3 fund portfolio vs. total world stock + bond fund

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john4546
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3 fund portfolio vs. total world stock + bond fund

Post by john4546 » Tue Mar 13, 2018 5:20 pm

Which portfolio would you choose and why for a taxable account with a 60/40 stock/bond allocation?:

1. 3-fund portfolio: 30% total US stock (VTSAX), 30% total international stock (VTIAX) [3,637 + 6,302 = 9,939 stocks total], 40% Total bond fund (or intermediate tax-exempt bond fund (VWITX)).

2. 60% total world stock (VTWSX) [8,005 stocks total], 40% intermediate bond fund (VWITX).

What are the pros and cons for each portfolio for a taxable account?

The % amount for the US stock allocation will change for the total world stock fund (VTWSX).

Number of stocks currently for each fund:

Total world stock (VTWSX): 8,005 stocks. [ER = 0.19%, turnover = 9.9%]
Total US stock (VTSAX): 3,637 stocks. [ER = 0.04%, turnover = 3.1%]
Total international stock (VTIAX) : 6,302 stocks. [ER = 0.11%, turnover = 3.4%]

Portfolio 1 has 1,934 more stocks than portfolio 2 [I think this does not matter statistically, but maybe it does?].
Last edited by john4546 on Tue Mar 13, 2018 5:35 pm, edited 3 times in total.

retiredjg
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by retiredjg » Tue Mar 13, 2018 5:29 pm

john4546 wrote:
Tue Mar 13, 2018 5:20 pm
What are the pros and cons for each portfolio for a taxable account?
Some people might want to retain the ability to sell US stock without selling foreign stock and vice versa. This would not be much of a con for many others though.

I have not checked lately, but the world fund used to have a higher ER than the two funds held separately.

If a person wants about half their stocks in international, I don't see a problem with either approach.

retiredjg
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by retiredjg » Tue Mar 13, 2018 5:30 pm

I wonder if there is a tax-efficiency difference because of the fact that the US to Non-US stock ratio changes over time?

john4546
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by john4546 » Tue Mar 13, 2018 5:40 pm

One issue that I may be concerned about is the % US stock drift for the 2-fund portfolio: Would it bother you if the US stock allocation drifted to below 50%, say 20-30% or even less (who knows what may happen in the future) (The US is currently 52.4% of the total world stock (VTWSX) portfolio)?

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oldcomputerguy
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by oldcomputerguy » Tue Mar 13, 2018 6:21 pm

Expense ratio of VTSAX: 0.04%

Expense ratio of VTIAX: 0.11%

Expense ratio of VTWSX: 0.19% (it’s an Investor-class fund, no Admiral share class)
Expense ratio of the ETF version (VT): 0.10%

Seems to me that you’ll save substantially on your US allocation if you go with the individual funds.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

golfCaddy
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by golfCaddy » Tue Mar 13, 2018 7:13 pm

I think either choice is reasonable. There's been lots of threads debating US vs international if you search.

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Sandtrap
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Sandtrap » Tue Mar 13, 2018 7:23 pm

#1
Tax exempt only if you are knocking on the door of the upper tax bracket.
j

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Taylor Larimore
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Taylor Larimore » Tue Mar 13, 2018 7:55 pm

john4546 wrote:
Tue Mar 13, 2018 5:20 pm
Which portfolio would you choose and why for a taxable account with a 60/40 stock/bond allocation?:

1. 3-fund portfolio: 30% total US stock (VTSAX), 30% total international stock (VTIAX) [3,637 + 6,302 = 9,939 stocks total], 40% Total bond fund (or intermediate tax-exempt bond fund (VWITX)).

2. 60% total world stock (VTWSX) [8,005 stocks total], 40% intermediate bond fund (VWITX).

What are the pros and cons for each portfolio for a taxable account?

The % amount for the US stock allocation will change for the total world stock fund (VTWSX).

Number of stocks currently for each fund:

Total world stock (VTWSX): 8,005 stocks. [ER = 0.19%, turnover = 9.9%]
Total US stock (VTSAX): 3,637 stocks. [ER = 0.04%, turnover = 3.1%]
Total international stock (VTIAX) : 6,302 stocks. [ER = 0.11%, turnover = 3.4%]

Portfolio 1 has 1,934 more stocks than portfolio 2 [I think this does not matter statistically, but maybe it does?].
John4546:

I answered this question on page 1 (about half-way down) in my Three-Fund Portfolio post.

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

tonycost
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by tonycost » Tue Mar 13, 2018 8:42 pm

john4546 wrote:
Tue Mar 13, 2018 5:40 pm
One issue that I may be concerned about is the % US stock drift for the 2-fund portfolio: Would it bother you if the US stock allocation drifted to below 50%, say 20-30% or even less (who knows what may happen in the future) (The US is currently 52.4% of the total world stock (VTWSX) portfolio)?
I think that for any kind of major shift like this to happen, it would likely take a very long time. Had you been invested in Total World over this time, then you would have reaped all of those international gains so you would have made out well. Since there's no guarantee that market weights would then ever shift back towards 50/50, and assuming this change happened over many years, those Market Weights could in a sense become the new normal.

Another thing you might also consider though is if the reverse of your above statement happened. Say the US beats out International over the next 30 years and gets to a point where the US is at 70% market weight and International falls to 30%. If you were to keep a 50/50 balance, would you then start to feel uncomfortable having 50% in International?

I like Total World because I like the idea of being able to invest over a very long time period without ever having to worry about tinkering with the allocation.

drk
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by drk » Tue Mar 13, 2018 10:13 pm

john4546 wrote:
Tue Mar 13, 2018 5:40 pm
One issue that I may be concerned about is the % US stock drift for the 2-fund portfolio: Would it bother you if the US stock allocation drifted to below 50%, say 20-30% or even less (who knows what may happen in the future) (The US is currently 52.4% of the total world stock (VTWSX) portfolio)?
No, it would not bother me. This seems like an odd worry for someone interested in the Total World fund. The "bet" that you're making is on the global equity markets, so who cares where the ride takes you?

Always passive
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Always passive » Tue Mar 13, 2018 10:26 pm

The only true advantage of owning 2 funds versus one is if you are interested in applying different allocations to US versus International. If you are comfortable with the allocation offered by the total world fund, I would go with one fund since it has the advantage of self rebalancing.

Dominic
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Dominic » Tue Mar 13, 2018 11:24 pm

Splitting the funds:
- Allows you to hold a static US/ex-US allocation (allows you to gain a rebalancing bonus, or to tilt away from international to reduce currency risk)
- Saves you a few basis points in costs
- Gives you slightly more holdings in the US small-cap space
- Allows you to tax-loss harvest the indices separately
- Is more flexible, should you choose to change your US/international ratio (if your risk tolerance changes, or if tax efficiency of international funds changes)

Combining them is more simple. If you're in a tax-advantaged account, there's really no difference unless you want to rebalance. If you're in taxable, I'd personally split the funds, just in case. If you change your allocation, you don't want to have to incur capital gains to sell Total World Stock.

MotoTrojan
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by MotoTrojan » Tue Mar 13, 2018 11:36 pm

Easier to tax-loss harvest with the split and it should naturally maintain balance extremely well without any interference, assuming you setup your initial AA based on Total World.

Always passive
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Always passive » Wed Mar 14, 2018 2:30 am

Has anyone given any thought to the iShares multi factor world ETF (ACWF)?

MnD
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by MnD » Wed Mar 14, 2018 12:38 pm

MotoTrojan wrote:
Tue Mar 13, 2018 11:36 pm
Easier to tax-loss harvest with the split and it should naturally maintain balance extremely well without any interference, assuming you setup your initial AA based on Total World.
1
I'm a huge fan of total world but in a taxable account it would be much easier to find low cost tax-loss harvesting pairs for total US and Total ex-US than it would be for Total World. Remember with tax-loss harvesting pairs, if you get a strong recovery you may be stuck with your pair for many years or decades unless you tax-gain harvest.

Marketman
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Marketman » Wed Mar 14, 2018 1:56 pm

The Vanguard Total World seems very appealing to me but I hate that the expense ratio is higher than using Total US and Total International separately. Also I wonder why the turnover is so much higher in Total World than Total US and International held separately? At first blush, it would seem to me that Total World would be more tax efficient since you would not have to rebalance but the turnover (9.9%) does not seem so great.

Jiu Jitsu Fighter
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Jiu Jitsu Fighter » Wed Mar 14, 2018 4:17 pm

Always passive wrote:
Wed Mar 14, 2018 2:30 am
Has anyone given any thought to the iShares multi factor world ETF (ACWF)?
I've thought about this for a replacement of the three fund portfolio (although I'm not a three-funder). You get exposure to all of the factors. It's global, so you don't have to rebalance on the stock side. I would combine this with an intermediate treasury fund such as Vanguard's (VSIGX/VGIT), and I believe you would get better risk-adjusted returns over time than the three fund portfolio with the same stock/bond allocation. Unfortunately, the AUM is small and there is a lack of volume for ACWF.

I'd prefer much more of a tilt to small value so I would end up with more than two funds, but it could be a good place to start if you believe in the value, size, quality and momentum.

tonycost
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by tonycost » Thu Mar 15, 2018 7:55 am

MnD wrote:
Wed Mar 14, 2018 12:38 pm
MotoTrojan wrote:
Tue Mar 13, 2018 11:36 pm
Easier to tax-loss harvest with the split and it should naturally maintain balance extremely well without any interference, assuming you setup your initial AA based on Total World.
1
I'm a huge fan of total world but in a taxable account it would be much easier to find low cost tax-loss harvesting pairs for total US and Total ex-US than it would be for Total World. Remember with tax-loss harvesting pairs, if you get a strong recovery you may be stuck with your pair for many years or decades unless you tax-gain harvest.
I think you could tax loss harvest Total World into its component parts right? So you could tax loss harvest VT into VTI and VXUS?

john4546
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by john4546 » Thu Mar 15, 2018 8:38 am

retiredjg wrote:
Tue Mar 13, 2018 5:29 pm
john4546 wrote:
Tue Mar 13, 2018 5:20 pm
What are the pros and cons for each portfolio for a taxable account?
Some people might want to retain the ability to sell US stock without selling foreign stock and vice versa. This would not be much of a con for many others though.

I have not checked lately, but the world fund used to have a higher ER than the two funds held separately.

If a person wants about half their stocks in international, I don't see a problem with either approach.
I assume the ER for total world stock will keep coming down. I also assume that total world stock will get admiral shares eventually.

tonycost
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by tonycost » Thu Mar 15, 2018 11:11 am

Yes the ER dropped again this year for Total World. The ETF is only 0.10% now. I like using the mutual fund though in order to do automated investing. If the amount in the account got so high that the difference in ER between the mutual fund and etf made a big difference, you can convert the mutual fund to the ETF tax free assuming the account is held at Vanguard. So that’s always an option if they never end up making Admiral shares. While you can convert a mutual fund to etf at vanguard, you cannot convert an etf to a mutual fund.

They talk about etf conversion here:
https://investor.vanguard.com/etf/faqs

Kennyt7
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Re: 3 fund portfolio vs. total world stock + bond fund

Post by Kennyt7 » Thu Mar 15, 2018 11:46 am

bogle believes 20% of equity allocation to intl
from 1996 to 2016 sp500 did twice as well as intl
bogle was against intl frim day 1 changed a bit now

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