Benchmark Details

by Tim Isbell     January 2016

This page helps investors compute a meaningful Benchmark against which they can compare the IRR of their actual portfolio, for any asset allocation from 20 to 80% stocks (and perhaps a bit beyond).

Any of the four Vanguard LifeStrategy Funds is an excellent instance of a benchmark return for a globally diversified portfolio. These four index funds include the appropriate mix of domestic stocks and bonds, and international stocks and bonds, in asset allocations of 20/80 (VASIX), 40/60 (VSCGX), 60/40 (VSMGX), and 80/20 (VASGX), where the first number is the percentage of stocks and the second is the percentage of bonds in a portfolio.

But many people have portfolios where the asset allocation isn’t targeting one of these four instances. For example, maybe their target is 53% stocks and 47% bonds. So I decided to graph the four data points for the LifeStrategy funds and see if I could develop a simple equation for the benchmark CAGR as a function of the stock target.

So I navigated to the web pages for each of these four Vanguard funds, and then went to the "Price & Performance" tab. There I found the cumulative 3-year Historical Returns for each fund. Then, I plotted these four points on a grid and was pleasantly surprised that they form almost a perfectly straight line. So I plugged the four data points into the Desmos online graphing calculator and determined the equation of that line. (For a 4-minute YouTube tutorial on how to use Desmos to find the best-fit line, click here) I did this for both the 3-year and 5-year data. The Desmos results are below:


The resulting equation for the 3-year (2013-15) CAGR Benchmark return = 0.0868*(Stock %) + 1.556 percent/year. For example, suppose you want a the compound benchmark return for a portfolio of 64% stocks and 36% bonds. Your compound return = 0.0868*(64) + 1.556 = 7.11%/year. Then subtract off the expense ratio of 0.15%/year and you have your number: 6.96%/yr. That's your benchmark.

And the resulting equation for the 5-year (2011-2015) CAGR Benchmark return = 0.058*(stock %) + 2.8. For example, if we want to see this for a portfolio of 64% stocks, and 36% bonds, the Benchmark = 0.058*(64) + 2.8 = 6.51%/yearThen subtract off the expense ratio of 0.15%/year and you have your number: 6.36%/yr.


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All the best,

Tim


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