The Three Fund Portfolio

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Re: The Three Fund Portfolio

Postby investor.saver1 » Thu Jan 19, 2012 2:45 pm

Taylor

First let me say that I appreciate your wisdom.

I apologize if you addressed this, early on the question of TIPS came up and I don't recall seeing a response from you in this regard. I scanned the thread, but it has gotten so long I may have missed it. Did you not include TIPS in an effort to maintain simplicity or is it that you are not an advocate of TIPs as a tilt? If you would not mind saying, do you hold inflation protected bonds/funds in your portfolio?
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Re: The Three Fund Portfolio

Postby Taylor Larimore » Thu Jan 19, 2012 3:30 pm

investor.saver1 wrote:Taylor, early on the question of TIPS came up and I don't recall seeing a response from you in this regard.


I mention TIPS in the opening post. Our bond allocation in retirement is half Total Bond Market and half Inflation-Protected Securities.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby billw » Thu Jan 19, 2012 4:16 pm

Regarding Tax Managed Funds. Can one exchange Total Bond and Inter Tres into a Tax Managed account without additional cost, taxes owed on cap gains, etc in a Taxable account?

Had placed some Bond funds in Taxable accounts, Equities in Tax deferred before finding the Bogleheads and getting better informed. Now in the process of trying to establish AA, reducing number of funds held in accounts and reducing expenses and tax.

Thanks.
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Exchanges, capital-gains, tax-managed funds, etc.

Postby Taylor Larimore » Thu Jan 19, 2012 4:27 pm

Hi Bill:

Please start a new thread about your personal portfolio. It deserves its own lengthy informed replies.

Thank you and best wishes.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby mikef » Thu Jan 19, 2012 10:41 pm

Taylor Larimore wrote:
investor.saver1 wrote:Taylor, early on the question of TIPS came up and I don't recall seeing a response from you in this regard.


Investor.saver:

I mention TIPS in the opening post. Our bond allocation in retirement is half Total Bond Market and half Inflation-Protected Securities.

Best wishes.
Taylor


Taylor, is the tips allocation via a fund or individual tips?
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Re: The Three Fund Portfolio

Postby Taylor Larimore » Thu Jan 19, 2012 11:14 pm

Hi Mike:

Taylor, is the tips allocation via a fund or individual tips?


I no longer own individual securities. To me, the slightly higher expense of a mutual fund is worth the liquidity, professional management, diversification, fund options and simplicity.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby umfundi » Mon Jan 23, 2012 12:11 am

stlutz wrote:My 2012 prediction. Taylor's original post will be the best post on this board for the entire year. :D

So, do we have that contest?
POTY and TOTY: Post of the year, thread of the year.

My nominations, acknowledging my recency bias, and my bias bias:

POTY: viewtopic.php?p=1263681#p1263681

TOTY: viewtopic.php?p=1267278#p1267278

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Diversification and the Three-Fund Portfolio

Postby Taylor Larimore » Thu Jan 26, 2012 4:06 pm

Bogleheads:

DIVERSIFICATION of the Three-Fund Portfolio (12-31-2011):

Vanguard Total Stock Market Index Fund:

Number of U.S. stocks = 3323

Portfolio Composition:
Consumer Discretionary 11.70%
Consumer Staples 10.10%
Energy 11.40%
Financials 14.40%
Health Care 11.80%
Industrials 11.20%
Information Technology 18.60%
Materials 4.00%
Telecommunication Services 2.90%
Utilities 3.90%

Distribution by size:
Giant 41.47%
Large 29.89%
Medium 19.86%
Small 6.41%
Micro 2.37%

Distribution by style:
Large Value 25%
Large Blend 24%
Large Growth 23%
Mid-Cap Value 6%
Mid-Cap Blend 7%
Mid-Cap Growth 7%
Small-Cap Value 3%
Small-Cap Blend 3%
Small-Cap Growth 3%

Vanguard Total International Stock Index Fund

Number of International stocks = 6485

Distribution by Country:
United Kingdom 14.5%
Japan 15.2%
Canada 7.6%
Australia 6.1%
France 6.2%
Switzerland 5.3%
Germany 5.5%
China 4.1%
Korea 3.4%
Brazil 3.6%
Taiwan 3.1%
Spain 2.1%
Sweden 2.3%
Hong Kong 2.0%
South Africa 1.9%
Netherlands 1.7%
Italy 1.8%
India 2.0%
Russia 1.4%
Singapore 1.2%
Mexico 1.0%
Malaysia 0.7%
Denmark 0.7%
Indonesia 0.6%
Belgium 0.7%
Norway 0.7%
Finland 0.8%
Israel 0.6%
Thailand 0.4%
Chile 0.4%
Austria 0.3%
Ireland 0.2%
Poland 0.4%
Turkey 0.4%
Peru 0.1%
Philippines 0.1%
Portugal 0.2%
Colombia 0.1%
Czech Republic 0.1%
Egypt 0.1%
Greece 0.2%
Hungary 0.1%
New Zealand 0.1%
Other 0.1%

Vanguard Total Bond Market Index Fund

Number of bonds = 5075

Distribution by issuer:
Asset-Backed 0.2%
Commercial Mortgage-Backed 2.3%
Finance 7.1%
Foreign 5.4%
Government Mortgage-Backed 26.4%
Industrial 11.7%
Other 1.4%
Treasury/Agency 43.1%
Utilities 2.4%

Distribution by credit quality:
U.S. Government 69.3%
Aaa 4.4%
Aa 5.2%
A 11.2%
Baa 9.8%
<Baa 0.1%

Best wishes
Taylor
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Re: The Three Fund Portfolio

Postby mikef » Thu Jan 26, 2012 4:55 pm

Taylor,
You are the WIZARD! :beer

Also it looks like it might be the UK that is sucking the life out of the Total International. Go Japan, Canada, Australia, France, Switzerland, Germany, China!
Last edited by mikef on Thu Jan 26, 2012 5:00 pm, edited 1 time in total.
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Re: The Three Fund Portfolio

Postby baw703916 » Thu Jan 26, 2012 4:57 pm

But...

Vanguard Total Bond Market Index Fund

Nominal return bonds: 100%
Real return bonds: 0%

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Re: The Three Fund Portfolio

Postby Senin » Wed Feb 08, 2012 5:36 am

I like the Two Fund Portfolio---

Total Stock Market
and
Vanguard GNMA
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Re: The Three Fund Portfolio

Postby stemikger » Wed Feb 08, 2012 7:00 am

Are there any advantages or disadvantages of doing The Target Retirement Fund instead of the Three Fund Portfolio?

The two that come to mind is:

Target Retirement - Pro - No need to ever rebalance or even look at it.
Target Retirement - Con - You don't have control over the glide path

I'm not sure if the expenses are lower with the Target Retirement or the Three Fund?
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Re: The Three Fund Portfolio

Postby FrugalInvestor » Wed Feb 08, 2012 11:08 am

stemikger wrote:Are there any advantages or disadvantages of doing The Target Retirement Fund instead of the Three Fund Portfolio?

The two that come to mind is:

Target Retirement - Pro - No need to ever rebalance or even look at it.
Target Retirement - Con - You don't have control over the glide path

I'm not sure if the expenses are lower with the Target Retirement or the Three Fund?


A single fund combining stocks and bonds may also prevent you from positioning each of those asset classes in the most tax efficient manner.
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Re: The Three Fund Portfolio

Postby CABob » Wed Feb 08, 2012 12:33 pm

stemikger wrote:Are there any advantages or disadvantages of doing The Target Retirement Fund instead of the Three Fund Portfolio?

The two that come to mind is:

Target Retirement - Pro - No need to ever rebalance or even look at it.
Target Retirement - Con - You don't have control over the glide path

I'm not sure if the expenses are lower with the Target Retirement or the Three Fund?
If the three funds are Admiral share class (or ETFs) expenses would be lower.
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Re: The Three Fund Portfolio

Postby umfundi » Wed Feb 08, 2012 2:35 pm

stemikger wrote:Are there any advantages or disadvantages of doing The Target Retirement Fund instead of the Three Fund Portfolio?

The two that come to mind is:

Target Retirement - Pro - No need to ever rebalance or even look at it.
Target Retirement - Con - You don't have control over the glide path

I'm not sure if the expenses are lower with the Target Retirement or the Three Fund?


With the Three Funds, you get to set your own Asset Allocation, which may be different from what the Target Funds have.

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Re: The Three Fund Portfolio

Postby Taylor Larimore » Wed Feb 08, 2012 4:58 pm

Semikger:

Are there any advantages or disadvantages of doing The Target Retirement Fund instead of the Three Fund Portfolio?


Target Funds designed by Vanguard experts, are nearly identical to the Three Fund Portfolio.

The Three Fund Portfolio's primary advantage over a Target Fund is in portfolios containing both taxable and tax-advantaged accounts. Target Funds are tax-inefficient and become more-so with time. They are seldom recommended for taxable accounts. The Three Fund Portfolio lets us locate tax-efficient stocks in our taxable account and tax-inefficient bonds in our tax-deferred accounts--a huge advantage over time.

If an investor has only tax-advantaged accounts, using Target Funds with similar stock/bond ratios in all accounts simplifies the portfolio because contributions and withdrawals from any account does not materially affect the desired stock/bond allocation.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby nisiprius » Wed Feb 08, 2012 10:05 pm

As I noted in another thread, there's been an interesting change in Vanguard's "core funds" page. It used to be a list of nine funds: a money market fund, four actively managed funds, and four index funds. Now, there are only four: Prime Money Market, Total Bond, Total Stock, and Total International. Does Vanguard think these are all you need? They are wording it very cautiously; their exact words are "We've highlighted a few examples below that—when applied to your asset allocation—may give you the building blocks you need for an easy-to-manage, well-diversified portfolio."

If you go the Vanguard's personal investing website and kind of follow links and explore the way someone new to investing might, almost all roads lead to the core funds. Either it's
  • The core funds page itself
  • The Target Retirement funds, which are essentially three-fund portfolios (with TIPS added approaching retirement),
  • The LifeStrategy funds, which have recently been revamped into, you guessed it, three-fund portfolios
The only big exception is the Managed Payout funds... and even those, if you look at them, are more that half composed of Total Bond, Total Stock, and Total International.

These days, if you visit the site, you're not going to stumble across Wellington or Wellesley unless you search for them by name, or go to the list of all of their mutual funds.
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Re: Adding to the Three Fund Portfolio ?

Postby Gauntlet » Wed Feb 08, 2012 10:35 pm

Taylor Larimore wrote:
dguad4 wrote:Understanding that Cash should not be included in the AA for the Three Fund Portfolio should I not be including I-Bonds purchased for short term savings (3-5 years) in the AA? I originally included them in my bond allocation however I realized if I cash these in then it could drastically effect my 80/20 AA. I then thought I could just re-balance, however I may not be purchasing under performing assets at that time. Thoughts?


I dguad4:

Cash (or any other asset) CAN be included in the Three Fund Portfolio.

The 3-Fund Portfolio is a very efficient and diversified portfolio by itself. It is easily adaptable to additional securities but portfolio maintenance will be increased and its simplicity diminished.

Adding your I-Bonds makes sense to me.

Best wishes.
Taylor


To Taylor's point, I use the TSP's G Fund, I-Bonds, and the Vanguard Total Bond for my bond portion of my AA and I consider myself essentially following Three Fund Portfolio.
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Re: The Three Fund Portfolio

Postby stilllearning » Wed Feb 15, 2012 4:10 pm

Hello and thank you for your dramatically clear throughts on the three-fund portfolio.
In the final paragraph you say: "in taxable accounts high-income investors may substitute a tax exempt bond fund for Total Bond Market" and also " Larger portfolios may benefit from adding TIPS, REIT< or a small-cap value fund in tax deferred accounts."

What do you mean by "hi-income" in this statement please? And what do you mean by "larger portfolios"? I am trying to figure out if these suggestions apply to me.

Thanks!

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Re: The Three Fund Portfolio

Postby FNK » Wed Feb 15, 2012 11:21 pm

To me: high income is beyond the 25% federal bracket (in US). If you save well, eventually you'll run out of tax advantaged space and will have to put bonds into taxable accounts. By the way, savings bonds is a good option for that, too.

I don't tilt to REITs or SCV (I do tilt to small), but generally, you want the tilting fund to clear the Admiral shares minimum, i.e., $10K for index funds. If the tilt is 10% of a portfolio, then you're talking $100K. If your portfolio is less than $50K, just stick to Target Retirement and don't waste your time.
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Re: The Three Fund Portfolio

Postby Mrs.Feeley » Thu Feb 16, 2012 12:12 am

nisiprius wrote:As I noted in another thread, there's been an interesting change in Vanguard's "core funds" page. It used to be a list of nine funds: a money market fund, four actively managed funds, and four index funds. Now, there are only four: Prime Money Market, Total Bond, Total Stock, and Total International. Does Vanguard think these are all you need? They are wording it very cautiously; their exact words are "We've highlighted a few examples below that—when applied to your asset allocation—may give you the building blocks you need for an easy-to-manage, well-diversified portfolio."


I recently worked through the little questionaire on Vanguard's site that asks about one's risk level, investing needs, etc. The portfolio that Vanguard came up with for us was the three fund portfolio, Total Bond Index, Total Stock Index, and International Index. Thought it was rather interesting that the site didn't suggest any other funds.
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Adding more funds ?

Postby Taylor Larimore » Thu Feb 16, 2012 12:38 pm

What do you mean by "hi-income" in this statement please? And what do you mean by "larger portfolios"? I am trying to figure out if these suggestions apply to me.


Hi Stilllearning (arn't we all):

FNK gave you an excellent reply. I believe you could stick to the 3-fund portfolio of any size and do better than most investors.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby mikef » Thu Feb 16, 2012 1:13 pm

FNK wrote:To me: high income is beyond the 25% federal bracket (in US). If you save well, eventually you'll run out of tax advantaged space and will have to put bonds into taxable accounts. By the way, savings bonds is a good option for that, too.


Stilllearning, I would like to point out that if your income is from self-employment you may be able to extend your tax advantaged savings space by opening a Vanuguard I 401K with a Roth component and make Roth and traditional contributions or do what we do is apply KISS principle and make employee Roth only contributions. This year $22000.00. That REALLLY helps. :lol: We have bond funds in the Vanguard I 401K.

Happy trails...
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Re: The Three Fund Portfolio

Postby mawhinney » Sat Feb 18, 2012 9:37 pm

As a retiree required to take distributions from IRA accounts, is it better to hold savings in mutual funds or in an EFT?
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Re: The Three Fund Portfolio

Postby southerndoc » Sat Feb 18, 2012 10:58 pm

mikef wrote:
FNK wrote:To me: high income is beyond the 25% federal bracket (in US). If you save well, eventually you'll run out of tax advantaged space and will have to put bonds into taxable accounts. By the way, savings bonds is a good option for that, too.


Stilllearning, I would like to point out that if your income is from self-employment you may be able to extend your tax advantaged savings space by opening a Vanuguard I 401K with a Roth component and make Roth and traditional contributions or do what we do is apply KISS principle and make employee Roth only contributions. This year $22000.00. That REALLLY helps. :lol: We have bond funds in the Vanguard I 401K.

Happy trails...


That's only for those 55 and older with catch-up contributions, right?
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Re: The Three Fund Portfolio

Postby CABob » Sun Feb 19, 2012 1:13 pm

mawhinney wrote:As a retiree required to take distributions from IRA accounts, is it better to hold savings in mutual funds or in an EFT?

Opinions may differ, but, the primary consideration to me is the transaction costs and the ease of keeping the account in balance.
What are your transaction costs associated with sales of the ETF or mutual fund? ETFs require a brokerage account with may have a commission associated with their sale although there are a number of places that have no transaction fee ETFs. Mutual funds held with their sponsor mutual fund company generally do not have transaction fees, but, if held at a brokerage or some another company's account there may be fees. Depending upon the contents of the account a distribution may require the sale of a number of funds. In the case of mutual funds at Vanguard and many others distributions can be taken by proportional shares of all funds which would be much more comples with ETFs.
The sale of ETFs for distribution requires the sale of a specific number of shares while the sale of mutual funds can be done in dollar amounts.
The use of a money market fund to place dividends and fund distributions may make the process simplier.
Personally, I think that mutual funds in an IRA make RMDs easier, but, others may not see this as a problem.
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Re: The Three Fund Portfolio

Postby mawhinney » Sun Feb 19, 2012 1:24 pm

My thoughts on the benefits of holding IRA accounts in mutual funds vs EFTs echo your thoughts. At this stage of the game, I'm seeking to keep financial affairs as simple as possible and easy to manage!
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Re: The Three Fund Portfolio

Postby mikef » Sun Feb 19, 2012 3:22 pm

southerndoc wrote:
mikef wrote:
FNK wrote:To me: high income is beyond the 25% federal bracket (in US). If you save well, eventually you'll run out of tax advantaged space and will have to put bonds into taxable accounts. By the way, savings bonds is a good option for that, too.


Stilllearning, I would like to point out that if your income is from self-employment you may be able to extend your tax advantaged savings space by opening a Vanuguard I 401K with a Roth component and make Roth and traditional contributions or do what we do is apply KISS principle and make employee Roth only contributions. This year $22000.00. That REALLLY helps. :lol: We have bond funds in the Vanguard I 401K.

Happy trails...


That's only for those 55 and older with catch-up contributions, right?


Correct and since RMD has come up as a concern the I 401K ROTH would at some point have a the RMD kick in...unless of course you convert it to a ROTH IRA which we have planned to do. SWEET :sharebeer Unless of course in the mean time they change the law. :annoyed
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Stocks are not paper.

Postby Taylor Larimore » Wed Feb 29, 2012 8:33 am

A poster with the signiture, "Harry at Bradenton," made this post (slightly modified) in another thread which reflects my own thinking about total market index funds:

"Jack Bogle, Jane Bryant Quinn, Andrew Tobias, Warren Buffett and others of like stature, constantly remind us that equity investments are not just pieces of paper (or blips on a computer screen) whose value fluctuates, but part ownership of companies, whose value ultimate depends on financial success or failure of the companies.

The difficulty, even impossibility, for most individual investors to meaningfully judge the financial prospects of individual companies, is the reason that all such commentators recommend index investing for most investors. As Mr. Bogle has stated many times in many ways, investing in a broad index like the S&P 500 or Wilshire 5,000 mathematically guarantees getting ones fair share of the growth and earnings of the American economy: no more, no less.

Jane, analogizes it to shooting par at golf, a score that all golfers aspire to but few attain consistently. Golfers who always go for the green and investors who try to beat the market play a losers game, go against the odds. Bogleheads recognize and act on this truth and conserve time, energy, and sanity by settling for par."


Thank you, Harry.
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Re: The Three Fund Portfolio

Postby gym4866 » Tue Mar 06, 2012 9:31 pm

i am looking to retire this year,and will need to roll over my employer 401k that is mostly in a saving plan and company stock,plus other saving plans. i have some investments with edward jones(bonds-corp/mini) roth,ira,mutal funds etc(don't like edward jones/front load funds) max out my roth
i have been sitting on the sidelines ,mostly saving money in liquid accounts,401 catch up,max out my 401k, all in all saving more money than investing. long story short, i will have about 525k to reconfigure and was reading about the 3 fund portfolio with vangaurd/fidelity, seems that it would be the most simple for me. how do i go about setting up a properly balanced portfolio of stocks/bonds/etf's ??? would and all etf portfolio be better, or an all stock/bonds be better,or a 50/50 mix. i'm scared to death to make a mistake,as i have worked hard in saving the last couple of years.
any advice would be appreciated.
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Re: The Three Fund Portfolio

Postby LadyGeek » Tue Mar 06, 2012 10:36 pm

Welcome to the forum! You'll get a much better answer to your questions if you create a new thread in Investing - Help with Personal Investments and follow the format in the sticky: Asking Portfolio Questions

This format is designed to make you think about the big picture, while giving forum members the information they need to help answer your questions. If you can't answer everything, don't worry about it - the point is to get started in the right direction. You'll get plenty of help.
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Re: The Three Fund Portfolio

Postby Mrxyz » Thu Mar 08, 2012 3:56 pm

"Addendum:

* Place Total Bond Market in a tax-deferred account.
* In taxable accounts, high-income investors may substitute a tax-exempt bond fund for Total Bond Market."



I have the 3 fund portfolio along with other investments but they are mutual funds only.

Q1. Can someone please explain how to place the TBM in a tax deferred account?
Q2. Which tax exempt bond fund can be substituted for the TBM?


Thanks
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Re: The Three Fund Portfolio

Postby Taylor Larimore » Thu Mar 08, 2012 4:16 pm

Mrxyz wrote:"Taylor's Addendum:

* Place Total Bond Market in a tax-deferred account.
* In taxable accounts, high-income investors may substitute a tax-exempt bond fund for Total Bond Market."



I have the 3 fund portfolio along with other investments but they are mutual funds only.

Q1. Can someone please explain how to place the TBM in a tax deferred account?
Q2. Which tax exempt bond fund can be substituted for the TBM?


Thanks


Hi Mrxyz:

The general rule is to locate your bond funds in tax-advantaged accounts and stocks in your taxable account. The 3-Fund Portfolio makes this very easy. Tax-exempt bond funds are normally used only by higher income taxpayers when their tax-advantaged accounts are filled with higher yielding taxable bonds.

Vanguard's Tax-Exempt Intermediate-Term bond fund (VWITX) currently has almost the same duration as Total Bond Market Index Fund (VBMFX). Credit quality of both funds is very good.

You can read more about "Fund Location" on our wiki here:

http://www.bogleheads.org/wiki/Principl ... _Placement

Best wishes.
Taylor
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Re: Vanguard experts saw the light ahead.

Postby raildogg » Sat Mar 10, 2012 3:15 pm

AnotherINTP wrote:
Taylor Larimore wrote:
Further support for this 3-Fund approach comes from the fact that these same 3 funds form the core holdings in Vanguard's own Target Retirement Funds.


With the most recent changes in the Target and Life Strategy Funds, Vanguard experts finally saw the light. :wink:

Happy New Year!
Taylor


Each New Year brings the hope of progress -- or at least of new ideas to consider.

A case could be made that the new generation of Vanguard's all-in-one funds is even better than a traditional implementation of a lazy Big Three Index Fund portfolio:

    * simpler
    * much better stability of asset ratios (apparent risk), with no manual rebalancing required (unless life circumstances change)
    * during 2011 at least, slightly better returns for any of the Target Retirement funds than their underlying target ratio of 3 Index funds -- even if implemented as Admiral shares or ETFs!

The daily or fast rebalancing of the TR funds (and LifeStrategy funds very recently) adds a slightly new twist to index portfolio construction: it wasn't tracking error that gave the TR funds their slight edge in 2011, it was rebalancing strategy. Perhaps this hasn't generated much discussion on this forum because it is a fairly modest and rather random effect that will vary from year to year.

Even those who prefer to customize and tinker with a mostly Big Three Index Fund lazy portfolio might consider starting with a Target Retirement or LifeStrategy fund as the core building block (in a tax-advantaged account), in order to maintain a more constant level of market risk and perhaps take advantage of market volatility. (Constant rebalancing is just constantly buying low and selling high, right? 8-) )


This post has me rethinking my strategy a bit. I have a taxable and a tax-deffered account and was just wondering what might a better and simpler approach. I started off with a Target Retirement fund in my tax-deffered account and a broad market fund in my taxable but later changed the Target Retirement fund to a LifeStrategy fund. Recently, I have changed that LifeStrategy fund into individual funds such as this thread mentions. My reasoning behind this was that it is easier to maintain a certain AA when you have individual funds rather than a fund of funds.

Sometimes I wonder if what I did was wise or not. I know that once I change these individual funds into another fund of funds I may regret that decision as well. It is more difficult than I thought to just stick with something but I believe you must do it. The old saying that the enemy of a good plan is to want a perfect plan comes to mind.

A part of me tells me to just keep the indivifual funds but another part says that the LifeStrategy funds are simpler in that they rebalance constantly and are therefore easier to maintain. Not quite sure.
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"Not quite sure."

Postby Taylor Larimore » Sat Mar 10, 2012 4:45 pm

Hi raildogg:

A part of me tells me to just keep the individual funds but another part says that the LifeStrategy funds are simpler in that they rebalance constantly and are therefore easier to maintain. Not quite sure.


Of course you are "not quite sure." A good investor is never sure. No one can predict the future. Accept the fact you don't know.

"The enemy of a good plan is the dream of a perfect plan." -- Jack Bogle

Best wishes.
Taylor
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Re: Vanguard experts saw the light ahead.

Postby joe8d » Sat Mar 10, 2012 10:56 pm

raildogg wrote:
Another wrote:
Taylor Larimore wrote:
Further support for this 3-Fund approach comes from the fact that these same 3 funds form the core holdings in Vanguard's own Target Retirement Funds.


With the most recent changes in the Target and Life Strategy Funds, Vanguard experts finally saw the light. :wink:

Happy New Year!
Taylor


Each New Year brings the hope of progress -- or at least of new ideas to consider.

A case could be made that the new generation of Vanguard's all-in-one funds is even better than a traditional implementation of a lazy Big Three Index Fund portfolio:

    * simpler
    * much better stability of asset ratios (apparent risk), with no manual balancing required (unless life circumstances change)
    * during 2011 at least, slightly better returns for any of the Target Retirement funds than their underlying target ratio of 3 Index funds -- even if implemented as Admiral shares or ETFs!

The daily or fast rebalancing of the TR funds (and LifeStrategy funds very recently) adds a slightly new twist to index portfolio construction: it wasn't tracking error that gave the TR funds their slight edge in 2011, it was rebalancing strategy. Perhaps this hasn't generated much discussion on this forum because it is a fairly modest and rather random effect that will vary from year to year.

Even those who prefer to customize and tinker with a mostly Big Three Index Fund lazy portfolio might consider starting with a Target Retirement or LifeStrategy fund as the core building block (in a tax-advantaged account), in order to maintain a more constant level of market risk and perhaps take advantage of market volatility. (Constant rebalancing is just constantly buying low and selling high, right? 8-) )


This post has me rethinking my strategy a bit. I have a taxable and a tax-deferred account and was just wondering what might a better and simpler approach. I started off with a Target Retirement fund in my tax-deferred account and a broad market fund in my taxable but later changed the Target Retirement fund to a LifeStrategy fund. Recently, I have changed that LifeStrategy fund into individual funds such as this thread mentions. My reasoning behind this was that it is easier to maintain a certain AA when you have individual funds rather than a fund of funds.

Sometimes I wonder if what I did was wise or not. I know that once I change these individual funds into another fund of funds I may regret that decision as well. It is more difficult than I thought to just stick with something but I believe you must do it. The old saying that the enemy of a good plan is to want a perfect plan comes to mind.

A part of me tells me to just keep the individual funds but another part says that the LifeStrategy funds are simpler in that they rebalance constantly and are therefore easier to maintain. Not quite sure.



I would use the Life Strategy funds during the accumulation years and then when you reach the withdrawal phase, you may want to consider breaking down into the individual funds. This would allow more flexibility in your withdrawal method.
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Re: The Three Fund Portfolio

Postby abuss368 » Thu Mar 22, 2012 5:21 pm

Most folks on this forum treat all accounts as one rather than separate. I however, am in the minority and do not. Too much hassle with rebalancing, limitations on contributions to tax advantaged accounts, etc.

For simplicity, place the three funds in each account, and substitute Intermediate Term Tax Exempt in your taxable account if that works.

Much easier to rebalance, monitor, simplicity.

Rick Ferri once posted a nice response on the forum a year or so ago about an all equity taxable account. When the markets tanks next, and it will at some point, can you stand seeing your taxable account tank too because there are no bonds? That stinks for folks who need income, stability, peace of mind.

Either way is fine. You have to decide what works for you.

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Re: The Three Fund Portfolio add REITs

Postby rocket » Sat Mar 24, 2012 7:47 am

I believe REIT are a very good addition to 3 fund portfolio, because REITs have a low correlation to the stock.
I have 6% in REIT. I have no logical reason for picking 6%.
With a portfolio in the very small 7 figures, I think it a good idea.
With a $20K portfolio it does not make as much sense.
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Re: "Not quite sure."

Postby rocket » Sat Mar 24, 2012 7:56 am

Taylor Larimore wrote:
A part of me tells me to just keep the individual funds but another part says that the LifeStrategy funds are simpler in that they rebalance constantly and are therefore easier to maintain. Not quite sure.

Hi Joe:
Of course you are not quite sure. That's a good sign. Experienced investors know that it is impossible to forecast which fund is going to outperform all others. We make an informed choice--then stay the course.
Best wishes.
Taylor


Being that interest rates are manulipulated to artificially low rates, bonds (TBM) would seem to be a bad strategy.
I practice the 4 fund portfolio (3 fund + REIT) but I think it I may be doing the wrong thing.
10 years from now, I may think how could I have been so stupid to invest in TBM in 2012.
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Re: The Three Fund Portfolio

Postby abuss368 » Sat Mar 24, 2012 10:23 am

Rocket,

Rick Ferri recommends your exact portfolio. He calls it the "core four" portfolio.

I like the "core four" as well. Always made sense to me. Now I am adding TIPS, and would like to add International REITs (if that Vanguard purchase fee would go away and the expense ratio would just come down).

Good choice.
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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Mar 24, 2012 12:16 pm

The "Core Four" is in the wiki under Lazy Portfolios.

Background for this thread: Three-fund portfolio

Update: Removed comments noting that the wiki was out of date. The Core Four portfolio was updated on 25-Mar-12, reviewed by Rick Ferri.
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Re: The Three Fund Portfolio

Postby momar » Sat Mar 24, 2012 12:44 pm

abuss368 wrote:. Now I am adding TIPS, and would like to add International REITs (if that Vanguard purchase fee would go away and the expense ratio would just come down).

Buy the ETF and the purchase fee is gone.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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Re: The Three Fund Portfolio

Postby abuss368 » Sat Mar 24, 2012 1:05 pm

I do not have a brokerage account and do not plan to open one for just one holding.

I have all index. Vanguard needs to remove the purchase fee and bring down that expense ratio over time. Would probably result in additional inflows of cash!
Last edited by abuss368 on Mon Mar 26, 2012 12:08 am, edited 1 time in total.
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Re: The Three Fund Portfolio

Postby rocket » Sun Mar 25, 2012 9:25 pm

abuss368 wrote:Rocket,
Rick Ferri recommends your exact portfolio. He calls it the "core four" portfolio.
I like the "core four" as well. Always made sense to me. Now I am adding TIPS, and would like to add International REITs (if that Vanguard purchase fee would go away and the expense ratio would just come down). Good choice.


I doubt Rick ferri invented core four. The core 4 is a logical conclusion for those that think in term of diversification and correlation of assets.
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Re: The Three Fund Portfolio

Postby fbauer727 » Tue Mar 27, 2012 3:52 pm

If one has a 401K plan that offers Vang'd Total Int'l Stock, Total Bond Fund, 500 Index Fund and Extended Mkt. Index Fund, but does not offer Vang'd Total Stk. Mkt. Fund, wouldn't it be possible to replicate the Total Stk. Mkt. Fund by combining the 500 Index and Extended Mkt. Index Funds thus making the "three fund portfolio" possible? If so, what would be theproper ratio of the 500 Idx. Fund and the Ext. Mkt. Fund?
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Re: The Three Fund Portfolio

Postby 555 » Tue Mar 27, 2012 4:47 pm

fbauer727 wrote:If one has a 401K plan that offers Vang'd Total Int'l Stock, Total Bond Fund, 500 Index Fund and Extended Mkt. Index Fund, but does not offer Vang'd Total Stk. Mkt. Fund, wouldn't it be possible to replicate the Total Stk. Mkt. Fund by combining the 500 Index and Extended Mkt. Index Funds thus making the "three fund portfolio" possible? If so, what would be theproper ratio of the 500 Idx. Fund and the Ext. Mkt. Fund?

See here.
http://www.bogleheads.org/wiki/Approxim ... ock_Market
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Re: The Three Fund Portfolio

Postby LadyGeek » Tue Mar 27, 2012 4:58 pm

fbauer727 - Welcome to the forum! In addition to 555's suggestion, take a look in the wiki here: Extended Market Index Fund. Follow the "External links" reference to a forum discussion which contains examples of what you are trying to do: Now in Wiki: Extended Market Index Fund.

If you have additional questions, please feel free to start a new thread in the Investing - Help with Personal Investments forum. You'll get a lot of help.
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Re: The Three Fund Portfolio

Postby 555 » Tue Mar 27, 2012 5:01 pm

LadyGeek wrote:fbauer727 - Welcome to the forum! In addition to 555's suggestion, take a look in the wiki here: Extended Market Index Fund. Follow the "External links" reference to a forum discussion which contains examples of what you are trying to do: Now in Wiki: Extended Market Index Fund.

Yes, see the first pie chart here
https://personal.vanguard.com/us/funds/ ... statistics
Also here says 75% rather than 80%
http://www.standardandpoors.com/indices ... --p-us-l--
Just take that as a ballpark figure. Anything in that range is fine.
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Re: The Three Fund Portfolio

Postby fbauer727 » Wed Mar 28, 2012 11:39 am

To 555 and LadyGeek: Thank you very much for your prompt replies, which gave me the exact information I was looking for. I spent considerable time looking for the information without success and know I could have spent much more time and possibly not have found what I needed, but one quick post to Bogleheads forum and there it was. Thank you again.

Now for one more question: Any thoughts on the comparison of the "three portfolio fund" (constructed using the Vang'd 2040 Retirement Fund - VFORX - as an allocation guide) vs. the Blackrock Lifepath 2040 Institutional Retirement Fund (STLEX), other than the obvious drawback of having to manually rebalance the Vang'd portfolio every year? Other than the rebalancing, the two main factors are probably cost and performance. I'm quite sure Vanguard would be the choice for lower cost, although the plan administration costs (Fidelity) would be the same, whatever they are. In the area of performance, as of 1/31/12, VFORX has a slight edge over STLEX in the trailing 3 and 5 year periods, but of course, as the saying goes: "prior performance is no guarantee...etc.".

Any thoughts you might have would be appreciated.
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Fund costs

Postby Taylor Larimore » Wed Mar 28, 2012 12:08 pm

Hi fbauer:

Welcome to the Bogleheads Forum!

Many studies have shown that "cost" is the only reliable indicator of future mutual fund performance.

I checked with Morningstar to learn that the 10-year cost (not including 401K Administrative costs) of investing $10,000 in the two funds.

STLEX = $1,402

VFORX = $243


In my opinion, VFORX is a no-brainer.

Best wishes.
Taylor
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