3-fund vs Vanguard 4-fund portfolio?

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need403bhelp
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3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 12:30 pm

To date, as far as retirement, I have only been contributing $5,500 yearly to a Roth IRA at Vanguard, invested in a target retirement fund (VTIVX).

Now, I will have access to multiple tax-deferred investment vehicles at work, including a 403b and 457 (both of which, I believe, I will be able to max out).


As neither of the work accounts are through Vanguard (there are, however, about 5 companies as options, so I am hoping there will be some good, low-cost, diversified funds), I will probably need to move away from a target retirement fund to a 3 fund or Vanguard 4 fund portfolio. I am a pretty logical person, so I don't believe that rebalancing the investments myself (vs a target retirement fund automatically doing it for me) will be "risky" in terms of me doing something drastic when I am rebalancing - i.e., something that does not align with my AA, e.g., in terms of large stock market losses.

I am fairly happy with the Vanguard target retirement AA of 90/10 stocks/bonds (I would, honestly, be happy with 80/20 as well, as my understanding is that performance of 90/10 and 80/20 has, historically, been fairly similar; 100/0 seems a bit "risky" as there would be an intrinsic "hurdle" when going from 0% bonds to x!=0% bonds at some future point, which I could potentially delay due to inertia for too long).

My question.

I noticed that the Vanguard target retirement funds use the 4 fund portfolio: https://www.bogleheads.org/wiki/Vanguar ... _portfolio

On the other hand, a lot of folks on this forum recommend the more traditional 3 fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio

My inherent bias, having to do with:
  • my status quo (in the sum total of my retirement accounts which, to date, only encompassing a Roth IRA)
  • Vanguard being more "expert" than I at investment planning
is to go ahead and mirror my 403b/457 as a Vanguard 4-fund portfolio, vs a traditional 3-fund portfolio.

Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
Last edited by need403bhelp on Wed May 31, 2017 7:17 pm, edited 22 times in total.

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Taylor Larimore
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by Taylor Larimore » Mon May 29, 2017 1:01 pm

Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
need403bhelp:

Unlike the Vanguard Three-Fund Portfolio, the Four-Fund portfolio adds an International Bond Fund.

Bonds are primarily for safety. Vanguard Total Bond Market does this well. It's worst annual loss since inception was less than 3%. I doubt if adding an International Bond fund will make much foreseeable difference in risk or return, especially in an a 10% or 20% bond portfolio, but it does add complexity and probably higher cost.

You can find my reasons for not including an international bond fund in the three fund portfolio. Use the link above, page 11, about 3/4 of the way down.

I suggest you use either the 3- or 4-fund portfolio, whichever is easier for you. There is more than one road to Dublin.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

mhalley
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by mhalley » Mon May 29, 2017 1:06 pm

Bogleheads have not embraced intl bonds, probably because they feel they are more risky than domestic bonds plus they complicate the portfolio, and have a higher er. Vanguard of course disagrees. The proper bond allocation is more controversial than the stock portion.
Some feel you should go very safe, i.e. Treasuries, others feel some risk is warranted i.e. Adding junk.
Last edited by mhalley on Mon May 29, 2017 1:17 pm, edited 1 time in total.

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SinisterMethods
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by SinisterMethods » Mon May 29, 2017 1:07 pm

need403bhelp wrote:
As neither of the work accounts are through Vanguard (there are, however, about 5 companies as options, so I am hoping there will be some good, low-cost, diversified funds), I will probably need to move away from a target retirement fund to a 3 fund or Vanguard 4 fund portfolio.
Do you know which other companies, by chance? Vanguard may be the leader, but other companies like Fidelity are just as good.

It seems like Fidelity has been mirroring Vanguard on their funds, except for a few small differences. For example, Fidelity's target date fund has a very small percentage in commodities, which haven't been doing good for the past few years. But otherwise their performance will be similar to Vanguards.

Fidelity also goes a few points lower with international.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 1:11 pm

mhalley wrote:Bogleheads have not embraced intl bonds, probably because they feel they are more risky than domestic bonds plus they complicate the portfolio. Vanguard of course disagrees. The proper bond allocation is more controversial than the stock portion.
Some feel you should go very safe, i.e. Treasuries, others feel some risk is warranted i.e. Adding junk.
Thank you for succinctly describing why Bogleheads tend not to embrace intl bonds (risk & extra complexity).

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 1:13 pm

SinisterMethods wrote:
need403bhelp wrote:
As neither of the work accounts are through Vanguard (there are, however, about 5 companies as options, so I am hoping there will be some good, low-cost, diversified funds), I will probably need to move away from a target retirement fund to a 3 fund or Vanguard 4 fund portfolio.
Do you know which other companies, by chance? Vanguard may be the leader, but other companies like Fidelity are just as good.

It seems like Fidelity has been mirroring Vanguard on their funds, except for a few small differences. For example, Fidelity's target date fund has a very small percentage in commodities, which haven't been doing good for the past few years. But otherwise their performance will be similar to Vanguards.

Fidelity also goes a few points lower with international.
Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.

My understanding is that investments and ERs can vary quite a bit in different employer plans with the same company - i.e., one employer may have great ERs for the same Fidelity fund for which another employer has a very high ER. Is this true? If so, any specific recommendations?

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brother7
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by brother7 » Mon May 29, 2017 1:22 pm

need403bhelp wrote: Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.
Personally, I'd avoid any company closely associated with annuity or insurance products, which narrows the list down to Fidelity.
I've had issues dealing with my relative's 403b at VALIC. I'd definitely avoid them.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 1:31 pm

brother7 wrote:
need403bhelp wrote: Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.
Personally, I'd avoid any company closely associated with annuity or insurance products, which narrows the list down to Fidelity.
I've had issues dealing with my relative's 403b at VALIC. I'd definitely avoid them.
Got it. Thanks so much! I know that some Bogleheads advocate TIAA traditional fund in lieu of a bond fund if it is the liquid version, so definitely something that I will need to check once I have access to the retirement system.

student
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by student » Mon May 29, 2017 1:54 pm

need403bhelp wrote:
brother7 wrote:
need403bhelp wrote: Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.
Personally, I'd avoid any company closely associated with annuity or insurance products, which narrows the list down to Fidelity.
I've had issues dealing with my relative's 403b at VALIC. I'd definitely avoid them.
Got it. Thanks so much! I know that some Bogleheads advocate TIAA traditional fund in lieu of a bond fund if it is the liquid version, so definitely something that I will need to check once I have access to the retirement system.
TIAA is a good company. Don't let the name annuities scares you. I use TIAA traditional for my bond. I use both the liquid and illiquid versions.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 1:57 pm

student wrote:TIAA is a good company. Don't let the name annuities scares you. I use TIAA traditional for my bond. I use both the liquid and illiquid versions.
Thank you so much for the helpful information!

NiceUnparticularMan
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by NiceUnparticularMan » Mon May 29, 2017 2:47 pm

Here is Vanguard's white paper on international bonds:

https://personal.vanguard.com/pdf/icrif ... 2_high.pdf

That was 2012, and since then they have increased their recommending percentage of bonds in international (hedged) (at that time it was 20%, and they since raised it to 30%).

There are two basic takeaways from their research. First, if you have a high enough equity percentage with a decent percentage of international equities, you probably don't need international bonds. However, once you get past a certain percentage of bonds in total, adding international bonds is a good idea--and it is a good idea precisely because it will likely lower portfolio volatility.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 2:50 pm

NiceUnparticularMan wrote:Here is Vanguard's white paper on international bonds:

https://personal.vanguard.com/pdf/icrif ... 2_high.pdf

That was 2012, and since then they have increased their recommending percentage of bonds in international (hedged) (at that time it was 20%, and they since raised it to 30%).

There are two basic takeaways from their research. First, if you have a high enough equity percentage with a decent percentage of international equities, you probably don't need international bonds. However, once you get past a certain percentage of bonds in total, adding international bonds is a good idea--and it is a good idea precisely because it will likely lower portfolio volatility.
Thank you so much for the link and for the succinct summary. I will need to try to read the entire white paper when I have time. Thank you again!

KarenC
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by KarenC » Mon May 29, 2017 3:51 pm

Taylor Larimore wrote:
Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
need403bhelp:

[…]

You can find my reasons for not including an international bond fund in the three fund portfolio. Use the link above, page 11, about 3/4 of the way down.

[…]

Best wishes.
Taylor
This seems to link directly to the post in question:
viewtopic.php?f=10&t=88005&start=500#p1837043
"How much you know is less important than how clearly you understand where the borders of your ignorance begin." — Jason Zweig

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 4:13 pm

Taylor Larimore wrote:
Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
need403bhelp:

Unlike the Vanguard Three-Fund Portfolio, the Four-Fund portfolio adds an International Bond Fund.

Bonds are primarily for safety. Vanguard Total Bond Market does this well. It's worst annual loss since inception was less than 3%. I doubt if adding an International Bond fund will make much foreseeable difference in risk or return, especially in an a 10% or 20% bond portfolio, but it does add complexity and probably higher cost.

You can find my reasons for not including an international bond fund in the three fund portfolio. Use the link above, page 11, about 3/4 of the way down.

I suggest you use either the 3- or 4-fund portfolio, whichever is easier for you. There is more than one road to Dublin.

Best wishes.
Taylor
KarenC wrote: This seems to link directly to the post in question:
viewtopic.php?f=10&t=88005&start=500#p1837043
Thank you, both, so much for the very helpful information. Somehow, I missed Taylor's until I saw KarenC's post. Thank you again!

radiowave
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by radiowave » Mon May 29, 2017 4:28 pm

If you choose Fidelity for your 403b, you could consider moving the Roth IRA over to Fidelity as well and have both under one roof. Add a taxable account at Fidelity, and a cash management account (which is excellent an includes a no fee debit card for ATM), you'll have everything you need for the next few decades. Setting aside the Vanguard vs. Fidelity discussion (if you have time do a search here on the forum), Fidelity will give you excellent consumer support and equivalent low cost index funds. Note, I have both and like both brokerages, but if you have Fidelity available for your tax-deferred, makes sense to consolidate everything together for easier management.

Note, to find the equivalent target retirement fund in Fidelity, go to the site and type in Fidelity Freedom Index xxxx Fund (the xxxx is the target year). Be sure to choose the index fund, there are other target retirement funds with much higher expense ratios.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 4:36 pm

radiowave wrote:If you choose Fidelity for your 403b, you could consider moving the Roth IRA over to Fidelity as well and have both under one roof. Add a taxable account at Fidelity, and a cash management account (which is excellent an includes a no fee debit card for ATM), you'll have everything you need for the next few decades. Setting aside the Vanguard vs. Fidelity discussion (if you have time do a search here on the forum), Fidelity will give you excellent consumer support and equivalent low cost index funds. Note, I have both and like both brokerages, but if you have Fidelity available for your tax-deferred, makes sense to consolidate everything together for easier management.

Note, to find the equivalent target retirement fund in Fidelity, go to the site and type in Fidelity Freedom Index xxxx Fund (the xxxx is the target year). Be sure to choose the index fund, there are other target retirement funds with much higher expense ratios.
Thank you for the helpful advice about consolidating everything under one roof. I will definitely take a look at the expense ratios on the Fidelity Freedom Index xxxx Fund when I have access to the employer-sponsored site (after I start).

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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by CABob » Mon May 29, 2017 6:06 pm

Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
I don't do market forecasts but if I did I wouldn't pick one over the other but I would be willing to forecast over the long term there will be very little difference in performance.
Bob

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Mon May 29, 2017 6:16 pm

CABob wrote:
Any thoughts about the Vanguard 4-fund portfolio vs the traditional 3-fund portfolio? Any reasons NOT to go with the Vanguard 4-fund portfolio?
I don't do market forecasts but if I did I wouldn't pick one over the other but I would be willing to forecast over the long term there will be very little difference in performance.
Thanks so much for your helpful thoughts.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Tue May 30, 2017 11:14 am

Deleted as I am adding details to my initial post. Will post questions and then bump thread when ready for more responses. Thank you all so much!
Last edited by need403bhelp on Tue May 30, 2017 8:26 pm, edited 1 time in total.

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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by BolderBoy » Tue May 30, 2017 11:31 am

brother7 wrote:
need403bhelp wrote: Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.
Personally, I'd avoid any company closely associated with annuity or insurance products, which narrows the list down to Fidelity.
I've had issues dealing with my relative's 403b at VALIC. I'd definitely avoid them.
I'll second the vote for using Fidelity over the others.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Tue May 30, 2017 11:46 am

BolderBoy wrote:
brother7 wrote:
need403bhelp wrote: Fidelity, TIAA-CREF, ING/VOYA, Lincoln Financial Group, VALIC Financial.
Personally, I'd avoid any company closely associated with annuity or insurance products, which narrows the list down to Fidelity.
I've had issues dealing with my relative's 403b at VALIC. I'd definitely avoid them.
I'll second the vote for using Fidelity over the others.
Thanks for the advice. Out of curiosity, what makes you choose Fidelity over TIAA-CREF? I have seen many positive things posted on this forum about the TIAA Traditional fund in lieu of or as part of the bond component, especially the liquid version?

Thanks!

P.s. See, e.g., viewtopic.php?t=211688

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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by BolderBoy » Tue May 30, 2017 1:37 pm

need403bhelp wrote:Thanks for the advice. Out of curiosity, what makes you choose Fidelity over TIAA-CREF?
Purely because I've dealt with Fidelity before and never with TIAA/CREF.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Tue May 30, 2017 6:24 pm

BolderBoy wrote:Purely because I've dealt with Fidelity before and never with TIAA/CREF.
Got it. Thank you so much for letting me know!

heyyou
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by heyyou » Tue May 30, 2017 9:36 pm

Either portfolio will be good enough. We live in a perverse world. Whichever path you choose, the other one will immediately outperform, but that has little long term consequence since your savings rate matters more.

Costs matter but the lowest cost may be near to the next lowest one. Broad diversification matters but the last fund addition of several, may not matter. In retrospect, you can be grateful for what you have, or you can lament that you didn't pick what eventually became the optimal choice, back in the twenty-teens. In personal finance, there seems to be a never ending supply of dilemmas.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Wed May 31, 2017 10:05 am

heyyou wrote:Either portfolio will be good enough. We live in a perverse world. Whichever path you choose, the other one will immediately outperform, but that has little long term consequence since your savings rate matters more.

Costs matter but the lowest cost may be near to the next lowest one. Broad diversification matters but the last fund addition of several, may not matter. In retrospect, you can be grateful for what you have, or you can lament that you didn't pick what eventually became the optimal choice, back in the twenty-teens. In personal finance, there seems to be a never ending supply of dilemmas.
Thank you so much for the helpful practical and theoretical advice re optimizing one's portfolio choice.

need403bhelp
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Re: 3-fund vs Vanguard 4-fund portfolio?

Post by need403bhelp » Wed May 31, 2017 10:54 am

Thank you all for your helpful comments!

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