How's this for a 3 fund portfolio?

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How's this for a 3 fund portfolio?

Postby EternalOptimist » Wed Feb 13, 2013 4:23 pm

For those about to enter retirement-ville and who love target retirement funds, what do you think of this? Let's assume for the sake of discussion that you are planning for 30 years, that each fund would be of roughly equal size and would withdraw 3-4%/year, you would own the following:

:happy Target Retirement 2015
:happy Target Retirement 2025
:happy Target Retirement 2035

You would start withdrawing for '2015' until it is depleted, then '2025' then '2035'. The major thoughts here are that this would give stocks 10-30 years to grow, and that as you move along the later retirement portfolios would glide toward bonds. Any takers? BTW it always bothered me that a Retirement 2015 assumes you will need the money around then, BUT NOT ALL OF IT
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Re: How's this for a 3 fund portfolio?

Postby InvestorNewb » Wed Feb 13, 2013 4:27 pm

Why not just break it down into individual ETFs? It would be cheaper this way.

It seems more complicated (in my view) to hold 3 TR funds.
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Re: How's this for a 3 fund portfolio?

Postby BrandonBogle » Wed Feb 13, 2013 4:33 pm

InvestorNewb wrote:Why not just break it down into individual ETFs? It would be cheaper this way.

It seems more complicated (in my view) to hold 3 TR funds.


I'd agree. You can easily get the breakdowns for the index holdings, set it now, and adjust periodically via rebalancing. Or if you want a set-it-and-forget-it approach, pick ONE target retirement fund that has the breakdown you want today. Then just leave it from there on out unless you see a reason down the road to change it.
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Re: How's this for a 3 fund portfolio?

Postby NYBoglehead » Wed Feb 13, 2013 4:39 pm

BrandonBogle wrote:
InvestorNewb wrote:Why not just break it down into individual ETFs? It would be cheaper this way.

It seems more complicated (in my view) to hold 3 TR funds.


I'd agree. You can easily get the breakdowns for the index holdings, set it now, and adjust periodically via rebalancing. Or if you want a set-it-and-forget-it approach, pick ONE target retirement fund that has the breakdown you want today. Then just leave it from there on out unless you see a reason down the road to change it.


+2

I don't see much point in holding 3 different Target Date Funds. If you like the weighted AA of the combo of those 3 just set it yourself and enjoy the ride. You'll probably save ~8-10 basis points by doing this.
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Re: How's this for a 3 fund portfolio?

Postby EternalOptimist » Wed Feb 13, 2013 4:43 pm

NYBoglehead wrote:
BrandonBogle wrote:
InvestorNewb wrote:Why not just break it down into individual ETFs? It would be cheaper this way.

It seems more complicated (in my view) to hold 3 TR funds.


I'd agree. You can easily get the breakdowns for the index holdings, set it now, and adjust periodically via rebalancing. Or if you want a set-it-and-forget-it approach, pick ONE target retirement fund that has the breakdown you want today. Then just leave it from there on out unless you see a reason down the road to change it.


+2

I don't see much point in holding 3 different Target Date Funds. If you like the weighted AA of the combo of those 3 just set it yourself and enjoy the ride. You'll probably save ~8-10 basis points by doing this.



My thought was that the plan gives you greater control over what fund you can withdraw from and what you could leave alone.
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Re: How's this for a 3 fund portfolio?

Postby ObliviousInvestor » Wed Feb 13, 2013 4:43 pm

This recent thread may be of interest: viewtopic.php?f=1&t=110099

I'm not sure I understand the benefit of what you're suggesting. Why would this be better than, for example, just using the TR 2025 fund?
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Re: How's this for a 3 fund portfolio?

Postby InvestorNewb » Wed Feb 13, 2013 4:45 pm

Maybe there is some psychological benefit to knowing you have 3 "accounts" to spend in retirement?

i.e. when you're spending your 1st one, it might be gratifying to know that you have 2 more left that you haven't "touched" yet.
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Re: How's this for a 3 fund portfolio?

Postby EternalOptimist » Wed Feb 13, 2013 4:49 pm

ObliviousInvestor wrote:This recent thread may be of interest: viewtopic.php?f=1&t=110099

I'm not sure I understand the benefit of what you're suggesting. Why would this be better than, for example, just using the TR 2025 fund?


As I see it, you could pull from a bond-heavier 2015 if that's what you wanted (or stock heavier 2035)--a TR 2025 you have zero control. Like I said by leaving the later TR alone it would have a greater opportunity (presumably) to iron out volatility...just a thought
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Re: How's this for a 3 fund portfolio?

Postby nodenuff2 » Wed Feb 13, 2013 5:06 pm

Optomist I am thinking of a 3 fund approach like you with a slightly different approach. Say 10% in 2060 for my grandchilrens retirement 10% 2035 for my kids and 70% in 2015 for wife and I. Start with 10% intended to last 5 years in cash then go to the 2015 which will probably outlast me .Whatever is left the kids can fight over. if I live to be 100 then I can start on the kids money first in 2050. Automatically gets more conservative as we get older.
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Re: How's this for a 3 fund portfolio?

Postby Peter Foley » Wed Feb 13, 2013 5:14 pm

Interesting suggestion. I think it would be a good approach psychologically for some investors. It would also be a simple approach for one to manage. These two factors in combination might make it a good approach for some investors to consider.
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Re: How's this for a 3 fund portfolio?

Postby YDNAL » Wed Feb 13, 2013 6:20 pm

EternalOptimist wrote:For those about to enter retirement-ville and who love target retirement funds, what do you think of this? Let's assume for the sake of discussion that you are planning for 30 years, that each fund would be of roughly equal size and would withdraw 3-4%/year, you would own the following:

:happy Target Retirement 2015 -- 55/45 Stocks/Bonds
:happy Target Retirement 2025 -- 71/29 Stocks/Bonds
:happy Target Retirement 2035 -- 86/14 Stocks/Bonds

Investing 1/3 of the portfolio in each, you are holding 71/29 Stocks/Bonds.
    Code: Select all
    Portfolio   $100k   $100k   $100k   $300k
    Stocks         55      71      86      71
    Bonds          45      29      14      29
  • Unless one piece (or more) is invested for a different purpose and timeframe, there is absolutely NO benefit in splitting 3 ways.
  • I may understand, for instance, 2/3 invested in TR 20XX based on Ability and Need for risk to withdraw for retirement; and 1/3 invested in TR 20XX for kids, charity, whatever.
  • Otherwise, for your own retirement, I say hold TR 2025 and call it a day!
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Re: How's this for a 3 fund portfolio?

Postby EternalOptimist » Thu Feb 14, 2013 12:17 pm

YDNAL wrote:
EternalOptimist wrote:For those about to enter retirement-ville and who love target retirement funds, what do you think of this? Let's assume for the sake of discussion that you are planning for 30 years, that each fund would be of roughly equal size and would withdraw 3-4%/year, you would own the following:

:happy Target Retirement 2015 -- 55/45 Stocks/Bonds
:happy Target Retirement 2025 -- 71/29 Stocks/Bonds
:happy Target Retirement 2035 -- 86/14 Stocks/Bonds

Investing 1/3 of the portfolio in each, you are holding 71/29 Stocks/Bonds.
    Code: Select all
    Portfolio   $100k   $100k   $100k   $300k
    Stocks         55      71      86      71
    Bonds          45      29      14      29
  • Unless one piece (or more) is invested for a different purpose and timeframe, there is absolutely NO benefit in splitting 3 ways.
  • I may understand, for instance, 2/3 invested in TR 20XX based on Ability and Need for risk to withdraw for retirement; and 1/3 invested in TR 20XX for kids, charity, whatever.
  • Otherwise, for your own retirement, I say hold TR 2025 and call it a day!


The years chosen were arbitrary could have easily been 10, 15, 20. The point here is that you have greater control over withdrawals with one of the upsides being a longer timeframe for stocks to grow. This is a basic 3 bucket approach
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Re: How's this for a 3 fund portfolio?

Postby YDNAL » Thu Feb 14, 2013 12:47 pm

EternalOptimist wrote:
The years chosen were arbitrary could have easily been 10, 15, 20. The point here is that you have greater control over withdrawals with one of the upsides being a longer timeframe for stocks to grow. This is a basic 3 bucket approach

The 3 funds are irrelevant, what is relevant is:
1. Your overall risk profile (Riskier/Less Risky).
2. Your expected return based on Ability and Need for risk that helped determined #1.
3. Everything else is sort-of mental accounting.
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Re: How's this for a 3 fund portfolio?

Postby BBL » Thu Feb 14, 2013 12:59 pm

EternalOptimist wrote:
YDNAL wrote:
EternalOptimist wrote:For those about to enter retirement-ville and who love target retirement funds, what do you think of this? Let's assume for the sake of discussion that you are planning for 30 years, that each fund would be of roughly equal size and would withdraw 3-4%/year, you would own the following:

:happy Target Retirement 2015 -- 55/45 Stocks/Bonds
:happy Target Retirement 2025 -- 71/29 Stocks/Bonds
:happy Target Retirement 2035 -- 86/14 Stocks/Bonds

Investing 1/3 of the portfolio in each, you are holding 71/29 Stocks/Bonds.
    Code: Select all
    Portfolio   $100k   $100k   $100k   $300k
    Stocks         55      71      86      71
    Bonds          45      29      14      29
  • Unless one piece (or more) is invested for a different purpose and timeframe, there is absolutely NO benefit in splitting 3 ways.
  • I may understand, for instance, 2/3 invested in TR 20XX based on Ability and Need for risk to withdraw for retirement; and 1/3 invested in TR 20XX for kids, charity, whatever.
  • Otherwise, for your own retirement, I say hold TR 2025 and call it a day!


The years chosen were arbitrary could have easily been 10, 15, 20. The point here is that you have greater control over withdrawals with one of the upsides being a longer timeframe for stocks to grow. This is a basic 3 bucket approach


How would your proposal be better than buying the underlying ETFs in the preferred proportions and then simply mentally accounting for each of the ETFs as three separate 'accounts'

Example your total position in BND is 300K but the mental accounting model [you can make a spreadsheet to visualize this while you're at it] views the BND allocation as:
BND 1 - 100K
BND 2 - 100K
BND 3 - 100K

Based on the mental accounting model you have control of what you withdraw from. You have more control of your AA via your withdraw methods and you can implement your own rebalance & TLH sceme if you want to.

I'm by no means advocating this or any other form of mental accounting but if someone is determined to do it how would this not be an improvement?

Also - I don't think you have as much control withdrawing from your proposal because you only choose which proportions of the underlying each withdrawn dollar represent. You can't pull just from bonds or just from TSM, etc.

I must be missing something....
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Re: How's this for a 3 fund portfolio?

Postby BrandonBogle » Thu Feb 14, 2013 1:55 pm

BBL wrote:
How would your proposal be better than buying the underlying ETFs in the preferred proportions and then simply mentally accounting for each of the ETFs as three separate 'accounts'

Example your total position in BND is 300K but the mental accounting model [you can make a spreadsheet to visualize this while you're at it] views the BND allocation as:
BND 1 - 100K
BND 2 - 100K
BND 3 - 100K

Based on the mental accounting model you have control of what you withdraw from. You have more control of your AA via your withdraw methods and you can implement your own rebalance & TLH sceme if you want to.

I'm by no means advocating this or any other form of mental accounting but if someone is determined to do it how would this not be an improvement?

Also - I don't think you have as much control withdrawing from your proposal because you only choose which proportions of the underlying each withdrawn dollar represent. You can't pull just from bonds or just from TSM, etc.

I must be missing something....


I would say is rather than subdiving your holdings of Bond, you buy the underlying funds or ETFs and simply withdrawal from stocks and/or bonds as it meets your target allocation as the years go by. So lets say you reach the time of your first distribution time and you have 40/60 stocks to bonds and the 3 target retirement approach would blend to 30/70, simply begin your withdrawals from the equity allocation. This also lets you, over time, place the underlying funds in the most efficient tax manner as opposed to have domestic equity, international equity, and bonds in your taxable and tax-advantaged accounts.

Maybe it's not as simple as 3 TR funds, but it makes the "big picture" easier in that you can clearly identify your AA without digging into the individual TR funds and can easily move them around as appropriate.
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Three overlapping Target Funds ?

Postby Taylor Larimore » Thu Feb 14, 2013 1:59 pm

Eternal Optimist:

Strive for simplicity--not complexity.

Best wishes
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Re: How's this for a 3 fund portfolio?

Postby BBL » Thu Feb 14, 2013 2:07 pm

I would say is rather than subdiving your holdings of Bond


:happy It was only a 'mental' subdivision - it only existed in the land of unicorns and leprechauns. 300K of BND is 300K of BND.
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Re: How's this for a 3 fund portfolio?

Postby FinancialDave » Thu Feb 14, 2013 2:08 pm

I actually like this approach for one simple reason -- for the beneficiary, it is a simple approach, and requires no rebalance, though one TDF would be simpler.

Even though a simple 3 ETF fund approach seems simple on the surface, it requires you adjust the stock/bond ratio as you get older. For most of us who are familiar with this it is easy, but for those left to deal with it, there are easier ways to go.

I am however curious if these near term date funds are going to be able to generate any positive returns if we start seeing interest rate increases.

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Re: How's this for a 3 fund portfolio?

Postby BrandonBogle » Thu Feb 14, 2013 2:11 pm

FinancialDave wrote:I actually like this approach for one simple reason -- for the beneficiary, it is a simple approach, and requires no rebalance, though one TDF would be simpler.

Even though a simple 3 ETF fund approach seems simple on the surface, it requires you adjust the stock/bond ratio as you get older. For most of us who are familiar with this it is easy, but for those left to deal with it, there are easier ways to go.

I am however curious if these near term date funds are going to be able to generate any positive returns if we start seeing interest rate increases.

fd


I agree Dave that a 3 fund approach requires some manual rebalancing, which may not be something beneficiaries want to take on. But then we go back to the original recommendations of just picking one TR fund that has the same mix as the blended 3 TRs. Even simpler then!
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