The Three Fund Portfolio

[rustymutt]

This thread just totally tosses out all the academic studies that show titling to have higher returns, and with less risk.
I cannot understand how easy it is for some to toss these studies out, and give them no credibility. Countless books by many Bogleheads show this to be the facts. Some even tilt towards bonds, for even less risk.

[LadyGeek]

With additional collaboration, there are now 6 ways to do this without Vanguard mutual funds: Three-fund portfolio...

This is a very useful information. As an European I ask you if anyone can help me replicate the three fund portfolio only using EUR based ETF and cappitalising instead of distributing. For me, it's being very hard to settle down this task. Thanks!

Here is useful information: EU investing, the article contains links to find EUR based ETF providers. If you have any questions, start a new topic in Investing - Help with Personal Investments and describe your situation.

I have no recommendation for you, except to not select AMUNDI ETF SP 500. (The reason for accumulating instead of distributing gains is important to EUR investors, and is discussed in this thread.)

[abuss368]

This threat just totally tosses out all the academic studies that show titling to have higher returns, and with less risk.
I cannot understand how easy it is for some to toss these studies out, and give them no credibility. Countless books by many Bogleheads show this to be the facts. Some even tilt towards bonds, for even less risk.

Hi rustymutt,

Depends on the source of the information. As such, I would not consider it a fact. There is just as much overwhelming evidence noting a whole markets approach.

At the end of the day, you have to do what works for you.

Best.

[Taylor Larimore]

Rustymutt:

I cannot understand how easy it is for some to toss these studies out, and give them no credibility.

I cannot understand how easy is is for some to toss Jack Bogle's studies out, and give them no credibility. He knows far more about investing than we do.

There is more than one road to Dublin.

Best wishes.
Taylor

[pingo]

This threat just totally tosses out all the academic studies that show titling to have higher returns, and with less risk.
I cannot understand how easy it is for some to toss these studies out, and give them no credibility. Countless books by many Bogleheads show this to be the facts. Some even tilt towards bonds, for even less risk.

You're darn right it's a threat!

Kidding aside, all I know is that I don't toss them out, even though I don't tilt. To be more accurate, I haven't read enough about it, although I've been exposed to quite a few back-and-forths on this forum. I'm not ready to do it and I would have to do so with conviction and with Mrs. Pingo's blessing (she's not ready either).

At present, I live by the Boglehead mantra that what matters first (and more than any of the rest of it) is the stock-bond split, perhaps even regardless of which stocks and which bonds. I believe that to be reasonable. My belief is that the next, most significant order of diversification is the percent of equities in foreign markets.

As to beliefs, imperfect or even incomplete as they may be, they are centered in an investment philosophy which advisors such as Rick Ferri (and I think even Larry Swedroe) have even noted is more important than whether or not one has all their FF factors covered.

It can be quite an exercise to bring newbies just to that point, and I believe it is enough. After they've arrived It is a good core, if only that.

If tilting has higher returns with less risk, that doesn't make tilting better for all or even most investors. There are a lot of qualitative factors to consider, which we see many ex-tilters come to appreciate over time.

[ClosetIndexer]

You're darn right it's a threat!

Kidding aside, all I know is that I don't toss them out, even though I don't tilt. To be more accurate, I haven't read enough about it, although I've been exposed to quite a few back-and-forths on this forum. I'm not ready to do it and I would have to do so with conviction and with Mrs. Pingo's blessing (she's not ready either).

At present, I live by the Boglehead mantra that what matters first (and more than any of the rest of it) is the stock-bond split, perhaps even regardless of which stocks and which bonds. I believe that to be reasonable. My belief is that the next, most significant order of diversification is the percent of equities in foreign markets.

As to beliefs, imperfect or even incomplete as they may be, they are centered in an investment philosophy which advisors such as Rick Ferri (and I think even Larry Swedroe) have even noted is more important than whether or not one has all their FF factors covered.

It can be quite an exercise to bring newbies just to that point, and I believe it is enough. After they've arrived It is a good core, if only that.

If tilting has higher returns with less risk, that doesn't make tilting better for all or even most investors. There are a lot of qualitative factors to consider, which we see many ex-tilters come to appreciate over time.

I do tilt, but I agree with all of the above. The thing is, if you're going to tilt your portfolio, you should understand the details of what you're doing. At a minimum you should have a rational basis for the degree of factor tilt you're targeting, and the ability to estimate the factor loadings of various funds yourself. While you could tilt by simply picking a bunch of funds with "small" and "value" in their names, you have no way of knowing what level of risk you're taking on, and no way of evaluating the performance of your portfolio with respect to any logical benchmark.

I personally am a strong believer in the value of multi-factor analysis... but it's not simple. I've spent many, many hours studying the topic in general as well as the results for specific funds. Many people do not have the time (or even the mathematical or technical ability, not that either is out of reach) to put this level of research into their investments, and many of those wisely avoid diving into a style of investing they do not understand. While it may be possible for some to gain a benefit from tilting their portfolios - I personally believe that it is - that theoretical benefit is not universal, nor is it enormous. For many, the simplicity and transparency of something like the three fund portfolio easily overwhelms the potential edge that might be gained through factor tilts.

My personal opinion is, if someone is able to understand and manage a three fund portfolio themselves, but would not feel comfortable tilting without professional advice, they should stick with what they're doing. Paying 1% adviser fees plus potentially higher MERs to achieve factor tilts dramatically alters the risk/reward equation. If you have the time to dedicate to learning and understanding the FF model and how to use it, that's fantastic. I recommend that everyone do it, even if they don't plan to tilt. But if you don't, then something like the three fund portfolio is probably a near-optimal approach.

(Now, if you are interested in learning about multi-factor analysis, it is getting easier due to contributions by other Bogleheads. Robert T wrote a great comprehensive post a few years back. I've written a couple covering more specific things, like how you might get an idea of what factor loads you'd like to target, or how to do the regressions internationally where the data isn't as easily available. I'm sure you can find more by searching. I know LadyGeek is updating the info in the wiki too. The info is out there; it's just important to do some learning before diving in!)

[rullom]

Hi, i'm guessing this is a beginner question so I apologize in advance if this isn't the appropriate place to ask this. Is the cost of ownership for the "three fund portfolio" method usually cheaper than a target date fund, or are they essentially a wash? Lets use the 3 funds given in the opening statement of the post vs something like Vanguards VFIFX 2050 Target Date fund. I realize that the answer to this will depend on your asset allocation, but it seems like the 3 fund portfolio may be cheaper if the bulk of your asset allocation has an ER for a fund of, lets say, 0.06% vs having to take the whole hit with VFIFX's ER of 0.19 % for your entire portfolio. I hope my question is clear, but I fear that it may not be... however, not sure how to rewrite it to be more clear at the moment so please ask questions. Appreciate any thoughts on this!

[l2ridehd]

The three fund has a slightly lower ER. However the bigger advantage for most investors is the ability to hold the TBM fund in a 401K or IRA and the TSM in a taxable account. The single fund approach is simpler for those that don't want to manage the AA themselves, but may cause some tax issues if your not careful. Always remember that taxes are part of the total expense picture. Doesn't help to get a really low cost fund and then over pay taxes on the proceeds.

[CABob]

Is the cost of ownership for the "three fund portfolio" method usually cheaper than a target date fund, or are they essentially a wash?

The target date funds at Vanguard charge a prorated ER of the funds contained. This means that if you are comparing to individual holdings of Investor class funds the expenses would be a wash. OTOH if you hold Admiral share funds the expenses would be lower holding the individual funds.

[BornInCA]

If the Three-Fund Portfolio is so good, how come the Federal Retirement Thrift Investment Board (the folks in charge of administering the Thrift Savings Plan frtib.gov) insist on having an S&P 500 index fund and a completion (Wilshire 4500) index fund instead of having just one total U.S. stock market fund? Also, why do they insist on excluding emerging markets and international small cap stocks from the I Fund? I disagree with their 2009 evaluation http://frtib.gov/pdf/reports/InvestmentBenchmarks/2009-i-fund-benchmark-evaluation.pdf

This is a beliefs line I pasted from their 2006 fund evaluation http://frtib.gov/pdf/reports/InvestmentBenchmarks/Investment-Option-Review-FINAL_10-2006.pdf:
- The number of options should not overwhelm participants
- The more broadly diversified an asset class/asset category, the better it will serve participants over the long term

I can't understand how having the C Fund and the S Fund instead of one Total U.S. Stock Market fund can support their aforementioned beliefs . To me, it's seems contradictory.

I do agree with most posters that the G Fund is a great option in the TSP and the TSP's low expenses are superior to any 401k plan in the country. I just wish they can improve on the fund lineup.

[umfundi]

Troll?

By the way, can we dispense with even voting for post and thread of the year? This is no contest.

Taylor, thank you!

Keith

[abuss368]

By the way, can we dispense with even voting for post and thread of the year? This is no contest.

Taylor, thank you!

Keith

Hi Keith,

I agree. Definitely in the running for thread of the year!

Thank you Taylor!

[abuss368]

By the way, can we dispense with even voting for post and thread of the year? This is no contest.

Taylor, thank you!

Keith

Hi Keith,

I agree. Definitely in the running for thread of the year!

Thank you Taylor!

[555]

"Troll?"

Which post are you reffering to?

[rustymutt]

I want to thank everyone for the contribution to this thread. Because of threads like this one, I'm better understanding overall investment theory, and why it's done. Taylor, you'd be happy to know that I've simplified my own holdings to just 6 funds, down from 14 I owned two years ago. Re-balancing is much easier.

[abuss368]

I want to thank everyone for the contribution to this tread. Because of threads like this one, I'm better understanding overall investment theory, and why it's done. Taylor, you'd be happy to know that I've simplified my own holdings to just 6 funds, down from 14 I owned two years ago. Re-balancing is much easier.

Hi rustymutt,

It is posts like yours that make me smile and happy to be part of such a great forum. I am thankful when this forum can help ordinary folks like you and me become better investors.

Best.

[Taylor Larimore]

Rustymutt:

Taylor, you'd be happy to know that I've simplified my own holdings to just 6 funds, down from 14 I owned two years ago.

I am happy for you! Mr. Bogle would also be pleased.

Congratulations and best wishes.
Taylor

[victor2244]

I am brand new to Bogleheads and this is the first post I started to read in detail. After 4 hours (and reading many of the links) I am only about 1/3 of the way through the thread, but will finish up tomorrow because this has been a fascinating read! I have about 50 different stocks/mutual funds and will soon start on paring these down. This post referenced one link that included a speech Mr. Bogle gave in 2002 on Return to Mean. The speech showed charts allowing one to gage if the stock market was above the mean (stock prices high and a bad time to buy stocks), or below the mean(stock prices low and a good time to buy stocks). I recently received proceeds of close to seven figures from a company stock pay-out and for some real estate that was sold. I am 60 years old, plan to retire in 6-8 years, and came up with an allocation of TSM/TIM/TBM=35/20/45 for myself. I know that we cannot time the market but would hate to put 55% of this into TSM and TIM and have a major market correction without a whole lot of time to make things up. I do have other assets so it is not critical that I have these proceeds exactly upon retirement. What are suggestions on how much to put where and when? Also, does anyone know if we are currently above or below the stock value trend (Mean) line?

We are going out now, but I can't wait to get back to reading the rest of this post tomorrow!!

[Taylor Larimore]

Victor:

Welcome to the Bogleheads Forum!

When seeking advice for personal investments it is best to start a new thread of your own on the "Help With Personal Investments" forum. Use this link to assist you in providing the necessary information.

ASKING PORTFOLIO QUESTIONS

Thank you and best wishes
Taylor

[victor2244]

Thanks Taylor.

[victor2244]

The Vanguard Total Bond Market Index Fund has been recommended as one of the 3 funds to use in the 3 fund portfolio. The VTBM has average risk and slightly below average return (1 year=5%, 3 year=6%) based on Morningstar. Some similar funds that are also compared against the Barclays US Bond benchmark with a bit more risk such as say Pimco Total Return have done quite a bit better than VTBM. Is the feeling that VTBM carries the "optimum" amount of risk and that at some point funds like Pimco Total Return that have historically done well will eventually underperform VTBM? Are there other index bond funds that may have a bit more risk, but should outperform the VTBM that might be appropriate for a 3 fund portfolio?

[athrone]

The only stock/bond funds I hold are the Fidelity Spartan 500, Vanguard Total International ex-US, and Vanguard Total Bond Market.

However, when looking at the historical performance over the last 40 years of the Three Fund portfolio using a sample 60/40 allocation:

30% Total Stock Market
30% Total International
40% Total Bond Market

This portfolio had a U.S. market correlation of 90%. That is, it moved 90% lock-step with the U.S. Stock market. In fact, any mix of these three funds has a similar correlation. Are there any concerns about this? I would think the goal of "diversification" would be to avoid a near 1:1 correlation with any one asset.

[Taylor Larimore]

Author and Financial Adviser, Rick Ferri, has written an interesting article about the S&P Indices versus Active Funds Scorecard (SPIVA). Standard and Poor's found that the majority of individual index funds routinely outperform similar managed funds over various time periods.

Rick takes this another step to show how a portfolio of three index funds has outperformed a portfolio of three similar managed funds over 82% of the time. He writes:

One interesting aspect in this portfolio study, as in other studies I conducted previously for The Power of Passive Investing, was that a portfolio of actively-managed funds performed worse than the individual active funds in each asset class separately. Table 1 shows how index funds performed in each asset class over five years ending in June 2012. None of them were below 22 percent, yet only 18 percent of (managed) three-fund portfolios beat all index funds.

The power of negative compounding in active funds from each asset class lowers a multi-fund portfolio performance relative to all index funds. This is an important concept that’s often missed in the active versus passive debate, yet it is the essence of how people invest.

Fortunately, through the magic of the internet and articles like this, more people are catching on to the benefits of an all-index fund portfolio, all the time. It’s the portfolio return that matters, not the return of each fund in a portfolio. --Rick Ferri

Indexes Beat Active Funds Again in S&P Study

Best wishes
Taylor

[cosmic]

This thread just totally tosses out all the academic studies that show titling to have higher returns, and with less risk.
I cannot understand how easy it is for some to toss these studies out, and give them no credibility. Countless books by many Bogleheads show this to be the facts. Some even tilt towards bonds, for even less risk.

The academic studies do not show tilting to have higher returns. They show that someone who followed tilting in the past would have earned higher returns. There are two problems with this i) the future may be different ii) people may be less disciplined about following a more complex investing approach, compared to a simple one.

For example, if a 10-fund model with quarterly rebalancing would add 1% to returns, then a perfectly disciplined investor with low transactions costs would be right to follow it. But suppose the investor is not super discplined, and will sometimes forget to rebalance, or get confused by 10 funds and give up, or just finds it annoying to have 10 financial statements and rebalances to deal with each quarter, compared to 3 per year. In this case, the 3 fund model is superior. It is better to perfectly execute a simple but good plan, than to poorly execute a perfect plan (or fail entirely).

The best exercise plan is probably some high intensity daily schedule of 1-2 hours. But for most people, if they try to maintain that, they will fail and eventually give up. For the average person, far better to succeed at doing 30 minutes of exercise 3 times a week, than to fail at doing 2 hours per day.

[cjcerny]

Taylor,

I keep seeing the phrase "tax managed" pop up over and over again in this great thread--just wondering how that might apply to me. I'm 45 now and my hope is to save $25k a year for the next 10 years so that I can semi-retire at 55. But I digress...since I already max out my Roth and don't really have many good choices in my 401k, how exactly do I get "tax managed" on that $25k a year I hope to save. My initial thought is to go with TSM for 50% or so of my portfolio and then to put the other 50% in Vanguard's Ohio muni bond fund rather than TBM. Does that make sense for someone who is only in the 25% tax bracket, or should I just go "un-tax managed" and not worry about it because I'm not in a high tax bracket. Or, is there another path that I haven't thought of yet?

[Taylor Larimore]

cjcerny:

When seeking advice for personal investments it is best to start a new thread of your own on the "Help With Personal Investments" forum. You will also benefit by getting several opinions.

Use this link to assist you in providing the necessary information:

ASKING PORTFOLIO QUESTIONS

Thank you and best wishes.
Taylor

[jwa]

The Vanguard Total Bond Market Index Fund has been recommended as one of the 3 funds to use in the 3 fund portfolio. The VTBM has average risk and slightly below average return (1 year=5%, 3 year=6%) based on Morningstar. Some similar funds that are also compared against the Barclays US Bond benchmark with a bit more risk such as say Pimco Total Return have done quite a bit better than VTBM. Is the feeling that VTBM carries the "optimum" amount of risk and that at some point funds like Pimco Total Return that have historically done well will eventually underperform VTBM? Are there other index bond funds that may have a bit more risk, but should outperform the VTBM that might be appropriate for a 3 fund portfolio?

I'm not sure I can eloquently address PIMCO vs Vanguard Total Bond and do justice to it. However, I can tell you what I did and why. I had Pimco Ttl Return in a 401K which I recently rolled over to Vanguard Total Bond in an IRA.

- One reason is Pimco is actively managed vs an index approach. Bill Gross is a brilliant man who does a great job but he also has more than a few failures along the way as well. I wasn't sure I wanted to trust my bond money to a potential bad call on his part. The index return is good enough. In my mind it is risk/return and while you may get a better return with Bill it's not guaranteed going forward. It could be worse.

- While I respect Bill Gross he is also approaching 70. (so am I) I will retire someday and Bill might as well. If he is gone from PIMCO, are you still as comfortable?

- I decided a long time ago I couldn't predict returns but that I could expense ratios. Are the returns you indicate pre or post expenses? PIMCO expense ratio is higher by far.

All of this to say that I did some other adjusting as well and moved everything to Taylor's 3 fund portfolio. I am a happy camper with Vanguard Total Bond replacing PIMCO Total Return. Keep in mind this is just me and not you. As in all things, YMMV.

[tsturbo]

The Vanguard Total Bond Market Index Fund has been recommended as one of the 3 funds to use in the 3 fund portfolio. The VTBM has average risk and slightly below average return (1 year=5%, 3 year=6%) based on Morningstar. Some similar funds that are also compared against the Barclays US Bond benchmark with a bit more risk such as say Pimco Total Return have done quite a bit better than VTBM. Is the feeling that VTBM carries the "optimum" amount of risk and that at some point funds like Pimco Total Return that have historically done well will eventually underperform VTBM? Are there other index bond funds that may have a bit more risk, but should outperform the VTBM that might be appropriate for a 3 fund portfolio?

I'm not sure I can eloquently address PIMCO vs Vanguard Total Bond and do justice to it. However, I can tell you what I did and why. I had Pimco Ttl Return in a 401K which I recently rolled over to Vanguard Total Bond in an IRA.

- One reason is Pimco is actively managed vs an index approach. Bill Gross is a brilliant man who does a great job but he also has more than a few failures along the way as well. I wasn't sure I wanted to trust my bond money to a potential bad call on his part. The index return is good enough. In my mind it is risk/return and while you may get a better return with Bill it's not guaranteed going forward. It could be worse.

- While I respect Bill Gross he is also approaching 70. (so am I) I will retire someday and Bill might as well. If he is gone from PIMCO, are you still as comfortable?

- I decided a long time ago I couldn't predict returns but that I could expense ratios. Are the returns you indicate pre or post expenses? PIMCO expense ratio is higher by far.

All of this to say that I did some other adjusting as well and moved everything to Taylor's 3 fund portfolio. I am a happy camper with Vanguard Total Bond replacing PIMCO Total Return. Keep in mind this is just me and not you. As in all things, YMMV.

Same reasons I switched from Pimco to Vanguard Total Bond Market, plus the ER is lower

[vset]

Hello all



this 3 fund's portfolio for EUROPEAN citizens using EUROS is possible?

Regards

[selftalk]

The 8 lazy portfolios that are listed by MarketWatch.com by Paul Farrell are all Vanguard index funds and cover the major asset classes. These do beat the VTSMX and VFINX over the long term. My question is why doesn`t John Bogel suggest these kinds of asset allocations instead of recommending the VTSMX for the stock portion of the portfolio?

[Taylor Larimore]

Selftalk:
Comparing a stock fund with a stock/bond portfolio is meaningless.
Best wishes
Taylor

[selftalk]

Your suggestion is fine but I understand from reading much material ie. lazy portfolios by paul farrell at marketwatch.com, coffeehouse investor by bill schultheis and paul merriman, all well known and respected in the investing business that larger returns over time are gotten by adding other index classes such as large value, small cap, small value, reits from the USA and the same allocation in the international segment of a portfolio with bond allocations. Doing it that way these people indicate that the overall returns will beat the VTSMX and VFINX with a bond allocation. And these portfolios allow for a good portion of a bond allocation and in most cases 40%. What do you think about this approach?

[selftalk]

Your idea of the 3 fund portfolio is listed at marketwatch.com and then click on in the upper right corner the word lazy and then click lazy portfolio. Then scroll down a little and click on lazy portfolio. Up comes 8 lazy portfolios, click the last one called SECOND GRADERS and look at the the performance of it for the 1,3,5,and 10 years and compare it to the S&P 500 only at the bottom. You can also compare it to the other 7 lazy portfolios. It works fine! This should give the members of this website CONFIDENCE even in bad markets.

[travellight]

thanks for this great thread!

[pingo]

Your idea of the 3 fund portfolio is listed at marketwatch.com and then click on in the upper right corner the word lazy and then click lazy portfolio. Then scroll down a little and click on lazy portfolio. Up comes 8 lazy portfolios, click the last one called SECOND GRADERS and look at the the performance of it for the 1,3,5,and 10 years and compare it to the S&P 500 only at the bottom. You can also compare it to the other 7 lazy portfolios. It works fine! This should give the members of this website CONFIDENCE even in bad markets.

I couldn't find what you're talking about by what you described. For those interested, here's a link:

MarketWatch Lazy Portfolios

Another 3-Fund portfolio you'll find in that list is the Margaritaville Portfolio. Rather than Total Bond, it uses TIPS.

[vset]

Hellooooo,



what would be this 3 FUNDS portfolio for EUROPE citizen?

Still didn't find...

[LadyGeek]

Hello vset,

You are asking this question in several threads - but there is no response. In summary, you would like to create a 3-fund portfolio which trades in EUR currency. The purpose is to avoid currency risk.

I have searched for you, but can find no funds. Perhaps others can search? Here is my search engine: ETF Classification System - IndexUniverse.com

One must also consider the taxes, as described in this wiki article: EU investing

You can not find a 3-fund portfolio which trades inside your country? What is your country?

[vset]

Hello vset,

You are asking this question in several threads - but there is no response. In summary, you would like to create a 3-fund portfolio which trades in EUR currency. The purpose is to avoid currency risk.

I have searched for you, but can find no funds. Perhaps others can search? Here is my search engine: ETF Classification System - IndexUniverse.com

One must also consider the taxes, as described in this wiki article: EU investing

You can not find a 3-fund portfolio which trades inside your country? What is your country?

Thank for the site.

Now I am living in Portugal.

Any suggestion for the portfolio?

[technovelist]

You forgot gold.

[fish supper]

vanguard lifestyle 60% equity looks the one for me

with low fees an diversification

don't have lump sum/will be pound/costing monthly into it

I'm more concerned with slowing building up capital than an outright risk

[fishdrzig]

If one was completely invested say 300k in the three fund portfolio at equal amounts%, starting in the year 2000. What would be the % gain (an estimate is fine) from 2000-2012?

[fishdrzig]

Do the Life Strategy funds rebalance like the Target retirement funds do?

[umfundi]

If one was completely invested say 300k in the three fund portfolio at equal amounts%, starting in the year 2000. What would be the % gain (an estimate is fine) from 2000-2012?

Here is a two-fund strategy:

viewtopic.php?f=10&t=105592

The returns for a 50/50 portfolio of stocks and bonds were 5.6% for an initial lump sum, and 7.2% for systematic monthly investments. The allocation was rebalanced monthly. The problem is to find the total return data for representative investments. International has been a drag for the last couple of years, I am not sure about the whole decade. I would be surprised if they make much of a difference, if you maintain the stock/bond ratio.

One problem is we diversify to reduce risk. But, at the end of the year, everyone forgets that and focuses on returns. I know of no way to quantify the relative or total risk of a 3-fund vs. a 2-fund portfolio. But, I suppose I could extend the spreadsheet to calculate beta. But, then the "beta is not risk" crowd would start lobbing hand grenades.

Send me a PM with your e-mail address if you want the spreadsheet. It should be easy to load different data and extend it to three funds.

You can read the criticisms of what I did in the thread.

Keith

[BigFoot48]

If one was completely invested say 300k in the three fund portfolio at equal amounts%, starting in the year 2000. What would be the % gain (an estimate is fine) from 2000-2012?

You can use Simba's Spreadsheet for Backtesting to determine that return, and many more: http://www.bogleheads.org/forum/viewtopic.php?t=2520&postdays=0&postorder=asc&start=0

[madinvest]

(SCHB) Schwab U.S. Broad Market ETF (ER=0,04%) - 30%
(SCHF) Schwab International Equity ETF (ER=0,09%) - 30%
(SCHP) Schwab U.S. TIPS ETF (ER=0,07%) - 40%

Best three fund portfolio in terms of expense ratio?
What do you think about this?

[pingo]

(SCHB) Schwab U.S. Broad Market ETF (ER=0,04%) - 30%
(SCHF) Schwab International Equity ETF (ER=0,09%) - 30%
(SCHP) Schwab U.S. TIPS ETF (ER=0,07%) - 40%

Best three fund portfolio in terms of expense ratio?
What do you think about this?

Very nice indeed. One drawback is that it lacks emerging markets.

[pingo]

Do the Life Strategy funds rebalance like the Target retirement funds do?

Yep! That's how they maintain their fixed allocations. As new money comes in, they direct it to where it's most needed to maintain (as best as possible) the asset allocation. When necessary, they would rebalance by selling assets to purchase others (not too often mind you), but as I understand Vanguard is pretty good at keeping things efficient.

[pingo]

don't have lump sum/will be pound/costing monthly into it

If by "pound/costing" you mean that you're in the U.K., it might make sense to prepare a separate thread for specific portfolio advice according to the suggestions for asking portfolio questions. I say this because the LifeStrategy Moderate Growth Fund (VSMGX) overweights U.S. equities, which might not be highly recommended if based outside the U.S. I don't really know, but I bring it up because it might be important to keep in mind when selecting a portfolio.

Another way to keep things almost as simple (if you have access to the funds) might be to house 60% of assets in the Vanguard Total World Stock Index Fund (VTWSX) or ETF (VT) which uses global market weights. The rest would go to bonds.

[LadyGeek]

(SCHB) Schwab U.S. Broad Market ETF (ER=0,04%) - 30%
(SCHF) Schwab International Equity ETF (ER=0,09%) - 30%
(SCHP) Schwab U.S. TIPS ETF (ER=0,07%) - 40%

Best three fund portfolio in terms of expense ratio?
What do you think about this?

Very nice indeed. One drawback is that it lacks emerging markets.

Based on the number separator ("," versus "."), I'd also say this was a EU or outside the US investor. Be very careful on currency risk and taxation. Consider posting a new thread (Asking Portfolio Questions) in the Investing - Help with Personal Investments forum and request assistance.

[pingo]

Your suggestion is fine but I understand from reading much material ie. lazy portfolios by paul farrell at marketwatch.com, coffeehouse investor by bill schultheis and paul merriman, all well known and respected in the investing business that larger returns over time are gotten by adding other index classes such as large value, small cap, small value, reits from the USA and the same allocation in the international segment of a portfolio with bond allocations. Doing it that way these people indicate that the overall returns will beat the VTSMX and VFINX with a bond allocation. And these portfolios allow for a good portion of a bond allocation and in most cases 40%. What do you think about this approach?

Bonds happened to have done just as well, if not better, than stocks during the periods reported at that website. Their purpose is not to compete with stocks, rather to diversify and stabilize a portfolio according the willingness, need and/or tolerance for risk of the individual. When considering any of the lazy portfolios, I would first consider an appropriate amount of bonds for my situation, and then probably adjust the portfolio accordingly, instead of going with whatever high or low amount of bonds the portfolio dictates.

One of the most eye-opening things you can do on this forum is prepare a "portfolio help requested"-type thread, including the information recommended here for asking portfolio questions. I highly recommend it.

There are certain things one can do by which the bulk of one's returns will be obtained. I am referring to those things that have the largest impact on retirement. The perfect combination of funds that will create the highest possible returns (all else being equal and if such a combination can be known ahead of time) is still no match, and cannot outperform the impact of other decisions from which a portfolio evolves (because all things are not equal and such a combination cannot be known ahead of time).

Some portfolios may add a small amount to returns, the bulk of which are already achievable via a 3-fund portfolio. That means that all the study and work and potential complexity in order to push beyond a simple, broad-index based portfolio will only mostly achieve what the simple portfolio can do without even breaking a sweat. In other words, it's easy to get caught up in which recipe will result in the most icing, but relative to the cake the icing will always be a small part of the end result.

So, I'll pull a few items out of order from The Bogleheads Investment Philosophy that I believe will have a bigger impact on portfolio choice and even on one's returns:

a. Invest early and often. No portfolio can overcome one's rate of savings. Save little, have little. Additionally, Bogleheads know that increasing one's savings rate by 0.5% can have the same outcome as eking out an additional 0.5% in returns. Spending time reducing living expenses or raising income potential can be more meaningful to one's rate of savings and lifestyle. And if raising income potential also results in the creation of additional tax-advantaged space to save the money (say, from a side business) the impact is greater. And saving more creates zero additional risk to one's portfolio.

b. Minimize taxes. One is typically better off investing in a lousy 401k to prevent taxes from ravaging returns. Often the only tolerable option in that lousy 401k is an S&P 500 Index fund, so the bulk of one's investment dollars end up there, which makes S&P 500-beating portfolios irrelevant. Often the portfolio one desires is not the best portfolio for one's situation because such a portfolio would require a crippling level of taxation.

c. Keep costs low. Efficiently distributing a single portfolio across multiple accounts can result in other meaningful improvements to a portfolio. If I save 0.5% on portfolio costs and add that to my 0.5% savings increase, that's a long-term 1% improvement in my returns (guaranteed!) that requires no additional complexity or risk.

Philosophically, there are those who are not convinced that a simple portfolio of broad-index funds can be outdone, except when one mines data from the past (which can never predict the future, anyway). If that is not your philosophy or belief system, pick the portfolio that makes the most sense to you; one that is appropriately doable in your circumstances.

Those lazy portfolios are fine portfolios, regardless. The most good will come from staying the course in those asset classes. The most good will come from the cake, not the icing, which is achievable from a 3-fund or other lazy portfolio. Do what makes sense to you, because when the next market apocalypse tries your faith, you'll want to have a portfolio that you really believe in so you'll stay the course.

I haven't done much, if any reading on the Lazy Portfolios you mention, but if it were me (and I'm no expert):

The Aronson Family Taxable doesn't make sense (to me) for all (or mostly) taxable investments, if for no other reason than the problems with rebalancing which will have tax implications every time you do it. It is also very complicated. Even assuming all tax-advantaged space, I don't particularly care for separate Pacific, European and Emerging Markets funds, but I realize that Rick Ferri and some others might. I consider a little High Yield to be okay, but unnecessary. I personally am not comfortable with Long-Term bonds unless they're a part of VG Total Bond. That's just me.

FundAdvice's Ultimate Buy and Hold is also very complicated. Trev H ingeniously figured out what makes the UBH tick and brilliantly reduced it to 4 equity funds instead of an unwieldy 8 in the following thread: Ultimate Buy and Hold 8 funds vs 4. Definitely read the thread.

Dr. Bernstein's Smart Money makes more sense to me, but I'm still not crazy about separate Pacific-Euro-Emerging funds. With all of these portfolios, keep in mind that even big believers in the diversification of REITs (Bernstein, Ferri to name a couple) consider them to be overgrazed at this point, so they continue to have high risk profiles with lower than historically average expected returns. (I seem to recall their current expected returns are no different those of the S&P 500.)

The Coffee House makes more sense to me than the first three.

Yale U's Unconventional makes a lot of sense to me except that the REIT portion seems too high for my liking, but I might feel differently when I finally read Swensen's work; I've already mentioned that I'd rather have Total Bond or an Intermediate Term bond fund than LT Treasuries. I would also consolidate the Developed and Emerging Markets funds into Total International for the following reasons: (1) Total Int'l already holds Developed and Emerging Markets in the same 3-to-1 proportion; (2) Total Int'l is more diversified than the other two because it includes all Lg, Md and Sm asset classes; (3) Total Int'l would be more tax-efficient if money must be in a taxable account; (4) Simplicity of one fund instead of 2. Basically I'd end up making the portfolio more like the Rick Ferri Core Four Portfolio.

Dr. Bernstein's No Brainer is not so different than a 3 (in this case 4) fund portfolio, but it has me scratching my head: why would anyone use a European Stock fund as their sole international fund, versus VG Total International? Knowing me, I'd also probably use Total U.S. Stock instead of the S&P 500. I also might replace the Small Blend fund with an Extended Market fund, or go with Small Value. Not sure.

Margaritaville is a 3 fund portfolio, but with TIPS instead of the typical Total Bond.

Second Grader's Starter is also a 3 fund portfolio.

You'll find more Lazy Portfolios in the Bogleheads Wiki: Wiki Lazy Portfolios

All the best!