Three fund portfolio using inflation indexed bonds – 2019 update

The Taylor Larimore three-fund portfolio is a portfolio design consisting of three “total” market index funds covering the US stock market, the international stock market, and the US taxable investment grade bond market.  Newspaper columnist Scott Burns has suggested a three fund portfolio (called the Margarita portfolio) that uses inflation-indexed treasury bonds for the bond allocation in the portfolio.

Investors were able to implement this portfolio beginning in 2001, when Vanguard introduced an inflation-indexed treasury bond fund.  The firm had introduced a total US stock market index fund in 1992, and a total international index fund in 1997.

The 2019 returns for the portfolio’s constituent Vanguard funds:

  • Vanguard Total Stock Market Index Fund: 30.80%
  • Vanguard Total International Stock Index Fund: 21.51%
  • Vanguard Inflation Protected Securities fund : 8.06%

Below are four portfolios with allocations devoting 30% of the stock allocation to international stocks (click images to enlarge).

The table below provides 2019 returns for these portfolios. Note that a different weighting of international stocks would result in differing returns.

Three-fund portfolio returns

 Year80/2060/4040/6020/80
201924.02%20.03%16.04%12.05%

Historical returns

The following tables give return data for three-fund portfolios assuming investment in Vanguard investor share funds. Keep in mind that past returns are no guarantee of future returns, but the history reveals how each portfolio allocation has performed over both the  2008 bear market and ensuing recovery.

In 2018 Vanguard lowered the minimum investment  for admiral shares in many index funds. Thus for 2018 forward we will report admiral share returns for stock fund allocations. As admiral shares for active funds have a $50,000 minimum investment, we will continue to report investor share returns for bond allocations. Note that prior to 2018 you can add approximately +0.10% annual compound return for each allocation for an investment in admiral share portfolios.

 Year80/2060/4040/6020/80
201924.02%20.03%16.04%12.05%
2018-6.66%-5.36%-4.07%-2.78%
201718.93%14.90%10.87%6.84%
20169.04%7.91%6.78%5.65%
2015-1.25%-1.40%-1.54%-1.69%
20146.71%5.99%5.27%4.55%
201320.50%13.15%5.79%-1.56%
201214.81%12.80%10.79%8.79%
2011-0.31%3.08%6.47%9.85%
201013.47%11.65%9.82%8.00%
200927.05%22.99%18.92%14.86%
2008-31.90%-24.63%-17.37%-10.11%
20079.12%9.74%10.35%10.97%
200615.17%11.48%7.80%4.11%
20057.60%6.35%5.10%3.84%
200413.67%12.32%10.97%9.62%
200328.84%23.63%18.42%13.21%
2002-12.03%-4.87%2.29%9.45%
2001-9.46%-5.19%-0.92%3.34%

Compound returns

The tables below give 3-year, 5-year, 10-year, and 15-year compound returns and volatility statistics for each three-fund portfolio allocation.

80/20 allocation

3 yr5 yr10 yr15 yr
CAGR11.25%8.19%9.49%7.35%
STD DEV16.44%12.98%10.24%14.60%

60/40 allocation

3 yr5 yr10 yr15 yr
CAGR9.28%6.79%8.01%6.60%
STD DEV13.43%10.68%7.81%11.49%

40/60 allocation

3 yr5 yr10 yr15 yr
CAGR7.26%5.35%6.47%5.71%
STD DEV10.45%8.14%5.94%8.69%

20/80 allocation

3 yr5 yr10 yr15 yr
CAGR5.19%3.87%4.85%4.69%
STD DEV7.52%6.20%5.26%6.61%

Sharpe Ratios

The table below provides Sharpe ratios for the four portfolios with allocations devoting 30% of the stock allocation to international stocks.

Sharpe ratio80/2060/4040/6020/80
3yr0.640.610.580.51
5yr0.620.600.570.51
10yr0.790.830.870.73
15yr0.540.560.590.58

Addendum

Calculated returns data uses this three-fund portfolio using inflation protected bonds google drive spreadsheet. The spreadsheet contains returns data for an assortment of international stock allocations (20%, 30%, 40%, or 50% of the equity allocation).

Allocation80/2070/3060/4040/6020/80
20% internationalCAGRCAGRCAGRCAGRCAGR
3yr11.60%10.58%9.54%7.43%5.27%
5yr8.61%7.85%7.09%5.55%3.97%
10yr10.14%9.33%8.50%6.79%5.01%
15yr7.63%7.24%6.81%5.85%4.76%
30% international
3yr11.25%10.27%9.28%7.26%5.19%
5yr8.19%7.49%6.79%5.35%3.87%
10yr9.49%8.76%8.01%6.47%4.85%
15yr7.35%6.99%6.60%5.71%4.69%
40% international
3yr10.89%9.96%9.02%7.09%5.10%
5yr7.77%7.13%6.48%5.14%3.77%
10yr8.84%8.19%7.53%6.15%4.69%
15yr7.06%6.74%6.38%5.57%4.62%
50% international
3yr10.52%9.65%8.75%6.92%5.02%
5yr7.36%6.77%6.17%4.94%3.67%
10yr8.19%7.62%7.04%5.83%4.53%
15yr6.76%6.48%6.17%5.43%4.55%
About

Barry Barnitz, an administrator of the John C. Bogle Center for Financial Literacy site.

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