The Three Fund Portfolio

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Re: The Three Fund Portfolio

Postby jay22 » Mon Mar 11, 2013 10:07 am

pingo wrote:Perhaps pen and paper would do for limited purposes? For example, I went to Morningstar.com looked up Vanguard Investor Class funds:
Vanguard Total Stock
Vanguard Total International
Vanguard Total Bond

If the portfolio I want to know about is 60% Stock / 40% Bond with 30% of equities in the international fund, it translates to:
52% TSM
18% TISM
40% TBM


Looking at annualized returns over a 10 year period:
52% x 9.45% = 4.914%
18% x 10.81% = 1.9458%
40% x 4.8% = 1.92%
Portfolio returns of 8.78% per year.

It wouldn't account for any bonus or detriment to the portfolio from rebalancing, and I'm limited to what periods I can get from M* for free, but it's a start.

Not sure if I am missing something here, but shouldn't it be 42%TSM if 30% are in international equities?
jay22
 
Posts: 339
Joined: Thu Aug 23, 2012 9:56 am

Re: The Three Fund Portfolio

Postby pingo » Mon Mar 11, 2013 10:45 am

^ Yikes. Thanks for the correction. I have edited my last post to include arithmetic that makes sense. :D

Thank you!
pingo
 
Posts: 2065
Joined: Sat Sep 19, 2009 9:24 pm

If you have the TSP, should it be a 6-fund portfolio?

Postby BornInCA » Mon Mar 11, 2013 12:08 pm

I don't think a 3-fund portfolio would be adequate when the government's Thrift Savings Plan (TSP) constitutes a majority of one's life savings. The Thrift Savings Plan:
1.) Doesn't have a Total Stock Market (TSM) Index Fund. You have to build your own U.S. TSM from the allocations to the "C Fund" and the "S Fund"
2.) Excludes equities from Canada and the Emerging Markets.
3.) Excludes small-cap stocks from outside the U.S.

If one wants to keep the number of funds small, how about this? 4 TSP + 2 non-TSP?
From the TSP side: "C Fund", "S Fund", "I Fund", and "G Fund"
From the non-TSP side: Vanguard Emerging Markets (VEIEX/VWO) and Vanguard FTSE All-World ex-US Small Cap (VSS)
BornInCA
 
Posts: 249
Joined: Tue Oct 26, 2010 9:40 pm

Re: If you have the TSP, should it be a 6-fund portfolio?

Postby DieselEngineer » Mon Mar 11, 2013 3:26 pm

BornInCA wrote:I don't think a 3-fund portfolio would be adequate when the government's Thrift Savings Plan (TSP) constitutes a majority of one's life savings. The Thrift Savings Plan:
1.) Doesn't have a Total Stock Market (TSM) Index Fund. You have to build your own U.S. TSM from the allocations to the "C Fund" and the "S Fund"
2.) Excludes equities from Canada and the Emerging Markets.
3.) Excludes small-cap stocks from outside the U.S.

If one wants to keep the number of funds small, how about this? 4 TSP + 2 non-TSP?
From the TSP side: "C Fund", "S Fund", "I Fund", and "G Fund"
From the non-TSP side: Vanguard Emerging Markets (VEIEX/VWO) and Vanguard FTSE All-World ex-US Small Cap (VSS)

I posted my portfolio in another thread. A large portion is TSP-based. One of the suggestions I recevied was to use the G and/or F funds to address the bond portion of my asset allocation and address stocks outside of the TSP via the TSM and TISM.
Went from 14 funds to 4 Funds - TSM, TISM, F, and G!
DieselEngineer
 
Posts: 40
Joined: Sat Mar 09, 2013 2:48 am
Location: NH

Re: The Three Fund Portfolio

Postby LadyGeek » Mon Mar 11, 2013 4:32 pm

The wiki has an approximation of the total stock market for TSP: Thrift Savings Plan

For those who need it, a list of Vanguard equivalent funds is also described.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 19582
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: If you have the TSP, should it be a 6-fund portfolio?

Postby pingo » Mon Mar 11, 2013 7:25 pm

BornInCA wrote:I don't think a 3-fund portfolio would be adequate when the government's Thrift Savings Plan (TSP) constitutes a majority of one's life savings.


One might not have the opportunity to literally hold only 3 funds in a portfolio (or across accounts), the spirit and intent of a three fund portfolio can inform one's fund selection, regardless.

Maybe it's just me, but I still consider such portfolios to be "3 fund".
pingo
 
Posts: 2065
Joined: Sat Sep 19, 2009 9:24 pm

Re: One fund or three?

Postby limache » Tue Mar 12, 2013 1:41 am

Taylor Larimore wrote:limache:
What do you think of a fund of fund vs buying the 3 funds separately?

Vanguard experts now use the 3-fund portfolio for both their Target and Life-Strategy Funds. Vanguard fund-of-funds have a $1,000 minimum, so investors can now start a one-fund diversified portfolio with a $1,000 investment.

Target Funds offer 12 different stock/bond ratios; Life Strategy Funds offer 4 different ratios. If the investor wants a different stock/bond allocation, investors can easily exchange to another fund-of-funds in retirement accounts (where they belong) without fees or taxes.

Fund-of-funds are not usually suitable for taxable accounts. In general, taxable accounts should hold only tax-efficient stock funds. If the investor has both taxable and tax-advantaged accounts, it is usually best to hold the three funds individually to avoid having either stocks or bonds in the wrong type account.

Best wishes.
Taylor


So what about the Vanguard LifeStrategy Growth Fund (VASGX) in terms of tax efficiency? Mine is in a taxable account. What's considered a "tax-efficient" stock fund?
limache
 
Posts: 10
Joined: Fri Dec 14, 2012 12:36 am

Re: The Three Fund Portfolio

Postby Hexdump » Tue Mar 12, 2013 9:04 am

***Moved to a new thread.
Last edited by Hexdump on Tue Mar 12, 2013 12:43 pm, edited 1 time in total.
User avatar
Hexdump
 
Posts: 1483
Joined: Fri Oct 10, 2008 8:28 am
Location: Houston, Texas

Re: If you have the TSP, should it be a 6-fund portfolio?

Postby BornInCA » Tue Mar 12, 2013 9:11 am

pingo wrote:One might not have the opportunity to literally hold only 3 funds in a portfolio (or across accounts), the spirit and intent of a three fund portfolio can inform one's fund selection, regardless.

Maybe it's just me, but I still consider such portfolios to be "3 fund".


If the number of funds being used is not 3, then it's not a "3 fund" portfolio. Maybe it can be called 3-asset-class portfolio instead:
1.) All US Stocks
2.) All non-US Stocks
3.) All bonds
BornInCA
 
Posts: 249
Joined: Tue Oct 26, 2010 9:40 pm

Re: If you have the TSP, should it be a 6-fund portfolio?

Postby Phineas J. Whoopee » Tue Mar 12, 2013 1:37 pm

pingo wrote:
BornInCA wrote:I don't think a 3-fund portfolio would be adequate when the government's Thrift Savings Plan (TSP) constitutes a majority of one's life savings.


One might not have the opportunity to literally hold only 3 funds in a portfolio (or across accounts), the spirit and intent of a three fund portfolio can inform one's fund selection, regardless.

Maybe it's just me, but I still consider such portfolios to be "3 fund".

I agree with you pingo, and I'd like to elaborate (hands up all who are surprised!),

A mutual fund is a vehicle by which to own underlying assets. The 3-fund portfolio as Taylor constructed it is a very simple and low-cost way to hold those assets, but the fact remains it is the thousands of US stocks, thousands of international stocks, and thousands of USD bonds which provide all the returns.

I personally use the 3-fund portfolio + TIPS, in terms of its underlying holdings in their proportions, but split across 4 accounts with a total of 7 different funds, some in more than 1 account, and for one of which I own two share classes. The annualized expense ratio (including 401(k) administrative fees) is 10 basis points. That's down 1bp from what it was last year because the 401(k) switched two of my funds from Institutional to Institutional Plus shares. I see no meaningful distinction (except for the TIPS).

BornInCA wrote:If the number of funds being used is not 3, then it's not a "3 fund" portfolio. Maybe it can be called 3-asset-class portfolio instead:
1.) All US Stocks
2.) All non-US Stocks
3.) All bonds


I also agree with you, BornInCA, if we're going to use the most literal sense of the words. If so, then I'd suggest adding "cap weighted" to all three, and to the third "but not really all, or even really US all, but really really well diversified without combining fixed income types which really don't belong in the same fund, really." No doubt further qualifiers will be needed but I haven't thought of them. :happy

PJW
User avatar
Phineas J. Whoopee
 
Posts: 2902
Joined: Sun Dec 18, 2011 7:18 pm

Re: One fund or three?

Postby Phineas J. Whoopee » Tue Mar 12, 2013 1:56 pm

limache wrote: ...
So what about the Vanguard LifeStrategy Growth Fund (VASGX) in terms of tax efficiency? Mine is in a taxable account. What's considered a "tax-efficient" stock fund?

Hi limache (and I certainly hope that's an allegorical, not literal, name, otherwise my sympathies),

The LifeStrategy funds, like the Target Retirement family and a few others, are balanced funds which hold both stocks and taxable bonds. Taxable bonds are usually best held in tax-advantaged accounts.

Here's a wiki page which should help:
Principles of Tax-Efficient Fund Placement

Please come back with questions if you still have some after reading the article. It probably would be worth starting a new thread for them.

PJW
User avatar
Phineas J. Whoopee
 
Posts: 2902
Joined: Sun Dec 18, 2011 7:18 pm

Re: One fund or three?

Postby limache » Tue Mar 12, 2013 3:33 pm

Phineas J. Whoopee wrote:
limache wrote: ...
So what about the Vanguard LifeStrategy Growth Fund (VASGX) in terms of tax efficiency? Mine is in a taxable account. What's considered a "tax-efficient" stock fund?

Hi limache (and I certainly hope that's an allegorical, not literal, name, otherwise my sympathies),

The LifeStrategy funds, like the Target Retirement family and a few others, are balanced funds which hold both stocks and taxable bonds. Taxable bonds are usually best held in tax-advantaged accounts.

Here's a wiki page which should help:
Principles of Tax-Efficient Fund Placement

Please come back with questions if you still have some after reading the article. It probably would be worth starting a new thread for them.

PJW


Thanks Phineas! Yes limache actually is an anagram for michael haha.
limache
 
Posts: 10
Joined: Fri Dec 14, 2012 12:36 am

Re: One fund or three?

Postby Phineas J. Whoopee » Tue Mar 12, 2013 4:01 pm

limache wrote:...
Thanks Phineas! Yes limache actually is an anagram for michael haha.

Excellent! I had feared it meant lim[b] ache.
PJW
User avatar
Phineas J. Whoopee
 
Posts: 2902
Joined: Sun Dec 18, 2011 7:18 pm

Three Fund Portfolio beats largest pension fund !

Postby Taylor Larimore » Thu Mar 21, 2013 12:16 pm

Bogleheads:

According to this post by Eric, the Three Fund Portfolio outperformed CALPERS (the largest U.S. public pension fund) during the past 10 years:
CALPERS only earned +7.5% on their fund for the 10 years through 12/31 vs. +8.0% for the average pension fund with more than $1B dollars. A risk-adjusted Total Market portfolio (56% Russell 3000, 24% MSCI All Country World exUS, 20% Barclays Aggregate Bond) earned +8.3% over this period. So theoretically, CALPERS could have earned almost 1% per year higher returns with less risk by simply adopting the 3 Fund approach!

Thank you, Eric.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: Three Fund Portfolio beats largest pension fund !

Postby abuss368 » Thu Mar 21, 2013 3:44 pm

Taylor Larimore wrote:Bogleheads:

According to this post by Eric, the Three Fund Portfolio outperformed CALPERS (the largest U.S. public pension fund) during the past 10 years:
CALPERS only earned +7.5% on their fund for the 10 years through 12/31 vs. +8.0% for the average pension fund with more than $1B dollars. A risk-adjusted Total Market portfolio (56% Russell 3000, 24% MSCI All Country World exUS, 20% Barclays Aggregate Bond) earned +8.3% over this period. So theoretically, CALPERS could have earned almost 1% per year higher returns with less risk by simply adopting the 3 Fund approach!

Thank you, Eric.

Best wishes.
Taylor


Thank you Taylor and Eric.

Keep investing low cost, diversified, and simple!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6571
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

Re: The Three Fund Portfolio

Postby Allan » Sat Mar 23, 2013 8:04 am

Based on advice from Bogleheads, and primarily years of reading Taylor’s posts, I am moving my portfolio to the 3 Fund setup. I am 62. I like the simplicity aspect, something important to me as I grow older. But I am having a difficult time mentally moving into the bond fund because of all of the negative stuff I read about bonds and bond funds, such as a recent article titled “Are bond funds a ticking time bomb?”. I’ve cleaned up my portfolio and consolidated but still have 20% or so in cash, but just can’t bring myself to put it all in the bond fund. I’ve already moved into Total Stock and Total International. Any advice?

Allan
Allan
 
Posts: 626
Joined: Wed Feb 21, 2007 10:15 pm
Location: Houston

Re: The Three Fund Portfolio

Postby LadyGeek » Sat Mar 23, 2013 9:14 am

If you don't want to put everything into a bond fund, then don't. Remember that it's the total portfolio that counts, as bonds may or may not be combined with cash as Fixed income. You also have the Treasury Inflation Protected Security funds available.

Why don't you start a thread in the Investing - Help with Personal Investments forum in the Asking Portfolio Questions format? The right answer really depends on what you feel comfortable with.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 19582
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: The Three Fund Portfolio

Postby pingo » Sat Mar 23, 2013 12:16 pm

pingo
 
Posts: 2065
Joined: Sat Sep 19, 2009 9:24 pm

Re: The Three Fund Portfolio

Postby Senin » Mon Mar 25, 2013 3:09 am

I guess my Three Fund Portfolio has become a One (and a half) Fund Portfolio.

One, of course the Total Stock Market.

I have never like the international market more than the USA, so why invest in it? Sure, there are higher returns, higher risks. But why? I like the stability of the USA. And in time of tragedy, the USA will hold up better than the rest of the world.

Bond funds. I don't trust them at all. I think they are in for a crash. Sure, maybe the crash will be minor compared to stock crashes of 2001 and 2008, but why take the risk. Right now you get about 3% from a bond fund (now, not last year), so why risk it? If you are going to invest for such a low return, you might as well go for CDs or money markets.

So,
1- Total Stock Market
1/2- (the half would be cash, cds, money market, your choice of safe investment).
Senin
 
Posts: 97
Joined: Sat May 14, 2011 4:42 am

Total Bond Market Index Fund -- Risk?

Postby Taylor Larimore » Mon Mar 25, 2013 12:49 pm

Senin wrote:
Bond funds. I don't trust them at all. I think they are in for a crash.

Vanguard's Total Bond Market Index fund in the Three Fund Portfolio was started by Jack Bogle, our mentor, in December, 1986. It is a very diversified, high-quality, intermediate-term bond index fund that tracks Barclays US Aggregate Bond Index (formerly the Lehman Aggregate Bond Index created in 1976). With good reason, Jack's invention is now the world's largest bond index fund.

Listed below are the historical U.S. inflation rates (CPI-U) and total returns for the Aggregate Bond Index since its inception:

YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6
1983-------3.8-----------8.4
1984-------3.9----------15.2
1985-------3.8----------22.1
1986-------1.1----------15.2
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9
1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.9)
1995-------2.5----------18.5
1996-------3.3-----------3.6
1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4
2006-------2.5-----------4.3
2007-------4.1-----------7.0
2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7
2012-------1.7-----------4.3
Source: U.S. Department of Labor and Barclays

Observations:
* Inflation increased from 4.9% in 1976 to 13.3% in 1979; nevertheless the Aggregate Bond Index had positive returns every year during that period of rising inflation.
* The Aggregate Bond Index had only two negative years (both small) reflecting low risk.

Past performance does not guarantee future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby abuss368 » Mon Mar 25, 2013 2:53 pm

Thank you Taylor for that excellent post.

I love the simplicity and beauty of the Total Bond Market fund. In fact, in an interview I watched with Mr. Bogle not to long ago, he stated it was his largest bond fund in his portfolio.

Thank you Mr. Bogle!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6571
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

Re: The Three Fund Portfolio

Postby Senin » Tue Mar 26, 2013 2:38 am

Actually I was only half kidding.

In my main portfolio, I invest monthly
50% Vanguard Total
25% Vangauard REIT - Vgsix
25% Vanguard Int Tax Exempt- Vwitx

And, funny enough, its Vwitx that scares me the most. I know we are in a good bull run for the time being. Vgsix has been a star. I just wish I had invested more at a cheaper price.

As for Mr Larimore's chart...
I think we are currently somewhere around 1977...

(I've been watching the bond funds lately-- both declining Nav's and lower dividends.)
Senin
 
Posts: 97
Joined: Sat May 14, 2011 4:42 am

Re: The Three Fund Portfolio

Postby HEPennyPacker » Sun Mar 31, 2013 1:09 pm

Taylor,

Would you suggest NOT having a Total Bond Index for someone in their 20s/30's? We are paying debt down and are looking to invest in 2 or 3 years (maxing out Roths for each of us with the rest going into a normal taxable account). At that time we'll be 34-35 years old with defined benefit pensions but NOTHING currently in retirement beyond the pensions. I'm thinking something along the lines of:

75% VTSMX
25% VGTSX

And then moving up to the Admiral Shares when we can. Then, when we turn 40, doing 10% in a Total Bond Index, then slowly increasing the percentage in Total Bond Index as we age to lower the overall volatility of what an all-stock portfolio would be. Am I on the right track?

Thanks! And I love this thread!
HEPennyPacker
 
Posts: 5
Joined: Fri Mar 29, 2013 9:48 pm

Is the Total Bond Fund necessary?

Postby Taylor Larimore » Sun Mar 31, 2013 8:26 pm

HEPennyPacker wrote:Taylor,

Would you suggest NOT having a Total Bond Index for someone in their 20s/30's? We are paying debt down and are looking to invest in 2 or 3 years (maxing out Roths for each of us with the rest going into a normal taxable account). At that time we'll be 34-35 years old with defined benefit pensions but NOTHING currently in retirement beyond the pensions. I'm thinking something along the lines of:

75% VTSMX
25% VGTSX

And then moving up to the Admiral Shares when we can. Then, when we turn 40, doing 10% in a Total Bond Index, then slowly increasing the percentage in Total Bond Index as we age to lower the overall volatility of what an all-stock portfolio would be. Am I on the right track?

Thanks! And I love this thread!

Penny Packer:

I suspect you have not endured a lengthy bear market with a 100% stock portfolio. I've suffered through eleven bear markets with stock market declines of 20% or more. I'll attempt to tell you what it's like.

You see your hard-earned savings disappear day by day, month by month, year by year--perhaps forever (ask a Japanese). The media and your friends advise you to sell. Doom and gloom is everywhere. Your spouse questions your ability and urges you to sell before you lose more. You agonize over what to do. You lose sleep night after night because you know the Dow plunged 89% during the Great Depression (my parents lost their home and business). It could be happening again. No one knows.

There is a saying: "Stocks let you eat well; bonds let you sleep well." They work very well in combination.

This is what our mentor, John Bogle, said about bonds in a portfolio:

"As a starting point, an investor should hold a percentage of bonds equal to one's age."

Benjamin Graham, Warren Buffet's mentor, wrote:

"The investor may vary his holding of common stocks between the 25% minimum and the 75% maximum."

Consider these figures from "Finance for Dummies":
Starting with a $10,000 stock portfolio on January 1, 1928, by December 1937 (ten years later) the portfolio was worth $8,298. Meanwhile, The same 10-year investment in bonds was worth $21,744 (a +217% gain).

A 100% stock portfolio violates a fundamental rule of investing--Diversification.

I believe every portfolio should include bonds--if for no other reason than to learn about them which will prove invaluable as you get older.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby HEPennyPacker » Sun Mar 31, 2013 9:13 pm

Taylor,

Thank you for your insightful comments. I think you've swung me towards holding some bonds. Maybe not my age in bonds but definitely some. I just came across this article: http://www.kiplinger.com/article/investing/T041-C009-S001-a-two-fund-portfolio.html. What do you think?
HEPennyPacker
 
Posts: 5
Joined: Fri Mar 29, 2013 9:48 pm

Re: The Three Fund Portfolio

Postby Senin » Mon Apr 01, 2013 5:08 am

Normally, I would agree with you-- bonds. But I think we are in for a bond bubble.

What I do think we need to do is to keep some cash in reserve somewhere save-- even if its a money market or bank making next to nothing.

Those market crashes-- got bless 'em. They are there for us. That is the time to invest. That is the time to make all of our money. Take our cash and invest!!!

You want 2 things.
1- Market Volatlity
2- Cash out at the top.
Senin
 
Posts: 97
Joined: Sat May 14, 2011 4:42 am

Re: The Three Fund Portfolio

Postby Johm221122 » Mon Apr 01, 2013 6:27 am

Senin wrote:Normally, I would agree with you-- bonds. But I think we are in for a bond bubble.

What I do think we need to do is to keep some cash in reserve somewhere save-- even if its a money market or bank making next to nothing.

Those market crashes-- got bless 'em. They are there for us. That is the time to invest. That is the time to make all of our money. Take our cash and invest!!!

You want 2 things.
1- Market Volatlity
2- Cash out at the top.

This sounds like market timing. There is no way to know market high or low.pick an AA and stay course.A written plan can help
http://www.bogleheads.org/wiki/Investme ... _Statement
John
Johm221122
 
Posts: 4840
Joined: Fri May 13, 2011 7:27 pm

Re: The Three Fund Portfolio

Postby Taylor Larimore » Mon Apr 01, 2013 8:20 am

Bogleheads:

Please keep this thread about The Three Fund Portfolio. "Bond bubbles" and "market-timing" deserve a separate thread.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby Senin » Tue Apr 02, 2013 3:34 am

[Off topic comment removed by admin LadyGeek]
Senin
 
Posts: 97
Joined: Sat May 14, 2011 4:42 am

Re: The Three Fund Portfolio

Postby HEPennyPacker » Tue Apr 02, 2013 8:10 am

Taylor,

Do you still suggest age in bonds +/- even though we both have pensions for 60% of pay upon retirement? Would you count that as part of the "bond" part of our portfolio, which would allow us to go 100% equities in our Roth's?
HEPennyPacker
 
Posts: 5
Joined: Fri Mar 29, 2013 9:48 pm

Re: The Three Fund Portfolio

Postby dbr » Tue Apr 02, 2013 9:51 am

HEPennyPacker wrote:Taylor,

Do you still suggest age in bonds +/- even though we both have pensions for 60% of pay upon retirement? Would you count that as part of the "bond" part of our portfolio, which would allow us to go 100% equities in our Roth's?


Rather than the thought process above, you could ask the question what would be the impact if your Roth were 100% stocks and you lost half of it compared to your Roth being half stocks and your loss was 1/4 of your assets, in a market crash. Would the difference between those two outcomes be worth taking in order to try, for example, for an expected return of 6% instead of only, say, 4%.

A different analysis would be to look at how likely you might not be able to sustain a retirement depending on how the Roth is invested. It will generally be true that investing the Roth at 100% stocks will not significantly reduce chances of failure and therefore that it is prudent to take no more risk than needed. However, It would also be a bad idea to be all bonds in the Roth, generally speaking.

All of these comments are for illustration. This is not portfolio advice but a point of view about the thought process.
dbr
 
Posts: 14339
Joined: Sun Mar 04, 2007 10:50 am

Asset allocation tool

Postby Taylor Larimore » Tue Apr 02, 2013 12:11 pm

HEPennyPacker wrote:Taylor,

Do you still suggest age in bonds +/- even though we both have pensions for 60% of pay upon retirement? Would you count that as part of the "bond" part of our portfolio, which would allow us to go 100% equities in our Roth's?


PennyPacker:

Dbr offers good advice. Mr. Bogle's "age in bonds" rule is only a rough guideline. Our stock/bond ratio is determined by our time-frame, risk-tolerance, and personal financial situation (need to take risk). Personally, I feel a pension allows us to theoretically have larger stock allocation but risk-tolerance and need to take risk must be considered.

If you will go back to my opening topic post under "Addendum," you will find a link to an asset-allocation tool. It is usually best to consider all your accounts (not just Roths) when selecting an asset-allocation plan.

Don't expect to find a perfect answer--there is none except in hindsight.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

A "serene and profitable" portfolio

Postby Taylor Larimore » Wed Apr 17, 2013 11:14 am

Bogleheads:

I frequently get PMs (Private Messages) about the Three Fund Portfolio. This is a PM I received this morning and my reply:
Re: The Three Fund Portfolio
Sent: Wed Apr 17, 2013 9:31 am
From: (deleted)
To: Taylor Larimore

I don't know if I've said it before - but thank you for being an early, frequent and tireless advocate of the
Three Fund Portfolio.

The closer I get to the simplicity of that ideal portfolio, the more serene (and profitable) the investment side of my life becomes. - [name removed by admin LadyGeek]

This is my reply:
I appreciate your comments about the Three Fund Portfolio.

Most advisors, brokers and the media hate the Three Fund Portfolio because it gives them nothing to sell or write about. So it is up to a few of us to repeat its many advantages.

Thanks again for your encouragement. - Taylor

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: A "serene and profitable" portfolio

Postby abuss368 » Wed Apr 17, 2013 3:30 pm

Taylor Larimore wrote:Bogleheads:

I frequently get PMs (Private Messages) about the Three Fund Portfolio. This is a PM I received this morning and my reply:
Re: The Three Fund Portfolio
Sent: Wed Apr 17, 2013 9:31 am
From: (deleted)
To: Taylor Larimore

I don't know if I've said it before - but thank you for being an early, frequent and tireless advocate of the
Three Fund Portfolio.

The closer I get to the simplicity of that ideal portfolio, the more serene (and profitable) the investment side of my life becomes. - [name removed by admin LadyGeek]

This is my reply:
I appreciate your comments about the Three Fund Portfolio.

Most advisors, brokers and the media hate the Three Fund Portfolio because it gives them nothing to sell or write about. So it is up to a few of us to repeat its many advantages.

Thanks again for your encouragement. - Taylor

Best wishes
Taylor


That is an awesome post Taylor that makes it all worth it!

Thank you for sharing.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6571
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

Why Total Bond Market Index Fund?

Postby jay22 » Thu Apr 18, 2013 7:54 am

Hi Taylor - Because of the situation bonds are in these days, do you think it would be wise for investors to consider medium or long term bonds instead of TBM when they construct the three fund portfolio?
jay22
 
Posts: 339
Joined: Thu Aug 23, 2012 9:56 am

Re: The Three Fund Portfolio

Postby Blues » Thu Apr 18, 2013 9:11 am

jay22 wrote:Hi Taylor - Because of the situation bonds are in these days, do you think it would be wise for investors to consider medium or long term bonds instead of TBM when they construct the three func portfolio?


I'm not Taylor but the further out you go in duration (and lesser credit quality if that factors in), the more "stock-like" your fixed income investments become. Many of our sage elders here will tell you not to chase yield and to take your risk on the equity side.

On the other hand, it's your money and as long as you know the risks involved you can weigh the options and possible outcomes.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1234
Joined: Wed Dec 10, 2008 12:58 pm

Re: The Three Fund Portfolio

Postby jay22 » Thu Apr 18, 2013 9:16 am

Blues wrote:
jay22 wrote:Hi Taylor - Because of the situation bonds are in these days, do you think it would be wise for investors to consider medium or long term bonds instead of TBM when they construct the three func portfolio?


I'm not Taylor but the further out you go in duration (and lesser credit quality if that factors in), the more "stock-like" your fixed income investments become. Many of our sage elders here will tell you not to chase yield and to take your risk on the equity side.

On the other hand, it's your money and as long as you know the risks involved you can weigh the options and possible outcomes.

OK, how about short term bonds then?

P.S: The only reason I am asking this is just because I am trying to understand the pros and cons of having TBM instead of short/medium/long term bonds in the next 4-6 years.
jay22
 
Posts: 339
Joined: Thu Aug 23, 2012 9:56 am

Re: The Three Fund Portfolio

Postby Blues » Thu Apr 18, 2013 9:25 am

jay22 wrote:OK, how about short term bonds then?

P.S: The only reason I am asking this is just because I am trying to understand the pros and cons of having TBM instead of short/medium/long term bonds in the next 4-6 years.


It really depends on your personal situation. I've shortened duration on my Vanguard bond holdings (though I still have a good portion of intermediate term bonds elsewhere and I'm also 60 and retired).

If you are young and have a long investment horizon ahead of you, you can probably ride out any temporary loss of principal due to interest rate risk and duration. On the other hand, if you're older and think you'll need access to the funds sooner rather than later and can't ride out the potential fluctuation in value due to interest rate risk and duration, shortening duration may be appropriate.

Shortening duration is not a guarantee of success in terms of avoiding interest rate risk...nor is it a guarantee of keeping up with inflation going forward. (Few bonds are these days.)

There is no really easy answer imho but you need to try to find the best choice for your own circumstances and risk tolerance.

Other wiser members will be able to provide further (and superior) assistance.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1234
Joined: Wed Dec 10, 2008 12:58 pm

Why Total Bond Market Index Fund.

Postby Taylor Larimore » Thu Apr 18, 2013 9:43 am

Hi Taylor - Because of the situation bonds are in these days, do you think it would be wise for investors to consider medium or long term bonds instead of TBM when they construct the three fund portfolio?

Jay:

Total Bond Market (TBM) is an intermediate-term bond fund. The important advantage of TBM is that it is a very diversified, high-quality fund that contains bonds of nearly all durations. This assures that a TBM bond fund share owner never wastes time trying to guess what bonds will do, and they won't find themselves 100% invested in a losing bond category. (TBMs worst annual loss was -2.66% in 1994 followed by a +16.0% gain in 1995).

In my opinion, trying to market-time bonds is more difficult than trying to market-time stocks. Both are losing strategies. Diversifying in bonds is almost as important as diversifying in stocks. Mr. Bogle's invention of Total Bond Market Index Fund is a 1-fund solution.

Keep investing simple.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: Why Total Bond Market Index Fund.

Postby jay22 » Thu Apr 18, 2013 10:04 am

Taylor Larimore wrote:
Hi Taylor - Because of the situation bonds are in these days, do you think it would be wise for investors to consider medium or long term bonds instead of TBM when they construct the three fund portfolio?

Jay:

Total Bond Market (TBM) is an intermediate-term bond fund. The important advantage of TBM is that it is a very diversified, high-quality fund that contains bonds of nearly all durations. This assures that a TBM bond fund share owner never wastes time trying to guess what bonds will do, and they won't find themselves 100% invested in a losing bond category. (TBMs worst annual loss was -2.66% in 1994 followed by a +16.0% gain in 1995).

In my opinion, trying to market-time bonds is more difficult than trying to market-time stocks. Both are losing strategies. Diversifying in bonds is almost as important as diversifying in stocks. Mr. Bogle's invention of Total Bond Market Index Fund is a 1-fund solution.

Keep investing simple.

Best wishes.
Taylor

Thanks, Taylor. I just checked - more than 55% of the bonds in TBM are of 3-10 years duration. I was not aware of that.
jay22
 
Posts: 339
Joined: Thu Aug 23, 2012 9:56 am

Re: The Three Fund Portfolio

Postby Ingo » Thu Apr 25, 2013 9:27 am

My question has to do with spending dividends from the 3-fund ETF portfolio (Total Stock Market, Total International, and Total Bond Market) and the expected change in the "properly" allocated asset mix.

Does anyone here not realign the proper mix, to always match their tolerance for risk and "age in bonds"? Does everyone here always tweak the allocation to match one's risk?

In other words, whats wrong with (spending the dividends - for living expenses) and letting "drift" in style and asset allocation occur in the 3 fund portfolio?
User avatar
Ingo
 
Posts: 7
Joined: Tue Feb 22, 2011 12:33 pm

Withdrawing and Rebalancing the Three Fund Portfolio.

Postby Taylor Larimore » Thu Apr 25, 2013 10:21 am

Ingo wrote:My question has to do with spending dividends from the 3-fund ETF portfolio (Total Stock Market, Total International, and Total Bond Market) and the expected change in the "properly" allocated asset mix.

Does anyone here not realign the proper mix, to always match their tolerance for risk and "age in bonds"? Does everyone here always tweak the allocation to match one's risk?

In other words, whats wrong with (spending the dividends - for living expenses) and letting "drift" in style and asset allocation occur in the 3 fund portfolio?


Ingo:

If you are spending from your portfolio, it is usually better to withdraw total return--not just dividends. This Vanguard study explains:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Rebalancing is necessary to maintain your desired stock/bond ratio -- your most important portfolio decision.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby CABob » Thu Apr 25, 2013 11:40 am

Ingo wrote:My question has to do with spending dividends from the 3-fund ETF portfolio (Total Stock Market, Total International, and Total Bond Market) and the expected change in the "properly" allocated asset mix.

Does anyone here not realign the proper mix, to always match their tolerance for risk and "age in bonds"? Does everyone here always tweak the allocation to match one's risk?

In other words, whats wrong with (spending the dividends - for living expenses) and letting "drift" in style and asset allocation occur in the 3 fund portfolio?

I think you are combining two separate issues into a single question. Whether to reinvest dividends or take them as a distribution for expenses is mostly a matter of personal preference. If you are in the withdrawal phase there is certainly nothing wrong with taking dividends for expenses. Personally, I reinvest dividends in my tax advantaged account and in my taxable account I have dividends directed to a money market fund. This is mostly in consideration of the tax records involved with reinvestment.
The matter of keeping asset allocation in the desired range is a separate consideration and should be done regardless of the dividend decision. This can be done with withdrawals, contributions, adjusting within accounts, or a combination of methods.
Bob | An investment in knowledge pays the best interest. -- Benjamin Franklin
User avatar
CABob
 
Posts: 3032
Joined: Sun Feb 25, 2007 9:55 pm
Location: Southern California

Re: The Three Fund Portfolio

Postby tuomasj » Sat Apr 27, 2013 6:00 am

I wrote this question in thread about SDIV dividend etf.

tuomasj wrote:Ok, I've read a lot about three fund portfolio and lazy investing, and I'm even more interested. Since I do not live in US, is there are difference on following same strategy but using Vanguard ETF's instead of mutual funds?

For example, Vanguard Total World Stock Index Fund (0.35%) and Vanguard Total World Stock ETF (0.19%) have a bit different expense ratios, are there are other differences? (For reference, my stock broker has $20 transaction fee for US stocks and ETF's, without any additional expences)


I'm curious, since I have access only to Vanguard ETF's through my stock broker.

As I'm living in euro-zone, is there any need to adjust fund's in three fund portfolio? Should I worry about USD/EUR exchange rate, how I might affect on three fund portfolio performance?
tuomasj
 
Posts: 10
Joined: Sat Apr 20, 2013 1:15 am
Location: Finland, Europe

Total Market Index Funds for non-U.S. investors

Postby Taylor Larimore » Sat Apr 27, 2013 8:02 am

tuomasj:

The concept of using total market index funds or ETFs as a basic portfolio should work anywhere. I suggest you seek local advice for implimentation.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby LadyGeek » Sat Apr 27, 2013 9:24 am

tuomasj wrote:As I'm living in euro-zone, is there any need to adjust fund's in three fund portfolio? Should I worry about USD/EUR exchange rate, how I might affect on three fund portfolio performance?

Welcome! We have members with EU experience. Start a thread in the Investing - Help with Personal Investments forum and use the Asking Portfolio Questions format (it's customized for US, but you can see the idea). Taxation and currency risk are a concern; we can help you answer these questions.

Include Euro-Zone (or your country) in the thread title to draw the attention of our EU experts. We also have a wiki article: EU investing
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 19582
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: The Three Fund Portfolio

Postby tuomasj » Sat Apr 27, 2013 5:28 pm

LadyGeek wrote:
tuomasj wrote:As I'm living in euro-zone, is there any need to adjust fund's in three fund portfolio? Should I worry about USD/EUR exchange rate, how I might affect on three fund portfolio performance?

Welcome! We have members with EU experience. Start a thread in the Investing - Help with Personal Investments forum and use the Asking Portfolio Questions format (it's customized for US, but you can see the idea). Taxation and currency risk are a concern; we can help you answer these questions.

Include Euro-Zone (or your country) in the thread title to draw the attention of our EU experts. We also have a wiki article: EU investing


Thanks for the help! I'm still newbie here, so I'm still learning the rules of the road :)

Here is my new thread on "Investing - Help with Personal Investments"
Starting a Three Fund Portfolio in Euro-zone (USD vs EUR?)
tuomasj
 
Posts: 10
Joined: Sat Apr 20, 2013 1:15 am
Location: Finland, Europe

Inspiration for The Three Fund Portfolio.

Postby Taylor Larimore » Wed May 01, 2013 9:32 pm

Bogleheads:
In another Topic I was asked:
What was the "inspiration" for the three fund portfolio?

This is part of my answer:

My interest in investing is inherited. My grandfather, Christopher Foster Coombs, was one of three principals heading United Founders Group, the largest group of investment trusts (now called mutual funds) in the late 1920s. He was a multi-millionaire who became bankrupt in the 30s (stocks bought on margin).

I began investing in 1950 with a neighborhood investment club and spent most of my life trying to "beat the market" by succumbing to Wall Street's marketing machine, and later succumbing to the lure of market-timing newsletters. When I finally realized that all my time and effort trying to beat the market was unsuccessful, I began reading financial literature (over 300 books) and to study academic research.

A Random Walk Down Wall Street by Professor Burton Malkiel and Bogle on Mutual Funds by our mentor, both based on academic research, were two books that had the greatest influence on me. I found it impossible to read these books and not be convinced of the power of total market indexing and the benefits of simplicity.

Most (not all) Wall Street firms and advisers hate simple portfolios and low-cost indexing because it minimizes or eliminates their services. The Three Fund Portfolio is a tough sell against their billion dollar marketing campaigns. Nevertheless, many leading authorities, mostly academics and conflict-free authors, have gone on record as favoring total market index funds.

I understand that Certified Financial Planners (CFPs) in Vanguard's Personal Service are now recommending the Three Fund Portfolio for most clients. (The Three Fund Portfolio is also the basis for Vanguard's Target and Life Strategy funds.)

Its time has come.

viewtopic.php?f=10&t=113389

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20096
Joined: Tue Feb 27, 2007 9:09 pm
Location: Miami FL

Re: The Three Fund Portfolio

Postby Artsdoctor » Wed May 01, 2013 9:41 pm

As always, what a nice post. Your history is fascinating.

I use the Three Fund Portfolio as my benchmark. I might tinker a bit, knowing that the enemy of a good plan is the search for the perfect plan. But at the end of the day, I hold myself accountable to the Three Fund Portfolio that matches my asset allocation. Whether or not I manage to come out ahead after many years remains to be seen. However, once I retire, I'm reverting back to my benchmark to make life easier: I'm scared that my current complexity will be too difficult for me at some point (let alone the spouse I might leave behind!).

Thank you for all of your generosity.

Artsdoctor
User avatar
Artsdoctor
 
Posts: 737
Joined: Thu Jun 28, 2012 4:09 pm
Location: Los Angeles, CA

Re: Inspiration for The Three Fund Portfolio.

Postby abuss368 » Thu May 02, 2013 10:28 pm

Taylor Larimore wrote:Bogleheads:
In another Topic I was asked:
What was the "inspiration" for the three fund portfolio?

This is part of my answer:

My interest in investing is inherited. My grandfather, Christopher Foster Coombs, was one of three principals heading United Founders Group, the largest group of investment trusts (now called mutual funds) in the late 1920s. He was a multi-millionaire who became bankrupt in the 30s (stocks bought on margin).

I began investing in 1950 with a neighborhood investment club and spent most of my life trying to "beat the market" by succumbing to Wall Street's marketing machine, and later succumbing to the lure of market-timing newsletters. When I finally realized that all my time and effort trying to beat the market was unsuccessful, I began reading financial literature (over 300 books) and to study academic research.

A Random Walk Down Wall Street by Professor Burton Malkiel and Bogle on Mutual Funds by our mentor, both based on academic research, were two books that had the greatest influence on me. I found it impossible to read these books and not be convinced of the power of total market indexing and the benefits of simplicity.

Most (not all) Wall Street firms and advisers hate simple portfolios and low-cost indexing because it minimizes or eliminates their services. The Three Fund Portfolio is a tough sell against their billion dollar marketing campaigns. Nevertheless, many leading authorities, mostly academics and conflict-free authors, have gone on record as favoring total market index funds.

I understand that Certified Financial Planners (CFPs) in Vanguard's Personal Service are now recommending the Three Fund Portfolio for most clients. (The Three Fund Portfolio is also the basis for Vanguard's Target and Life Strategy funds.)

Its time has come.

viewtopic.php?f=10&t=113389

Best wishes.
Taylor



Hi Taylor,

I always find that story incredible.

Thank you.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6571
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

PreviousNext

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: metacritic and 16 guests