3-4 Fund Portfolio Question(s)
3-4 Fund Portfolio Question(s)
Hi.
The Vanguard profiling tool seems to make the same general 4-fund suggestions with just different percentages based on your input. Has anyone here created a portfolio based on the suggestions from this tool?
If one were to use the suggested portfolio from Vanguard (or any 3-4 fund portfolio), how comfortable were you with putting such large chunks of money into only a few funds? That seems to be the biggest mental hurdle for me as it goes against what I've been "taught" for many years.
The Vanguard profiling tool seems to make the same general 4-fund suggestions with just different percentages based on your input. Has anyone here created a portfolio based on the suggestions from this tool?
If one were to use the suggested portfolio from Vanguard (or any 3-4 fund portfolio), how comfortable were you with putting such large chunks of money into only a few funds? That seems to be the biggest mental hurdle for me as it goes against what I've been "taught" for many years.
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
Re: 3-4 Fund Portfolio Question(s)
The 3 or 4 fund portfolio is very diversified. Pull up each fund by the ticker and note the number of stocks/bonds in each fund. For example, VTSAX has 3,816 stocks. If you buy that and 10 shares of Apple, they overlap. The index has Apple. It is the #1 holding.
You actually get less diversified by buying more funds (or individual stocks) because they overlap each other and you get over-saturated in particular markets or stocks. If you have both an S&P 500 index and the Total US Stock index, there is complete overlap. Two growth mutual funds likely have nearly the same stocks.
There are some good discussions about if you need International Bonds. I have stuck with 3 funds, but having them adds currency diversification.
Simple to maintain (does not mean it is not good), low cost, passive and diversified. What isn't to like?
You actually get less diversified by buying more funds (or individual stocks) because they overlap each other and you get over-saturated in particular markets or stocks. If you have both an S&P 500 index and the Total US Stock index, there is complete overlap. Two growth mutual funds likely have nearly the same stocks.
There are some good discussions about if you need International Bonds. I have stuck with 3 funds, but having them adds currency diversification.
Simple to maintain (does not mean it is not good), low cost, passive and diversified. What isn't to like?
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Re: 3-4 Fund Portfolio Question(s)
You need to read Taylor Larimore's Three Fund Portfolio thread... Probably the best investing advice on the internet.
http://www.bogleheads.org/forum/viewtop ... 10&t=88005
http://www.bogleheads.org/forum/viewtop ... 10&t=88005
Re: 3-4 Fund Portfolio Question(s)
I do indeed like the idea.bloom2708 wrote:Simple to maintain (does not mean it is not good), low cost, passive and diversified. What isn't to like?
It's seeing $300,000 in a single fund that makes me uneasy.
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
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Re: 3-4 Fund Portfolio Question(s)
You could diversify by moving to various vendors (Fidelity, Schwab, Vanguard, etc).... I wouldn't waste my time, though. Go 3-fund and move on with life!TinyElvis wrote:I do indeed like the idea.bloom2708 wrote:Simple to maintain (does not mean it is not good), low cost, passive and diversified. What isn't to like?
It's seeing $300,000 in a single fund that makes me uneasy.
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Re: 3-4 Fund Portfolio Question(s)
It, also, may help to go back to first principles. Try "The Arithmetic of Active Management" by William Sharpe. In it he shows that in any market, passive management beats active active management. Specifically,
I'm satisfied with getting very close to stock market returns at a relatively low risk. That's a personal preference. Holding both of those stock funds spreads the risk of owning stocks over ~ 10,000 stocks in all the various financial / market sectors spread around the world. That seems to be adequate distribution of risk to me. Again, personal preference. YMMV
Am I comfortable? Well, I'm as comfortable as I am going to get.
Now, in the domestic stock market, say a representative sample of those stocks is held in the Total Stock fund. Investing in that fund will get you closer to domestic stock market return, long term, on a risk adjusted basis than any other combination of active mutual funds. The same thing can be said for international stocks and Total International.Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.
I'm satisfied with getting very close to stock market returns at a relatively low risk. That's a personal preference. Holding both of those stock funds spreads the risk of owning stocks over ~ 10,000 stocks in all the various financial / market sectors spread around the world. That seems to be adequate distribution of risk to me. Again, personal preference. YMMV
Am I comfortable? Well, I'm as comfortable as I am going to get.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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Re: 3-4 Fund Portfolio Question(s)
Read the threads on the safety of Vanguard funds.TinyElvis wrote:I do indeed like the idea.bloom2708 wrote:Simple to maintain (does not mean it is not good), low cost, passive and diversified. What isn't to like?
It's seeing $300,000 in a single fund that makes me uneasy.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Re: 3-4 Fund Portfolio Question(s)
TinyElvis wrote:That seems to be the biggest mental hurdle for me as it goes against what I've been "taught" for many years.
My guess is this that you've been "taught" this based on investing in individual stocks and/or an adviser chasing performance with actively managed funds.TinyElvis wrote:It's seeing $300,000 in a single fund that makes me uneasy.
Clearly a large concentration in an one individual stock is very risky. However, when you buy the components of the 3-fund portfolio you are very diversified into thousands of stocks and bonds no matter how much you invest. The fact is that the risk you mention is far less than if you invested $30,000 in 10 different stocks.
If you're history is with active funds I think advisers like to spread your investments around a lot and teach you this for two reasons. The first is that this creates the illusion of complexity and reinforces your need for them. The second is that this way they have a better chance to have a least a few big winners. This helps keep you convinced that their ability to pick the best active funds is the path to riches. In fact, it is the path to riches but it's their net worth that is enhanced not yours.
Do some more reading and thinking about this and I expect you'll get past your unease and be ready to join those of us who are 3-fund portfolio converts
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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Re: 3-4 Fund Portfolio Question(s)
+1BigJohn wrote:TinyElvis wrote:That seems to be the biggest mental hurdle for me as it goes against what I've been "taught" for many years.My guess is this that you've been "taught" this based on investing in individual stocks and/or an adviser chasing performance with actively managed funds.TinyElvis wrote:It's seeing $300,000 in a single fund that makes me uneasy.
Clearly a large concentration in an one individual stock is very risky. However, when you buy the components of the 3-fund portfolio you are very diversified into thousands of stocks and bonds no matter how much you invest. The fact is that the risk you mention is far less than if you invested $30,000 in 10 different stocks.
If you're history is with active funds I think advisers like to spread your investments around a lot and teach you this for two reasons. The first is that this creates the illusion of complexity and reinforces your need for them. The second is that this way they have a better chance to have a least a few big winners. This helps keep you convinced that their ability to pick the best active funds is the path to riches. In fact, it is the path to riches but it's their net worth that is enhanced not yours.
Do some more reading and thinking about this and I expect you'll get past your unease and be ready to join those of us who are 3-fund portfolio converts
Re: 3-4 Fund Portfolio Question(s)
Thanks everyone for listening and replying.
This is the recommended allocation by the Vanguard profiler tool:
42% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
28% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
21% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
9% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
From what I've read about tax-efficiency in the wiki and the book, I would load the bonds side of the portfolio into my Roth and traditional IRAs, and put stock allocations in my taxable account? It's not that simple is it? I usually assume that if it is that simple than I am doing something wrong.
Can I assume that the Total Stock Market fund includes small and mid-cap or do I need to season it myself with those?
This is the recommended allocation by the Vanguard profiler tool:
42% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
28% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
21% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
9% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
From what I've read about tax-efficiency in the wiki and the book, I would load the bonds side of the portfolio into my Roth and traditional IRAs, and put stock allocations in my taxable account? It's not that simple is it? I usually assume that if it is that simple than I am doing something wrong.
Can I assume that the Total Stock Market fund includes small and mid-cap or do I need to season it myself with those?
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
Re: 3-4 Fund Portfolio Question(s)
Well, we've not done a lot of chasing. I don't like a lot of unnecessary movement in my accounts. I am mostly in American funds and have stayed pretty steady with those.BigJohn wrote:My guess is this that you've been "taught" this based on investing in individual stocks and/or an adviser chasing performance with actively managed funds.
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
Re: 3-4 Fund Portfolio Question(s)
TinyElvis-
When you own the Total Stock Market Index fund you'll own the entire whole domestic market and are guaranteed the market returns (minus the minimal ER cost). This is the core fund for many of us so high balances are common and not to be feared.
If you're coming to Vanguard from an advisor you've probably been told you need a dozen or more funds to be diversified. Blatantly false information.
Another thing you'll appreciate about the TSM is the tax-efficiency. If you'd had a balance of $300K in TSM last year, you'd would have had maybe $5,500 in dividend distributions and no capital gains distributions. Compare that to your taxable American funds distributions.
Yes, put your fixed income in tax-advantaged accounts. Many prefer to use tIRA first, rather than ROTH.
When you own the Total Stock Market Index fund you'll own the entire whole domestic market and are guaranteed the market returns (minus the minimal ER cost). This is the core fund for many of us so high balances are common and not to be feared.
If you're coming to Vanguard from an advisor you've probably been told you need a dozen or more funds to be diversified. Blatantly false information.
Another thing you'll appreciate about the TSM is the tax-efficiency. If you'd had a balance of $300K in TSM last year, you'd would have had maybe $5,500 in dividend distributions and no capital gains distributions. Compare that to your taxable American funds distributions.
Yes, put your fixed income in tax-advantaged accounts. Many prefer to use tIRA first, rather than ROTH.
Re: 3-4 Fund Portfolio Question(s)
Those Vanguard-recommended percentages give the appearance of far greater precision than is really possible or necessary.
So if you do go with four funds, I hope you simply their recommendations to:
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
20% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
10% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
Or
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
30% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
So if you do go with four funds, I hope you simply their recommendations to:
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
20% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
10% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
Or
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
30% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
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Re: 3-4 Fund Portfolio Question(s)
By concentrating your investments in these 2-4 funds (starting with Total Stock Market and Total Bond Market and ending with all four you mention) you are more diversified than you would likely be by attempting to pick lots of funds and you pay less in time, fees, taxes and frustration to accomplish that diversification.
Prior to fully understanding this I tried to blend more (sector focused) funds thinking that I was diversifying. But when looking at my overall asset allocation I found that I was always over-weighted in some areas and under-weighted in others. That resulted in more work, complication and taxes in trying to keep things in balance. I finally figured out that the only way I would ever become fully diversified and stay that way without pulling out my hair (which I can ill afford to do) was to invest in a fund that does it automatically. A big bonus for me was that it's also accomplished in a very tax efficient manner.
I wasn't comfortable putting my investments in a very few funds until I understood just how beneficial it could be for me in many ways. I use three funds today but would be as if not more comfortable with just two (I stick with three due to tax implications).
Prior to fully understanding this I tried to blend more (sector focused) funds thinking that I was diversifying. But when looking at my overall asset allocation I found that I was always over-weighted in some areas and under-weighted in others. That resulted in more work, complication and taxes in trying to keep things in balance. I finally figured out that the only way I would ever become fully diversified and stay that way without pulling out my hair (which I can ill afford to do) was to invest in a fund that does it automatically. A big bonus for me was that it's also accomplished in a very tax efficient manner.
I wasn't comfortable putting my investments in a very few funds until I understood just how beneficial it could be for me in many ways. I use three funds today but would be as if not more comfortable with just two (I stick with three due to tax implications).
Last edited by FrugalInvestor on Sun Aug 16, 2015 12:23 pm, edited 1 time in total.
Have a plan, stay the course and simplify. Then ignore the noise!
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Re: 3-4 Fund Portfolio Question(s)
IMO (worth what you paid to read it), 30% total portfolio is pretty rich for international. 30% of stock holdings (or roughly 20% of total portfolio with a 70/30 allocation) may be more prudent. 40/30/30 puts international at 43% of your stock holdings... Maybe go 50/20/30 (tsm/tism/tbm)?CFM300 wrote:Those Vanguard-recommended percentages give the appearance of far greater precision than is really possible or necessary.
So if you do go with four funds, I hope you simply their recommendations to:
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
20% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
10% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
Or
40% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
30% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
30% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
Re: 3-4 Fund Portfolio Question(s)
Overall recommendations from VG look very reasonable. Lots of diversity of opinion on this site on how much international is prudent. The range is from none to market weight which would be about 55 - 60% of your stock holdings in international. VG recommendation is a bit on the high side for my tastes and I'm closer to what gvsucavie suggests. Also lots of diversity of opinion on whether you need international bond or not. What you received is VGs typical position and there is nothing wrong with it but I've decided to not use that fund at this time. You can do a forum search on both topics to read the pros/cons of each side to get a deeper understanding.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Re: 3-4 Fund Portfolio Question(s)
I completely agree with your suggestion. 50/20/30 would be my vote for a 70/30 portfolio.gvsucavie03 wrote:IMO (worth what you paid to read it), 30% total portfolio is pretty rich for international. 30% of stock holdings (or roughly 20% of total portfolio with a 70/30 allocation) may be more prudent. 40/30/30 puts international at 43% of your stock holdings... Maybe go 50/20/30 (tsm/tism/tbm)?
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Re: 3-4 Fund Portfolio Question(s)
Why, yes it is.TinyElvis wrote:From what I've read about tax-efficiency in the wiki and the book, I would load the bonds side of the portfolio into my Roth and traditional IRAs, and put stock allocations in my taxable account? It's not that simple is it?
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.