The Four Fund Portfolio 2022

The Four Fund Portfolio

When it comes to investing, I’m a big fan of simplicity. In fact, I would say that keeping things simple is one of the primary things that I have learned over my 25+ year investing career. As is neatly laid out in The Bogleheads’ Guide to the Three-Fund Portfolio, you don’t need a lot of complications or funds to beat the pants off the vast majority of investors.

And, as you get more involved in investing and educate yourself, you’ll find that the majority of savvy investors do in fact limit their portfolios to just a handful of key holdings. So, why can investing seem so complicated? Well, there is a multi-billion dollar industry, e.g. Wall Street, which has a vested interest in convincing you that investing is too complicated and that owning just a few funds is insufficient.

Instead of educating yourself and investing your own funds, they would rather charge you a fee and handle it themselves. They would also like to put you into some high-cost mutual funds that give them big rebates. But, that’s a topic for another time.

The key message here is that with just a few funds you can do a great job all by yourself. So, in addition to the hugely popular three-fund portfolio, another common investing approach is the four fund portfolio. Still simple to execute, but lets you add another fund that you may find intriguing. This is the strategy I am pursuing.

What is the Four Fund Portfolio?

There are various flavors of the four fund portfolios, but their core approaches are all the same. Keep three funds as your core, and then add a fourth to tilt the portfolio in whichever direction you like.

The three core funds of the portfolio would be:

  • A total U.S. stock market index fund (e.g. Vanguard Total Stock Market Index Fund Admiral Shares – VTSAX)
  • A total international market index fund (e.g. Vanguard Total International Stock Index Fund Admiral Shares – VTIAX)
  • A total U.S. bond market index fund (e.g. Vanguard Total Bond Market Admiral Shares – VBTLX)

But before we move to a discussion on the fourth fund, let me clarify something.

Clarifying Asset Classes vs. Funds

One of the problems with trying to simplify a portfolio is that most people have multiple brokerage accounts. For example, my wife and I, have six brokerage accounts.

In each account, you will likely have different fund options. So, while you might have Vanguard funds available in your IRA, you might only have Blackrock funds in your 401k and maybe Fidelity funds in your HSA. This makes it difficult to put 60% of your portfolio into one particular fund, like Vanguard’s VTSAX, for example, but that’s ok as long as they are in the same category/asset class.

So, throughout this discussion, I’ll continue to talk about having four funds in your portfolio, but what I’m really talking about is having four asset classes. For example, U.S. equities would be one asset class and U.S. bonds would be a different one. You might have several funds from different accounts for each asset class.

In my 401k at work, I have a Russell 3000 index fund which counts towards my “U.S. stock market index” asset class. I also own quite a bit of Vanguard total market index (VTSAX) from my IRA which I don’t count it as an additional fund. Since it is also a “U.S. stock market index,” I just add them up because they are in the same asset class.

For purposes of clear communication and to mimic the way these discussions happen in the media, I’ll simply keep referring to the funds as funds and not worry about the complexity of multiple accounts and asset classes.

As a side note, one of the reasons I am such a big fan of Personal Capital is that it makes it so easy to consolidate the holdings from multiple accounts and easily see your distributions across asset classes and re-allocate your capital as necessary. If you have not yet opened up a free account, I highly recommend you do!

So now that we have funds vs. asset classes cleared up, what could the fourth fund be?

The Rick Ferri Core Four Portfolio

You could use a number of different funds for your fourth asset class, but popular investment author and advisor Rick Ferri propose that you add a U.S. equity real estate investment trust (REIT) to your first three funds. Why a REIT?

The argument is that REITs are less correlated with the overall stock market than non-REIT stocks. So, they provide diversification and improve the risk-adjusted performance of a portfolio. Seems reasonable to me.

His core four portfolios would look like this:

  • A total U.S. stock market index fund (e.g. Vanguard Total Stock Market Index Fund Admiral Shares – VTSAX)
  • A total International market index fund (e.g. Vanguard Total International Stock Index Fund Admiral Shares – VTIAX)
  • A total U.S. bond market index fund (e.g. Vanguard Total Bond Market Admiral Shares – VBTLX)
  • A U.S. REIT (e.g. Vanguard REIT Index Fund Admiral Shares – VGSLX)

As I have whittled my portfolio holdings down over the years and concentrated my assets down into four funds, I unwittingly ended up with the Rick Ferri core four portfolios myself.

How to Allocate Your Capital Across Funds

Once you know which funds you want to own, you’ll have to determine how to allocate your capital across the funds. Rick proposes that investors first determine their bond allocation, which will determine how conservative or aggressive their overall portfolio will be. More bonds equal more conservative.

Of the remaining non-bond funds, allocate 60% to U.S. stock, 30% to international stock, and 10% to REITs.

A conservative portfolio with 80% bonds might look like this:

  • 12% – A total U.S. stock market index fund (e.g. Vanguard Total Stock Market Index Fund Admiral Shares – VTSAX)
  • 6% – A total International market index fund (e.g. Vanguard Total International Stock Index Fund Admiral Shares – VTIAX)
  • 80% – A total U.S. bond market index fund (e.g. Vanguard Total Bond Market Admiral Shares – VBTLX)
  • 2% – A U.S. REIT (e.g. Vanguard REIT Index Fund Admiral Shares – VGSLX)

An aggressive portfolio with only 10% bonds might look like this:

  • 54% – A total U.S. stock market index fund (e.g. Vanguard Total Stock Market Index Fund Admiral Shares – VTSAX)
  • 27% – A total International market index fund (e.g. Vanguard Total International Stock Index Fund Admiral Shares – VTIAX)
  • 10% – A total U.S. bond market index fund (e.g. Vanguard Total Bond Market Admiral Shares – VBTLX)
  • 9% – A U.S. REIT (e.g. Vanguard REIT Index Fund Admiral Shares – VGSLX)

Don’t worry about your individual fund allocations too much. As long as they are directionally correct (+/- 5%), then you’ll be on the right track.

Other Four Fund Portfolios and Resources

While the Rick Ferri portfolio with the REIT is very popular, there are many approaches to a four-fund portfolio that you can look into and other resources to explore.

Not surprisingly, the Vanguard financial advisors routinely recommend their own core four portfolios to clients. They even created funds that execute a core four strategy based upon your risk tolerance. These are their LifeStrategy target-risk funds which in their own words, “are a series of broadly diversified, low-cost funds with an all-index, fixed allocation approach that may provide a complete portfolio in a single fund.

The four funds, each with a different allocation, target various risk-based objectives.” They range in risk from “growth” with a 20% bond allocation to “income” with an 80% bond allocation. So even Vanguard, one of the largest investment firms in the world recommends a four-fund portfolio.

Conclusion

Over the years, I have made a conscious decision to dramatically simplify my portfolio. I’ve rolled over 401k’s, consolidated IRA accounts,  and dramatically reduced the number of funds I hold. All of the evidence suggests that there is little benefit in having more than three or four funds (asset classes) in your investment portfolio, so why have the added complexity?

Extra funds and asset classes make it more complicated to re-jigger your allocations across multiple accounts. Having more money in fewer funds also makes it easier to hit minimum investment thresholds for certain funds or even get into higher-tier and lower-cost funds, like the Admiral shares at Vanguard.

So, my advice to you is this. Check out your portfolio. Look at your funds and asset classes and if you have more than four, ask yourself why. If it’s adding extra value, then that’s great. If not, then it could be a lot of extra complexity for no reason.

Keep it simple and spend your energy on more important things, like spending time with your family or working on your next raise at work. Good luck!

How many funds (asset classes) do you have in your investment portfolio? If more than four, why? Do you have any plans to consolidate or reduce the number of funds?

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