Creating a 3 Fund Portfolio??

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PitaBear
Posts: 4
Joined: Thu Aug 03, 2017 2:48 pm

Creating a 3 Fund Portfolio??

Post by PitaBear » Thu Oct 05, 2017 4:41 pm

For quick background information I am married with 2 kids (3yo and 2yo). We have a traditional 401k with a little over $50k per year contribution after company match and profit sharing, this is in a Vanguard target retirement fund. We will max out 2 backdoor Roth IRAs, also in Vanguard target retirement funds. Also 529s for each kid.

I recently transferred over a previously managed joint account to a Vanguard account for me to manage myself to cut down on the costs. I wanted to keep things simple however and was planning on doing a 3 fund portfolio. I want to try to make this as tax friendly as possible as we are in a high tax bracket (annual joint income ~500k). This account will be used as a supplement to retirement, additional school costs that 529s don't cover, as well as any other large expenses that may occur between now and retirement. It has about $100k now and the plan is to add about $36k a year.

Using the simple math of having your age in Bonds% we would have a 33% bond / 77% stock ratio, however I figure since our base retirement funds (401k and Roths) will be in a similar ratio this account could be a little more aggressive and I would just subtract 10 years from our ages when I redistribute, so for easy math starting around 25/75 split. I'd first like to know what people thought of this and whether we should perhaps be more or less aggressive? I would also plan to adjust the ratio every couple years to gradually become more conservative.

Finally, and my main question, is what are the 3 best funds to start a 3 fund portfolio with Vanguard. I was planning on doing the Total Stock Market Index Admiral Shares VTSAX (ER 0.04%) at 50%, Total International Stock Index Admiral VTIAX (ER 0.11%) at 25%, and Tax Exempt Bond Index Admiral VTEAX (ER 0.09%) at 25%.

1. Are there any advantages to choosing an ETF for one of these such as the Total Stock Market ETF over the Index fund?

2. I read the boglehead page on the differences of the Total Int Stock Index and FTSE All World ex-US, but I still don't see any difference or why to choose one over the other. Any insight on this would be helpful.

3. Finally, for the bond index I guess this is where you have to be careful for tax purposes. Is this the best Vanguard Bond to choose to get a decent return with low fees and still be most tax friendly, or is the about the taxes on this portion of the account over thinking it. Any advice here would be appreciated as well.

Thanks for any help or advice.

Compound
Posts: 433
Joined: Mon May 26, 2014 1:32 pm

Re: Creating a 3 Fund Portfolio??

Post by Compound » Thu Oct 05, 2017 7:51 pm

To address your main question, I’d say yes you have chosen good options to create a three fund portfolio in taxable. Hopefully others will come along and add opinions and address your other more specific questions.

MotoTrojan
Posts: 699
Joined: Wed Feb 01, 2017 8:39 pm

Re: Creating a 3 Fund Portfolio??

Post by MotoTrojan » Thu Oct 05, 2017 10:21 pm

It is best to think of your portfolio as one unit. Given that you are now going to have significant taxable assets, I would see if you can implement a true 3-fund portfolio across all accounts, and ditch the Target Funds. If you have to withdraw from taxable, just shift things around after in tax-advantaged (no taxes paid) to maintain balance. The only strong reason against this in my opinion is if your 401k offers much lower ER's on Target funds, than 3-fund components.

I'd go with Total Bond, or equivalent, and hold that exclusively in your 401k, if possible. A Roth is also an acceptable place for bonds, but some prefer to bias them towards equities since the tax-free growth will pay-off more, in theory. Then taxable would be Total US and Total Int, which are both very tax efficient. If you can achieve this with bonds only living in your 401k, perfect. If not, then you may want to search muni's or other tax-efficient fixed-income options to maintain your AA overall.

You could look at your 529's in isolation, just for ease of mental accounting (could use a Target Retirement fund, Balanced Fund, or your own 3-fund), but that isn't a must.

Also another note, if your 401k offers S&P500 only/cheaper, it is a very good substitute to Total US, so I would not hesitate to consider them equivalent. Just Google the Portfolio Visualizer returns comparison for them over the years.

venkman
Posts: 230
Joined: Tue Mar 14, 2017 10:33 pm

Re: Creating a 3 Fund Portfolio??

Post by venkman » Fri Oct 06, 2017 3:37 am

PitaBear wrote:
Thu Oct 05, 2017 4:41 pm
1. Are there any advantages to choosing an ETF for one of these such as the Total Stock Market ETF over the Index fund?

2. I read the boglehead page on the differences of the Total Int Stock Index and FTSE All World ex-US, but I still don't see any difference or why to choose one over the other. Any insight on this would be helpful.

3. Finally, for the bond index I guess this is where you have to be careful for tax purposes. Is this the best Vanguard Bond to choose to get a decent return with low fees and still be most tax friendly, or is the about the taxes on this portion of the account over thinking it. Any advice here would be appreciated as well.
1. VTEAX has a purchase fee of .25%. You can avoid the purchase fee by buying ETF shares (VTEB) of the fund. However, if you generally prefer owning the actual funds over owning ETF's, a .25% purchase fee is not automatically a deal breaker.

2. Total Intl. has some allocation to small-cap stocks, while the FTSE All World ex-US doesn't. It's not a huge difference, but I like intl. small caps because they tend to have less correlation with US stocks.

3. This depends on your state of residence, and state income taxes. If you live in high-tax state, it can be better to invest part of your bond allocation in the Vanguard muni fund for that specific state.

I should also add that having your age in bonds is not necessarily the best guideline to follow. If you're 15+ years away from retirement, an 80/20 split is fine. (Provided that fits with your individual risk tolerance--if you want to be more conservative because you don't like the wild swings of the stock market, that's perfectly okay.)

PitaBear
Posts: 4
Joined: Thu Aug 03, 2017 2:48 pm

Re: Creating a 3 Fund Portfolio??

Post by PitaBear » Fri Oct 06, 2017 8:23 am

Thanks for the advice. I hadn't thought of joining all accounts to make an overall 3 fund portfolio but that makes sense. I'll try to see how all that will work out, I should be able to do mostly bonds in the 401k and be good with the ratio. Also, we probably will skew a little more aggressive, closer to 80/20. I usually tend to be more conservative but my wife would probably do 90/10 or more.

I saw the .25% purchase fee on the total stock fund, so if I can avoid it by buying the ETF what is the trade off. Is there any disadvantage to having the ETF instead of the fund?

Thanks again.

venkman
Posts: 230
Joined: Tue Mar 14, 2017 10:33 pm

Re: Creating a 3 Fund Portfolio??

Post by venkman » Sat Oct 07, 2017 2:50 am

PitaBear wrote:
Fri Oct 06, 2017 8:23 am
I saw the .25% purchase fee on the total stock fund, so if I can avoid it by buying the ETF what is the trade off. Is there any disadvantage to having the ETF instead of the fund?
The main difference with an ETF is that you have to buy and sell it on the open market, so its value might fluctuate throughout the day. And it may trade at a slightly different price than its NAV. Whether those are advantages or disadvantages depends mostly on your point of view. You also generally have to buy a whole number of shares, rather than investing a set dollar amount.

If you have a Vanguard account, you don't pay any commissions to trade VG ETF's, and you can get dividends automatically reinvested. So, the decision between mutual fund and ETF mostly comes down to individual preference.

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