The Three Fund Portfolio

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Re: The Three Fund Portfolio

Postby Cooperd0g » Mon Apr 02, 2012 9:55 pm

I like the three fund approach. I view several possibilities to achieve this goal in my traditional and Roth IRA accounts:

1. Purchase all three of the individual mutual funds and set the allocation per my desire.
Pros: Set the allocation and rebalance occasionally as needed. If investing directly with Vanguard I could have the monthly IRA deposit split into each of the three funds with no transaction costs. Fixed expense ratios for each fund.
Cons: Must move trad and Roth IRAs from existing brokerage account to Vanguard. Seems to be the highest expense ratios.

2. Purchase a TR fund with my desired allocation.
Pros: Only one fund to worry about. Slightly lower expense ratio. Automatic investing with monthly IRA deposit.
Cons: Have to move to a different fund it the AA moves away from my goal. Must move IRAs to Vanguard from existing brokerage account.

3. Purchase a LifeStrategy fund with my desired allocation.
Pros: Only one fund to worry about. Even lower expense ratio than TR funds. Automatic investing with monthly IRA deposit. Easy changing of funds for changes to desired AA.
Cons: Less AA variety among available funds. Must move IRAs to Vanguard from existing brokerage account.

4. Purchase ETFs for the core three funds.
Pros: Monthly rebalancing available. Get to maintain existing IRA brokerage accounts. Lowest expense ratios.
Cons: Less DCA by buying a different one each month to keep AA balance and reduce commission fees. Must actively purchase ETFs each month. Are the expense ratios really the lowest? 12 trades at $5.95 is $71.40 per year. On a $5000 IRA investment that is 1.42% just on commission.

Yes, I can buy Vanguard mutual funds in my current brokerage, but there is a commission fee of $45 per transaction. This is why I say I would need to move my IRA accounts to Vanguard if I chose the mutual fund method. I am not opposed to moving my accounts. Since everything is tax advantaged the easiest method seems to be using the LifeStrategy since there is one with my desired AA. I know the ETFs have the lowest expense ratios and I'm guessing that if you just buy once a year the commission doesn't hurt as bad, but my math makes it look like a bad option for monthly IRA deposits. Am I missing something here?
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Re: The Three Fund Portfolio

Postby joe8d » Tue Apr 03, 2012 9:13 pm

3. Purchase a LifeStrategy fund with my desired allocation.
Pros: Only one fund to worry about. Even lower expense ratio than TR funds. Automatic investing with monthly IRA deposit. Easy changing of funds for changes to desired AA.


Since everything is tax advantaged the easiest method seems to be using the LifeStrategy since there is one with my desired AA. I


That would be the way to go.
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Re: The Three Fund Portfolio

Postby DWolf » Tue Apr 24, 2012 3:51 pm

If the 3 fund portfolio is ideal (which I happen to be in favor of with maybe REITs, TIPS, and potentially some T-Bonds tied to known liabilities) then why do passive portfolio managers have so many funds in their model portfolios. Do you think this is so they can control tilts to risk premiums? Is it trying to justify an existence? Is it to provide better back tested performance? Or can you actually increase portfolio efficiency and return (after trading costs and taxes) by adding more asset classes and rebalancing?
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Re: The Three Fund Portfolio

Postby yobria » Tue Apr 24, 2012 4:20 pm

DWolf wrote:If the 3 fund portfolio is ideal (which I happen to be in favor of with maybe REITs, TIPS, and potentially some T-Bonds tied to known liabilities) then why do passive portfolio managers have so many funds in their model portfolios.


The portfolio manager who has "nothing better" than a three fund portfolio isn't going to be seen as adding much value. Meanwhile, my local ML broker has my neighbors in managed futures and Asian currencies. They love their "sophisticated" portfolio and advisor. Such is human nature.

Or try writing an investing book about only a three fund portfolio. After about page 10, you're probably going to be searching for new material. The end result will be a recommendation for a total market port, then a bunch of filler.

Take complexity with a grain of salt. There are few free lunches beyond the market portfolio, whatever this or that historical back test may "prove".
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Re: The Three Fund Portfolio

Postby steve r » Tue Apr 24, 2012 7:32 pm

yobria wrote: ... local ML broker has my neighbors in managed futures ... They love their "sophisticated" portfolio and advisor. Such is human nature.

+1
My local broker ... shorting bonds ... good move last year.
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Re: The Three Fund Portfolio

Postby vset » Wed Apr 25, 2012 7:02 pm

Hi,

here in Europe I can't buy Index Funds I think...

Can you help me choosing 3 similar ETF's or other?

Thank you.

Best regards.
:beer
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Re: The Three Fund Portfolio

Postby vset » Wed Apr 25, 2012 7:07 pm

vset wrote:Hi,

here in Europe I can't buy Index Funds I think...

Can you help me choosing 3 similar ETF's or other?

Thank you.

Best regards.
:beer



One could, of course, use ETFs rather than mutual funds. For example, one could use Total Stock Market ETF (VTI) [1], Vanguard FTSE All-World ex-US ETF (VEU) [2] for international, and Vanguard Total Bond Market ETF (BND).


:happy


Hi,

what about a Chart for the last 30-40 years with history - profit and drawdowns?

Where can I find the annual rentability of this strategy ?


Thank you.


Kindest regards.
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Re: The Three Fund Portfolio

Postby LadyGeek » Wed Apr 25, 2012 9:21 pm

Anyone wishing to help vset can post in his thread, there is additional information: Long term successful investing portfolio

To vset: I have answered your questions in your thread.
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Re: The Three Fund Portfolio

Postby cosmic » Sun Apr 29, 2012 6:08 pm

Although I approve of the intention of this thread, and it definitely would improve results for most retail investors, I feel duty-bound to point out some flaws and potential improvements.

Firstly, this is way too USA-centric (although I agree it works well for US residents IF - big if - the USA stays as economically stable and prosperous as it has for the last 30 years). What about for people from risky countries where government bonds default every decade or two, and stocks can be a huge rollercoaster ride, inflation might be high for a generation etc?

It is also ignoring the lessons of the 1930s and the 1970s, which is that having a moderate allocation to gold increases total portfolio risk-adjusted return (as well as boosting diversification). This is an irresponsible oversight in the Boglehead philosophy, motivated more by narrow-minded dogma and prejudice rather than any facts or evidence.

Let's examine the experience of someone who used the 3-fund portfolio and happened to have the financial bad luck to be a Greek citizen/resident. Note that Greece is by no means the worst example of a country and its markets blowing up, one could point to Asia and Russia in 1997-1998, Argentina/Brazil from 1998 to 2002, Ukraine or former Yugoslavia in the 1990s, let alone the true 3rd world countries of Africa and SE Asia.

Domestic TSM: fell almost 90% since 2007
TBM: down 50%+ since 2007
International TSM: since there's no 'ex-Greece' TSM it's hard to calculate, but let's assume moderate gains of 20% for this one since 2007.

According to the recommended 3 fund weighting. Let's assume a split of 40% domestic bonds, 30% domestic stocks, 30% international stocks. The 5 year return would be:

TSM: -85% * 30% = -25.5%
I TSM: +20% * 30% = +6%
TMB: -50% * 40% = -20%

Total 5 year return -40%.

Now let's consider the USA 1929-32:

TSM: -85% * 30% = -25.5%
I TSM: -50% * 30% = -15%
TBM: +30% (estimate) * 40% = +12%

Total 3 year return -29%.

Much better than purely in stocks, or even a 60/40 purely domestic portfolio (strike 1 for diversification!) but can this be improved on? I would say yes. Let's add 20% in gold and take 10% off stocks (5% each off foreign and domestic) and 10% off bonds. We now get this allocation:

25% TSM
25% I-TSM
30% TBM
20% gold

What are the results? Greece 2007-2012:

TSM: -85% * 25% = -21.25%
I TSM: +20% * 25% = +5%
TMB: -50% * 30% = -15%
GLD: +140% * 20% = +28%

Total 5 year return: -2.75%. Quite an improvement.

USA 1929-32:

Now let's consider the USA 1929-32:

TSM: -85% * 25% = -21.25%
I TSM: -50% * 25% = -12.5%
TBM: +30% (estimate) * 30% = +9%
Gold: flat = 0%. Or if you used gold stocks (since gold was fixed) you would have made a hefty gain.

Total 3 year return -24.75%. Again an improvement.

What about the 1973-74 bear market? Again, holding some gold saved your ass. Same in 2000-2002, 2007-2009, 1987, 1937 and so on. Gold helped even more for those not fortunate enough to be born in stable 1st world countries with relatively sound economic policies. Quite a few times the loss on domestic securities - both stocks and bonds - has been close to 100% thanks to hyperinflation, currency devaluation, political repression, or military defeat or revoluation.

Another important factor is that a portfolio with 20% gold, and then domestic stocks and bonds, plus foreign stocks, hardly suffers at all in total return (check the stats if you don't believe me) and has considerably smaller drawdowns and far lower tail risk in the event of major financial calamity.

For this reason I would always recommend a 4-fund portfolio: domestic stocks, domestic bonds, foreign stocks, and gold. Even 5-10% rather than my chosen 20% allocation would significantly improve the risk/reward characteristics, and robustness against tail risks, of any conventional Boglehead portfolio.

Finally, we shouldn't forget about cash.
Last edited by cosmic on Sun Apr 29, 2012 6:15 pm, edited 1 time in total.
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Re: The Three Fund Portfolio

Postby cosmic » Sun Apr 29, 2012 6:12 pm

ClaireTN wrote:I'm also curious about the exclusion of TIPS. I'm using a four-fund portfolio: TSM, TISM, TBM, and TIPS.


TIPS are a product with a relatively short investing history. Also, there is a huge government incentive to renege on the inflation-hedging promise in the event of sustained high inflation. Finally, they don't mitigate against massive currency devaluation. For this reason, I think gold is a superior inflation hedging asset despite its high volatility and low overall return.
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Re: The Three Fund Portfolio

Postby backofbeyond » Sun Apr 29, 2012 6:23 pm

cosmic...why not international bonds as well?

I think you are spot on regarding international stocks. I'm an American but have lived outside of American 18 out of the last 20 years. When I retire, I plan on living part time in the US, part time in Aisa and part time in Europe. So for me, international stocks make up 1/3 of my stock portfolio and international bonds make up 1/3 of my bond portfolio. Would appreciate your insights on this. Thanks!
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Re: The Three Fund Portfolio

Postby Muchtolearn » Sun Apr 29, 2012 7:32 pm

DWolf wrote:If the 3 fund portfolio is ideal (which I happen to be in favor of with maybe REITs, TIPS, and potentially some T-Bonds tied to known liabilities) then why do passive portfolio managers have so many funds in their model portfolios. Do you think this is so they can control tilts to risk premiums? Is it trying to justify an existence? Is it to provide better back tested performance? Or can you actually increase portfolio efficiency and return (after trading costs and taxes) by adding more asset classes and rebalancing?

I think it is trying to justify an existence.
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Re: The Three Fund Portfolio

Postby umfundi » Sun Apr 29, 2012 9:15 pm

Cosmic,

A tenet of the Boglehead philosophy and of the Three-Fund portfolio is that you are investing in the TOTAL market, which is global. For those of us in the USA, the combination of VTSAX, VTIAX, and VBTLX meets that idea pretty well.

If you are not a resident of the US, you really have a problem. How do you invest globally? How do you understand that you should? In my opinion, a resident of Greece should still have 60% or more of their money in US-based investments. That's where the global share is.

After all, the Greek economy is about 2/3 the size of WalMart.

I have a similar problem with a relative who has a substantial net worth, and lives in South Africa. That's where all her investments are. But, South Africa is only about 1% of the world's economy. I can't convince her to diversify outside of ZA.

The answer is not to buy gold. It is to truly diversify in the total global economy.

Keith
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Re: The Three Fund Portfolio

Postby jarrodwilcox » Fri May 04, 2012 10:01 pm

Simplicity is the mark of genius.

The main catch is knowing how much of cash/bonds to hold versus stocks. But as a footnote, I wonder if even conventional tax-exempt bonds really belong if they trigger AMT.
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Re: The Three Fund Portfolio

Postby Senin » Sat May 12, 2012 3:55 am

I look at the US, then I look at the globe. Would I rather invest in the US or some other country? I really don't understand the push for INtl Stocks. Sure, sometimes they pay off, but I look at them like a wild sector. High risk. I love the stability of the US over the instability of some foreign country.
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Re: The Three Fund Portfolio

Postby Elbowman » Sat May 12, 2012 4:40 am

"Domestic" is another name for U.S. It doesn't translate well.
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Re: The Three Fund Portfolio

Postby Senin » Sat May 12, 2012 4:58 am

Domestic works just fine for me. I believe in the USA.
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Re: The Three Fund Portfolio

Postby sschullo » Sat May 12, 2012 1:10 pm

Hi Taylor,
I did some backtesting using Simba's and TrevH Excel program using your 3 fund portfolio and comparing it to what we actually got from 1994 (when we began keeping records of our portfolio) through 2011. Started with the same amount, $238,000 and inserted all contributions and distributions in the program since 1994 and I created this comparison graph.

The 3-fund portfolio would have returned a hypothetical about $49,000 more in our portfolio over the years.

This work is made possible by Simba and Trevh program. The 3-fund returns are from their program. I am confident those returns are accurate.
Guess which year, we found the Boglehead way? :D

Image
Image[/url] Image
Last edited by sschullo on Mon Jul 16, 2012 10:46 am, edited 2 times in total.
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Re: The Three Fund Portfolio

Postby vset » Sat May 12, 2012 1:19 pm

Tks for sharing,

What is the other portfolio ?

:-)
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Re: The Three Fund Portfolio

Postby sschullo » Sat May 12, 2012 1:31 pm

vset wrote:Tks for sharing,

What is the other portfolio ?

:-)

The other portfolio is mine. It's what we actually got, from the morningstar reports where we monitor our portfolio. I inserted the end of the year value to create the solid black line.
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Re: The Three Fund Portfolio

Postby Taylor Larimore » Sat May 12, 2012 1:39 pm

sschullo:

According to the chart, your portfolio declined about 50% in the 2000-2002 bear market but gained about 50% in the 2008 bear market?

Care to explain ?

Thank you and best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby sschullo » Sat May 12, 2012 2:23 pm

Hi Taylor,
Name is Steve and my long time companion is Dan. Our portfolio actually declined over 70% in the tech bubble (from the mid-year high) because we weren't diversified, you know the mistakes people make. We were ready by the time 2008 came around. We learned our lesson the hard way, but we didn't give up.
We found the Boglehead way from the tech bubble disaster and diversified with a stock bond split that matched our ages as you and Mr. Bogle would recommend. We are both retired and in our middle and late 60s.
In 2008 we sold our real estate and inserted a bunch of money and we had a 30% stock/70% bond split. The $200,000 nominal loss was ameliorated by the house proceeds. Our portfolio gained because we happened to take advantage of the real estate bubble. BTW, it wasn't planned. We were extremely fortunate about our real estate and our 30/70 split.
2nd grader portfolio had a similar pattern. Roth's equity exposure was 90% and 10% bonds.
I hope I answered your questions.
Steve
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Last edited by sschullo on Mon Jul 16, 2012 10:52 pm, edited 2 times in total.
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The "Boglehead Way."

Postby Taylor Larimore » Sat May 12, 2012 2:45 pm

Steve:

I hope I answered your questions.


You did and I appreciate it very much.

You and Dan are a good example of how the "Boglehead Way" has helped many of us.

Best wishes
Taylor
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Re: The Three Fund Portfolio

Postby jimkinny » Wed May 30, 2012 7:14 am

umfundi wrote:Taylor, and Bob:

Thank you very much!

It is incredible how much knowledge has gone into providing the simple choices that Taylor proposes.

Keith


Yes, it took me a long time to realize this.

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Re: The "Boglehead Way."

Postby vset » Wed May 30, 2012 1:27 pm

Taylor Larimore wrote:Steve:

I hope I answered your questions.


You did and I appreciate it very much.

You and Dan are a good example of how the "Boglehead Way" has helped many of us.

Best wishes
Taylor


Hi all,

I am in europe...
My biggest difficulty is to select portfolio. :annoyed
Where can i see more examples of various hipotesys and your experience and case studies. I have seen the videos and the page you suggested but i remain a bit empty.

Please help.

Thank you all.
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Re: The Three Fund Portfolio

Postby k-slice » Wed May 30, 2012 2:31 pm

I like the 3 index fund approach, but I wonder from now on what to do about the low yield from Total Bond Mkt. Index.
Over long periods of time, NAV ups and downs of bond funds may cancel out, so what you are left with is the yield.
It's paltry these days so I would maybe suggest adjusting the total bond index portion to a Stock Dividend and High Yield Corporate component.
Of course, I have just suggested taking something simple and complicating it.
I worry for the younger guys investing for long term goals and not being paid enough in interest for their trouble.
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Re: The "Boglehead Way."

Postby umfundi » Wed May 30, 2012 3:15 pm

vset wrote:Hi all,

I am in europe...
My biggest difficulty is to select portfolio. :annoyed
Where can i see more examples of various hipotesys and your experience and case studies. I have seen the videos and the page you suggested but i remain a bit empty.

Please help.

Thank you all.

vset,

It is my understanding that Vanguard funds are available to investors resident in Europe. If you look at their web site, there is a way to select a region of the world other than the USA.

Best wishes, and good luck,

Keith
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Re: The "Boglehead Way."

Postby vset » Wed May 30, 2012 5:14 pm

umfundi wrote:
vset wrote:Hi all,

I am in europe...
My biggest difficulty is to select portfolio. :annoyed
Where can i see more examples of various hipotesys and your experience and case studies. I have seen the videos and the page you suggested but i remain a bit empty.

Please help.

Thank you all.

vset,

It is my understanding that Vanguard funds are available to investors resident in Europe. If you look at their web site, there is a way to select a region of the world other than the USA.

Best wishes, and good luck,

Keith


Hi,

how are you?

I can trade by the broker the etfs of the three funds portfolio.

But you suggest a simple portfolio ?

Hug.
:greedy
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Re: The Three Fund Portfolio

Postby BigFoot48 » Wed May 30, 2012 5:51 pm

k-slice wrote:It's paltry these days so I would maybe suggest adjusting the total bond index portion to a Stock Dividend and High Yield Corporate component. I worry for the younger guys investing for long term goals and not being paid enough in interest for their trouble.

Chasing performance by increasing risk carries consequences. For those young guys, with 40-50 years to invest, TBM will provide diversified, low fee, market bond returns and would be an excellent bond investing vehicle, and the one I use. I think the yield has been about 3% annualized so far this year.
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Re: The "Boglehead Way."

Postby umfundi » Wed May 30, 2012 6:38 pm

vset wrote:
umfundi wrote:
vset wrote:Hi all,

I am in europe...
My biggest difficulty is to select portfolio. :annoyed
Where can i see more examples of various hipotesys and your experience and case studies. I have seen the videos and the page you suggested but i remain a bit empty.

Please help.

Thank you all.

vset,

It is my understanding that Vanguard funds are available to investors resident in Europe. If you look at their web site, there is a way to select a region of the world other than the USA.

Best wishes, and good luck,

Keith


Hi,

how are you?

I can trade by the broker the etfs of the three funds portfolio.

But you suggest a simple portfolio ?

Hug.
:greedy

vset,

This is only my opinion.

You should look to have at least 30% of your investments in your own country. That is where you live, and will be spending your money. I would weight it towards liquid investments.

For the part that you choose to put in the 3-fund portfolio, I suggest 40% Total stocks, 20% Total international stocks, and 40 % Total bonds.

A starting point.

Keith
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Re: The Three Fund Portfolio

Postby pingo » Wed May 30, 2012 8:18 pm

k-slice wrote:I like the 3 index fund approach, but I wonder from now on what to do about the low yield from Total Bond Mkt. Index.
Over long periods of time, NAV ups and downs of bond funds may cancel out, so what you are left with is the yield.
It's paltry these days so I would maybe suggest adjusting the total bond index portion to a Stock Dividend and High Yield Corporate component.
Of course, I have just suggested taking something simple and complicating it.
I worry for the younger guys investing for long term goals and not being paid enough in interest for their trouble.


I appreciate your enthusiasm, but I am confused by these suggestions. Perhaps, you could explain.

As for me, since the young may benefit from the longest of terms, it seems out-of-sync to worry much about income. The portfolio would likely reflect the desire for growth. Where risk is concerned, a stock dividend fund might offer some yield, but it is still composed of stocks which last I checked are prone to big crashes and major volatility. Vanguard Dividend Growth (VDIGX) and Vanguard Dividend Appreciation (VDAIX) didn't provide much comfort the last time the world was about to end and shouldn't be expected to behave differently at the next apocalypse. And their yields acc. to Morningstar are smaller than Vanguard Total Bond.

As to High Yield, a nice short thread on the topic can be found here, which again leaves me confounded if the idea is to reach for high yield in order to get something better than what Total Bond Market can provide over the long term.

For me, a good portfolio relies on bonds to stabilize and diversify against stock risk since they do not correlate with stocks. Current lower yields aside, it cannot be expected that bonds will behave less like bonds than stocks. My belief (correct me if I am wrong) is that yield chasing can just as easily disappoint as other forms of performance chasing.

I love the Three/Four Fund portfolio. With a very small exception, we try to model it as best as we can, given the limitations of our options.
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Re: The "Boglehead Way."

Postby vset » Thu May 31, 2012 5:17 pm

umfundi wrote:
vset wrote:
umfundi wrote:
vset wrote:Hi all,

I am in europe...
My biggest difficulty is to select portfolio. :annoyed
Where can i see more examples of various hipotesys and your experience and case studies. I have seen the videos and the page you suggested but i remain a bit empty.

Please help.

Thank you all.

vset,

It is my understanding that Vanguard funds are available to investors resident in Europe. If you look at their web site, there is a way to select a region of the world other than the USA.

Best wishes, and good luck,

Keith


Hi,

how are you?

I can trade by the broker the etfs of the three funds portfolio.

But you suggest a simple portfolio ?

Hug.
:greedy

vset,

This is only my opinion.

You should look to have at least 30% of your investments in your own country. That is where you live, and will be spending your money. I would weight it towards liquid investments.

For the part that you choose to put in the 3-fund portfolio, I suggest 40% Total stocks, 20% Total international stocks, and 40 % Total bonds.

A starting point.

Keith



Keith ,

you in US use Vanguard :

From Vanguard's list of "core funds," the funds that are best for a three-fund portfolio are:
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)



I in EU will use:

One could, of course, use ETFs rather than mutual funds. For example, one could use Total Stock Market ETF (VTI) [1], Vanguard FTSE All-World ex-US ETF (VEU) [2] for international, and Vanguard Total Bond Market ETF (BND).

What are the differences? Commissions?

Thank you!


:dollar
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Re: The "Boglehead Way."

Postby umfundi » Thu May 31, 2012 5:31 pm

vset wrote:Keith ,

you in US use Vanguard :

From Vanguard's list of "core funds," the funds that are best for a three-fund portfolio are:
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)



I in EU will use:

One could, of course, use ETFs rather than mutual funds. For example, one could use Total Stock Market ETF (VTI) [1], Vanguard FTSE All-World ex-US ETF (VEU) [2] for international, and Vanguard Total Bond Market ETF (BND).

What are the differences? Commissions?

Thank you!


:dollar


vset,

I suggest you start a new thread here: viewforum.php?f=1

with your question. Many people can give you better advice than I can.

Best wishes,

Keith
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Re: The Three Fund Portfolio

Postby LadyGeek » Thu May 31, 2012 5:58 pm

Hi vset,

Please continue your discusion in your existing topic: Long term successful investing portfolio. I think you have already many good answers.
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Re: The Three Fund Portfolio

Postby nisiprius » Thu May 31, 2012 6:30 pm

LadyGeek suggest I post this here, too--I just put it into the Wiki article on Three-fund portfolio.

As of 2012, Vanguard provides a tool that in fact recommends a three-fund portfolio of the kind championed by Taylor, with percentages based on your responses to a short online questionnaire. The tool is entitled Get a recommendation to fit your goals; you can navigate to it by way of Vanguard.com, Go to personal investors' site, What we offer: Mutual Funds, Get a Recommendation. The methodology isn't profound, but the relevance here is that the "recommendation" often takes the form of a three-fund portfolio of Total Stock, Total International, and Total Bond.
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Re: The Three Fund Portfolio

Postby abuss368 » Thu May 31, 2012 8:09 pm

There is a reason for that: Simple but very effective.
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Re: The Three Fund Portfolio

Postby vset » Fri Jun 01, 2012 3:11 pm

nisiprius wrote:LadyGeek suggest I post this here, too--I just put it into the Wiki article on Three-fund portfolio.

As of 2012, Vanguard provides a tool that in fact recommends a three-fund portfolio of the kind championed by Taylor, with percentages based on your responses to a short online questionnaire. The tool is entitled Get a recommendation to fit your goals; you can navigate to it by way of Vanguard.com, Go to personal investors' site, What we offer: Mutual Funds, Get a Recommendation. The methodology isn't profound, but the relevance here is that the "recommendation" often takes the form of a three-fund portfolio of Total Stock, Total International, and Total Bond.


What do you think of these Life Strategy Funds?

https://personal.vanguard.com/us/funds/ ... tegyAnchor
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Vset:

Any fund-of-funds holding Total Stock Market, Total International Stock Market and Total Bond Market, and that is suitably allocated between these three funds, is almost certain to outperform most investors.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby meebers » Sun Jun 03, 2012 3:01 pm

In regards to the three fund portfolio, is there an easy means to show what percentage of TSM, TISM and TBM invested would have gained the most for any one day/week or month. Not that one would "day trade" the percentages but to use as a comparison to ones own choice?
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Re: The Three Fund Portfolio

Postby BigFoot48 » Sun Jun 03, 2012 3:16 pm

meebers wrote:In regards to the three fund portfolio, is there an easy means to show what percentage of TSM, TISM and TBM invested would have gained the most for any one day/week or month. Not that one would "day trade" the percentages but to use as a comparison to ones own choice?

You might try TrevH's Backtesting spreadsheet, although it deals with prior years and decades, and not days. http://www.bogleheads.org/forum/viewtopic.php?t=2520&postdays=0&postorder=asc&start=0
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Re: The Three Fund Portfolio

Postby meebers » Sun Jun 03, 2012 4:15 pm

Since I am retired :beer , I think me and Mr. Excel will have a go at it. Simple at first and then expand it? :shock:
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Re: The Three Fund Portfolio

Postby Charybdis » Sat Jun 09, 2012 1:54 pm

vset wrote:Hi,

here in Europe I can't buy Index Funds I think...

Can you help me choosing 3 similar ETF's or other?

Thank you.

Best regards.
:beer


http://www.spdrseurope.com/product/fund ... =SPYI%20GY

+ choose a local bond index fund in your own currency, or buy local inflation linked government bonds.
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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Jun 09, 2012 2:41 pm

Hi,

vset has a thread with more detailed responses: Long term successful investing portfolio
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Re: The Three Fund Portfolio

Postby LondonJimmy » Wed Jul 04, 2012 9:53 am

Taylor Larimore wrote:After a lifetime of investing since 1950 trying to "beat the market," I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated, is an ideal portfolio for most investors. The advantages are many


What in your opinion, separates the few who beat the market over a long period of time, compared to those who don't. What special skills do they have?
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Past Performance -- Skill or luck?

Postby Taylor Larimore » Wed Jul 04, 2012 11:01 am

London Jimmy:

What in your opinion, separates the few who beat the market over a long period of time, compared to those who don't.


Probably luck. In any group flipping coins, a small percentage will get heads nearly every time.

Whether skill or luck, I know I can't pick skilled managers based on their past performance. These experts agree:

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Barra Research: "There is no persistence of equity fund performance."

Jack Bogle: "In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Wm. Bernstein, author: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Brennan, Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Jonathan Clements, author & columnist: "Trying to pick market-beating investments is a loser's game."

Eugene Fama: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Gensler & Bear, authors: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Burton Malkiel, author: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to underperformance in the subsequent period."

After fifteen straight years beating the S&P 500 Index, Legg Mason Value manager, Bill Miller's Legg Mason Value Trust (LMNVX) is now (Oct. 2012) in the bottom 1% of its category for 10-year returns .

Morningstar strategist, Samuel Lee: "If there's one verity that can be both relied on and reliably ignored, it's that past performance does not guarantee future results."

Ron Ross, author: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."

Bill Schultheis, author: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."

Larry Swedroe, author: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, authors: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author: "If you had invested in the annual #1 top performing stock and bond funds over the last 15 years, 80% of those top performers subsequently performed worse, over the next 3-10 years, than the average fund in their peer group! Two of three former #1 funds are actually the worst performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard: "Buying a fund solely because it's done well in the past, or selling a fund that has performed poorly, can turn into a costly mistake."

Vanguard U.S. Growth had the 2nd BEST 10-year return of all Vanguard funds in December, 1998. In December, 2005, U.S. Growth had the 2nd WORST 10-year return of all Vanguard funds.

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."

Best wishes
Taylor
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Re: The Three Fund Portfolio

Postby 1210sda » Wed Jul 04, 2012 11:18 am

In addition to their luck, you would have to be lucky also to identify them in advance.

If you believe a long and successful track record is all it takes, think LeggMason. It can turn quickly

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Re: Skill or luck ?

Postby LondonJimmy » Wed Jul 04, 2012 12:56 pm

Taylor Larimore wrote:Probably luck. In any group flipping coins, a small percentage will get heads nearly every time.

Whether skill or luck, I know I can't pick the skilled managers in advance.

Best wishes
Taylor



I really struggle to believe it is just luck. I would not look for picking managers either. I would either dedicate myself 100% if I were picking stocks or I would simple invest in an index fund.

Have you ever read the Intelligent Investor? I think that book is outstanding.

I have been investing myself for the past couple of years and my roi is roughly 55% over this period. Rather than getting into a debate as to whether you can make above average returns over a long period, I am just trying to grasp the Boglehead mentality and know what your views are.

Do you believe Warren Buffett was simply lucky? Also, do you place emphasis on emotional stability and buying more of a stock as its price falls (provided the fundamentals of the business has not changed)?
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The Bogleheads Investment Philosophy.

Postby Taylor Larimore » Wed Jul 04, 2012 1:11 pm

LondonJimmy wrote:
I am just trying to grasp the Boglehead mentality and know what your views are.

This is The Bogleheads Investment Philosophy. My views are similar.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby Jerry_lee » Wed Jul 04, 2012 1:38 pm

DWolf wrote:If the 3 fund portfolio is ideal (which I happen to be in favor of with maybe REITs, TIPS, and potentially some T-Bonds tied to known liabilities) then why do passive portfolio managers have so many funds in their model portfolios. Do you think this is so they can control tilts to risk premiums? Is it trying to justify an existence? Is it to provide better back tested performance? Or can you actually increase portfolio efficiency and return (after trading costs and taxes) by adding more asset classes and rebalancing?


I think your post is an interesting one, because in the same sentence you say you think the "3 fund portfolio" is ideal, then name 3 other asset classes you may want to own as well. That would double the number of funds you hold to 6, and also reveal you don't think the 3F portfolio is ideal.

It is likely that investment advisors who use passive strategies to implement plans use more than 3 funds because they think there is more to investing than just stocks vs. bonds. There is almost no one today who doesn't also consider small vs. large and value vs. growth to be separate risk and return dimensions that you may want to diversify across. Similar to you realizing the 3 fund portfolio may not be complete, and wanting to include real estate along with stocks and bonds. Putting 100% of your stocks in TSM, which is heavily weighted towards LG stocks, means you should expect to see 10-15 year periods of 0% real returns (see 1965-1981 or 2000-2011) which hasn't been and likely will not be offset by holding non-US large growth stocks (total international stock index).

So holding more funds, or diversifying across more sources of risk and return isn't about "trying to justify an existence", as much as it is about prudent portfolio management, adhering to fiduciary standards, etc. Investment advisors are paid to develop and manage prudent portfolios through thick and thin, thats it. The conspiracy theories about selling complexity are not founded. Now, the sleight-of-hand you often see here that lumps brokers (who traditional use active management and try to time markets) in with investment advisors is what confuses the issue. In my opinion, this is an intentional slant on their part, intending to disparage professional advisors who really do have their client's best interests in mind.

And as for # of funds, someone who appreciates the # of securities held in total stock/total international stock portfolios but wanting additional small cap and value diversification can simply use DFA US Vector, DFA Int'l Vector, and DFA Emerging Markets Core, as Bill Bernstein recommends in his latest book. The later mix is actually vastly more diversified than TSM/TISM both in terms of # of securities (10600 vs 8800--almost 2000 more stocks) and sources of return (exposure to market, size, and value premiums vs. just market premiums). And TBM fans will find the DFA Investment Grade fund covers similar ground with higher expected (and historical) returns due to the variable maturity and credit approach. So there is nothing that says passive advisors can't/don't also use 3-4 fund portfolios.

Hope this helps.
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Re: Skill or luck ?

Postby Roy » Wed Jul 04, 2012 4:15 pm

LondonJimmy wrote:Do you believe Warren Buffett was simply lucky?


Hi, LondonJimmy: Do you mean as a stockpicker? The popular answer is that he has (or had) superior selection skills. I don't know the answer. Now, Buffett does seem to know how to structure deals in ways that few others can.

Even with those massive advantages, I was surprised to find that the 10-year return for Buffett's BRK.A is 6.56 and the 10-year return for VTSMX is 6.57.

And if some of the common equity tilts mentioned on this forum were part of the comparative, the outperformance would have been significantly greater, using those appropriate passive funds. I'm guessing that most of Buffett's advantages have come less from his individual stock-picking prowess and more because he can make particular sweet deals and acquisitions, of many manipulated sorts, that ordinary managers and investors do not or cannot.

But it gets tougher when one realizes the frequently-mentioned point that you'd have to be able to identify a Buffett before he becomes a BUFFETT, were one to invest with the great man. Of course one might become the great man himself with lots of hard work. And maybe luck.
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Re: The Three Fund Portfolio

Postby SGM » Wed Jul 04, 2012 4:54 pm

Looking back at Taylor's initial post he recommends three funds, and in the case of larger portfolios, possibly benefitting from TIPS, REIT, and a small-cap value fund in tax-deferred accounts.
This seems to cover the territory without the expense of a financial advisor. I love the improved after tax returns secondary to low turnover. I don't think you need a financial advisor to pick those three additional funds or how much to allocate to each.

The simplicity of it, the low expenses, low taxes and diversification is impressive. :sharebeer
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