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Three core asset investment plans are the most popular ones in retirement plans such as 401K, 403B retirements. The three core assets are U.S. stocks, International stocks and fixed income (bonds). Some 401K or 403B plan administrators are either U.S. and developed country stocks-centric or 'conservative'. They believe adding emerging market stock fund offerings to their plans is too risky.

However, more and more 401K plans are now offering more choices that include emerging market stock funds. This increases diversification choice but along with it, increases short term discomfort too.

Three Core Asset ETF Benchmark consists of the following three ETFs:

U.S. stocks: Vanguard Total Stock Market Index (VTI)

International stocks: Vanguard International Stock Market Index (VEU)

Fixed Income: Vanguard Total Bond Market Index (BND)

Four Core Asset ETF (EM) Benchmark consists of an additional ETF:

Emerging market stocks: Vanguard Emerging Market Index (VWO)

The following table and chart compare the performance among four asset allocation model portfolios:

Portfolio Performance Comparison (as of 12/12/2011)

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Four Core Asset ETF (EM) Benchmark Strategic Asset Allocation Moderate -5% -42% 12% 61% 2% 1%
Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate -3% -3% 11% 67% 1% 4%
Four Core Asset ETF (EM) Benchmark Tactical Asset Allocation Moderate 0% 24% 6% 55% 6% 46%
Three Core Asset ETF Benchmark Tactical Asset Allocation Moderate 5% 83% 4% 42% 4% 34%

Five Year Chart

More detailed performance comparison here.

Clearly, the four core asset portfolios are suffering from lower performance this year. This is due to the under performance of emerging market stocks. The Four Core Asset ETF (EM) Benchmark Tactical Asset Allocation Moderate did better, but still can not escape the distraction brought by the emerging market stocks.

However, in 3 and 5 years time frame, four core asset allocation portfolios are clearly the winners against the three core ones.

The takeaway are

  • Adding one extra major asset class can increase diversification and thus, performance in a longer time frame.
  • In a short term, it is possible that additional asset class(es) can distract performance. This is the expense one has to pay for the extra long term performance.

Disclosure: We do not have any business relationship with the company or companies mentioned in this article. It does not set up retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: Asset Allocation Portfolio Review: 3 Core Assets Vs. 4 Core Assets