The Three-Fund Portfolio
Re: The Three Fund Portfolio
Thank you Taylor and abuss368!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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Re: The Three Fund Portfolio
"Simplicity is the master key to financial success." -- Jack Bogle
Re: The Three Fund Portfolio
Taylor what are your thoughts on adding VTABX Vanguard Total International Bond Index to the 3 fund portfolio?
Thanks.
Dave
Thanks.
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
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Adding Total International Bond Fund (VTABX) ?
Dave:Dave55 wrote:Taylor what are your thoughts on adding VTABX Vanguard Total International Bond Index to the 3 fund portfolio?
Thanks.
Dave
This is what I wrote in an earlier reply:
I feel the same today.It is always tempting to add additional funds to the Three Fund Portfolio and overlook their additional costs and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.
It is notable that Vanguard added only a small amount of the new bond fund to their Target and Life Strategy funds. Total International Bond fund represents only 2.0% of the 2060 Target Fund and only 4.0% of the Life Strategy Growth Fund. It's largest allocation is 14% in the Target Retirement Income fund. These allocations are nearly meaningless.
Adding another fund inside a single Target or Life-Strategy fund adds no complexity to the investor. However, I doubt if it is worth complicating the Three Fund Portfolio with another small fund containing several disadvantages: More political risk; higher expense ratios (.23% and .20% Adm.); longer duration (6.6 years) and relatively week credit quality compared with Total Bond Market which is already in the Three Fund Portfolio to provide safety and income.
The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: The Three Fund Portfolio
Thanks Taylor.
Dave
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
- Taylor Larimore
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"Buy the haystack"
Bogleheads:
The Callan Table of Investment Returns shows the impossibility of forecasting which asset-class will lead or lag during any one year.
Mr. Bogle likes to say: "Don't look for a needle in the haystack--own the haystack."
The Three Fund Portfolio contains Three "Haystacks."
Best wishes.
Taylor
The Callan Table of Investment Returns shows the impossibility of forecasting which asset-class will lead or lag during any one year.
Mr. Bogle likes to say: "Don't look for a needle in the haystack--own the haystack."
The Three Fund Portfolio contains Three "Haystacks."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Buy the haystack"
This is an excellent post from Taylor.Taylor Larimore wrote:Bogleheads:
The Callan Table of Investment Returns shows the impossibility of forecasting which asset-class will lead or lag during any one year.
Mr. Bogle likes to say: "Don't look for a needle in the haystack--own the haystack."
The Three Fund Portfolio contains Three "Haystacks."
Best wishes.
Taylor
I have seen this table in Vanguard's research reports and have found it very informative. Predicting the performance of asset classes and the attempt to market time by moving both in and out at the right moment is fruitless.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Three Fund Portfolio
Taylor, in general does slice and dice return more that the 3 fund portfolio?
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Slice & Dice
Selftalk:selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?
"Slice and dice" refers to over-weighting categories within total markets. During various periods sub-categories will over-perform and under-perform. Picking the winning categories in advance is the problem.
From Page 1 (written in 2012):
This is what happened to these Vanguard funds the following year (2013):I really like the three fund portfolio, but I can't resist the urge to season mine with a few extra REIT's and TIP's. So I guess the cajun in me likes something slightly more spicy.
Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%
Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.
"The enemy of a good plan is the dream of a perfect plan."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three Fund Portfolio
It was a U.S. Large Cap year indeed.
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Three Fund Portfolio
See the wiki: http://www.bogleheads.org/wiki/Three-fund_portfolioselftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?
In my opinion, it is important to note that the TFP comes at this as a simplification of needlessly complicated other portfolios. It does not build up from one is not enough, two is better, three is good enough.A three-fund portfolio is a portfolio which does not slice and dice, ...
The TFP is a very sophisticated conclusion of work and thought by some brilliant people over many years. It's not just Mr. Taylor Larimore (bless him!), one has only to look at the basics of the Vanguard LifeStrategy and Target Retirement Funds to see they implement the same basic idea.
Further than that is the component funds themselves. Total Stock Market indexing, for example, is not just a simple idea. It is a very sophisticated concept put together, over time, by some very smart and perceptive people.
In my opinion, pick the Vanguard LifeStrategy fund that best approximates your AA and be done.
There are perhaps two good arguments to supplement (slice and dice) the TFP:
First: The three funds are not representative of the total economy. Mr. Rick Ferri argues for REITS, since (he says) real estate is under represented in the metric of the Total Stock Market. Both Ferri and Mr. Jack Bogle say that the Total Bond Market does not adequately include corporate bonds, etc.
Second: There are market inefficiencies to be exploited, because some sectors like small company value have added returns that outweigh their added risks. Mr. Larry Swedroe is a notable proponent.
A third (not good) reason is that you have some insight others do not. So, add gold, commodities, emerging markets, ... This is simply speculation, in my opinion.
The Three-Fund Portfolio is, indeed, majestically simple. And, very sophisticated.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: The Three Fund Portfolio
Well said.Leeraar wrote:See the wiki: http://www.bogleheads.org/wiki/Three-fund_portfolioselftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?In my opinion, it is important to note that the TFP comes at this as a simplification of needlessly complicated other portfolios. It does not build up from one is not enough, two is better, three is good enough.A three-fund portfolio is a portfolio which does not slice and dice, ...
The TFP is a very sophisticated conclusion of work and thought by some brilliant people over many years. It's not just Mr. Taylor Larimore (bless him!), one has only to look at the basics of the Vanguard LifeStrategy and Target Retirement Funds to see they implement the same basic idea.
Further than that is the component funds themselves. Total Stock Market indexing, for example, is not just a simple idea. It is a very sophisticated concept put together, over time, by some very smart and perceptive people.
In my opinion, pick the Vanguard LifeStrategy fund that best approximates your AA and be done.
There are perhaps two good arguments to supplement (slice and dice) the TFP:
First: The three funds are not representative of the total economy. Mr. Rick Ferri argues for REITS, since (he says) real estate is under represented in the metric of the Total Stock Market. Both Ferri and Mr. Jack Bogle say that the Total Bond Market does not adequately include corporate bonds, etc.
Second: There are market inefficiencies to be exploited, because some sectors like small company value have added returns that outweigh their added risks. Mr. Larry Swedroe is a notable proponent.
A third (not good) reason is that you have some insight others do not. So, add gold, commodities, emerging markets, ... This is simply speculation, in my opinion.
The Three-Fund Portfolio is, indeed, majestically simple. And, very sophisticated.
L.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Slice & Dice
Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%
Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.
"The enemy of a good plan is the dream of a perfect plan."
Best wishes.
Taylor
Taking what Taylor shows above and based on my allocations.....I netted out about a 20% gain in my portfolio. I'll take that all the way to the bank without any regrets about not getting the maximum possible returns....slice/dice, market timing, etc. makes my head hurt and keeps me up at night....I'd rather go brew some beer.
Aloha...
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Re: The Three Fund Portfolio
In a German financial forum a chart has been posted showing the yearly returns based on several MSCI indices and different portfolios build on them, yearly rebalanced.
http://www.wertpapier-forum.de/index.ph ... h_id=83588
I would like to point out the comparison between the MSCI ACWI IMI (total stock world) and a portfolio combined out of 75 % world, 10 % EM and small stocks 5 % each USA, Europe and EM which is quite similar to the ACWI IMI. Due to the yearly rebalancing the return of the multi indices variant is about 1 percent higher per year (2.35 vs. 3.43 from 2001 till a fee days ago). The benefit of rebalancing within equity might be a reason for a more complex portfolio
http://www.wertpapier-forum.de/index.ph ... h_id=83588
I would like to point out the comparison between the MSCI ACWI IMI (total stock world) and a portfolio combined out of 75 % world, 10 % EM and small stocks 5 % each USA, Europe and EM which is quite similar to the ACWI IMI. Due to the yearly rebalancing the return of the multi indices variant is about 1 percent higher per year (2.35 vs. 3.43 from 2001 till a fee days ago). The benefit of rebalancing within equity might be a reason for a more complex portfolio
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Re: Slice & Dice
Excellent information Taylor.Taylor Larimore wrote:Selftalk:selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?
"Slice and dice" refers to over-weighting categories within total markets. During various periods sub-categories will over-perform and under-perform. Picking the winning categories in advance is the problem.
From Page 1 (written in 2012):This is what happened to these Vanguard funds the following year (2013):I really like the three fund portfolio, but I can't resist the urge to season mine with a few extra REIT's and TIP's. So I guess the cajun in me likes something slightly more spicy.
Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%
Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.
"The enemy of a good plan is the dream of a perfect plan."
Best wishes.
Taylor
After looking at the results, I guess you and I are somewhat similar in our investing styles. I have the REITs and no TIPS (at least yet). You have the TIPS and no REITs. At least the REITs had a positive return! The TIPS fund was just plain awful last year but appears to be positive this year to date.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Slice & Dice
Thank you Taylor.Taylor Larimore wrote:
Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.
"The enemy of a good plan is the dream of a perfect plan."
Best wishes.
Taylor
Happy Birthday!
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Three Fund Portfolio
Taylor, Thank you for the 3 fund portfolio. At 56 I have been thru 2 advisors, then 5 years of my own efforts chasing alpha and the light bulb went off last fall. I moved everything to Vanguard and now I am using the 3 fund portfolio - thanks again Taylor and Happy Birthday!
Dave
"Nothing is more simple than greatness, indeed to be simple is to be great"
Ralph Waldo Emerson
Dave
"Nothing is more simple than greatness, indeed to be simple is to be great"
Ralph Waldo Emerson
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
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Rick Ferri and The Three Fund Portfolio
Dave:
We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.
Best wishes.
Taylor
We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Rick Ferri and The Three Fund Portfolio
Hi Taylor,Taylor Larimore wrote:Dave:
We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.
Best wishes.
Taylor
That is great to hear Rick & Mel were a part of your birthday. It is also reassuring to hear Rick is a proponent of the Three Fund Portfolio.
I hope you had a great birthday. Congrats on the sailing win!
Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
Re: Rick Ferri and The Three Fund Portfolio
Taylor, congratulations! You sure have made a difference in our lives.Taylor Larimore wrote:Dave:
We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.
Best wishes.
Taylor
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Rick Ferri and The Three Fund Portfolio
I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.
L.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Rick Ferri and The Three Fund Portfolio
I have no knowledge of what Mr Ferri or the company, Portfolio Solutions, does with their clients' investments.abuss368 wrote:I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.
L.
However, my impression is that he is increasingly of the opinion that the 3-fund portfolio is good enough and it does not need to be more complicated than that.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Rick Ferri and The Three Fund Portfolio
Was it not Warren Buffett that said there is a human characteristic to make easy things more complicated?Leeraar wrote:I have no knowledge of what Mr Ferri or the company, Portfolio Solutions, does with their clients' investments.abuss368 wrote:I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.
L.
However, my impression is that he is increasingly of the opinion that the 3-fund portfolio is good enough and it does not need to be more complicated than that.
L.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Rick Ferri and The Three Fund Portfolio
There is an Einstein quote along those lines: As simple as possible but not more so.abuss368 wrote:Was it not Warren Buffett that said there is a human characteristic to make easy things more complicated?
For me: Simple but not simplistic.
But, I really think Taylor Larimore has it right when he says: Majestic in its simplicity.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: The Three Fund Portfolio
Taylor thanks again, glad you enjoyed your birthday and had a good meeting. Not surprised Rick Ferri endorsed your 3 fund portfolio that I happen to have adapted.
Best
Dave
Best
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Re: The Three Fund Portfolio
Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave
Best,
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
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Re: The Three Fund Portfolio
That is a great way of thinking about the Three Fund Portfolio (or any portfolio).Dave55 wrote:Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave
Thank you for the perspective!
Best Wishes.
John C. Bogle: “Simplicity is the master key to financial success."
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The Three Fund Portfolio holds thousands of corporations.
Dave:Dave55 wrote:Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave
I am glad you reminded us of this important concept.
For more than 200 years U.S. and foreign corporations have more-or-less steadily grown larger and more profitable as they provide us with goods and services. It is reasonable to assume that, in total, they will continue to grow and earn profits.
It is very comforting to know that I am a small shareholder in nearly all these great corporations.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three Fund Portfolio
Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.abuss368 wrote:It was a U.S. Large Cap year indeed.
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Adding a small-cap fund to The Three Fund Portfolio?
Code Commit:Code Commit wrote:Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.abuss368 wrote:It was a U.S. Large Cap year indeed.
Total Market Index Funds are an average of all the stocks (and bonds) in the index. There will always be sub-categories within the total market that do better or worse during various periods.
If you think you can select a winning sub-category in advance with its additional risk, complexity, cost and tax-inefficiency -- add a small-cap fund, or any other fund, to The Three Fund Portfolio.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Adding a small-cap fund to The Three Fund Portfolio?
Thank you for putting that in better perspective Taylor!Taylor Larimore wrote:Code Commit:Code Commit wrote:Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.abuss368 wrote:It was a U.S. Large Cap year indeed.
Total Market Index Funds are an average of all the stocks (and bonds) in the index. There will always be sub-categories within the total market that do better or worse during various periods.
If you think you can select a winning sub-category in advance with its additional risk, complexity, cost and tax-inefficiency -- add a small-cap fund, or any other fund, to The Three Fund Portfolio.
Best wishes.
Taylor
Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three Fund Portfolio
Taylor, I completely agree with your point that we will never know in advance which sub-category of the total market will outperform in the future. That is different than saying "it was a US Large Cap year". That statement by abuss was about the past year and I only offered a minor correction about the past performance.
By the way, Happy Birthday and here is to many more .
By the way, Happy Birthday and here is to many more .
Re: The Three Fund Portfolio
Fairly new to the Three Fund Portfolio, so thought to use Morningstar to
research the funds that are being recommended.
Here is a summary of what was found:
First, I am concerned with the erosion of book value in each of these funds.
Notice that it is particularly pronounced with the International Fund (VGTSX),
but also evident with total US Market Fund (VTSMX).
Notice too, that the S&P500 is growing book value at nearly 7% annually
which is healthy and in line with historical norms.
Does anybody have an explanation for the book value losses?
Similarly concerned with Sales Growth in VGTSX at -40%!!
I realize the global economy is having some problems, but
how can there be a 40% loss?
Lastly, notice that Historical Earnings (H Earn) is growing modestly within the S&P500.
However, declining within VTSMX and falling within VGTSX where Cash Flow is crashing.
Again; any good explanations?
Thanks!
research the funds that are being recommended.
Here is a summary of what was found:
First, I am concerned with the erosion of book value in each of these funds.
Notice that it is particularly pronounced with the International Fund (VGTSX),
but also evident with total US Market Fund (VTSMX).
Notice too, that the S&P500 is growing book value at nearly 7% annually
which is healthy and in line with historical norms.
Does anybody have an explanation for the book value losses?
Similarly concerned with Sales Growth in VGTSX at -40%!!
I realize the global economy is having some problems, but
how can there be a 40% loss?
Lastly, notice that Historical Earnings (H Earn) is growing modestly within the S&P500.
However, declining within VTSMX and falling within VGTSX where Cash Flow is crashing.
Again; any good explanations?
Thanks!
Qualified Nuclear Engineer & NYS Licensed Professional Engineer
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"Predicting the Past"
Andrew:
On of the many advantages of The Three Fund Portfolio is that it is a minimum-maintenance, stay-the-course portfolio needing only occasional rebalancing. It's statistics are interesting -- but time-consuming and nearly meaningless.
You might be interested in this post from a wise old investor named Ozark:
Predicting the Past
Best wishes.
Taylor
On of the many advantages of The Three Fund Portfolio is that it is a minimum-maintenance, stay-the-course portfolio needing only occasional rebalancing. It's statistics are interesting -- but time-consuming and nearly meaningless.
You might be interested in this post from a wise old investor named Ozark:
Predicting the Past
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: The Three Fund Portfolio
I'm concerned with generally accepted accounting principles:
http://en.wikipedia.org/wiki/Generally_ ... principles
http://en.wikipedia.org/wiki/Generally_ ... principles
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Re: The Three Fund Portfolio
What does GAAP have to do with a Three Fund Portfolio?AndrewXnn wrote:I'm concerned with generally accepted accounting principles:
http://en.wikipedia.org/wiki/Generally_ ... principles
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Three Fund Portfolio
abuss368;
The equity funds that are part of the Three Fund Portfolio have book values that
are falling and it is GAAP that defines how book value is calculated.
Book value for VTSMX is declining 3.12% per year.
Book value for VGTSM fell 28.42% per year (that's a lot).
In contrast Book value for the S&P 500 is rising 6.84% per year.
Somebody thought this was statistics, but it's not.
Instead, it is the change in carrying value of these funds
according to generally accepted accounting principles.
80% of VTSMX is basically the S&P 500. Since its book value
fell 3%, that tells me that the other 20% of the fund is comprised of
stocks whose book value fell almost 43% = (-3.12-0.8*6.84)/0.2.
Again, that a significant loss.
While the S&P500 has proven itself over time, you will find that
it's because its book value has appreciated over time as well.
That the book value of the equity of the three fund portfolio
outside of the S&P500 is declining so much is problematic.
Market prices don't necessarily move along with book value
over the short term. However, they do over the longer term.
The equity funds that are part of the Three Fund Portfolio have book values that
are falling and it is GAAP that defines how book value is calculated.
Book value for VTSMX is declining 3.12% per year.
Book value for VGTSM fell 28.42% per year (that's a lot).
In contrast Book value for the S&P 500 is rising 6.84% per year.
Somebody thought this was statistics, but it's not.
Instead, it is the change in carrying value of these funds
according to generally accepted accounting principles.
80% of VTSMX is basically the S&P 500. Since its book value
fell 3%, that tells me that the other 20% of the fund is comprised of
stocks whose book value fell almost 43% = (-3.12-0.8*6.84)/0.2.
Again, that a significant loss.
While the S&P500 has proven itself over time, you will find that
it's because its book value has appreciated over time as well.
That the book value of the equity of the three fund portfolio
outside of the S&P500 is declining so much is problematic.
Market prices don't necessarily move along with book value
over the short term. However, they do over the longer term.
Qualified Nuclear Engineer & NYS Licensed Professional Engineer
Re: The Three Fund Portfolio
@AndrewXnnAndrewXnn wrote:
I'm in over my head here, but I'll try to offer some perspective. To me, your questions re-enforce the benefits of a 3-fund portfolio, target fund, balanced fund or other lazy portfolio. It is difficult, if not impossible, for even a pro to read the tea leaves and know what markets will do, let alone whether circumstances will change in the future that might turn any negative figures around. That said, a simple 3-fund portfolio with a relatively static asset allocation plan (no market timing) tends to take advantage of market valuations, allowing a Boglehead to ignore them.
Earnings, Book Value and Dividends grow and contract independent each other and independent of market movements but we look at those figures in relation to market movements. Market surges may outpace earnings growth, book value growth and/or Dividend Growth, causing a high P/E, high P/B and/or lower Dividend Yield. A sudden plunge in stock prices can leave one with lower P/E, P/BV and/or a higher Dividend. (There are no absolutes.) The higher the P/E or P/BV, the lower the expected long-term returns from new investment purchases because as an investor you are paying a higher price relative to the actual growth potential of the asset.AndrewXnn wrote:First, I am concerned with the erosion of book value in each of these funds.
Notice that it is particularly pronounced with the International Fund (VGTSX),
but also evident with total US Market Fund (VTSMX).
Notice too, that the S&P500 is growing book value at nearly 7% annually
which is healthy and in line with historical norms.
U.S. stock prices ballooned last year at higher than historical averages. My portfolio *loved* it. As a result, current P/E and P/B are (presumably) higher than a year ago, and the Dividend Yield may be lower. (I haven't checked.) It tells me that future long-term expected returns of U.S. stocks are lower. And it makes sense that the Total Stock Market has a higher P/E than the S&P 500 because Total Stock includes all Mid and Small Caps which ballooned more than U.S. Large Caps.
Ex-U.S. companies didn't do as well and there is fear about Emerging Markets so it is no surprise that International equity prices didn't move up as high and that, as a result, they have more attractive valuations (lower P/E and lower P/B relative to the U.S.). The Dividend is also more attractive. The resulting conclusion: potentially higher long-term returns from the broad International market.
Bogleheads with a 3-fund portfolio tend to have fairly stable, "static" asset allocations. All a Boglehead has to know is that there's too much money in the U.S stock fund per his/her desired asset allocation, so the fund must be sold down to the appropriate allocation. They can ignore P/E, P/B, dividends, etc. because the fund's bloat coincides with less attractive valuations. The proceeds from the sale must necessarily be fed into International equities to bring the portfolio back into balance. Proceeds will also land into the relative safety of bonds. (We'll call it "taking profits" for sake of the illustration.) Talk about the majesty of simplicity!
To Bogleheads, the worst performing asset is most attractive so it receives more new money going forward. To average investors, the worst performing asset is the least attractive which is why they weren't buying equities in March of 2009 (when they should have) and they weren't selling bonds to buy those equities when doing so would have been best for their portfolios.
Imagine the following asset allocation at the beginning of 2013:
60% Total U.S. Stock (VTSMX)
20% Total International (VGTSX)
20% Bonds (VBMFX)
Left alone, the portfolio looks like this at the end of 2013:
65% Total U.S. Stock (VTXMX) <--Too much U.S. Stock. Less attractive valuations. Must sell back down to 60%.
19% Total International (VGTSX) <--Too little Ex-U.S. More attractive valuations. Must buy back up to 20%.
16% Bonds (VBMFX) <--Need more safety. Profit from U.S. stocks buy bonds back up to 20%.
I hope all that blathering was helpful.
Last edited by pingo on Thu Jan 30, 2014 6:04 pm, edited 15 times in total.
Re: The Three Fund Portfolio
Pingo;
Appreciate your response.
I suspect the answer is not simple or obvious,
so I'll be thinking this over some more.
Thanks!
Appreciate your response.
I suspect the answer is not simple or obvious,
so I'll be thinking this over some more.
Thanks!
Qualified Nuclear Engineer & NYS Licensed Professional Engineer
Re: The Three Fund Portfolio
I'm wondering if you are alluding to characterization of stock performance by the book values. If so, it's been done in a different form as the price/book ratio and with the size of the fund (market cap). See: Fama and French three-factor model More thinking.
- Barry Barnitz
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Re: The Three Fund Portfolio
HI:
Allan Roth - Bogleheads makes the case for the three-fund portfolio in Roth: Simple ETF Strategies Work.
regards,
Allan Roth - Bogleheads makes the case for the three-fund portfolio in Roth: Simple ETF Strategies Work.
I’ve long said that a simple three-fund portfolio will beat the vast majority of investors. This simple portfolio can easily be constructed with ETFs from families such as Vanguard, iShares and Schwab.
Note indexuniverse.com is now ETF.comThis ETF portfolio, also known as the Second Grader portfolio, is one of the MarketWatch Lazy Portfolios Paul Farrell often writes about. According to MarketWatch, of the eight Lazy Portfolios, the Second Grader portfolio is in either first or second place in all of the time frames [1-year; 3-year; 5-year; 10-year]
regards,
Additional administrative tasks: Financial Page bogleheads.org. blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; La Guía Bogleheads® España site.
- abuss368
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Re: The Three Fund Portfolio
Barry Barnitz wrote:HI:
Allan Roth - Bogleheads makes the case for the three-fund portfolio in Roth: Simple ETF Strategies Work.
I’ve long said that a simple three-fund portfolio will beat the vast majority of investors. This simple portfolio can easily be constructed with ETFs from families such as Vanguard, iShares and Schwab.Note indexuniverse.com is now ETF.comThis ETF portfolio, also known as the Second Grader portfolio, is one of the MarketWatch Lazy Portfolios Paul Farrell often writes about. According to MarketWatch, of the eight Lazy Portfolios, the Second Grader portfolio is in either first or second place in all of the time frames [1-year; 3-year; 5-year; 10-year]
regards,
I have not been on the CBS website in a while. It is nice to see the Three Fund Portfolio outperform!
Simplicity is the master key to financial success.
Thank you Jack Bogle!
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Three Fund Portfolio
Taylor,
I read your outstanding post of Jan 1, 2012 on The Three Fund Portfolio.
http://www.bogleheads.org/forum/viewtop ... 10&t=88005
I have a question for you about this Three Fund Portfolio, but it doesn't seem like anyone has posted on that thread since Jan 2, 2012 and don't know if you will even receive this question.
I don't see any way to email you or send this message to you directly.
Please reply if you become aware of my post, and once I know that you will receive this, I'll formulate my question, which is a fundamental question about the Three Fund Portfolio and how to invest
thanks!
rjb112
I read your outstanding post of Jan 1, 2012 on The Three Fund Portfolio.
http://www.bogleheads.org/forum/viewtop ... 10&t=88005
I have a question for you about this Three Fund Portfolio, but it doesn't seem like anyone has posted on that thread since Jan 2, 2012 and don't know if you will even receive this question.
I don't see any way to email you or send this message to you directly.
Please reply if you become aware of my post, and once I know that you will receive this, I'll formulate my question, which is a fundamental question about the Three Fund Portfolio and how to invest
thanks!
rjb112
Re: The Three Fund Portfolio
If you go to Taylor's post you will see on the right hand side Taylor's name and a little symbol marked PM. That means "personal message." You can click on that and be taken to a form to send a personal message. It is not e-mail but Taylor will get an e-mail that he has a personal message. When he answers, you will get e-mail that you have a personal message, and at the top of your Bogleheads web page you will see the User Control Panel where you can click to read the message.rjb112 wrote:
I don't see any way to email you or send this message to you directly.
Re: The Three Fund Portfolio
He is missing that there are multiple pages of posts.
L.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: The Three Fund Portfolio
Whenever I'm tempted by individual stocks or home bias, I check back in here to keep my sanity. Thanks Bogleheads!
Re: The Three Fund Portfolio
Thanks dbr..........by dbr » Thu Jan 30, 2014 6:51 pm
Thanks Leeraar...... by Leeraar » Thu Jan 30, 2014 7:11 pm
got it.......I'm pretty new here; this is an outstanding place!
rjb112
Thanks Leeraar...... by Leeraar » Thu Jan 30, 2014 7:11 pm
got it.......I'm pretty new here; this is an outstanding place!
rjb112
- Taylor Larimore
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- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Making contact about The Three Fund Portfolio
rjb:
I will look for your question here.
Best wishes.
Taylor
I will look for your question here.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: The Three Fund Portfolio
I have some questions about the Three Fund Portfolio:
With interest rates having gone down for 30 years, is it wise for one to have all (or even most) of one's fixed income investments in the Barclay’s Index? With a yield on the Index of only 2.2% (per Morningstar), interest rates can rise a lot more than they can fall. On 9/30/1981, the 10 year Treasury closed at a yield of 15.84%. Today that same 10 year Treasury yields 2.71%. Interest rates have been artificially kept down by extraordinary, unprecedented action by the Federal Reserve, and that Fed action is being tapered, with an end to the QE program envisioned for the near future.
With a yield of only 2.2%, is an investor getting paid enough to take the interest rate risk?
Also, do high yield bonds and municipal bonds, not in the Index, have any place in a portfolio?
Finally, should the Vanguard REIT Index fund play a fundamental role in a portfolio, and more importantly, how does one even go about researching this issue?
thanks!
With interest rates having gone down for 30 years, is it wise for one to have all (or even most) of one's fixed income investments in the Barclay’s Index? With a yield on the Index of only 2.2% (per Morningstar), interest rates can rise a lot more than they can fall. On 9/30/1981, the 10 year Treasury closed at a yield of 15.84%. Today that same 10 year Treasury yields 2.71%. Interest rates have been artificially kept down by extraordinary, unprecedented action by the Federal Reserve, and that Fed action is being tapered, with an end to the QE program envisioned for the near future.
With a yield of only 2.2%, is an investor getting paid enough to take the interest rate risk?
Also, do high yield bonds and municipal bonds, not in the Index, have any place in a portfolio?
Finally, should the Vanguard REIT Index fund play a fundamental role in a portfolio, and more importantly, how does one even go about researching this issue?
thanks!
- Taylor Larimore
- Posts: 32839
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Lengthy discussions.
rjb112:
We have had many lengthy discussions about the Barclay Index (benchmark for Total Bond Market), high-yield bonds and municipal bonds in today's low interest-rate environment. Adding REITs to a portfolio is also a topic that is often discussed on the forum. There is no definite answer.
Please use the forum's "Search" box to find other threads where these topics are discussed and debated.
Thank you and best wishes.
Taylor
We have had many lengthy discussions about the Barclay Index (benchmark for Total Bond Market), high-yield bonds and municipal bonds in today's low interest-rate environment. Adding REITs to a portfolio is also a topic that is often discussed on the forum. There is no definite answer.
Please use the forum's "Search" box to find other threads where these topics are discussed and debated.
Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle