Ef­fec­tive 60/40 Port­fo­lios

Pair­ing a va­ri­ety of Van­guard bond funds with an S&P 500 fund may help plan­ners re­think the clas­sic stock/bond mix.

Financial Planning - - CONTENTS - BY CRAIG L. ISRAELSEN

Pair­ing a va­ri­ety of Van­guard bond funds with an S&P 500 fund may help plan­ners re­think the clas­sic stock/bond mix.

What’s the best way to build the clas­sic 60% eq­uity/40% fixed-income port­fo­lio? To an­swer this ques­tion, ad­vi­sors should eval­u­ate the logic and per­for­mance of var­i­ous com­bi­na­tions of stock and bond funds. Sound com­pli­cated? Yes, but I’ve done it for you, mak­ing use of Van­guard bond funds. As of Jan. 31, Van­guard of­fered 114 bond funds in the Morn­ingstar data­base. To be sure, that’s a small per­cent­age of the 7,170 to­tal bond funds (both num­bers in­clude all share classes). But Van­guard’s mar­ket share ac­counts for fully 23% of the $4.45 tril­lion in as­sets held by all bond funds, so the firm is ac­tu­ally a ma­jor player in the bond mu­tual fund and ETF arena. Van­guard’s av­er­age bond fund ex­pense ra­tio is 0.12%, com­pared with 0.87% for all bond funds. For this anal­y­sis, the stock fund cho­sen was Van­guard 500 In­dex (VFINX). Each bond fund was then paired with VFINX to mea­sure over­all per­for­mance over the past 10 years. VFINX was given a 60% al­lo­ca­tion, and each bond fund rep­re­sented 40%. To keep the al­lo­ca­tions con­stant, the pair of funds was re­bal­anced at the end of each year. Taxes and in­fla­tion were not taken into ac­count here. In the ta­ble “Van­guard Bond Funds: a Sam­pling,” the list con­sists of the Bar­clays Ag­gre­gate Bond In­dex fol­lowed by 17 of Van­guard’s bond funds. This ta­ble at­tempts to high­light a fund from each of the ma­jor bond cat­e­gories, as clas­si­fied by Morn­ingstar. Also in­cluded in this ta­ble are each fund’s 10-year av­er­age an­nu­al­ized re­turn along with the stan­dard de­vi­a­tion for the 10 years. The cor­re­la­tion be­tween each of the Van­guard bond funds and the Bar­clay’s Ag­gre­gate Bond In­dex is also pre­sented. In this study, the Van­guard To­tal Bond Mar­ket In­dex Ad­mi­ral share class (VBTLX) has the high­est cor­re­la­tion to the bond bench­mark in­dex, with a 10-year cor­re­la­tion of 1. The listed Van­guard fund with the low­est cor­re­la­tion to the Bar­clay’s in­dex is the Van­guard High-yield Cor­po­rate Ad­mi­ral share class (VWEAX), at 0.19.

Out­pac­ing a Bench­mark

Ten of the Van­guard bond funds in this sam­ple out­per­formed the Bar­clay’s Ag­gre­gate Bond In­dex over the past 10 years. But in ev­ery case, that per­for­mance is at the cost of higher volatil­ity. In the case of Van­guard Ex­tended Du­ra­tion Trea­sury ETF (EDV), the

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