The 3.5 Fund Portfolio

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ERMD
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The 3.5 Fund Portfolio

Post by ERMD » Sun Dec 29, 2013 9:33 pm

What are people's thoughts on splitting the domestic large cap portion of the 3 fund portfolio into equal parts large and mid cap blend? Spiritually a 3 funder, technically a 4 funder.. playfully, the 3.5. Needlessly complicated or a bit more dynamic? I've divvied it up this way on my and my wife's 403b, but I wonder if ultimately I'm doing litle more than being cute?
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Re: The 3.5 Fund Portfolio

Post by livesoft » Sun Dec 29, 2013 9:37 pm

Instead of mid-cap, I would use small-cap value because the latter has plenty of mid-caps anyways and you get some small-cap value, too.
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Re: The 3.5 Fund Portfolio

Post by sscritic » Sun Dec 29, 2013 9:39 pm

If you are going for cute, do yours one way and let your wife do hers the other. Report back in 30 years and let us know the winner.

Note that I didn't say that you were to divvy up your wife's, as you apparently do currently.
I've divvied it up this way on my and my wife's 403b

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Re: The 3.5 Fund Portfolio

Post by ERMD » Sun Dec 29, 2013 9:44 pm

sscritic wrote:If you are going for cute, do yours one way and let your wife do hers the other. Report back in 30 years and let us know the winner.

Note that I didn't say that you were to divvy up your wife's, as you apparently do currently.
I've divvied it up this way on my and my wife's 403b
Per her requests, I'm in charge of "that stuff." I've tried to involve her, believe me. Not interested. And i figured configuring our portfolios the same way and diversifying them collective'y is easier than playing "See Who Retires First."
between scotch and nothing, i'll take scotch. -- faulkner

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Re: The 3.5 Fund Portfolio

Post by retiredjg » Sun Dec 29, 2013 10:10 pm

ERMD wrote:What are people's thoughts on splitting the domestic large cap portion of the 3 fund portfolio into equal parts large and mid cap blend?
I wonder if you are confused about what the 3 fund portfolio actually is. The domestic portion is total stock market - which is large, mid, and small caps. There is no discrete "domestic large cap portion" to split unless you mean using S&P 500 and mid caps, mid caps, and small caps as your domestic holding.

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Re: The 3.5 Fund Portfolio

Post by grabiner » Mon Dec 30, 2013 12:10 am

If you are going to split up a US portfolio into large and small, a reasonable way to do it would be Tax-Managed Capital Appreciation and Tax-Managed Small-Cap. This might be slightly better than Total Stock Market if you are in a very high tax bracket; otherwise, the higher cost of the tax-managed funds may outweigh any tax savings. Splitting 80/20 approximates Total Stock Market; splitting 50/50 would be a very tax-efficient way to overweight small-cap stock.

I don't do this myself, even though I had the option to switch to it in 2009. I use Total Stock Market as my core US holding, and while I do overweight small-caps, I have a small-cap fund in my employer plan, which allows me to use Total Stock Market as my sole taxable US holding. In my tax bracket (25% then, 28% now, so only 15% tax on qualified dividends, 21% including state tax deducted from federal), I decided that an 80/20 split wasn't worthwhile.
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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 7:05 am

retiredjg wrote:
ERMD wrote:What are people's thoughts on splitting the domestic large cap portion of the 3 fund portfolio into equal parts large and mid cap blend?
I wonder if you are confused about what the 3 fund portfolio actually is. The domestic portion is total stock market - which is large, mid, and small caps. There is no discrete "domestic large cap portion" to split unless you mean using S&P 500 and mid caps, mid caps, and small caps as your domestic holding.
i probably should have clarified that a total domestic market option wasn't a choice in my 403b, so VIIIX is my surrogate. but my question, in general, was about weighting the domestic portion towards mid/small while preserving total bond and international portions.
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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 7:12 am

grabiner wrote:If you are going to split up a US portfolio into large and small, a reasonable way to do it would be Tax-Managed Capital Appreciation and Tax-Managed Small-Cap. This might be slightly better than Total Stock Market if you are in a very high tax bracket; otherwise, the higher cost of the tax-managed funds may outweigh any tax savings. Splitting 80/20 approximates Total Stock Market; splitting 50/50 would be a very tax-efficient way to overweight small-cap stock.

I don't do this myself, even though I had the option to switch to it in 2009. I use Total Stock Market as my core US holding, and while I do overweight small-caps, I have a small-cap fund in my employer plan, which allows me to use Total Stock Market as my sole taxable US holding. In my tax bracket (25% then, 28% now, so only 15% tax on qualified dividends, 21% including state tax deducted from federal), I decided that an 80/20 split wasn't worthwhile.
i guess i need to read up on the tax managed funds - not sure i understand the draw here. suppose you were in the 39% bracket - it would then be worthwhile?
between scotch and nothing, i'll take scotch. -- faulkner

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Re: The 3.5 Fund Portfolio

Post by retiredjg » Mon Dec 30, 2013 10:23 am

ERMD wrote: but my question, in general, was about weighting the domestic portion towards mid/small while preserving total bond and international portions.
You can find more information on this if you go to the Wiki and search for Fama French . This will tell you about the historical data showing that small cap (and value) paid a premium during the time period studied. Nobody knows if this will continue, but a lot of people are investing with the idea that it will continue.

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Re: The 3.5 Fund Portfolio

Post by abuss368 » Mon Dec 30, 2013 10:26 am

You are probably splitting hairs. The additional fund will result in a little more complexity in terms of rebalancing and tracking.

Personally, I would select Total Stock Market Index Fund and stay the course.
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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 1:47 pm

abuss368 wrote:You are probably splitting hairs. The additional fund will result in a little more complexity in terms of rebalancing and tracking.

Personally, I would select Total Stock Market Index Fund and stay the course.
Unfortunately, total stock market fund isn't an option in my 403b. Only VIIIX (large cap) and VIEIX (mid-cap blend.) Since a 66/33 split of the two roughly approximates VTSM on Morningstar's Instant X-ray, the 50/50 tilts moderately towards mid and smalls.
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Re: The 3.5 Fund Portfolio

Post by abuss368 » Mon Dec 30, 2013 2:18 pm

ERMD wrote:
abuss368 wrote:You are probably splitting hairs. The additional fund will result in a little more complexity in terms of rebalancing and tracking.

Personally, I would select Total Stock Market Index Fund and stay the course.
Unfortunately, total stock market fund isn't an option in my 403b. Only VIIIX (large cap) and VIEIX (mid-cap blend.) Since a 66/33 split of the two roughly approximates VTSM on Morningstar's Instant X-ray, the 50/50 tilts moderately towards mid and smalls.
You would probably be fine with both. 30% or so of the Total Stock Market Index is mid and small caps.
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Re: The 3.5 Fund Portfolio

Post by ruralavalon » Mon Dec 30, 2013 3:55 pm

ERMD wrote: Unfortunately, total stock market fund isn't an option in my 403b. Only VIIIX (large cap) and VIEIX (mid-cap blend.) Since a 66/33 split of the two roughly approximates VTSM on Morningstar's Instant X-ray, the 50/50 tilts moderately towards mid and smalls.
A reasonable approach in my opinion. Many do this in the absence of a Total Stock Market fund in their employer-based account.
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Re: The 3.5 Fund Portfolio

Post by retiredjg » Mon Dec 30, 2013 6:48 pm

ERMD wrote:Unfortunately, total stock market fund isn't an option in my 403b. Only VIIIX (large cap) and VIEIX (mid-cap blend.)
Remember that you don't have to make your complete TSM in the 403b. You can put extended market or small cap or whatever in a Roth or traditional IRA.

It does seem odd to have a mid-cap blend and no small cap. Could you have overlooked it?

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Re: The 3.5 Fund Portfolio

Post by pkcrafter » Mon Dec 30, 2013 7:35 pm

I like your idea, 60 large/40 mid.

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Re: The 3.5 Fund Portfolio

Post by Thales » Mon Dec 30, 2013 8:45 pm

It is probably a pseudo three fund portfolio wherein one of the funds involves an extra layer of rebalancing to mimic its total fund counterpart.

You will most likely achieve a higher long term return at the cost of a slight increase in volatility.

It does beg the question of where and when does the three fund portfolio monicker cease to exist and a slice and dice fund start though. Pity. For the sake of an easy life I would choose the three fund total approach every time. But if you cannot then this is the next best thing.

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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 10:31 pm

retiredjg wrote:
ERMD wrote:Unfortunately, total stock market fund isn't an option in my 403b. Only VIIIX (large cap) and VIEIX (mid-cap blend.)
Remember that you don't have to make your complete TSM in the 403b. You can put extended market or small cap or whatever in a Roth or traditional IRA.

It does seem odd to have a mid-cap blend and no small cap. Could you have overlooked it?
There is one small cap fund available: Delafield/Champlain Small Comp Fund. Since it's non Vanguard, I ignored it. Possibly silly of me, but this asset allocation business is still new to me, and as I've been going on primarily what I see on this forum, I'm not sure I'm ready to move into anything not totally Bogled. :D

I don't have a Roth or other taxable account as of yet. I plan on making the 403b primarily my bond fund once I have assets elsewhere, in order to be more tax efficient (again, just aping the prevailing opinion around here without thoroughly understanding it!)
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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 10:34 pm

Thales wrote:It is probably a pseudo three fund portfolio wherein one of the funds involves an extra layer of rebalancing to mimic its total fund counterpart.

You will most likely achieve a higher long term return at the cost of a slight increase in volatility.

It does beg the question of where and when does the three fund portfolio monicker cease to exist and a slice and dice fund start though. Pity. For the sake of an easy life I would choose the three fund total approach every time. But if you cannot then this is the next best thing.
As my overly picky college philosophy teacher would tell me, it doesn't beg the question, it raises the question. Begging the question is a logical fallacy. Apologies if it's obnoxious to point that out but now I can't help myself!

I agree though. As simple as humanly possible.
between scotch and nothing, i'll take scotch. -- faulkner

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Re: The 3.5 Fund Portfolio

Post by livesoft » Mon Dec 30, 2013 11:29 pm

ERMD wrote:Only VIIIX (large cap) and VIEIX (mid-cap blend.)
VIEIX is extended market index. I used extended market index in my 401(k) until I had to rebalance out of small/mid caps. It is much more than a mid-cap fund. If I wasn't using equal parts large-cap and small-cap-value, then I would be using equal parts large-cap and extended market.

What about international equities? Equal parts of total international and FTSE all-world ex-US small (aka VSS)?
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Re: The 3.5 Fund Portfolio

Post by ERMD » Mon Dec 30, 2013 11:38 pm

livesoft wrote:
ERMD wrote:Only VIIIX (large cap) and VIEIX (mid-cap blend.)
VIEIX is extended market index. I used extended market index in my 401(k) until I had to rebalance out of small/mid caps. It is much more than a mid-cap fund. If I wasn't using equal parts large-cap and small-cap-value, then I would be using equal parts large-cap and extended market.

What about international equities? Equal parts of total international and FTSE all-world ex-US small (aka VSS)?
Again, not an option. I have access to FTSE ex-US (VFWSX) but not total international. So that third is entirely VFWSX, which I guess protect me bit morē from international volatility if I want to find the silver lining.
between scotch and nothing, i'll take scotch. -- faulkner

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Re: The 3.5 Fund Portfolio

Post by grok87 » Tue Dec 31, 2013 12:03 am

livesoft wrote:Instead of mid-cap, I would use small-cap value because the latter has plenty of mid-caps anyways and you get some small-cap value, too.
+1
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Re: The 3.5 Fund Portfolio

Post by grabiner » Tue Dec 31, 2013 1:36 am

ERMD wrote:
grabiner wrote:If you are going to split up a US portfolio into large and small, a reasonable way to do it would be Tax-Managed Capital Appreciation and Tax-Managed Small-Cap. This might be slightly better than Total Stock Market if you are in a very high tax bracket; otherwise, the higher cost of the tax-managed funds may outweigh any tax savings. Splitting 80/20 approximates Total Stock Market; splitting 50/50 would be a very tax-efficient way to overweight small-cap stock.

I don't do this myself, even though I had the option to switch to it in 2009. I use Total Stock Market as my core US holding, and while I do overweight small-caps, I have a small-cap fund in my employer plan, which allows me to use Total Stock Market as my sole taxable US holding. In my tax bracket (25% then, 28% now, so only 15% tax on qualified dividends, 21% including state tax deducted from federal), I decided that an 80/20 split wasn't worthwhile.
i guess i need to read up on the tax managed funds - not sure i understand the draw here. suppose you were in the 39% bracket - it would then be worthwhile?
Wiki article link: Tax-managed fund comparison

My best estimate is that the two-fund combination would save two basis points (0.02%) over Total Stock Market if you are in the 39.6% bracket and paying the Affordable Care Act surtax. Even then, there may not be a benefit unless you are still accumulating, as you may have to pay capital-gains tax to rebalance.
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Re: The 3.5 Fund Portfolio

Post by steve_14 » Tue Dec 31, 2013 2:38 am

I see no evidence the market has left me a free lunch in mid-caps, so expect their risk adjusted return to be the same as anything else.

I'd rather take the diversification free lunch of a market weighted portfolio.

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Re: The 3.5 Fund Portfolio

Post by retiredjg » Tue Dec 31, 2013 10:24 am

ERMD wrote:There is one small cap fund available: Delafield/Champlain Small Comp Fund. Since it's non Vanguard, I ignored it. Possibly silly of me...
No, not silly. This is a fund that should be ignored. The expense ratio is high (at least on the open market) and it is an actively managed fund instead of an index fund. You made the right choice.

Leave it to livesoft to spot the obvious. VIEIX is not just "a mid cap fund". It is the Extended Market Fund. It contains all the stuff that is not in the 500 index and is the natural partner to the 500 index. 80% 500 Index plus 20% Extended Market equals the total stock market. (Not sure how you got 66/33.)

Which brings this back to your original question. Should you hold the market weight (80/20) or should you overweight to something like 50/50 or somewhere in between as suggested by the advisor. This is a question that only you can answer. Do you want to hold a market weight portfolio or overweight toward mid/small caps? Do you believe that mid/small caps will continue to outperform as they have in the past?

Nobody knows the answer to that one - you just have to decide on your own. There are many people here who do each of these things. Either is a reasonable decision.

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Re: The 3.5 Fund Portfolio

Post by ERMD » Tue Dec 31, 2013 11:29 am

retiredjg wrote:
ERMD wrote: Leave it to livesoft to spot the obvious. VIEIX is not just "a mid cap fund". It is the Extended Market Fund. It contains all the stuff that is not in the 500 index and is the natural partner to the 500 index. 80% 500 Index plus 20% Extended Market equals the total stock market. (Not sure how you got 66/33.)
Basically just toyed with the ratios on Morningstar's X-ray until the style boxes looked approximately the same. :D But you're right - going back and looking at the 80/20 split mimics the total market style box exactly.
between scotch and nothing, i'll take scotch. -- faulkner

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Re: The 3.5 Fund Portfolio

Post by retiredjg » Tue Dec 31, 2013 12:23 pm

You might find this link useful. There is a similar page for Total International.

http://www.bogleheads.org/wiki/Approxim ... ock_Market

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