3 fund portfolio vs more complicated allocation

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3 fund portfolio vs more complicated allocation

Postby twowheeler » Sun Jun 30, 2013 9:51 pm

Hi,

I am in the process of moving my funds to Vanguard and simplifying my accounts. I am currently invested in way too many funds and I am interested in the 3 fund portfolio. Should I consider more funds to favor small value and add REITs like Larry Swedroe suggests in his book The Only Guide to a Winning Investment Strategy? Should I hold on to any gold?

Thanks!
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Re: 3 fund portfolio vs more complicated allocation

Postby JamesSFO » Sun Jun 30, 2013 10:09 pm

twowheeler wrote:Hi,

I am in the process of moving my funds to Vanguard and simplifying my accounts. I am currently invested in way too many funds and I am interested in the 3 fund portfolio. Should I consider more funds to favor small value and add REITs like Larry Swedroe suggests in his book The Only Guide to a Winning Investment Strategy? Should I hold on to any gold?

Thanks!


Perhaps provide some more information on what you hold now and what you are proposing to hold and the tax-status (deferred, loss available, etc.)? Simplifying is good, but paying say $100K in capital gains to get there might not be the smartest choice. [edited for grammar]
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Re: 3 fund portfolio vs more complicated allocation

Postby twowheeler » Sun Jun 30, 2013 10:31 pm

Thanks. Maybe I am jumping the gun. I will return with more info.
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Re: 3 fund portfolio vs more complicated allocation

Postby CABob » Sun Jun 30, 2013 11:19 pm

I don't think anyone will be able to definitively answer your question. If you have followed this forum and have read some of the Boglehead recommended books you probably already know that many favor a simple three fund approach. The main proponents of this fell that this includes all the sectors that need to be used. Others think that adding some "tilts" to over allocate certain sectors are an improvement. Most common of these are tilts toward small, value, and REIT. Others think it is advisable to add a small amount of commodities including gold. Many will point to data that will "prove" their recommendation is the best, but really all they are showing is what has happened during some defined period in the past. It comes down to your personal preference considering all factors.
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Re: 3 fund portfolio vs more complicated allocation

Postby nedsaid » Sun Jun 30, 2013 11:37 pm

This is an interesting question.

A three fund portfolio will cover all your bases if you use a Total US Stock Market, a Total International Stock Market, and a US Total Bond Market. Make sure that your International Index covers the Emerging Markets.

I have been in the "slice and dice" camp, in which I try to get extra return by tilting my portfolio towards small cap stocks and value stocks. This is based on academic research. The trouble with this approach is that they keep finding more factors in the markets that drive return. They keep coming up with more asset classes to invest in. I may wind up simplifying what has become a somewhat complicated portfolio.

You can't go wrong with a three fund approach. Low costs, wide diversification, and market returns.
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Re: 3 fund portfolio vs more complicated allocation

Postby Makane » Mon Jul 01, 2013 5:21 am

nedsaid wrote:A three fund portfolio will cover all your bases if you use a Total US Stock Market, a Total International Stock Market, and a US Total Bond Market.

In terms of covering all bases, how does it cover inflation? Are bonds a viable hedge vs. inflation? Why would anyone hold bonds instead of TIPS? (apologies if this question is off-topic)
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Re: 3 fund portfolio vs more complicated allocation

Postby wesleymouch » Mon Jul 01, 2013 6:22 am

To be truly diversified the following three fund portfolio to balance world asset classes:
VTWSX (total world stock) 46%
VBMFX (us bonds) VBMFX 21%
VTABX (tot ex US bonds) 33%

For simplicity
50% VTWSX
25% VBMFX
25% VTABX

This parallels the capitalization of World markets and has great diversification.
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Re: 3 fund portfolio vs more complicated allocation

Postby livesoft » Mon Jul 01, 2013 7:18 am

No one can answer the OP's questions. Everyone has to answer for themselves. I will say that polls on the forum show that most folks who respond use a small-cap and value tilted portfolio. OTOH, there is a very vocal crew who write about the 3-fund portfolio quite a lot.

The simple 3-fund portfolio can be converted to a small- and value- tilted portfolio by adding 2 funds: Small-Cap Value Index and Small-cap International.

Here are Robert T's collective thoughts: viewtopic.php?t=7353
Here are TrevH et al's thoughts: viewtopic.php?t=38374
And to round it all out, here is stlutz's The Final, Definitive Thread on Value.
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Re: 3 fund portfolio vs more complicated allocation

Postby JamesSFO » Mon Jul 01, 2013 7:26 am

livesoft wrote:No one can answer the OP's questions. Everyone has to answer for themselves. I will say that polls on the forum show that most folks who respond use a small-cap and value tilted portfolio. OTOH, there is a very vocal crew who write about the 3-fund portfolio quite a lot.


Thanks for the additional links.

I think depending on where the OP is coming from there may actually be some easier answers. For example if 100% of OP's investments are in taxable and minimal/no tax-loss harvesting is available, a big set of a exchanges may just be a bad idea. In contrast, if 100% of OP's investments are tax deferred and OP has great investment options in tax deferred it may be much easier to slice and dice.
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Re: 3 fund portfolio vs more complicated allocation

Postby RadAudit » Mon Jul 01, 2013 7:32 am

I don't know if this will answer your question - but I'm betting there's an answer in there somewhere.

viewtopic.php?f=10&t=88005&newpost=1737975

As you might surmise after a quick glance, there is some difference of opinion on the correct answer to your question.
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Re: 3 fund portfolio vs more complicated allocation

Postby ML 59 » Mon Jul 01, 2013 8:37 am

Depending on your overall investment circumstances, you can start with a three fund portfolio, take some time to study further, and add a tilt or two later if that is right for you.

Ferri's "All About Asset Allocation" is a good read - as are other books recommended elsewhere in this site.

This is, in effect, what I am doing - and having fun learning. It is exhilarating to finally have a plan and methodology to support my fund choices.
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Re: 3 fund portfolio vs more complicated allocation

Postby Scooter57 » Mon Jul 01, 2013 9:04 am

I suggest reading Dr. William Bernstein's book, The Investor's Manifesto, then after that introduction, tackle his more complex book, The Four Pillars of Investing. The latter goes into far greater detail than either Swedroe or Ferri books, and Bernstein is a much more entertaining author.

I felt his book gave me tools with which to think out my approach. The other books didn't seem to me to be in the same class, though since the authors are very active posting here, they gave fans who treat them as if they were.
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Re: 3 fund portfolio vs more complicated allocation

Postby Blues » Mon Jul 01, 2013 9:12 am

Scooter57 wrote:I suggest reading Dr. William Bernstein's book, The Investor's Manifesto, then after that introduction, tackle his more complex book, The Four Pillars of Investing. The latter goes into far greater detail than either Swedroe or Ferri books, and Bernstein is a much more entertaining author.

I felt his book gave me tools with which to think out my approach. The other books didn't seem to me to be in the same class, though since the authors are very active posting here, they gave fans who treat them as if they were.


I'm a huge fan of the books and investing theory promoted by Bill Bernstein, (I own and have read most of them), but I must take exception with the post by the forum member I've quoted above.

Both Messrs. Ferri and Swedroe have written very useful books, imho, particularly Ferri's "All About Asset Allocation" and Swedroe's "The Only Guide To A Winning Investment Strategy You'll Ever Need".

To denigrate the value of their books by implying they are pumped up by sycophants is ludicrous. These gentlemen, Ferri, Swedroe and Bernstein have spent countless hours on this site helping investors with questions and concepts on myriad issues. We are fortunate to have them share their perspective whether or not one agrees with every idea they promote via their posts here on the forum or through their books.
Last edited by Blues on Mon Jul 01, 2013 9:57 am, edited 2 times in total.
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Re: 3 fund portfolio vs more complicated allocation

Postby Dulocracy » Mon Jul 01, 2013 9:42 am

I like some tilt in a fund, and I like having a bit more control. While a 3 fund portfolio is not bad, I like being able to add more small and value portions. One thing to consider: in retirement/distribution phase, it is easier to sell the winners if they are broken out into different portions. That is, if one segment of the market is doing well, sell that portion for your distribution (rather than locking in losses). I want more flexibility of returns when this happens.

Makane wrote:In terms of covering all bases, how does it cover inflation? Are bonds a viable hedge vs. inflation? Why would anyone hold bonds instead of TIPS? (apologies if this question is off-topic)

Bonds typically do not do well with inflation. That is why some add TIPS (a type of bond) and I-bonds: both are inflation hedges.
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Re: 3 fund portfolio vs more complicated allocation

Postby Dandy » Mon Jul 01, 2013 10:11 am

The 3 fund portfolio covers equities fairly well.

The weakness in the 3 fund portfolio is that the Total Bond Market is misnamed. There are several fixed income vehicles that are not included especially Inflation Protected Securities. It also underweights Corporate bonds and foreign bonds. I also would consider having part of your fixed income allocation to CDs, EE bonds, I bonds or a Stable Value fund (if you have access to one). These are other products not included in the Total Bond fund. Many people seem to ignore these "safe" products. Having some assets that generate income without risking principal has value especially when interest rates are primed to rise and negatively affect bonds/bond funds at least for awhile. There are times when Cash is King. So at least a small allocation to cash/safe asset makes some sense. I'm sure the drop in bond values the last few days has reinforced that a bit.

While most recommend holding bonds in tax advantaged accounts if you have taxable money you may wish to look at muni funds.

You don't have to have all of the above but the 3 fund simple portfolio may be too simple. The 3 fund plus TIPS and CDs would be almost as simple and provide better coverage.
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Re: 3 fund portfolio vs more complicated allocation

Postby Blues » Mon Jul 01, 2013 10:24 am

I never really considered that the "Three Fund Portfolio" implied that one couldn't or shouldn't have investments in CDs, MM, I-Bonds etc.

I've always perceived them as complementary to the Vanguard (or other investment) account (but certainly as part of the portfolio as a whole).

I agree, (and believe that even Taylor does as well), that considering the addition of TIPS to the "three fund portfolio" may be prudent.
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Re: 3 fund portfolio vs more complicated allocation

Postby joe8d » Mon Jul 01, 2013 8:27 pm

Dandy wrote:The 3 fund portfolio covers equities fairly well.

The weakness in the 3 fund portfolio is that the Total Bond Market is misnamed. There are several fixed income vehicles that are not included especially Inflation Protected Securities. It also underweights Corporate bonds and foreign bonds. I also would consider having part of your fixed income allocation to CDs, EE bonds, I bonds or a Stable Value fund (if you have access to one). These are other products not included in the Total Bond fund. Many people seem to ignore these "safe" products. Having some assets that generate income without risking principal has value especially when interest rates are primed to rise and negatively affect bonds/bond funds at least for awhile. There are times when Cash is King. So at least a small allocation to cash/safe asset makes some sense. I'm sure the drop in bond values the last few days has reinforced that a bit.

While most recommend holding bonds in tax advantaged accounts if you have taxable money you may wish to look at muni funds.

You don't have to have all of the above but the 3 fund simple portfolio may be too simple. The 3 fund plus TIPS and CDs would be almost as simple and provide better coverage.


Yes. The 2 stock fund combo ( TSM/TInt ) is the way to go for equity coverage. On the Income side, I prefer an array of Debt Instrument vehicles which can include MMF, Online Savings,CD's,Stable Value Funds,EE Bonds, I-Bonds, Short Term Bond Funds, Tax Exempt Bond Funds,Hi YLD Bond Funds etc.
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Re: 3 fund portfolio vs more complicated allocation

Postby abuss368 » Mon Jul 01, 2013 9:33 pm

You don't have to, but we went with the Three Fund Portfolio + REIT s.

Stocks, bonds, real estate, and cash.

We are thankful for the simplicity and results.
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Re: 3 fund portfolio vs more complicated allocation

Postby nedsaid » Mon Jul 01, 2013 9:44 pm

How does the three fund portfolio cover inflation? Stocks are considered a great inflation hedge. In the total stock market index, you will have REITs. Bonds have inflation expectations priced into them already, what TIPs guard against is unexpected infation. So the good inflation hedges are all in there except for TIPs.

In my own portfolio, I own US Stocks, International Stocks,Emerging Markets stocks, US REITs, Intermediate Term Bond Funds, TIPs, and International Bonds. I also own a couple of Timber REITs. So I have myself been very concerned about inflation and built my portfolio accordingly. In essense, what I have done is overweight certain inflation hedges in bigger percentages than what are contained in the Total Stock Market and Total Bond Market Indexes.

I do not use Gold or Commodities to hedge inflation.
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Re: 3 fund portfolio vs more complicated allocation

Postby Makane » Wed Jul 03, 2013 9:07 am

nedsaid wrote:(...)Stocks are considered a great inflation hedge. (...) Bonds have inflation expectations priced into them already, what TIPs guard against is unexpected infation. (...) In essense, what I have done is overweight certain inflation hedges in bigger percentages than what are contained in the Total Stock Market and Total Bond Market Indexes.


Thanks for your explanation! How would I know what a good / optimal allocation in inflation hedges would be?
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Re: 3 fund portfolio vs more complicated allocation

Postby dhodson » Wed Jul 03, 2013 9:15 am

One of the problems i grapple with when it comes to "more complicated" is that to me it appears to have some element of market timing. It seems that overweight x,y, or z bc i believe something is more likely to happen then not that favors one of those letters. Im just not sure there is a lot fo validity to that and then if there is then maybe some element of market timing is appropriate. I just find it at slight odds to some of the principles.
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Re: 3 fund portfolio vs more complicated allocation

Postby dbr » Wed Jul 03, 2013 9:15 am

Makane wrote:
nedsaid wrote:(...)Stocks are considered a great inflation hedge. (...) Bonds have inflation expectations priced into them already, what TIPs guard against is unexpected infation. (...) In essense, what I have done is overweight certain inflation hedges in bigger percentages than what are contained in the Total Stock Market and Total Bond Market Indexes.


Thanks for your explanation! How would I know what a good / optimal allocation in inflation hedges would be?


You model the outcome in real dollars in comparison to your objectives in real dollars. Equivalently you model the outcome in nominal dollars compared to your objectives in nominal dollars considering the impact of inflation on those things. Doing that exercise is not simple and cannot be make more simple than it is. There are any number of investment and retirement planning models out there that try to do this exercise. FireCalc is a start, and the Fidelity planner is another as is i-ORP, etc.
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Re: 3 fund portfolio vs more complicated allocation

Postby 1210sda » Wed Jul 03, 2013 9:27 am

If you can handle managing a "more complicated allocation", then go ahead. (Some folks might say it's just a risk story)
But, if the "more complicated allocation" requires you to hire an advisor (ceteris paribus), the potentially greater return might not be enough to pay for the advisor.

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Re: 3 fund portfolio vs more complicated allocation

Postby dbr » Wed Jul 03, 2013 9:45 am

Makane wrote:
nedsaid wrote:(...)Stocks are considered a great inflation hedge. (...) Bonds have inflation expectations priced into them already, what TIPs guard against is unexpected infation. (...) In essense, what I have done is overweight certain inflation hedges in bigger percentages than what are contained in the Total Stock Market and Total Bond Market Indexes.


Thanks for your explanation! How would I know what a good / optimal allocation in inflation hedges would be?


There is more to say about inflation hedging. Technically an inflation hedged investment should be one that automatically increases or decreases in return to match inflation. TIPS are such an investment because the principle is incremented by inflation exactly. That is all inflation and not just unexpected inflation. It is true that a difference between nominal and TIPS bonds is that both have "expected" inflation priced in, but "priced in" is not the same as hedged. TIPS do indeed have unexpected, and expected, inflation hedged. Nominal bonds are not hedged as such for any inflation. But, TIPS returns are affected by other things, such as changes in real interest rate. It is possible to be hedged for inflation, as TIPS are, and present a total return that is not correlated with inflation. To get bonds that are correlated with inflation one could buy TIPS of such short duration that real interest rate sensitivity is nearly nil but inflation indexing still applies. One could also buy a cash equivalent but inflation indexed bond such as an I-bond.

Stocks are an inflation hedge in a very sloppy way of thinking in the sense that stock returns are high enough on average expectation to outrun inflation. That is, stock real returns have an expectation of being positive. This would hardly suggest that stock returns are correlated with inflation. Periods of high inflation can be bad for stocks.

So the question is, what are you trying to do, and what do you mean by hedging for inflation?
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Re: 3 fund portfolio vs more complicated allocation

Postby BigOilTexan » Wed Jul 03, 2013 9:50 am

dhodson wrote:One of the problems i grapple with when it comes to "more complicated" is that to me it appears to have some element of market timing. It seems that overweight x,y, or z bc i believe something is more likely to happen then not that favors one of those letters. Im just not sure there is a lot fo validity to that and then if there is then maybe some element of market timing is appropriate. I just find it at slight odds to some of the principles.


There is plenty of validity and research to back up small-caps and value stocks outperforming because theyre riskier, and whether you wish to increase your allocation in those areas is a risk question.

I'm overweight in my allocation for the energy sector, but thats because of my career and my bullish outlook of fossil fuels. You can tell me that's stupid, but its not market timing.

Like everything in life some people are lumpers and some people are splitters. I'm a splitter. I want my allocation exactly how I want it and I want to be able to add $1000 here and $750 there to keep it in check. If you want the three fund portfolio youre a lumper.
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Re: 3 fund portfolio vs more complicated allocation

Postby dhodson » Wed Jul 03, 2013 10:12 am

BigOilTexan wrote:
dhodson wrote:One of the problems i grapple with when it comes to "more complicated" is that to me it appears to have some element of market timing. It seems that overweight x,y, or z bc i believe something is more likely to happen then not that favors one of those letters. Im just not sure there is a lot fo validity to that and then if there is then maybe some element of market timing is appropriate. I just find it at slight odds to some of the principles.


There is plenty of validity and research to back up small-caps and value stocks outperforming because theyre riskier, and whether you wish to increase your allocation in those areas is a risk question.

I'm overweight in my allocation for the energy sector, but thats because of my career and my bullish outlook of fossil fuels. You can tell me that's stupid, but its not market timing.

Like everything in life some people are lumpers and some people are splitters. I'm a splitter. I want my allocation exactly how I want it and I want to be able to add $1000 here and $750 there to keep it in check. If you want the three fund portfolio youre a lumper.



Id say the opposite, i have no idea if its stupid but it is market timing. You believe you have knowledge that allows you to make a smart investment that others dont have. You will purchase when you think its a good deal and sell when you think its right. I have no idea if that is true. Im not sure why you think that isnt market timing. Do you just not like the label?
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Re: 3 fund portfolio vs more complicated allocation

Postby BigOilTexan » Wed Jul 03, 2013 10:29 am

dhodson wrote:Id say the opposite, i have no idea if its stupid but it is market timing. You believe you have knowledge that allows you to make a smart investment that others dont have. You will purchase when you think its a good deal and sell when you think its right. I have no idea if that is true. Im not sure why you think that isnt market timing. Do you just not like the label?


You obviously don't understand tilting...

For example, the Vanguard S&P 500 Index fund VFINX holds 10.6% energy sector. I chose to set my target allocation to of energy sector stocks to 18%. When I invest new money every month I do my best to keep my current allocation and my target with 1%.

I hold VSS (international small-cap), VWO (emerging markets), VNQ (real estate), VNQI (international real estate), VAW (basic materials), VIVAX (value stocks), VISGX (domestic small-cap) and VIMSX (domestic mid-cap) because I like to slice and dice and I want to control my target allocation more closely for each of these. They all have a place within my target allocation. This has nothing to do with "market timing".
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The Three Fund Portfolio

Postby Taylor Larimore » Wed Jul 03, 2013 10:38 am

twowheeler wrote:Hi,

I am in the process of moving my funds to Vanguard and simplifying my accounts. I am currently invested in way too many funds and I am interested in the 3 fund portfolio. Should I consider more funds to favor small value and add REITs like Larry Swedroe suggests in his book The Only Guide to a Winning Investment Strategy? Should I hold on to any gold?

Thanks!

Twowheeler:

Welcome to the Bogleheads Forum!

You are new here and I am not sure you understand the benefits of the Three Fund Portfolio. This is a link:

The Three Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: 3 fund portfolio vs more complicated allocation

Postby dhodson » Wed Jul 03, 2013 10:40 am

BigOilTexan wrote:
dhodson wrote:Id say the opposite, i have no idea if its stupid but it is market timing. You believe you have knowledge that allows you to make a smart investment that others dont have. You will purchase when you think its a good deal and sell when you think its right. I have no idea if that is true. Im not sure why you think that isnt market timing. Do you just not like the label?


You obviously don't understand tilting...

For example, the Vanguard S&P 500 Index fund VFINX holds 10.6% energy sector. I chose to set my target allocation to of energy sector stocks to 18%. When I invest new money every month I do my best to keep my current allocation and my target with 1%.

I hold VSS (international small-cap), VWO (emerging markets), VNQ (real estate), VNQI (international real estate), VAW (basic materials), VIVAX (value stocks), VISGX (domestic small-cap) and VIMSX (domestic mid-cap) because I like to slice and dice and I want to control my target allocation more closely for each of these. They all have a place within my target allocation. This has nothing to do with "market timing".



Again why do you chose to set your allocation higher?

Well as you mentioned, its bc of your knowledge in this area and now is a good time to be overweight in it. You may be right. You will also time when that isnt a good idea. You may be right again.

In case it isnt clear, i actually have my own complicated allocation. I dont have a 3 fund portfolio. I grapple with whether there is any evidence for what im doing and wether or not what i am doing is ALSO market timing. When im honest with myself, i realize i dont have any real evidence for these tilts. As you mentioned, there is very few tilts that have some evidence for them and that is bc they are riskier.
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Re: 3 fund portfolio vs more complicated allocation

Postby Dandy » Wed Jul 03, 2013 11:37 am

Why does the concept of 3 fund portfolio continue when many agree that Total Bond isn't really Total Bond and TIPs at least should be included? Did the 3 fund concept form before there were TIPS? Are TIPS too new to have a valid track record? Does Bogle put thumbs down on TIPS? Is adding a 4th fund make is too complicated? Are TIPS really only better suited to investors close to or in retirement? Are TIPs too volatile?
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Re: 3 fund portfolio vs more complicated allocation

Postby dbr » Wed Jul 03, 2013 11:56 am

Dandy wrote:Why does the concept of 3 fund portfolio continue when many agree that Total Bond isn't really Total Bond and TIPs at least should be included?

Total bond not really being total bond may not be a big deal, nor do TIPS have to be included. Anyway, using TIPS instead of or in addition to total bond is not a major change in philosophy, nor would using some other choice of bonds, such as intermediate, or even eschewing bonds for CD's and/or stable value funds. People have a tendency to worry these issues much too much.

Did the 3 fund concept form before there were TIPS?

Not really,but perhaps before knowledge of TIPS became commonplace. In any case TIPS are well known now and 3-fund concept is not going away.

Are TIPS too new to have a valid track record?

Vanguard has made that statement regarding use of TIPS in portfolios, but has still added TIPS to some lifetime funds. There is no monolithic school of thought that might suggest the 3 fund approach about which it can be said that "they" eschew TIPS because there is no track record.

Does Bogle put thumbs down on TIPS?

I have no idea, but I would not say advocates or critics of a pure 3-fund portfolio are aligned in some obedient way to Mr. Bogle.


Is adding a 4th fund make is too complicated?

I think the three fund concept IS put forward as an illustration that investing can be simple and that a good enough plan is good, period. So, yes, the concept would seem to be undermined if one starts down a path of "yes, but . . ."


Are TIPS really only better suited to investors close to or in retirement?

It is possible that an investor close to or in retirement has an allocation higher in bonds and is more at risk to inflation than a person with a lifetime of inflation increasing earnings is. In that case it should make sense to invest in TIPS rather than nominal bonds. If that investor is not highly allocated to bonds, say 50:50 or something like that, maybe it doesn't matter a lot.


Are TIPs too volatile?

As a stand alone question that has no answer. It all depends on why the investor cares about the volatility of any single component of the portfolio. In any case means exist to invest in TIPS at short, intermediate, and long durations.
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Re: 3 fund portfolio vs more complicated allocation

Postby nedsaid » Fri Jul 05, 2013 1:14 am

Makane wrote: Thanks for your explanation! How would I know what a good / optimal allocation in inflation hedges would be?


That is a great question. That is a way of saying I don't have a precise answer. This is known only in hindsight.

My guess is that the bond portion of your portfolio will match inflation. Right now the yield on the ten year treasury bond is 2.5%. My guess is that the stock portion of your portfolio should return 6-7%. So to the extent that you want to beat inflation, you want to be in stocks. For example, a 60% stock/40% bond portfolio going forward should return a bit more than 5% with inflation at about 2.5%.

Historically, Real Estate performs well with inflation. TIPs guard not against inflation itself, since the bond market has inflation expectations built in. TIPs guard against unexpected inflation. If the dollar continues a long term trend of falling against foreign currencies, this will help fuel inflation as it increases the price of imported goods. To guard against the falling dollar, own some international investments particularly on the stock side.

A good investment book written by the founder of my favorite mutual fund company wrote a primer on investing in stocks through mutual funds that made a big impression on me. The theme of the book was Inflation, Inflation, Inflation. The author drives than theme home time and time again. My parents, particularly my father talk a lot about how much purchasing power the dollar has lost over time. Inflation, inflation, inflation. Plus I still remember the rising prices of the 1970's.

So I have probably exaggerated tilts in my portfolio a bit because the lesson of loss of purchasing power of the dollar has been driven so deep into my brain. A dollar earned when I started my working career probably is worth $2.50 to $3 in 2013 purchasing power.

On the stock side, I try to own some things that would benefit from inflation. REITs and Natural Resource Stocks. Stocks in general work. Almost 13% of my stock portion of my portfolio is in REITs and Timber REITs. I own a lot of International stocks.

On the bond side, I own a lot of TIPs. Probably 11-12% of my bonds are TIPs. About 8% of my bonds are in International Bonds to hedge against a declining dollar.

So I am not telling you to do this yourself, I am just saying that this is what i am doing. To me the greatest threat to my portfolio is loss of purchasing power through inflation and not market volatility.
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Re: 3 fund portfolio vs more complicated allocation

Postby twowheeler » Sat Jul 13, 2013 5:48 pm

Wow, thanks for all you comments. I have been reading a lot and trying to figure out the best solution for me. I will make another post with my portfolio and what I am planning for changes. Currently debating between (all vanguard funds)
8% US Large Index
8% US Large Value
8% US Small
8% US Small Value
8% REIT
20% Total International
20% Total Bond
20% TIPS

OR

30% US Total Stock
5% Small Value
5% REIT
20% Total International
20% Total Bond
20% TIPS
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Re: 3 fund portfolio vs more complicated allocation

Postby livesoft » Sat Jul 13, 2013 6:25 pm

After many years of running a small-cap- and value-tilted portfolio, I must write that Yes, small-caps and value ETFs/funds seem to be more volatile than total market index funds. By "more volatile", I mean they drop more and they pop more than the total market funds. So if the total market fund goes down by 10%, the small-cap value fund might go down by 12% to 15%.

Thus, in order to take advantage of small-cap- and value-tilted portfolio, one has to have the guts to rebalance when small-cap and value ETF/funds have tanked more than the total market funds. One has to have the guts to rebalance when small-cap and value ETF/funds have popped more than the total market funds. If one is just a buy-and-hold-and-don't-look investor, then I personally think that a tilted portfolio probably won't do one much good.

However, if one actually rebalanced in the past few weeks when the market dropped a little bit and much of the noisy financial media got filled with doom-and-gloom stories, then I believe one is well-suited to a holding tilted portfolio. But one must act on such a portfolio more often than a 3-fund portfolio.
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Re: 3 fund portfolio vs more complicated allocation

Postby Default User BR » Sun Jul 14, 2013 12:26 pm

twowheeler wrote:Wow, thanks for all you comments. I have been reading a lot and trying to figure out the best solution for me. I will make another post with my portfolio and what I am planning for changes.

If you have some time to kill, you might want to review Trev's thread:

http://www.bogleheads.org/forum/viewtopic.php?t=38374


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