006 | 17.84% |
| 2005 | 8.23% |
| 2004 | 14.70% |
| 2003 | 27.25% |
| 2002 | -8.14% |
| 2001 | -3.23% |
| 2000 | 2.04% |
| 1999 | 13.60% |
Compound returns
| Period | Return |
|---|---|
| 3yr CAGR | 8.08% |
| 5yr CAGR | 12.14% |
| 10yr CAGR | 7.34% |
| 15yr CAGR | 6.77\5% |
Standard deviation
| Period | Standard deviation |
|---|---|
| 3yr standard deviation | 10.17% |
| 5yr standard deviation | 9.85% |
| 10yr standard deviation | 14.14% |
| 15yr standard deviation | 13.68% |
See Frank Armstrong Ideal Indexed portfolio, google drive spreadsheet for return computations.
Barry Barnitz, an administrator of the John C. Bogle Center for Financial Literacy site.
