Bogleheads.org

by **vset** » Sun Nov 25, 2012 4:51 am

PINGO

what a great answer!

Can you please give me your idea, about a portfolio for a european citizen?
What would you do about currency risk?

THANK YOU

by **fishdrzig** » Tue Nov 27, 2012 3:05 pm

1. I have all tax advantaged accounts and would like an AA of 70/30. Would 1/2 LifeStrategy Growth + 1/2 LifeStategyModerate Growth work? Thanks

2. Does the 3 fund portfolio actually include REITS, TIPS or SCV?

3. Besides being against the Bogelheads philosophy, why is Gold not added as a hedge? Just trying to understand why?

by **Taylor Larimore** » Tue Nov 27, 2012 4:41 pm

fishdrzig:

I will try to answer your questions:

1. I have all tax advantaged accounts and would like an AA of 70/30. Would 1/2 LifeStrategy Growth + 1/2 LifeStategyModerate Growth work?

Yes. Both Life Strategy Funds contain the identical three funds as the Three Fund Portfolio. I recommend the even greater simplicity of a Vanguard Life Strategy Fund or Target Retirement Fund if the entire portfolio is in a tax-advantaged account.

2. Does the 3 fund portfolio actually include REITS, TIPS or SCV?

The Three Fund Portfolio includes the market weight in REITS and Small Cap Value. The 3-fund portfolio does not contain TIPS.

3. Besides being against the Bogelheads philosophy, why is Gold not added as a hedge? Just trying to understand why?

The Three-Fund Portfolio contains the market's weight in gold stocks. Gold is not "against the Bogleheads Philosophy." However, Mr. Bogle in Common Sense on Mutual Funds (2010 edition) wrote:

Gold is often sought as a refuge during times of financial travail. True to form, the price of the precious mental more than tripled in the 1999-2009 decade. But gold is largely a rank speculation, for its price is based solely on market expectations.

Gold provides no internal rate of return. Unlike stocks and bonds, gold provides none of the intrinsic value that is created for stocks by earning growth and dividend yields, and for bonds by interest payments. So in the two centuries plus shown on the chart (page 10), the initial $10,000 investment in gold grew to barely $26,000 in real terms (compared with $4,808.731 invested in stocks).

Best wishes.
Taylor

by **selftalk** » Fri Nov 30, 2012 9:43 pm

What would a 3 fund portfolio look like for a fully taxable account? I know Vanguard has 5 tax managed funds.

by **abuss368** » Fri Nov 30, 2012 10:12 pm

selftalk wrote:What would a 3 fund portfolio look like for a fully taxable account? I know Vanguard has 5 tax managed funds.

Hi selftalk,

I think a nearly ideal Three Fund Portfolio for a taxable account would be:

1) Total Stock Market Index Fund
2) Total International Index Fund
3) Intermediate Term Tax Exempt Bond Fund

The difference being the bond fund. Granted, whether to use the Total Bond Index Fund or the Intermediate Term Tax Exempt Fund may depend on your tax structure among other considerations. However, the Intermediate Term Tax Exempt Fund is a low cost, very diversified, simple and effective fund. In fact, Mr. Bogle invests in this fund in his taxable account.

You may be able to do better, but you could do a lot worse.

Please post any additional questions or concerns you may have.

Best.

by **Taylor Larimore** » Fri Nov 30, 2012 10:23 pm

selftalk wrote:What would a 3 fund portfolio look like for a fully taxable account? I know Vanguard has 5 tax managed funds.

Selftalk:

Total Stock Market and Total International are superior funds in a taxable account. However, Total Bond Market is tax-INefficient and therefore seldom suitable in a taxable account except for investors in the lowest tax brackets.

If your tax-advantaged account(s) are too small to accomodate your bond allocation, you should consider using a tax-exempt bond fund such as Vanguard's Tax-Exempt Intermediate-Term Bond Fund (VWITX) in your taxable account to complete your bond allocation.

Vanguard offers this Tax Equivalent Yield Calculator to help us determine whether to use a taxable or tax-exempt bond fund in a taxable account.

In my opinion, Tax-Managed Funds seldom offer an advantage over tax-efficient, lower cost and better diversified total market index funds.

Best wishes
Taylor

by **selftalk** » Sat Dec 01, 2012 2:57 pm

Thank you Taylor for a most complete response and timely also. I think I may like a four (4) fund allocation instead of a three (3) fund asset allocation for my taxable account. In your opinion would it be wise to have VFIAX, VSIAX, VTIAX for stocks and VWITX for the bond allocation ? As you can see I am sure, I may want to separate the large and small cap U.S. funds to get the most returns from the small U.S. companies. In your opinion is this VSIAX the most tax efficient fund to use for the U.S. small cap assets? I will thank you in advance for your prompt response.

by **Taylor Larimore** » Sat Dec 01, 2012 5:57 pm

Selftalk:

I would like to keep this thread about the Three Fund Portfolio. Please post your question on the Investing Help forum. I will try to answer it there and you will get more replies to consider. Add fund names to your ticker symbols because few of us have memorized the ticker symbols.

Thank you and best wishes.
Taylor

by **mightymolar** » Thu Dec 13, 2012 1:41 pm

The three fund portfolio seems to be with Vanguard index funds...

I am currently with Fidelity for my IRA and 403b. Could you recommend any Fidelity equivalent index funds that will be similar (or identical) to the Vanguard index funds?

Thanks!

by **LadyGeek** » Thu Dec 13, 2012 6:02 pm

Welcome! The wiki can provide some guidance: Other than Vanguard, Boglehead-style (Fidelity is listed, among others)

If you need more help, start a thread in the Investing - Help with Personal Investments forum and post your portfolio as shown in the Asking Portfolio Questions format.

by **Sunny Sarkar** » Thu Dec 13, 2012 6:56 pm

Hi Taylor,

What is your current position on the intermediate TIPS fund vis-a-vis the 3-fund portfolio? It seems to have been evolving over the years with your experience with the TIPS fund and the TIPS asset class in general. If I remember correctly, at one point you had suggested a 50/50 TBM+TIPS split, and at one point around 2006 you mentioned that VIPSX is your favorite single bond fund (over TBM) for a portfolio like the 3-fund portfolio.

Your original post on the 3 total market fund portfolio on the Vanguard Diehards M* forum in 1999 set me on my investment journey, and a life lesson on simplicity. I'll be indebted to you forever for all your guidance all these years.

Thank you!

by **Taylor Larimore** » Thu Dec 13, 2012 8:33 pm

Sunny Sarkar wrote:Hi Taylor,

What is your current position on the intermediate TIPS fund vis-a-vis the 3-fund portfolio? It seems to have been evolving over the years with your experience with the TIPS fund and the TIPS asset class in general.

Your original post on the 3 total market fund portfolio on the Vanguard Diehards M* forum in 1999 set me on my investment journey, and a life lesson on simplicity. I'll be indebted to you forever for all your guidance all these years.

Thank you!

Sunny:

I will try to answer your questions:

What is your current position on the intermediate TIPS fund vis-a-vis the 3-fund portfolio?

I believe Vanguard's very diversified and good quality Total Bond Market Index Fund is all that's needed for the bond portion of a portfolio. It is the only bond fund recommended by Jack Bogle in The Little Book of Common Sense Investing. Once Total Bond Market exceeds the $10,000 needed for Admiral Shares, it may help to add the more volatile TIPS fund.

If I remember correctly, at one point you had suggested a 50/50 TBM+TIPS split.

In my opinion, any "split" between 25% TIPS to 50% TIPS is reasonable. At Mel's suggestion, we have used a 50% TBM/50% TIPS allocation (for maximum non-correlation) since Vanguard's Inflation-Protected Securities Fund's 2000 inception. This is the result:

YEAR..INFLATION..TBM ....TIPS
2001......2.8%.......8.4%.....7.7%
2002......1.6%.......8.3%....16.6%
2003......2.3%.......4.0%.....8.0%
2004......2.7%.......4.2%.....8.3%
2005......3.4%.......2.4%.....2.6%
2006......3.2%.......4.3%.....4.3%
2007... ..2.8%.......5.9%....11.6%
2008......0.1%.......5.1%....-2.8%
2009......2.7%.......5.9%....10.8%
2010......1.5%.......6.5%.....6.2%
2011......3.0% ......7.6%....13.2%
2012......2.2%.......4.0%.....7.6% (YTD)

Past performance does not guarantee future performance.

Your original post on the 3 total market fund portfolio on the Vanguard Diehards M* forum in 1999 set me on my investment journey, and a life lesson on simplicity. I'll be indebted to you forever for all your guidance all these years.

Your kind words are a treasured Christmas gift.

Thank you and best wishes.
Taylor

by **abuss368** » Thu Dec 13, 2012 8:45 pm

Sunny Sarkar wrote:Hi Taylor,

What is your current position on the intermediate TIPS fund vis-a-vis the 3-fund portfolio? It seems to have been evolving over the years with your experience with the TIPS fund and the TIPS asset class in general. If I remember correctly, at one point you had suggested a 50/50 TBM+TIPS split, and at one point around 2006 you mentioned that VIPSX is your favorite single bond fund (over TBM) for a portfolio like the 3-fund portfolio.

Your original post on the 3 total market fund portfolio on the Vanguard Diehards M* forum in 1999 set me on my investment journey, and a life lesson on simplicity. I'll be indebted to you forever for all your guidance all these years.

Thank you!

I always enjoy posts like this.

by **adlerps** » Tue Dec 18, 2012 10:59 am

Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

by **Johm221122** » Tue Dec 18, 2012 12:31 pm

adlerps wrote:Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

" A three-fund combination can serve as the core of a more complex portfolio, where you add a small play money allocation or a tilt to some corner of the market that interests you."
http://www.bogleheads.org/wiki/Three-fund_portfolio
You Don't need 12 funds unless you really want more complexity. There is nothing wrong with using 3 fund (for core)with tilt
John

by **pingo** » Tue Dec 18, 2012 4:36 pm

adlerps wrote:Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

Simplicity can offer qualitative benefits that overcome one's desire for higher returns, if it is that higher returns are achieveable by other means. "Better" is relative to the investor. If you're referring to more complicated strategies in hopes to eek out returns over and above those provided by beta (which is essentially what a 3 fund portfolio entails), then I'll direct your attention to the following posts within the confines of this very thread (this thread is so long that I wouldn't expect anyone to read its entire contents):

Here's one way to look at it...

...and here's someone else's perspective...

...and I've extracted the following posts in hopes they also address your question in some way, even if not directly:

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

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

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

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

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

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

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

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

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

When you speak of 12 funds, it makes me think of those Merriman/FundAdvice Ultimate Buy and Hold portfolios would entail about 12 funds (when one counts the suggested bond funds). Keep in mind that the following only address the 8 equity funds sans bond funds, but as such, I offer the following:

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

by **Sunny Sarkar** » Wed Dec 19, 2012 12:45 pm

adlerps wrote:Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

Can't think of anything better than this excellent speech by Jack Bogle on this very topic...
The Wisdom of Investment–The Folly of Speculation (December 5, 2001)

At the end of the speech, he concludes with this (in his words) "undeniable message":

Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth.

This short powerful sentence sums up the entire investment philosophy behind Taylor's Three Fund portfolio, which I have adopted as my investment strategy since I started investing more than a decade ago.

Best wishes,
Sunny

by **Taylor Larimore** » Wed Dec 19, 2012 4:07 pm

Sunny Sarkar wrote:
adlerps wrote:Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

Can't think of anything better than this excellent speech by Jack Bogle on this very topic...
The Wisdom of Investment–The Folly of Speculation (December 5, 2001)

At the end of the speech, he concludes with this (in his words) "undeniable message":
Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth.

This short powerful sentence sums up the entire investment philosophy behind Taylor's 3-Fund portfolio, and forms the basis my IPS.

Best wishes,
Sunny

Sunny:

My 3-fund portfolio is designed almost entirely from what I learned from reading Jack's books, listening to his speeches, and knowing the man himself.

I can think of no one in the mutual fund industry with a greater combination of practical experience, inventive genius, literary ability, perseverence, kindness, modesty, desire to help others and impecible character.

Best wishes.
Taylor

by **webslinger** » Wed Dec 19, 2012 6:41 pm

This thread brings back pleasant memories of Bogleheads 11, our first meeting.

As Jack Bogle was signing my book, I told him that my youngest daughter just graduated college and started her first job. We helped her set up a very simple portfolio consisting of just two Vanguard index funds to start her investing life off on the right foot. I was surprised when Jack quickly looked up at me with sharply focussed eyes and asked "which two funds? ". I answered just what you and the Bogleheads have been teaching: Total Bond and Total Stock. Jack then smiled back warmly and said "well done" and handed me back my signed book.

Over time, as she builds her portfolio, we will suggest that she adds a third fund, Total International. And then she will be done.

If only we had found Taylor and the other wonderful Bogleheads years ago.

Thank you all for helping us on the path to simplifying our own investments and helping start a new generation on the right path.

by **NYBoglehead** » Wed Dec 19, 2012 6:49 pm

2012 will be the first year that my portfolio is strictly a Boglehead portfolio. I am very grateful to have stumbled upon Jack Bogle's books and am delighted to look at the market return I have received this year with an effective ER of less than 10 basis points.

by **abuss368** » Thu Dec 20, 2012 11:42 am

NYBoglehead wrote:2012 will be the first year that my portfolio is strictly a Boglehead portfolio. I am very grateful to have stumbled upon Jack Bogle's books and am delighted to look at the market return I have received this year with an effective ER of less than 10 basis points.

Are you now a Three Fund Portfolio investor?

by **Clive** » Fri Dec 21, 2012 8:01 am

vset wrote:PINGO

what a great answer!

Can you please give me your idea, about a portfolio for a european citizen?
What would you do about currency risk?

THANK YOU

I'm obviously not Pingo, but I live outside of the US (London).

What's a reasonable way to diversify currency? - Perhaps a third each in gold, your domestic currency and the worlds primary reserve currency (US $).

What's a reasonable choice of asset allocation? - 60/40, 70/30 are common choices (a little bond added to an otherwise all stock portfolio tends to provide better risk adjusted rewards).

So to overlay the 'currency' holdings into investments, the easiest choice is to simply buy stocks with the domestic currency and buy US stocks with the USD currency.

A third each in domestic stocks, US stocks and gold overall asset allocation.

For US investors there's a problem however as the primary world reserve currency is also their domestic currency. An appropriate choice is to hold a basket of foreign currencies - so their core assets are more like a third domestic stocks, a third international stocks and a third gold.

Gold is ok when you can't earn a better real return elsewhere (inflation is higher than what treasury yields are paying), but at other times if you can earn a positive real yield (treasury yields are higher than inflation), its perhaps worth taking a bit of a risk to swap gold for treasury's.

In other cases taxes might be high on your domestic bonds, or such bonds might not even be available. In which case just continue to hold gold.

Gold can be volatile however, and lumping into gold after its been gaining 20%+ yearly for 5+ years could be a bad move. In which case cost averaging in over a number of years, perhaps keeping those funds in cash savings accounts in the interim, might be a more appropriate choice.

The ancient Talmud wrote about diversification thousands of years ago - such as investing a third in land, a third in merchandise and keeping a third in reserve. Assuming you own (or are buying) your own home, an equal 50-50 split of any liquid assets between merchandise (business/stocks) and cash type assets (or gold) would be a more modern day alternative perhaps.

by **Taylor Larimore** » Fri Dec 21, 2012 8:28 am

Bogleheads:

Please keep this thread on the subject: "The Three Fund Portfolio."

This is a recent article:

The Three Fund Portfolio: A Simple Diversifed Investing Strategy

Happy Holiday!
Taylor

by **Taylor Larimore** » Tue Jan 01, 2013 9:22 pm

Bogleheads:

I have updated in red the "Category Performance" of each of the three funds in the Opening Post (OP) to 12/31/2012.

viewtopic.php?f=10&t=88005

Happy New Year!
Taylor

by **Bungo** » Tue Jan 01, 2013 9:55 pm

I am not a 3-fund investor, in part because of suboptimal fund choices in my 401(k) which I don't want to replicate elsewhere.

However, to start the new year, I am going to take a step toward simplification by removing the two "tilts" (small value and REIT) from my domestic equity holdings and consolidating into VTI. This is not a change for the sake of change. I am removing these tilts for two reasons: (1) I don't see a good justification for having added them in the first place, and (2) they don't represent a large enough portion of my total portfolio (10% and 6.5%, respectively) to justify the extra complexity.

After this change, I will be an 8-fund investor instead of a 10-fund investor.

by **abuss368** » Tue Jan 01, 2013 10:02 pm

Taylor Larimore wrote:Bogleheads:

Please keep this thread on the subject: "The Three Fund Portfolio."

This is a recent article:

The Three Fund Portfolio: A Simple Diversifed Investing Strategy

Happy Holiday!
Taylor

Hi Taylor,

That was a good article.

Thank you for posting.

by **nrygiel** » Tue Jan 15, 2013 8:16 pm

rohitj wrote:You still have institutional risk. If vanguard screws up their algorithms for buying / selling / balancing, you're pretty much screwed. Just not worth the risk to me -- I'd rather have 8 or 10 funds spread between 2 or 3 trusted institutions.

Are you aware of the correlation of those 8 funds with each other across the 2-3 institutions? You may be adding risk without realizing it. Also, from a institutional stand-point, Vanguard is a member of SIPC: https://personal.vanguard.com/us/whatwe ... protection

by **Taylor Larimore** » Tue Jan 15, 2013 8:41 pm

You still have institutional risk. If vanguard screws up their algorithms for buying / selling / balancing, you're pretty much screwed. Just not worth the risk to me -- I'd rather have 8 or 10 funds spread between 2 or 3 trusted institutions.

rohitj:
You should find these two links helpful:

What if Vanguard went broke?

Strive for Simplicity--not complexity.

Best wishes.
Taylor

by **bill1958** » Sat Jan 19, 2013 8:22 am

Hi Taylor, I want to thank you for your contributions to this site, as well as this topic. I'm strongly considering implementing the 3 fund portfolio (after reading your posts here, as well as Mr. Bogles books). My concern is about implementing the bond component.

My current portfolio is comprised of 9 low cost index funds, with the bond space comprised of 2/3rds short term bonds (1 and 2 year), with the remaining bond allocation primarily in Ibonds. My concern is about shifting from a s-t strategy to an longer duration strategy for the bond component, were I to implement the 3 fund strategy now. My thoughts were to implement the equity components of your portfolio now, and average into the bond position over the next 2-3 years. I know this sounds like timing, but it seems to me that bonds yields can only rise from here- especially after we get thru the next 12 to 24 months (I had the opportunity to hear a fixed income fund manager speak to this topic as well this week).

Please provide your thoughts regarding this.

by **Taylor Larimore** » Sat Jan 19, 2013 9:27 am

Bill:

You can implement The Three Fund Portfolio all at once (which I generally recommend) or dollar-cost-average over a period of time.

If you want a personal and more detailed reply, please start a new Topic on the Investing Help forum.

Thank you and best wishes.
Taylor

by **dbr** » Sat Jan 19, 2013 11:42 am

Taylor Larimore wrote:Bill:

You can implement The Three Fund Portfolio all at once (which I generally recommend) or dollar-cost-average over a period of time.

If you want a personal and more detailed reply, please start a new Topic on the Investing Help forum.

Thank you and best wishes.
Taylor

Indeed, but the point might be made that there is a constant drumfire of "lump vs DCA" threads that can be read rather than posting a new one and also there is:

http://www.bogleheads.org/wiki/Dollar_cost_averaging

by **pingo** » Sat Jan 19, 2013 12:46 pm

dbr wrote:Indeed, but the point might be made that there is a constant drumfire of "lump vs DCA" threads that can be read rather than posting a new one and also there is:

http://www.bogleheads.org/wiki/Dollar_cost_averaging

Speaking of which:

This DCA/Lump Sum thread popped up just yesterday because the OP was kind enough to make a follow-up post.

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=104096

I think it gives very accessible DCA v. Lump Sum advice without being drawn out into a long technical debate.

by **Dandy** » Fri Feb 01, 2013 10:54 am

I would agree more if the Total Bond Fund really covered the US bond market/fixed income market. Inflation Protection bonds especially for retirees and muni bonds for those with taxable space and tax issues need to be considered. I also think that most people should have a large measure (10%+) of "safe" vehicles e.g. CDs, I Bonds, other FDIC vehicles. They are not bonds or ETFs but they make the "simple" a bit more complex.

A Three Fund Portfolio is a little too simple for me.

by **texasdiver** » Wed Feb 06, 2013 10:40 am

adlerps wrote:Can someone please point out to me a post or explain why a three or four fund portfolio is just as good or better than a deverfied portfolio of 12 funds created from Vanguard and DFA index funds? Paul

With the 3 fund portfolio you basically own the entire domestic and foreign stock market in proportions that are roughly equal size or market cap of the companies involved. All you accomplish by adding more mutual funds to your portfolio is duplicating the holdings you already have but in different proportions....giving additional weight to small caps, emerging markets, specific sectors, or whatever. You aren't actually adding diversification by adding more funds, you are reducing it by over-weighting certain sectors of the economy.

Of course there are other assets such as REITs, gold, TIPs and so on that aren't included in the 3 fund portfolio. But if we are limiting the discussion to traditional portfolios of stocks and bonds then by definition the 3 fund portfolio is the most evenly diversified portfolio you can own. Anything you chose to do to "tweak" it by adding other mutual funds is simply going to reduce the diversification by over-weighting specific sectors.

by **pingo** » Thu Feb 07, 2013 5:07 am

^Minor correction: the 3-Fund portfolio includes REITS at market weights within the equity funds. :beer

by **mmdds** » Mon Feb 11, 2013 11:12 am

Getting Started with Investing in the Three Fund Portfolio:

A few questions, thought I would just add them here instead of starting a new thread. I am a recent graduate from dental school, 27 years old, and am about to open a Roth IRA through Vanguard. I have no retirement savings currently as up until 9 months ago I've had no income

. I've done a lot of reading on investing and asset allocation in the past year, and am interested in this three fund portfolio for its simplicity. I expect to only be under the income limits for a Roth for for 2012, 2013, and possibly 2014. Funds available for investing are limited at the moment due to other responsibilities, so I plan to get a 2012 Roth started with 3k.

How do I begin building this portfolio starting from scratch? Should I start with the total stock first, then add international when I have enough for the minimum, then same with bond? Then work up with total stock (through future accounts in addition to the Roth) until I reach admiral, then repeat with international then bond, and then focus on creating "my ideal" allocation %-wise?

My other thought is keep it ever simpler with my roth via a Vanguard TargetRetirement fund. Then, once I obtain ownership in a practice (hopefully ~3 years from now) and have a higher income and SEP/Simple/401k, I can focus on building a portfolio such as this or Rick Ferri's "core four" within that account and leave my TargetRetirement alone?

I know in the long-run it probably doesn't really matter due to the fact that I'm dealing with such a small amount right now anyways, but I was just looking for any advice on how to get started. Thanks!

by **Taylor Larimore** » Mon Feb 11, 2013 12:15 pm

Is there someone in particular at Vanguard that we should thank for continuing and expanding Jack Bogle's vision?

When Jack made his selfless decision to make fund shareholders the owner's of his corporation, he made as sure as can be that Vanguard and its employees would continue and expand his vision. I doubt if there is anyone in particular that we should thank.

I am grateful to all Vanguard employes. In my opinion, they continue to provide a combination of low cost and customer service that is unsurpassed.

Best wishes.
Taylor

by **Taylor Larimore** » Mon Feb 11, 2013 2:15 pm

I was just looking for any advice on how to get started

.
mmdds:

Welcome to the Bogleheads Forums!

I would like to keep this thread for general information about the Three Fund Portfolio.

For personal portfolio help, please start a new topic on the Investing Help Forum. Use this link as a guide:

Asking Portfolio Questions

Thank you and best wishes.
Taylor

by **pingo** » Mon Feb 11, 2013 2:31 pm

+1

More information should be considered before weighing in with a specific portfolio suggestion. Now, since I believe the following is still in line with the parameters of this thread...

mmdds wrote:My other thought is keep it ever simpler with my roth via a Vanguard TargetRetirement fund.

The Vanguard Target Retirement Fund that you would be considering is no more and no less than a three fund portfolio(*) sold to you at cost. The same statement applies to any of the Vanguard LifeStrategy Funds, except that LifeStrategy Funds hold static allocations, whereas Target Funds have a glidepath to become more conservative as the target date approaches. The names "Target" and "LifeStrategy" are merely a box you buy that contains a pre-determined, logical amount of Total Stock, Total International and Total Bond inside, and where Vanguard maintains the allocations for you.

(*Be advised that there are a couple of changes on the horizon that may turn one's 3-fund Target/LifeStategy fund into a 4-fund, but the point is pretty much the same. Also, Target Funds begins to incorporate a TIPS fund 5 years from retirement.)

by **limache** » Wed Feb 20, 2013 4:18 pm

What do you think of a fund of fund vs buying the 3 funds separately? What are pros and cons?

I thought about this on my own and so far I've come up with the fact that if you were to buy the 3 funds on your own, you'd need at least 9K to buy each. With the FOF, you only need a minimum of 3000. However, I think the FOF is locked in the asset allocation so I think the allocation is up to the FOF. If an investor likes to tinker with their allocation, then I suppose a FOF is not for them. But I think it's simpler for most people and they have a range of (fixed) different allocations. I also don't think the FOF can be upgraded to admiral shares. How am I doing so far?

I literally bought this FOF a few days ago and put in 3K.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

by **umfundi** » Wed Feb 20, 2013 4:45 pm

limache wrote:What do you think of a fund of fund vs buying the 3 funds separately? What are pros and cons?

I thought about this on my own and so far I've come up with the fact that if you were to buy the 3 funds on your own, you'd need at least 9K to buy each. With the FOF, you only need a minimum of 3000. However, I think the FOF is locked in the asset allocation so I think the allocation is up to the FOF. If an investor likes to tinker with their allocation, then I suppose a FOF is not for them. But I think it's simpler for most people and they have a range of (fixed) different allocations. I also don't think the FOF can be upgraded to admiral shares. How am I doing so far?

I literally bought this FOF a few days ago and put in 3K.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

The pro is you never have to rebalance. They do it for you.

If an investor likes to tinker with their allocation,

That is another real pro. Don't tinker with your allocation!!

Less paperwork.

I chose LifeStrategy Funds because I did not want the changing AA of Target Retirement Funds. To each his own.

Keith

by **Taylor Larimore** » Wed Feb 20, 2013 4:49 pm

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

by **limache** » Wed Feb 20, 2013 4:52 pm

Actually I was just wondering, how does putting it in a taxable vs retirement account affect a FOF like the LifeStrategy?

Since you can only put in 5000 annually for retirement accounts, if you want to invest more, would it make sense to max out the 5000 annual account and then open another FOF account? i.e. would someone put in 5000 in this LifeStrategy fund and then add another 5000 in the same lifestrategy fund?

For myself, I just put it in the normal taxable account.

by **CABob** » Wed Feb 20, 2013 5:03 pm

limache wrote:Actually I was just wondering, how does putting it in a taxable vs retirement account affect a FOF like the LifeStrategy?

The problem is with the bond portion of the FOF. Bond funds distribute non-qualified dividends which means that those dividends will be taxed as distributed at ordinary income tax rates. Stock fund distributions are mostly qualified which means that they are taxed at a lower rate and part of the gains will be capital gains which are not taxed until you sell the fund.
In a tax advantaged account nothing gets taxed currently.

by tj » Wed Feb 20, 2013 5:18 pm

Why is holding a FOF in taxable so bad? Especially the more aggressive portfolios which have relatively small bond allocations? I almost wonder if the "higher" tax cost would be worth not being tempted to tinker with allocations, tax loss harvest/tax gain harvest, etc.

by **dbr** » Wed Feb 20, 2013 5:31 pm

tj wrote:Why is holding a FOF in taxable so bad? Especially the more aggressive portfolios which have relatively small bond allocations? I almost wonder if the "higher" tax cost would be worth not being tempted to tinker with allocations, tax loss harvest/tax gain harvest, etc.

With taxes everything depends on specifics. If one needs to make a decision the best thing isto calculate actual tax costs for various alternatives and decide how much one thing or another actually matters.

by **Hexdump** » Sun Mar 10, 2013 10:03 am

Is there a link to, or has anyone done a back test to see how a 3-fund portfolio has done ?

I would like to plug in my AA %s and see how it would have performed. Understanding, of course, that past performance, etc., etc.

Terrific article Taylor, and thanks again.

by **Taylor Larimore** » Sun Mar 10, 2013 12:31 pm

Hexdump wrote:Is there a link to, or has anyone done a back test to see how a 3-fund portfolio has done ?

I would like to plug in my AA %s and see how it would have performed. Understanding, of course, that past performance, etc., etc.

Terrific article Taylor, and thanks again.

Hexdump:

There is no specific allocation for the three funds in the Three-Fund Portfolio." The percentage of each of the three funds is allocated according to the owner's personal desire. This was Morningstar's "15-Year Category Performance*" for each fund on December 31, 2012:

TOP 29% = Vanguard Total Stock Market (VTSMX)
TOP 20% = After tax.

TOP 28% = Vanguard Total International (VGTSX)
TOP 22% = After tax

TOP 38% = Vanguard Total Bond Market (VBMFX)
TOP 33% = After tax

*RISK in all categories was average or below average.

Past performance does not guarantee future performance.

Best wishes
Taylor

by **pingo** » Sun Mar 10, 2013 12:38 pm

Edited to correct arithmetic error. :oops:

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:
42% TSM
18% TISM
40% TBM

Looking at annualized returns over a 10 year period:
42% x 9.45% = 4.914% 3.969%
18% x 10.81% = 1.9458%
40% x 4.8% = 1.92%
Portfolio returns of 8.78% 7.83% 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.

by **BigFoot48** » Sun Mar 10, 2013 12:54 pm

Hexdump wrote:Is there a link to, or has anyone done a back test to see how a 3-fund portfolio has done ?

I would like to plug in my AA %s and see how it would have performed. Understanding, of course, that past performance, etc., etc.

I would use Simba's Backtest model, as recently updated for 2012 by seebeer to test the historic performance under any allocation: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=2520&start=450 I use it to see how my 45/55 modified Coffeehouse allocation would have performed compared to the various schemes developed over the years and always conclude it's "good enough". When I reach 70 I'm going 3-4 fund for the homestretch.

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