1-fund, 2-fund or 3-fund portfolio?

[CommitmentDevice]

Greetings Bogleheads!

I'm ready to move my Roth IRA from Betterment to Vanguard. I want 90% equities, roughly global market capitalization weighted, and 10% bonds.

I'm wrestling with whether to go with a 1, 2 or 3 fund portfolio and would like your advice.

Should I go with:
1-Fund Portfolio (0.15% ER)
Vanguard Target Retirement 2055 Fund, VFFVX, 0.15% ER

2-Fund Portfolio (0.10%ER)
90% Vanguard Total World Stock Index Fund, VTWAX, 0.10% ER
10% Vanguard Total Bond Market Fund, VBTLX, 0.05% ER

3-Fund Portfolio (.06% ER)
60% Vanguard Total Stock Market Index Fund, VTSAX, 0.04% ER
30% Vanguard Total International Stock Index Fund, VTIAX, 0.11% ER
10% Vanguard Total Bond Market Fund, VBTLX, 0.05% ER

Considerations:

• They'd all give me the AA I want and low ER
• I'm comfortable with the Target Retirement Fund's glide path auto-initiating in 2030
• I like the simplicity of the 1-fund option
• I like the 9 basis points savings of the 3-fund

Many thanks!

[Jack FFR1846]

I like #3 for a couple reasons. It's the cheapest. And compared to #1, you won't have Vanguard deciding at some future point that they think it should shift completely to East Africa emerging bonds and Ruble FOREX trading. I exaggerate but they have screwed around with exactly what makes up their funds of funds and you have zero control over what they decide the newest fad is that they'd like to follow.

[ExitStageLeft]

...

• I like the simplicity of the 1-fund option
• I like the 9 basis points savings of the 3-fund

Choose one. If you're early in the accumulation stage then the difference in fees is inconsequential. When you get up to savings of $100k then 9 basis point savings is $90 a year. At some point the savings justify pivoting to a 3-fund, it's up to you when.

If you have Roth and traditional (tax-deferred) accounts then there is a good argument to go three-fund so you can keep the bonds in tax-deferred. If you are all Roth then it doesn't matter.

[CommitmentDevice]

I like #3 for a couple reasons. It's the cheapest. And compared to #1, you won't have Vanguard deciding at some future point that they think it should shift completely to East Africa emerging bonds and Ruble FOREX trading. I exaggerate but they have screwed around with exactly what makes up their funds of funds and you have zero control over what they decide the newest fad is that they'd like to follow.

Thanks for your advice. Very good point about potential changes Vanguard could make to their Target Retirement Funds.

...

• I like the simplicity of the 1-fund option
• I like the 9 basis points savings of the 3-fund

Choose one. If you're early in the accumulation stage then the difference in fees is inconsequential. When you get up to savings of $100k then 9 basis point savings is $90 a year. At some point the savings justify pivoting to a 3-fund, it's up to you when.

If you have Roth and traditional (tax-deferred) accounts then there is a good argument to go three-fund so you can keep the bonds in tax-deferred. If you are all Roth then it doesn't matter.

Thanks for the advice. Giving a dollar value to the expense ratio helped me put it in perspective. Also, very good point about being able to optimize which account houses my bond fund with the three-fund option.

[CommitmentDevice]

Also - why does the lazy 3-fund portfolio only include U.S. bonds? U.S. bonds are considered very safe, but wouldn't there be a diversification benefit from adding an international bond fund, like VTABX?

[lakpr]

Also - why does the lazy 3-fund portfolio only include U.S. bonds? U.S. bonds are considered very safe, but wouldn't there be a diversification benefit from adding an international bond fund, like VTABX?

I can only offer my perspective. Bonds/fixed income are meant to provide safety in one’s portfolio, and adding international bonds actually introduces currency risk into the mix instead of increasing safety. The meager returns from adding international bonds don’t help their cause either. I mean, no diversification benefit, lower returns, failing the main purpose of why bonds are supposed to be in one’s portfolio: all negatives and no positive, why would you want international bonds in your portfolio?

[dbr]

Also - why does the lazy 3-fund portfolio only include U.S. bonds? U.S. bonds are considered very safe, but wouldn't there be a diversification benefit from adding an international bond fund, like VTABX?

3 fund portfolio is just a concept that illustrates a very simple but effective way to invest. If someone wants to consider adding international bonds then they can. Vanguard has done just that in some of its blended funds, presumably based on a portfolio optimization argument. Some people judge that international stocks are not really needed and would opt for a two fund portfolio. Vanguard again uses international stocks based on an optimization argument. Many people might agree that the slippery slope starts somewhere after international bonds but before adding REITs, gold, and commodities. Actual real estate remains a discussion.

The snarky answer, of course, is that if there were more or less than three funds it wouldn't be a three fund portfolio. Actually maybe that is a real answer. The number 3 is a nice number to select. It is just enough more complicated than 2 to seem sophisticated but when you reach 4 it is starting to sound like things are complicated. Also 3 is still a prime number but not an even number. I also wonder if the image of the stability of the three legged stool influences people psychologically. The image I have of the four legged stool is the guy constantly cutting one leg or the other shorter because the table wobbles.

[willthrill81]

#1 would be fine if you want a hands-off approach and plan to keep this wholly within tax-advantaged accounts (e.g. 401k, IRA). If you want to ensure a consistent strategy, as noted above, #3 is preferable, and you would definitely go with #3 if you will have to use both taxable and tax-advantaged accounts. The general thought is that stock index funds should be kept in taxable accounts due to their tax efficiency, and bonds should be placed in tax-advantaged accounts as they are not tax efficient. If you need to keep stock index funds in a taxable account, I strongly urge you to read up on how to do tax-loss harvesting.

[YoungBogle]

I like #3 for a couple reasons. It's the cheapest. And compared to #1, you won't have Vanguard deciding at some future point that they think it should shift completely to East Africa emerging bonds and Ruble FOREX trading. I exaggerate but they have screwed around with exactly what makes up their funds of funds and you have zero control over what they decide the newest fad is that they'd like to follow.

Assuming we are dealing with tax advantaged accounts, I have the total opposite viewpoint of Jack.

-Ya #3 is cheap, but #1 is the simplest. The benefits outweigh the extra cost IMO. Auto-rebalancing eliminates the chance of intentional or unintentional human error related to rebalancing.

-I would rather have Vanguard in charge of shifting rather than me. I don’t believe I am smarter or know better than Vanguard.

I don’t doubt #3 is optimal for Jack and majority of BH’s but #1 for the average investor is a safe bet.

[longinvest]

Also - why does the lazy 3-fund portfolio only include U.S. bonds? U.S. bonds are considered very safe, but wouldn't there be a diversification benefit from adding an international bond fund, like VTABX?

Yes, international bonds diversify across various yield curves.

I'm personally a fan of fixed allocations (such as 60/40 stocks/bonds), like the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) provides.

With a gliding allocation one could end up unlucky and have stocks experience losses while the allocation is high and only recover once the allocation has drifted down. I much prefer the consistency over time of a fixed lifelong allocation.

[UpperNwGuy]

I would go with the 3 fund portfolio. It gives you maximum freedom to adjust your asset allocation later on.

[3-20Characters]

Assuming it’s all in tax advantaged account, it’s of little consequence because you can change your mind at any time. So I say, start with TD (1 fund). Focus on work, life, saving and come back to this later. If across taxable and tax advantaged, use 3 funds and use tax-efficient fund placement.

[Quercus Palustris]

3 fund may have some advantages if you also have 401k or equivalent you are still contributing to - maybe there is a great bond fund there, but expensive international. With a 3 fund Roth @ Vanguard you could adjust your holdings to put more in the lowest expense funds across multiple accounts.

[Olemiss540]

1 fund portfolio to reduce the possibility of "market timing" or sector timing and ensure you remain market weight.

[NativeTxn]

Of those listed, I prefer the 3 fund, because as others have said, I get to decide the specific allocation between US and foreign equities.

I'm doing basically what you've got in your 3-fund hypothetical at Fidelity with their total US market, total foreign market, and total bond market index funds. That is for my taxable accounts.

In the tax-deferred accounts, I have some REIT exposure and tilt a bit toward small value, but don't have those in the taxable account since REIT are tax-inefficient and, in theory, the (hopeful) growth on the small cap side can grow tax-free in the Roth or tax-deferred in the traditional.

[CommitmentDevice]

Thanks for your thoughtful comments!

[CommitmentDevice]

UPDATE:

• I was sold on the 1 fund portfolio (slightly higher cost, elegant simplicity).
• Then I talked it over with my DW and she reminded me that we want a social filter on our investments. Yes, my $ is a drop in the global ocean of investment capital out there, but, as a matter of principle, I don't want my drop to be supporting big tobacco, etc.
• My next step is to research fund options for a lazy SRI portfolio. In the mean time, I'll stay with Betterment, which gives me the social filter, but 25 basis points of extra fees.

I'll start my search with the funds @Quercus Palustris shared with me back in April:

US Sustainability Index Fund (FITLX), US large/mid, 0.11% ER
International Sustainability Index Fund (FNIDX), Int'l, 0.20% ER
Sustainability Bond Index Fund (FNDSX), US bond, 0.10% ER

[stan1]

Vanguard has ESG funds/ETFs also:

https://investor.vanguard.com/investing/esg/

[vineviz]

UPDATE:

• I was sold on the 1 fund portfolio (slightly higher cost, elegant simplicity).
• Then I talked it over with my DW and she reminded me that we want a social filter on our investments. Yes, my $ is a drop in the global ocean of investment capital out there, but, as a matter of principle, I don't want my drop to be supporting big tobacco, etc.

Vanguard has launched two environmental, social, and corporate governance (ESG) funds:

Vanguard ESG U.S. Stock ETF (ESGV)
Vanguard ESG International Stock ETF (VSGX)

Add in something like iShares ESG U.S. Aggregate Bond ETF (EAGG) and you should be good to go.

[CommitmentDevice]

UPDATE:

• I was sold on the 1 fund portfolio (slightly higher cost, elegant simplicity).
• Then I talked it over with my DW and she reminded me that we want a social filter on our investments. Yes, my $ is a drop in the global ocean of investment capital out there, but, as a matter of principle, I don't want my drop to be supporting big tobacco, etc.

Vanguard has launched two environmental, social, and corporate governance (ESG) funds:

Vanguard ESG U.S. Stock ETF (ESGV)
Vanguard ESG International Stock ETF (VSGX)

Add in something like iShares ESG U.S. Aggregate Bond ETF (EAGG) and you should be good to go.

Awesome - thanks!

[Carol88888]

I hate the sustainable option. Barrons this week has a whole section on it. If you look under the hood you often find that there are a lot of companies included that don't seem to be environmentally correct. A lot of times it is a judgment call.

The whole idea has an element of faddishness that really bothers me. And then there's the added cost. When Wall St comes up with these new ideas they always cost more.

Wasn't Bogle's biggest insight that costs really do matter?

One question: What exactly is the breakdown in the total world fund between US/foreign? I seem to remember that VT ( which I assume is the same as the fund) has a pretty high allocation to foreign. Maybe 55/45? (don't quote me on this, just suggesting you look deeper)

My vote goes for the cheapest.

[yogesh]

Vote simplicity of 1 TR fund as it avoids the itch of constant balancing/fiddling, panicking and selling low. Just focus on contributing regularly and leave everything to target date index fund. If it wasn't for target-date fund I would have sold stocks in 2008. P.S. I still made that mistake in taxable.

[1789]

My first choice would be #1 for a hands off investors.