The Bogleheads 80/20 Portfolio

Another benchmark portfolio, the 80/20 takes some of the allocation to bonds in a 60/40 and puts them in non-US equities instead. This is a traditional asset mix for investors seeking moderately high returns, while still maintaining some measure of stability.

Breakdown of the Bogleheads 80/20 portfolio

This portfolio is more aggressive than the 60/40 as half the bond allocation is devoted to international stocks. Another difference with that other benchmark portfolio is the substitution of BND, Vanguard’s Total Bond Index fund, for VGIT, or intermediate-term Treasury bonds. BND, by including longer duration bonds and then corporate bonds, should generate higher returns than VGIT. There is a cost, though, as corporate bonds can at times act much like stocks, thereby essentially increasing your drawdowns when the stock market declines. In times of crisis for stocks, the supposed safety of corporate bonds doesn’t always manifest itself, as the same risks that are impacting corporate stocks impact corporate debt instruments. It is for this reason that RP portfolios generally avoid corporate bonds as they are neither fish nor fowl - not equities, but not really bonds, either. For a portfolio,the  relatively high correlation between equities and corporate bonds can mean more volatility and lower withdrawal rates for the portfolio.

The 80/20is not one I am seriously considering, but it does serve as a benchmark for a moderately aggressive portfolio. Mainly, I will track it so that I can compare the Qian portfolio and the Leveraged Butterfly portfolios to it. For that matter, I am also curious to see how it performs compared to the RPC Income portfolio mentioned above, which beats it for expected return and for stability.

Looking at it compared to the other nine portfolios, the Bogleheads 80/20 lies in the bottom half in almost all the dimensions. The annual real return is expected to be 7.1%, making it the sixth best of the ten, under the RPC Income portfolio, and just a bit above the Golden Butterfly. It doesn’t shine in terms of safety, either. It is the second most ulcer inducing and has drawdowns that are substantially more severe and longer than the Golden Butterfly or the RPC Income portfolio.

The addition of BND is probably the culprit in the portfolio’s poor performance, in that it fails to provide any negative correlation while not adding much to the return side. BND’s correlations to the other two assets are close to zero, meaning it is non-correlated, but it would be better to have negative correlation instead (such as in the range of -.4 for long-term Treasury bonds). This would give the portfolio more of a counterbalance when stocks decline. The 80/20 is easy to manage and understand, but other than that, doesn’t seem to have too much going for it. This adds up to the second worst Sharpe ratio, meaning you get little return for all that stress of an equity-heavy portfolio.

By the way, since there are multiple versions of the Bogleheads 80/20 available (which is also known as the Bogleheads Three Fund portfolio), I have used the one written up at Optimum Portfolio.

Here is the Correlation Matrix (Data from 2009; credit to Portfolio Visualizer):

Correlation Matrix for the Bogleheads 80/20 portfolio

And, the Backtest Analysis (Data from 1970; credit to Portfolio Charts):

Backtest for the Bogleheads 80/20 portfolio