The 2-fund strategy for a beginner late-to-the-game investor

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fingoals
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The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Apr 08, 2019 6:10 pm

In one of the recent posts I saw a mention of Paul Merriman, got curious, looked it up and landed on his main website. From there I went straight to its Target Date Fund (TDF) category and stumbled on the 2-Funds for Life video podcast (https://www.youtube.com/watch?v=6CLzymhuVYs), which was quite long to my taste, but interesting and educational. It seems that a 2-funds strategy (2FS) significantly outperforms a pure TDF strategy with only a slight increase in potential risk (which seems like a no-brainer). Thus, based on this new information (and quite impressive results), I have the following questions. Thank you all in advance!

1. To what extent the 2FS is applicable to people who are, unfortunately, late to the game (say, started investing at 48-50)?

2. If applicable (per question above), what modifications, if any, should be made to one of the 2-fund strategies suggested in the relevant article?

3. What strategy out of several suggested in the above-mentioned article, would you recommend for a late-to-the-game investor as the optimal?

4. How viable/reliable is the general 2FS, considering that it is based on Monte Carlo simulations (last year) and backtesting (this year)?

5. If 2FS applicable and recommended, would Vanguard Small-Cap Value Index Fund Admiral Shares (VSIAX) be the optimal addition to VFORX?

6. Isn't monthly rebalancing assumed/suggested in the article an overkill in terms of frequency; would quarterly (yearly?) rebalancing suffice?

averagedude
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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by averagedude » Mon Apr 08, 2019 7:10 pm

I am a huge fan of Paul Merriman, but i have the opinion that his portfolios are better suited for young investors. I would recommend a target date fund, a life strategy fund, or the boglehead three fund portfolio for a late to the game investor like yourself. A target date fund would be a great simple solution for a beginner investor with limited knowledge. In my opinion, you will outperform the average experienced investor with this strategy.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Apr 08, 2019 7:52 pm

averagedude wrote:
Mon Apr 08, 2019 7:10 pm
I am a huge fan of Paul Merriman, but i have the opinion that his portfolios are better suited for young investors. I would recommend a target date fund, a life strategy fund, or the boglehead three fund portfolio for a late to the game investor like yourself. A target date fund would be a great simple solution for a beginner investor with limited knowledge. In my opinion, you will outperform the average experienced investor with this strategy.
Thank you for sharing your insights. I realize that 2FS especially targets young investors. However, considering that suggested 2FS's ratio of small-cap value (SCV) assets to over AA decreases linearly with age until retirement, I still seem to have some time to benefit from adding SCV assets to my TDF. I appreciate your advice, but I'm still curious what other people in this community think, regarding my questions. Let's see whether there is a consensus (or a clear majority of the opinions) on this ...

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by Wiggums » Mon Apr 08, 2019 8:06 pm

I’m doing the three fund portfolio.

If you are just starting to save for retirement, the amount you save is more important than the funds. A target or life strategy fund is good while you are accumulating wealth. You save and let Vanguard do the rest.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Apr 08, 2019 8:32 pm

Wiggums wrote:
Mon Apr 08, 2019 8:06 pm
I’m doing the three fund portfolio.

If you are just starting to save for retirement, the amount you save is more important than the funds. A target or life strategy fund is good while you are accumulating wealth. You save and let Vanguard do the rest.
Thank you for your comment and advice. Just to clarify: do you realize that my original post is not about Bogleheads' 2-fund portfolios, but rather Merriman's 2-fund strategy? Perhaps, you haven't had a chance to check the article I have linked ... I apologize, if you had; then, however, how is your comment relevant, if the whole point of Merriman's 2FS is to augment a Target Date Fund with small-cap value assets? I'm a bit confused ...

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by Wiggums » Mon Apr 08, 2019 10:03 pm

fingoals wrote:
Mon Apr 08, 2019 8:32 pm
Wiggums wrote:
Mon Apr 08, 2019 8:06 pm
I’m doing the three fund portfolio.

If you are just starting to save for retirement, the amount you save is more important than the funds. A target or life strategy fund is good while you are accumulating wealth. You save and let Vanguard do the rest.
Thank you for your comment and advice. Just to clarify: do you realize that my original post is not about Bogleheads' 2-fund portfolios, but rather Merriman's 2-fund strategy? Perhaps, you haven't had a chance to check the article I have linked ... I apologize, if you had; then, however, how is your comment relevant, if the whole point of Merriman's 2FS is to augment a Target Date Fund with small-cap value assets? I'm a bit confused ...
Yes, I watched the entire 54 minute video and looked at the 2fundsforlife.com site as well. The concept is not much different than the three fund portfolio with a tilt to SCV. Many members here have adopted tilts. Paul Merriman just used a target date fund for simplicity. Having said that, when you sell shares from the TDF, you are selling equities and bonds. For some, tax efficiency is very important and implementing the component funds separately is a requirement but would achieve the same goal. Others like the simplicity of a “set it and forget” all in one fund.

There’s nothing wrong with the 2 fund portfolio that he presented. I prefer to own the components separately so I can place them in my Roth, IRA, and taxable as appropriate.

I would not rebalance monthly. Monte Carlo and back testing only provides information on historical data. Maybe that is helpful to know the possible downdraft. No one knows what will happen in the future. Time in the market and your contribution amount means more if you are getting a late start.

You should look at all investment accounts all together. How does this strategy fit in with your other retirement investments and asset allocation?

I hope this helps. Good luck to you.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Apr 08, 2019 10:25 pm

Wiggums wrote:
Mon Apr 08, 2019 10:03 pm
fingoals wrote:
Mon Apr 08, 2019 8:32 pm
Wiggums wrote:
Mon Apr 08, 2019 8:06 pm
I’m doing the three fund portfolio.

If you are just starting to save for retirement, the amount you save is more important than the funds. A target or life strategy fund is good while you are accumulating wealth. You save and let Vanguard do the rest.
Thank you for your comment and advice. Just to clarify: do you realize that my original post is not about Bogleheads' 2-fund portfolios, but rather Merriman's 2-fund strategy? Perhaps, you haven't had a chance to check the article I have linked ... I apologize, if you had; then, however, how is your comment relevant, if the whole point of Merriman's 2FS is to augment a Target Date Fund with small-cap value assets? I'm a bit confused ...
Yes, I watched the entire 54 minute video and looked at the 2fundsforlife.com site as well. The concept is not much different than the three fund portfolio with a tilt to SCV. Many members here have adopted tilts. Merriman just used a target date fund for simplicity. Having said that, when you sell shares from the TDF, you are selling equities and bonds. For some, tax efficiency is very important and implementing the component funds is a requirement but would achieve the same goal.

There’s nothing wrong with the 2 fund portfolio that he presented. I prefer to own the components separately so I can place them in my Roth, IRA, and taxable.

You should look at all investment accounts all together. How does this strategy fit in with your other retirement investments?
Understood. Thank you very much for additional clarifications. (I feel bad that you - and, perhaps, others - had to spend almost an hour on the video for the approach that you/they are already very familiar with - IMHO, the video could have been 2-3 times shorter, perhaps, even more).

Re: "How does this strategy fit in with your other retirement investments?" - Well, currently, I don't have any investments other than VFORX shares in my Roth IRA. That's why I got interested in this 2FS, since it would be very easy for me to implement - I would just top off my Roth IRA with $3K to its 2019 limit (for simplicity) and then would open a taxable account [I guess, tIRA; by the way, can I have and contribute to both tIRA and Roth IRA for the same year?] - currently I don't have a 401k account - to buy relevant SCV assets (most likely, VSIAX) when I have free money to invest (to maintain suggested by Merriman SCV/total ratio). Does this approach make sense to you?

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Wiggums
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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by Wiggums » Mon Apr 08, 2019 10:42 pm

VFORX is 85/15% (Stocks/bonds)
Plus 28% SCV tilt. Assuming age 48

I think that is a lot of small cap (for me personally) in addition to what is already in your TDF. It feels a little aggressive given that you are getting a late start. But if you can stay the course, I’ll cheer for you!

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Apr 08, 2019 11:58 pm

Wiggums wrote:
Mon Apr 08, 2019 10:42 pm
VFORX is 85/15% (Stocks/bonds)
Plus 28% SCV tilt. Assuming age 48

I think that is a lot of small cap (for me personally) in addition to what is already in your TDF. It feels a little aggressive given that you are getting a late start. But if you can stay the course, I’ll cheer for you!
I appreciate your advice. I will think it over (e.g., I might go with a more conservative SCV ratio, or not do it all). And thank you for kind words!

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by spdoublebass » Tue Apr 09, 2019 12:19 am

I'm not one to give advice on this forum, mostly a reader, but here is my 2 cents for what it's worth.

I do not personally overweight SCV. I quickly just put it in PV and randomly selected some years. The last 13 years SCV slightly underperformed TSM. This of course means nothing, but it does confirm the above comment that your saving rate is more important and will matter most.

Another thing to consider...
Instead of a tilt to SCV I decided to just have a higher stock allocation. Maybe pick a different TDF, one with a lower bond allocation? All I'm saying is that an option is to increase your overall equity exposer instead of focusing so much on SCV.
I'm trying to think, but nothing happens

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Tue Apr 09, 2019 12:43 am

spdoublebass wrote:
Tue Apr 09, 2019 12:19 am
I'm not one to give advice on this forum, mostly a reader, but here is my 2 cents for what it's worth.

I do not personally overweight SCV. I quickly just put it in PV and randomly selected some years. The last 13 years SCV slightly underperformed TSM. This of course means nothing, but it does confirm the above comment that your saving rate is more important and will matter most.

Another thing to consider...
Instead of a tilt to SCV I decided to just have a higher stock allocation. Maybe pick a different TDF, one with a lower bond allocation? All I'm saying is that an option is to increase your overall equity exposer instead of focusing so much on SCV.
Thank you very much for sharing your thoughts and advice. It took a quick search on Bogleheads site to find out that PV and TSM abbreviations stand for Portfolio Visualizer and Total Stock Market. As for having a higher stock allocation instead of SCV tilt, actually, I've have already done that when I have selected not my true-age TDF. Being 49 (just turned recently), my TDF should have been a 2035 one. Instead, exactly to have a bit more aggressive stock allocation, I've chosen a 2040 one. Having said all that, I agree with you and others and realize that, in my situation, saving rate is much more important than anything else. It's just that I was extremely impressed by 2FS results that show that an aggressive 2FS (TDF+) strategy could generate 18.27x of contributions versus 7.97x under pure TDF, with practically the same amount of risk in the long term.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by TomCat96 » Wed Apr 10, 2019 1:22 pm

fingoals wrote:
Mon Apr 08, 2019 6:10 pm
In one of the recent posts I saw a mention of Paul Merriman, got curious, looked it up and landed on his main website. From there I went straight to its Target Date Fund (TDF) category and stumbled on the 2-Funds for Life video podcast (https://www.youtube.com/watch?v=6CLzymhuVYs), which was quite long to my taste, but interesting and educational. It seems that a 2-funds strategy (2FS) significantly outperforms a pure TDF strategy with only a slight increase in potential risk (which seems like a no-brainer). Thus, based on this new information (and quite impressive results), I have the following questions. Thank you all in advance!

1. To what extent the 2FS is applicable to people who are, unfortunately, late to the game (say, started investing at 48-50)?

2. If applicable (per question above), what modifications, if any, should be made to one of the 2-fund strategies suggested in the relevant article?

3. What strategy out of several suggested in the above-mentioned article, would you recommend for a late-to-the-game investor as the optimal?

4. How viable/reliable is the general 2FS, considering that it is based on Monte Carlo simulations (last year) and backtesting (this year)?

5. If 2FS applicable and recommended, would Vanguard Small-Cap Value Index Fund Admiral Shares (VSIAX) be the optimal addition to VFORX?

6. Isn't monthly rebalancing assumed/suggested in the article an overkill in terms of frequency; would quarterly (yearly?) rebalancing suffice?

I never heard of Paul Merriman, and the youtube video was far too long for the information it tried to provide.
But I read the article and found it quite insightful. He more clearly elucidates the same conclusions I came to in my personal backtesting, in particular these three points.
  • Target date funds are definitely not optimized for maximizing wealth. All of the TDF-Plus approaches had higher average end balances with no lower worst-case end-balances. Increases range from 20% to >100% and add from $1.6M to >$10M.

    It’s almost impossible to have high drawdown risk in the first 5 years of investing. The benefits of regular contributions and dollar-cost averaging greatly reduce the depth of drawdowns compared to what a lump-sum investor would experience.

    The most aggressive approach was the least risky in the long run. The Merriman Aggressive TDF Glide Path had the highest average return and lowest down-side risk (low end balance). The short-term drawdowns are higher, but history suggests tolerating them will likely be worth it.
I think it's important for the younger crowd here to understand that the advice on this site is heavily skewed towards being exceedingly conservative financially. The oft repeated "you simply can't handle 100% equities emotionally" is just pure projection based on past experiences.

The fact is, failure to take adequate risks when one has the ability to do so is extremely costly in the long run. Merriman's point about the most aggressive approach being the least risky in the long run can easily be verified by backtesting. The drawdowns in the late accumulation phase of a young investor become a matter of seeing a large drawdown in your portfolio vs not losing the extra gains you never had. Even an extra 1% gain a year compounded over 30 years is 34.7%. 1.5% is 56.3%. 2% a year extra growth is a whopping 81.13% higher after 30 years of growth. So what if the market crashes 50% at that point? Who really comes out on top? The math doesn't lie.

Frankly I prefer to lose gains from a large portfolio than to not lose money I never gained from taking inadequate risk.

If you want to protect yourself by being more financially conservative, you pay for it, one way or another.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by Big Dog » Wed Apr 10, 2019 1:27 pm

I'd recommend a 2-fund portfolio: Vanguard Total Stock and Vanguard Total Bond

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by scott68 » Sun Jun 28, 2020 4:22 pm

I have the same question as you finheads. I am 52 and have been in the Vanguard 2045 TDF. I was also impressed with the additional returns that could be had by adding in 22% small cap value (based on my age). My concern with the TDF and the Bogleheads 3 fund portfolio is that they are completely weighted to large cap blend stocks only. Does it seem more risky or less risky to diversify and add in 20% SCV and keep 80% in TDF?

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by 1789 » Sun Jun 28, 2020 5:54 pm

Big Dog wrote:
Wed Apr 10, 2019 1:27 pm
I'd recommend a 2-fund portfolio: Vanguard Total Stock and Vanguard Total Bond
+1
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by ruralavalon » Mon Jun 29, 2020 2:54 pm

fingoals wrote:
Mon Apr 08, 2019 6:10 pm
In one of the recent posts I saw a mention of Paul Merriman, got curious, looked it up and landed on his main website. From there I went straight to its Target Date Fund (TDF) category and stumbled on the 2-Funds for Life video podcast (https://www.youtube.com/watch?v=6CLzymhuVYs), which was quite long to my taste, but interesting and educational. It seems that a 2-funds strategy (2FS) significantly outperforms a pure TDF strategy with only a slight increase in potential risk (which seems like a no-brainer). Thus, based on this new information (and quite impressive results), I have the following questions. Thank you all in advance!

1. To what extent the 2FS is applicable to people who are, unfortunately, late to the game (say, started investing at 48-50)?

2. If applicable (per question above), what modifications, if any, should be made to one of the 2-fund strategies suggested in the relevant article?

3. What strategy out of several suggested in the above-mentioned article, would you recommend for a late-to-the-game investor as the optimal?

4. How viable/reliable is the general 2FS, considering that it is based on Monte Carlo simulations (last year) and backtesting (this year)?

5. If 2FS applicable and recommended, would Vanguard Small-Cap Value Index Fund Admiral Shares (VSIAX) be the optimal addition to VFORX?

6. Isn't monthly rebalancing assumed/suggested in the article an overkill in terms of frequency; would quarterly (yearly?) rebalancing suffice?
At age 49, and just starting establishing a high rate of contributions is the most important investing decision you can make.

I suggest keeping your investing simple with a target date fund, don't try to make up for your late start with a high risk small-cap value investing approach. Value investing is not for beginners in my opinion. Wiki article "Value tilting" .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Jun 29, 2020 5:35 pm

TomCat96 wrote:
Wed Apr 10, 2019 1:22 pm
fingoals wrote:
Mon Apr 08, 2019 6:10 pm
In one of the recent posts I saw a mention of Paul Merriman, got curious, looked it up and landed on his main website. From there I went straight to its Target Date Fund (TDF) category and stumbled on the 2-Funds for Life video podcast (https://www.youtube.com/watch?v=6CLzymhuVYs), which was quite long to my taste, but interesting and educational. It seems that a 2-funds strategy (2FS) significantly outperforms a pure TDF strategy with only a slight increase in potential risk (which seems like a no-brainer). Thus, based on this new information (and quite impressive results), I have the following questions. Thank you all in advance!

1. To what extent the 2FS is applicable to people who are, unfortunately, late to the game (say, started investing at 48-50)?

2. If applicable (per question above), what modifications, if any, should be made to one of the 2-fund strategies suggested in the relevant article?

3. What strategy out of several suggested in the above-mentioned article, would you recommend for a late-to-the-game investor as the optimal?

4. How viable/reliable is the general 2FS, considering that it is based on Monte Carlo simulations (last year) and backtesting (this year)?

5. If 2FS applicable and recommended, would Vanguard Small-Cap Value Index Fund Admiral Shares (VSIAX) be the optimal addition to VFORX?

6. Isn't monthly rebalancing assumed/suggested in the article an overkill in terms of frequency; would quarterly (yearly?) rebalancing suffice?

I never heard of Paul Merriman, and the youtube video was far too long for the information it tried to provide.
But I read the article and found it quite insightful. He more clearly elucidates the same conclusions I came to in my personal backtesting, in particular these three points.
  • Target date funds are definitely not optimized for maximizing wealth. All of the TDF-Plus approaches had higher average end balances with no lower worst-case end-balances. Increases range from 20% to >100% and add from $1.6M to >$10M.

    It’s almost impossible to have high drawdown risk in the first 5 years of investing. The benefits of regular contributions and dollar-cost averaging greatly reduce the depth of drawdowns compared to what a lump-sum investor would experience.

    The most aggressive approach was the least risky in the long run. The Merriman Aggressive TDF Glide Path had the highest average return and lowest down-side risk (low end balance). The short-term drawdowns are higher, but history suggests tolerating them will likely be worth it.
I think it's important for the younger crowd here to understand that the advice on this site is heavily skewed towards being exceedingly conservative financially. The oft repeated "you simply can't handle 100% equities emotionally" is just pure projection based on past experiences.

The fact is, failure to take adequate risks when one has the ability to do so is extremely costly in the long run. Merriman's point about the most aggressive approach being the least risky in the long run can easily be verified by backtesting. The drawdowns in the late accumulation phase of a young investor become a matter of seeing a large drawdown in your portfolio vs not losing the extra gains you never had. Even an extra 1% gain a year compounded over 30 years is 34.7%. 1.5% is 56.3%. 2% a year extra growth is a whopping 81.13% higher after 30 years of growth. So what if the market crashes 50% at that point? Who really comes out on top? The math doesn't lie.

Frankly I prefer to lose gains from a large portfolio than to not lose money I never gained from taking inadequate risk.

If you want to protect yourself by being more financially conservative, you pay for it, one way or another.
My apologies for late reply - I've just discovered several new comments here, including yours. I appreciate your valuable insights. I will definitely keep them in mind, even though they are not applicable to my current situation. Lack of employment does not allow me to "take adequate risks".

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Jun 29, 2020 5:36 pm

Big Dog wrote:
Wed Apr 10, 2019 1:27 pm
I'd recommend a 2-fund portfolio: Vanguard Total Stock and Vanguard Total Bond
Thank you for your advice - will keep it in mind.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Jun 29, 2020 5:45 pm

scott68 wrote:
Sun Jun 28, 2020 4:22 pm
I have the same question as you finheads. I am 52 and have been in the Vanguard 2045 TDF. I was also impressed with the additional returns that could be had by adding in 22% small cap value (based on my age). My concern with the TDF and the Bogleheads 3 fund portfolio is that they are completely weighted to large cap blend stocks only. Does it seem more risky or less risky to diversify and add in 20% SCV and keep 80% in TDF?
Thank you for your comment. First of all, I'm a beginner investor and, as such, don't have enough knowledge to give any advice on this. Secondly, your financial situation is most likely very different from mine. So, I would suggest you to read relevant wiki on this site (unless you have already done so) - https://www.bogleheads.org/wiki/Value_tilting_-_stock - and search this forum for relevant threads - I'm pretty sure that it has been discussed here many times (in fact, I remember seeing such threads). Sorry I could not be of more help.
Last edited by fingoals on Mon Jun 29, 2020 5:56 pm, edited 1 time in total.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by fingoals » Mon Jun 29, 2020 5:55 pm

ruralavalon wrote:
Mon Jun 29, 2020 2:54 pm
fingoals wrote:
Mon Apr 08, 2019 6:10 pm
In one of the recent posts I saw a mention of Paul Merriman, got curious, looked it up and landed on his main website. From there I went straight to its Target Date Fund (TDF) category and stumbled on the 2-Funds for Life video podcast (https://www.youtube.com/watch?v=6CLzymhuVYs), which was quite long to my taste, but interesting and educational. It seems that a 2-funds strategy (2FS) significantly outperforms a pure TDF strategy with only a slight increase in potential risk (which seems like a no-brainer). Thus, based on this new information (and quite impressive results), I have the following questions. Thank you all in advance!

1. To what extent the 2FS is applicable to people who are, unfortunately, late to the game (say, started investing at 48-50)?

2. If applicable (per question above), what modifications, if any, should be made to one of the 2-fund strategies suggested in the relevant article?

3. What strategy out of several suggested in the above-mentioned article, would you recommend for a late-to-the-game investor as the optimal?

4. How viable/reliable is the general 2FS, considering that it is based on Monte Carlo simulations (last year) and backtesting (this year)?

5. If 2FS applicable and recommended, would Vanguard Small-Cap Value Index Fund Admiral Shares (VSIAX) be the optimal addition to VFORX?

6. Isn't monthly rebalancing assumed/suggested in the article an overkill in terms of frequency; would quarterly (yearly?) rebalancing suffice?
At age 49, and just starting establishing a high rate of contributions is the most important investing decision you can make.

I suggest keeping your investing simple with a target date fund, don't try to make up for your late start with a high risk small-cap value investing approach. Value investing is not for beginners in my opinion. Wiki article "Value tilting" .
I very much appreciate your advice. And totally agree with you on critical importance of high rate of saving and making contributions in my situation. I'm working on fixing it (getting a good job), even though, unfortunately, it's much more challenging in current economic environment.

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Re: The 2-fund strategy for a beginner late-to-the-game investor

Post by UpperNwGuy » Mon Jun 29, 2020 6:00 pm

Big Dog wrote:
Wed Apr 10, 2019 1:27 pm
I'd recommend a 2-fund portfolio: Vanguard Total Stock and Vanguard Total Bond
Good advice!

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