Simple Two Fund Portfolio vs. Diversified

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JSS
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Simple Two Fund Portfolio vs. Diversified

Post by JSS » Wed Mar 07, 2018 5:51 pm

Emergency funds: six months of expenses
Debt: HELOC 4.25% interest
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal
State of Residence: Massachusetts
Age:61
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: % of stocks, Not Sure.
I am 61 and may retire in three years. At 64 I would have social security, a moderate size pension or lump sum, and this IRA and Roth.
The IRA and Roth total mid six figures.
I currently have a two fund portfolio similar to Jim Collins wrote about in "Simple Path To Wealth" a Vanguard IRA and a Vanguard Roth IRA.
Both are 60% VTSAX, and 40% VICSX. I like that on Portfolio Visualizer, this portfolio has high Sortino and Sharpe Ratios.
I have been told though, that I do not have enough income drivers in that portfolio.
Thus, I am considering adopting this portfolio:
Fund Name Ticker Wgt. Exp. Ratio Stategy
Vanguard Total World Stock Mkt. ETF VT 18.00% 0.11% Global Equity
iShares Currency Hedged MSCI ACWI ETF HACW 16.00% 0.36% Global Hedged Equity (USD)
iShares MSCI Int'l Developed Value Factor ETF IVLU 8.00% 0.30% Non-U.S. Smart Beta Value Equity
Vanguard FTSE Emerging Markets ETF VWO 8.00% 0.14% Emerging Mkts. Equity
Total Global Equity 50.00%

Doubleline Total Rtn. Bond Fund I-class DBLTX 14.00% 0.47% Core Fixed Income
iShares Short-Maturity Bond ETF NEAR 18.00% 0.25% Short-term Fixed Income
RidgeWorth Seix Floating Rate High Income Fund I Shares SAMBX 4.00% 0.60% Bank Loans
iShares JP Morgan USD Emerging Mkts. Bond ETF EMB 4.00% 0.40% Emerging Mkts. Bonds (USD)
Total Global Fixed Income 40.00%

iShares Global REIT ETF REET 5.00% 0.14% Global REITs
JP Morgan Alerian MLP ETN AMJ 5.00% 0.85% Master Limited Partnerships
Total Global Income Strategies 10.00%

Total 100.00% 0.31%
What are the pros and cons of these thoughts?
Thank you.

trueblueky
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Re: Simple Two Fund Portfolio vs. Diversified

Post by trueblueky » Wed Mar 07, 2018 6:08 pm

Who says you don't have enough income drivers?

Proposal is too complicated for my taste. Different strokes...

dbr
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Re: Simple Two Fund Portfolio vs. Diversified

Post by dbr » Wed Mar 07, 2018 6:10 pm

Who told you there are not enough "income drivers" in your portfolio? What was their explanation of what that is and what is your understanding of what that is? Was this told to you by a broker or "advisor" that wants to sell you the proposed funds?

I admit I have no idea what an income driver is, so if you can explain that it would help.

Obviously I am having a hard time seeing what this does for you.

The unanswered question is roughly how does the income you need or want from the portfolio compare to the size of the portfolio, expressed as a percent withdrawal rate?

Zero Alpha
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Re: Simple Two Fund Portfolio vs. Diversified

Post by Zero Alpha » Wed Mar 07, 2018 6:23 pm

I would consider swapping some or all of the VICSX Vangaurd Corporate bonds to something safer such as Vanguard Total Bond VBTLX or Intermediate Term Bond Index VBILX. You can also add in Vangaurd Total International Stock Index VTIAX to complete a 3 Fund Portfolio. No need to over complicate your portfolio.

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galeno
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Re: Simple Two Fund Portfolio vs. Diversified

Post by galeno » Wed Mar 07, 2018 6:32 pm

60% VT + 40% VGIT.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

delamer
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Re: Simple Two Fund Portfolio vs. Diversified

Post by delamer » Wed Mar 07, 2018 6:48 pm

Zero Alpha wrote:
Wed Mar 07, 2018 6:23 pm
I would consider swapping some or all of the VICSX Vangaurd Corporate bonds to something safer such as Vanguard Total Bond VBTLX or Intermediate Term Bond Index VBILX. You can also add in Vangaurd Total International Stock Index VTIAX to complete a 3 Fund Portfolio. No need to over complicate your portfolio.

Good advice.

Why go from 2 to 10? Just adding the international component is all you need.

And please explain “income driver.” The important thing in a portfolio is the total return (earnings plus price appreciation).

There is a section in this site’s wiki on portfolio allocations. Take a look at it if you haven’t already.

Dominic
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Re: Simple Two Fund Portfolio vs. Diversified

Post by Dominic » Wed Mar 07, 2018 8:02 pm

I believe that bonds should be kept very simple. Keep them short to intermediate term, and very high quality (ideally, Treasuries or even CDs). Do that, and your portfolio benefits from flight to quality when the stock market takes a dive. High-yield bonds aren't worth it. If you want a riskier asset with higher returns, just buy more stocks. Also, I'm not a believer in REITs. They're stocks that are legally structured to force high dividends. If that's what you're after, buy a value fund instead of concentrating into one sector.

My suggestion for a simple yet diversified portfolio:

45% Vanguard Total Stock Market Index
15% Vanguard Total International Stock Market Index
35% Vanguard Intermediate-Term Government Bond Index
5% Vanguard Short-Term TIPS or Money Market

This gives you much better diversification than what you have, without being much more complex. You add international stocks, make your bonds safer, and add a modest cash allocation as an inflation hedge.

If you believe in factor investing, you could tilt to factors (small value or multifactor in the US, value internationally) and to emerging markets. Your portfolio could be something like:

30% Vanguard Total Stock Market Index
15% Vanguard Small-Cap Value Index
5% Vanguard Developed International Index
5% Vanguard Emerging Markets Index
5% Vanguard International Value Index
35% Vanguard Intermediate-Term Government Bond Index
5% Vanguard Short-Term TIPS or Money Market

This is actually more diversified in terms of sources of return than the portfolio you suggested, but it uses only 7 funds instead of 10. Still, it requires you to believe that the value premium is an actual thing.

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Sandtrap
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Re: Simple Two Fund Portfolio vs. Diversified

Post by Sandtrap » Wed Mar 07, 2018 8:08 pm

Vanguard Total Stock Market Index (Admiral Shares)
Vanguard Total International Index (Admiral Shares)
Vanguard Total Bond Index (Admiral Shares

TAYLOR LARIMORE ON “SIMPLICTY”
https://www.bogleheads.org/forum/viewt ... p?t=156505

j

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spdoublebass
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Re: Simple Two Fund Portfolio vs. Diversified

Post by spdoublebass » Wed Mar 07, 2018 8:16 pm

I know you said you weren't sure what you wanted for International, but your Domestic to International ratio with those equities would be 36/64.........
I'm trying to think, but nothing happens

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BigFoot48
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Re: Simple Two Fund Portfolio vs. Diversified

Post by BigFoot48 » Wed Mar 07, 2018 8:49 pm

Stay simple with a two or three fund portfolio and use its total return as your "income drivers".
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

radiowave
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Re: Simple Two Fund Portfolio vs. Diversified

Post by radiowave » Wed Mar 07, 2018 8:59 pm

Agree with exchanging single corporate bond fund with a more diversified total bond
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MrPotatoHead
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Re: Simple Two Fund Portfolio vs. Diversified

Post by MrPotatoHead » Thu Mar 08, 2018 2:19 am

So at what age do you think cognitive decline may set in? My point is, it is normally desirable to simply as one ages verses complicating matters.

I have been unwinding my assets for some time, sadly, as I enjoyed some of the complexity, but there is the reality I have personally witnessed. A bell does not ring and indicate that your judgement is not as sound as it once was. They easiest way to mitigate the potential damage is to simplify your holding so a basic IPS can be followed by you, or at some point, a designee.

Dottie57
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Re: Simple Two Fund Portfolio vs. Diversified

Post by Dottie57 » Thu Mar 08, 2018 9:25 am

Too complicated. Ideally 4 or fewer funds. Total stock market is Very diversified.

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cheese_breath
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Re: Simple Two Fund Portfolio vs. Diversified

Post by cheese_breath » Thu Mar 08, 2018 9:55 am

All I read was the thread's title, and that's enough to spur me to this comment...

Who says you can't be diversified with two funds? TSM and BND seems pretty diversified to me.
The surest way to know the future is when it becomes the past.

JSS
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Re: Simple Two Fund Portfolio vs. Diversified

Post by JSS » Mon Mar 12, 2018 1:48 pm

The person who replied to my email about his opinion of a comparison between my two fund vs a more diversified model portfolio... that my two fund portfolio would most likely not perform as well as the more diversifield portfolio that I included in my original post is NOT trying to sell me anything. His background is that he was Chief Investment Strategist and Chief Portfolio Strategist at a $33 billion investment advisory firm, where he co-headed the 21-person research group. He also co-founded the firm’s $2.2 billion asset management division where he developed its investment philosophy and process and was the lead portfolio manager. He also has a financial podcast. All this means to me that he is much more qualified than I, an ordinary investor with minimal experience, am.
His reply to the comparison of my two fund portfolio to the more diversified model portfolio was yes, based on current valuations for U.S. stocks and the low yield on U.S. bonds coupled with the sensitivity to higher interest rates for VICSX, he believes the Moderate Portfolio should outperform a portfolio comprised of 60% VTSAX and 40% VICSX if no changes were made to either of the portfolios over the next decade.Further, he believes that the Moderate portfolio will do better than a static two fund by portfolio if the model has the flexibility to adjust its portfolio as market conditions change, which hopefully means losing less in a market downturn. He also notes that, of course, there is no guarantee of that but based on reasonable expectations for U.S. stocks compared to non-U.S stocks and current valuations he believes that would be the case.

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