Starting the "Three Fund Portfolio"

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austin88
Posts: 3
Joined: Fri Jun 29, 2018 10:41 am

Starting the "Three Fund Portfolio"

Post by austin88 » Fri Jun 29, 2018 11:03 am

Hi all,

I have about $30,000 I am looking to invest into an after tax three fund portfolio and plan on contributing about $1,100 a month to the account. I have been reading the wiki and through the forums and plan to use:

45% - VTSMX
25% - VGTSX
30% - VBMFX

This is just after tax money for investing, my wife and I already invest around 37% (including company match) of our income into tax advantaged retirement accounts (401k/IRA/403b). We also have a 6 months emergency fund. I say that to indicate I am a little more risk tolerant for this after tax account which is why I have my allocations like they are but please feel free to comment.

So with all that said the question I have is does it make sense to initially open the account with $10,000 dollars in each to get to the admiral share status or should I just stick with my allocation strategy when I first open the account?

Also any comments criticisms are welcome. I am trying to figure out how to set this money aside to grow so it can be used later for cars/vacations/kids college at some point in the future.
Last edited by austin88 on Tue Jul 03, 2018 9:10 am, edited 1 time in total.

bloom2708
Posts: 4285
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Starting the "Three Fund Portfolio"

Post by bloom2708 » Fri Jun 29, 2018 2:05 pm

Welcome.

Lots of small nuances to the 3 fund. I love it an recommend it often.

1. You probably don't want to use Total US Bond in taxable. Taxable bonds give taxable bond interest which is 100% ordinary income and taxed at your top/marginal rate. If you touch the 24% bracket, you lose 24% to tax.

Often recommended is to use Total US + Total International in taxable. Increase your bond percentage in your 401k (best choice) or Roth IRA (second choice). If no bond space available in either, then Int-Term Tax-Exempt bonds are often used in a taxable account. Interest is federal tax exempt. It is a close call in the 22 and 24% marginal brackets.

Are you currently maxing 401ks and Roth IRAs? $18,500 pre-tax and $5,500 post tax to Roth IRAs?

If not, one thing you could do is live off some of the $30k (put it in your checking account) and boost your pre-tax 401k percentage. You save the 22 or 24% tax and then your check is somewhat smaller, but you use some of the $30k to supplement your income.

Use taxable if you are maxing pre-tax 401k, Roth IRAs and HSA if you have those available. Then taxable. Taxable investing and short term/near term spending can be two different things. Many ways to use each dollar.

If you go with US + International in taxable, definitely go for lower cost admiral shares VTSAX and VTIAX.

Look at your 401k bond offerings to see where to increase/re-allocate bonds in 401k.

I hope that makes some sense. Welcome again.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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

Re: Starting the "Three Fund Portfolio"

Post by MotoTrojan » Fri Jun 29, 2018 2:09 pm

I agree with above. Look at portfolio as one entity, pick your AA, and place your funds tax-efficiently.

ExitStageLeft
Posts: 491
Joined: Sat Jan 20, 2018 4:02 pm

Re: Starting the "Three Fund Portfolio"

Post by ExitStageLeft » Fri Jun 29, 2018 2:47 pm

Welcome to the forum and congratulations on being such aggressive savers.

Another option if it is available to you is to make an after-tax contribution to a 401k account and then convert that to a Roth IRA via the Mega Backdoor Roth maneuver.

As long as you don't mind paying taxes there is nothing wrong with the plan you propose. As mentioned by the other commenters, you can ease your tax burden a little and allow your account to grow faster by taking tax efficient fund placement into account.

JustinR
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Joined: Tue Apr 27, 2010 11:43 pm

Re: Starting the "Three Fund Portfolio"

Post by JustinR » Fri Jun 29, 2018 8:29 pm

If the $30,000 is ready to be invested, you should invest all of it now.

If you're not ready to do that, don't worry about Admiral status or not. It won't make any real difference and you'll be able to easily convert once you hit the minimum.

venkman
Posts: 610
Joined: Tue Mar 14, 2017 10:33 pm

Re: Starting the "Three Fund Portfolio"

Post by venkman » Fri Jun 29, 2018 9:20 pm

austin88 wrote:
Fri Jun 29, 2018 11:03 am
So with all that said the question I have is does it make sense to initially open the account with $10,000 dollars in each to get to the admiral share status or should I just stick with my allocation strategy when I first open the account?
The investor shares will cost you less than $20 extra per year. And at the rate you're adding to the account, it won't even take that long to hit the $10k minimum for Admiral shares in all 3 funds. Go with the allocation you want, and don't worry about the slightly higher ER.

Daedalus
Posts: 23
Joined: Sat Oct 21, 2017 5:22 pm

Re: Starting the "Three Fund Portfolio"

Post by Daedalus » Sat Jun 30, 2018 10:21 pm

I like the simplicity of the 3 Fund Portfolio. No need to complicate things. I don't think anyone ever regretted investing in a 3 Fund Portfolio. Put it in, let it sit, and watch it grow!

TwstdSista
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Joined: Thu Nov 16, 2017 4:03 am

Re: Starting the "Three Fund Portfolio"

Post by TwstdSista » Sun Jul 01, 2018 3:20 am

Bonds are not tax efficient -- I keep bonds in my tax deferred accounts.

Put $15,000 in both:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
Vanguard Total International Market Index Fund Admiral Shares (VTIAX) ER 0.11%

Future contributions can be used to maintain your desired AA.

austin88
Posts: 3
Joined: Fri Jun 29, 2018 10:41 am

Re: Starting the "Three Fund Portfolio"

Post by austin88 » Tue Jul 03, 2018 8:42 am

bloom2708 wrote:
Fri Jun 29, 2018 2:05 pm
Welcome.

Lots of small nuances to the 3 fund. I love it an recommend it often.

1. You probably don't want to use Total US Bond in taxable.

2. Are you currently maxing 401ks and Roth IRAs? $18,500 pre-tax and $5,500 post tax to Roth IRAs?
1) Interesting point. I hadn't really considered that.

2) I am maxing a Roth 401k, two Roth IRAs, and my wife has some 401a or 403b thing that she can contribute in October (I haven't done much research as it isn't available to us yet but the contributions are mandatory 6% salary). I have read a ton about Roth vs traditional 401k and don't really want to derail this thread to jump down that rabbit hole. This is something I evaluate every year to see which I should fund. My company also matches 12.5% of my salary into a t401k so I have some t401k money. Unfortunately I don't have access to an HSA because I am on a healthcare plan that precludes me from it.



Based on the thoughts in this group I think I will go with some form of Total Stock and Total International.

Thanks everyone for their feedback.

Ron Scott
Posts: 630
Joined: Tue Apr 05, 2016 5:38 am

Re: Starting the "Three Fund Portfolio"

Post by Ron Scott » Tue Jul 03, 2018 9:18 am

Keep it up!

Two thoughts for you:


1. Read up on "asset location" in the wiki and the Bogleheads guide. (Many other investment books cover it too.) You'll be on the road to tax efficient savings in no time. The comment above re: housing bonds in taxable is a good one. Munis usually work better in taxable if and when needed.

2. Consider a 2-fund instead of a 3-fund. We don't need international stocks. And if for some reason you MUST, the max should be 20% of your equity holdings.

megabad
Posts: 287
Joined: Fri Jun 01, 2018 4:00 pm

Re: Starting the "Three Fund Portfolio"

Post by megabad » Tue Jul 03, 2018 4:07 pm

Some good replies so far. I would just reiterate at least investigating the possibility of megabackdoor Roth since that would allow you to tax shelter more before investing in taxable. Portfolio looks good though, I would just swap out Total Bond for Int Term Tax Exempt and done. I always tell folks to just grab the investor shares first and that will inspire you to get more in there quickly to be able to convert to admiral :happy . In other words, I would jump right in at your stated allocations.

austin88
Posts: 3
Joined: Fri Jun 29, 2018 10:41 am

Re: Starting the "Three Fund Portfolio"

Post by austin88 » Wed Jul 11, 2018 10:54 am

megabad wrote:
Tue Jul 03, 2018 4:07 pm
I would just reiterate at least investigating the possibility of megabackdoor Roth since that would allow you to tax shelter more before investing in taxable.
I am putting alot of money into tax advantage accounts. I have kind of maxed my good will with my wife in terms of retirement savings. For this account I am looking at converting some of our liquid cash (while still preserving out emergency fund) into stocks for better growth. I plan on using at least a portion of this money over the next 20 years. My goal is to use this as slush fund to pay for vacations, car repairs, maybe some college expenses for children if we exhaust the 529.

If I do a mega back door Roth withdrawing that money would incur the penalty correct?

nasrullah
Posts: 130
Joined: Fri Feb 10, 2017 11:40 am

Re: Starting the "Three Fund Portfolio"

Post by nasrullah » Wed Jul 11, 2018 1:09 pm

austin88 wrote:
Fri Jun 29, 2018 11:03 am
I say that to indicate I am a little more risk tolerant for this after tax account which is why I have my allocations like they are but please feel free to comment.
I used to do this as well. The reality is that your AA dictates your risk, your risk profile determines your AA, and this is a encompasses all of your accounts and holdings. Being more aggressive in one account and less aggressive in another could skew your overall goal for risk.

Figure out your desired AA as a whole, leverage your tax advantaged accounts for efficient fund placement and use the taxable for the rest.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

HJG0989
Posts: 144
Joined: Sat Oct 13, 2007 2:18 pm

Re: Starting the "Three Fund Portfolio"

Post by HJG0989 » Wed Jul 11, 2018 3:42 pm

For tax efficiency, consider Fidelity's ETFs. They won't kick out year end capital gains distributions.

https://www.fidelity.com/learning-cente ... efficiency

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