Jack Bogle and Bogleheads On Asset Allocation

Jack Bogle and Bogleheads On Asset Allocation

This writeup will not explain Asset Allocation, Risk vs Reward or many other related issues. It is just to serve, to me, as a reminder of the reasoning behind my personal Asset Allocation choices.

Many people over the years have asked Jack Bogle about his portfolio, hoping to divine the perfect investment mix. It’s an especially pressing question now in a volatile market, in which international events are whipsawing stocks.

The founder of Vanguard Group, the world’s largest mutual fund company, used to have a really basic portfolio that followed an asset allocation known as the 60-40 rule — 60 percent in a U.S. stock index fund and 40 percent in a U.S. bond index fund. He maintained that allocation for himself for years.

But he recently shifted his strategy by a hair: He’s now at 50/50, which makes his portfolio slightly more conservative.

“I just like the idea of having an anchor to the windward,” said Bogle, who is 86. “I’m not so much worried about having my estate grow.”


My personal Asset Allocation is currently around 21% Bonds / 10% Cash / 69% Stocks of which around 10% are International which brings us to this nice quote (below):

longinvest wrote:
Based on the above, here is the asset allocation approach that I recommend, regardless of age:

  • One should always have enough cash available to meet upcoming expenses.
  • One should have a reasonably sized emergency fund in cash.
  • The portfolio should be allocated as follows:
    1. It should only contain stocks and bonds through the use of total-market index ETFs or mutual funds.
    2. It should have no less than 25% and no more than 75% in bonds.
    3. It should have no less than 25% and no more than 75% in stocks divided as follows:
      1. It should have no less than 25% and no more than 75% of the stock allocation in the domestic stock market.
      2. It should have no less than 25% and no more than 75% of the stock allocation in international markets, without the use of currency hedging*.

Why 25% to 75%? There’s no deep theory behind these ratios. They are simply the ranges within which the allocation will have a noticeable impact on returns.

How much bonds, stocks, and international stocks, within these ranges? That’s up to each individual investor to choose according to his own perception of risks and potential rewards. The most important is to make a choice that the investor will be able to stick to regardless of how markets and inflation behave. That’s what we call staying the course.

As an example:

A 75% stocks / 25% bonds Three-Fund Portfolio with 25% of the stock allocation invested internationally would result in the following overall asset allocation:

  • Domestic stocks: 56% — (75% X 75%)
  • International stocks: 19% — (75% X 25%)
  • Bonds: 25%

As you can see, this is both within Bogle’s guidelines and the above guidelines.

I recommend that you decide for yourself about an appropriate allocation to international stocks within the above guidelines. There is simply no agreement among various Bogleheads authors (and members of this site) about how much should be invested internationally.

“When experts disagree, it is often because it does not make a foreseeable difference.” — Taylor Larimore, author of The Bogleheads’ Guide to Investing

So I want to take that recommendation and either drop International altogether or gradually work it up to 19-20% of holdings. I am leaning more towards the 20% at this point though would definitely want to get there slower than sooner.

On Bonds: I disagree with the seeming consensus of those who say one must/should hold International Bonds. Of course I have allowed a bit of International Bonds to creep into my mix and will limit it to a small percentage (4% like a large position size) of which I do not expect to impact my overall outcome significantly over time. I expect to glide, gradually, toward 50% bonds in my holdings. For a few reasons, mainly due to my liking how bonds have worked so far in my mix. Secondarily due to the general recommendations that they serve as stabilizers during market downs, though I do not really believe this, the only thing that would/could stabilize my holdings is having enough. If one does not have enough in a downturn to tie over all bets are off! That being said I am directing a 2% increase in bond holdings per year towards 50% Bonds (and Cash, Cash probably at 10% but may be lower) / 50% Stock. This does NOT include my Emergency Fund which has the following Allocation:

My Emergency Fund is current 2 years worth of expenses and is stored as follows:

Cash (Bank Savings Accounts (at least 2))- .5-1% yield – 20%
CDs (In a Ladder of sorts) – 5 year, various yields – 35%
Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX) – 10%
Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) – 35%

So far I am quite happy with how my Emergency Fund has developed and worked out over the 5 years I have actually had one! I still firmly hold that the best recommendation to begin one’s financial quest is to begin with an adequate Emergency Fund and not to mingle it with the rest of one’s finances.

Now back a Asset Allocation, briefly, after all my experimenting and looking around here and there I believe the best way to invest would be to hold the following mix of funds according to ones preferred Asset Allocation:

Domestic Stocks – Vanguard Total Stock Market Index Fund (VTI, VTSAX)
International Stocks – Vanguard Total International Stock Index Fund (VXUS, VTIAX)
Domestic Bonds – Vanguard Total Bond Market Index Fund (BND, VBTLX) / Vanguard Intermediate-Term Bond Index Fund (BIV, VBILX) – Each with 50% of the Bond Allocation, example if Bonds are 50% then 25% would be Total Bond and 25% would be Intermediate-Term Bond, this is not a requirement for success, Total Bond Index is just fine. A bit more on the Bond Split can be found here.

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