The chart above shows the simulated performance of a blended portfolio for the quarter century from July 1, 1994, to June 30, 2019. The portfolio's returns (the blue line) were better in the long run than a traditional balanced fund of 60% US stocks and 40% US bonds (the black line). Yet the blended portfolio was even more stable than holding a bond fund of safe, 10-year US Treasuries (the red line). The table below captures relevant statistics.
Composition: Building a Blended Portfolio
A blended portfolio generates growth by holding a diversity of US and international stocks when equity markets are strong; limits drawdowns by always holding some bonds, with a bias toward US Treasuries; and smooths performance by including a substantial portion of low-volatility stocks. In the example presented here, the blended portfolio holds two or three of the following mutual funds at a given time:
- Vanguard Balanced Index Admiral Shares (VBIAX), which holds 60% US equities, indexed to the total US stock market, and 40% US bonds, indexed to a broad set of corporate and government bonds with an average maturity of about eight years.
- Vanguard Global Minimum Volatility Fund (VMVFX), which invests 100% in US and international equities expected to have low volatility and, significantly, uses currency contracts to hedge the effects of fluctuating exchange rates.
- Vanguard Intermediate Term Bond Index (VBILX), which holds roughly equal amounts of US corporate and government bonds with an average maturity of about seven years.
- Vanguard Intermediate Term Treasury Index (VSIGX), which holds US Treasuries with an average maturity of about six years.
- Vanguard Short-Term Bond Index (VBIRX), which holds US corporate and government bonds with an average maturity of two to three years.
An equivalent portfolio could be constructed with Exchange Traded Funds (ETFs), instead of mutual funds. Vanguard offers an ETF corresponding to each mutual fund in the portfolio, except for VMVFX. For that, iShares ACWV could be substituted; it covers the same universe of stocks but does not hedge against currency risks. For the 25-year simulation, data for the MSCI index underlying ACWV was used until late December 2013, when VMVFX was first offered.
Management: Rotating the Portfolio's Holdings
At all times, the blended portfolio holds a target percentage in intermediate corporate and government bonds (VBILX). It thereby limits the potential impact of a sudden plunge in stock prices. For the simulation, the VBILX target was 20%. However, one could build more conservative portfolios by setting higher targets for VBILX, such as 40% or even 60%. A more aggressive version with 0% in VBLIX would be sensible in some cases, such as a retirement fund where the date to begin withdrawing funds is more than 10-to-15 years in the future.
Once a month, on a regular date (the first of the month in the simulation), a blended portfolio rotates between stocks and bonds, depending on how the mutual funds (or ETFs) have performed over the past 12 months. Specific decisions are made as follows:
- VBIAX is held if it has performed better than VSIGX since the same date a year ago; otherwise, the portion held in VBIAX goes instead to US Treasuries (VSIGX). The target allocation for VBIAX is half the amount not assigned to VBILX (40% in the simulation).
- VMVFX is held if it has outperformed VSIGX since the same date a year ago; otherwise the portion held in VMVFX goes to US Treasuries (VSIGX). The target allocation is the other half of the amount not assigned to VBILX (40% in the simulation).
- VBIRX may be held temporarily, for a month or two, to avoid repurchasing a fund that was sold within the past month. This tactic honors the restrictions on frequent trading imposed by investment firms and avoids the tax consequences of a "wash sale" if applicable.
- On rare occasions, the portfolio is rebalanced, if the total drift from target levels has exceeded 5%. (Essentially, drift is calculated as the sum of excess percentages for funds that are above-target. Ignore those that are below target, because the negative drift must, mathematically, be equal in magnitude to the total positive drift.)
In the simulation, the total exposure to equities never exceeded 64% (40% in VBILX plus 60% of 40% in VBIAX). At times, when both US and international stocks were falling, the portfolio was invested 0% in equities, 80% in intermediate Treasuries, and 20% in mixed intermediate bonds. On average, over the entire 25-year period, the exposure to equities was 45%.
Current and Future Status
Going forward, a subscription service to be offered soon at this site will track blended portfolios and other rotation strategies, to monitor whether future results match the historical simulations.
Presently, as of August 1, a blended portfolio like the one in the simulation holds:
- 20% VBLIX
- 40% VMVFX
- 20% VBIRX (because of the sharp swings in US stock prices in June and July)
Portfolios described here are presented for information only, not as investment advice. They are based on simulations that may not capture or reproduce every aspect of actual investing. Historical results are no guarantee of future performance. All investments are subject to risks. You may lose money, and your assets may be vulnerable to inflation. You are responsible for your own investment decisions.
Able to Pay LLC is not a registered investment adviser and does not own, sell, or manage any of these portfolios. Alex Wilkinson may own similar portfolios in personal accounts.