Three Index Funds vs "The Coffeehouse Portfolio" ?

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Shaoya
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Three Index Funds vs "The Coffeehouse Portfolio" ?

Post by Shaoya » Sun Sep 20, 2009 12:09 pm

I’ve gone ahead and shifted my (many) expensive actively traded funds to just VBMFX, VGTSX, and VTSMX in both taxable and tax-advantaged accounts, per the suggestions of several Bogleheads. [It was a cathartic experience!]

I’ve also been re-reading Bill Schultheis’ The Coffeehouse Investor (www.coffeehouseinvestor.com). From that, comes the Coffeehouse Portfolio (below) where one covers each section of the equity/bond/REIT market with an index fund (here, with Vanguard examples). [I imagine the bond weighting changes with one’s age.]

40% Total Bond Market Index (VBMFX) (0.22%)
10% S&P 500 Index (VFINX) (0.1
10% Value Index (VIVAX) (0.26%)
10% Small-Cap Index (NAESX) (0.28%)
10% Small-Cap Value Index (VISVX) (0.28%)
10% Total International Stock Index (VGTSX) (0.34%)
10% REIT Index (VGSIX) (0.26%)

What do you all have to say about doing it this way versus a three-way diversification of Total Bond Market index (VBMFX), Total International Stock Index (VGTSX), and Total Stock Market Index (VTSMX)?

Any advantages or disadvantages to either?

Thank you - Shaoya

chaz
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Post by chaz » Sun Sep 20, 2009 12:18 pm

Keep it simple.
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Taylor Larimore
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The "best" portfolio?

Post by Taylor Larimore » Sun Sep 20, 2009 12:33 pm

Hi Shaoya:

When you first came to the Bogleheads you had a very complex and tax-INefficient portfolo. I will post a link for reference.

http://www.bogleheads.org/forum/viewtop ... ht=#494691

It would be helpful if you would post your current portfolio in the earlier format showing the total portfolio percentage of each fund and the type of account where each fund is now located.

The problem with reading various books about investing, is that no two books recommend exactly the same portfolio. In my opinion, ALL of this forum's recommended books contain superior portfolios, including the "Coffeehouse Portfolio," so you might say we are "dancing on the head of a pin."

I look forward to viewing your current portfolio.
"Simplicity is the master key to financial success." -- Jack Bogle

medgar
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Post by medgar » Sun Sep 20, 2009 12:35 pm

Make it even more simple. Vanguard Total World Market and Vanguard Total Bond.

That is if you can handle 60% international right now.

Medgar

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Post by livesoft » Sun Sep 20, 2009 12:42 pm

Your 7-fund portfolio is a small-cap- and value-tilted portfolio. It is superior in performance to a simplified total market index based portfolio.

Have you read Larry Swedroe's "The Only Guide to a Winning Investment ..." where all the advantages of the sliced-and-diced portfolio are discussed in a compelling fashion? These ideas are re-iterated on this forum over and over and over. Most people on this forum are using small-cap and value tilted portfolios for good reason and avoiding a total stock market index based portfolio.

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Post by Opponent Process » Sun Sep 20, 2009 1:16 pm

both good portfolios, one slightly simpler than the other is all. you could also add VISVX (Small Value Index) to your current three fund portfolio if you want that tilt.

my only beef with coffeehouse is possible regret if value lags growth over the next few decades. this concept/possibility never occurs to some.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37

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Re: Three Index Funds vs "The Coffeehouse Portfolio&quo

Post by YDNAL » Sun Sep 20, 2009 1:51 pm

Shaoya wrote:I’ve also been re-reading Bill Schultheis’ The Coffeehouse Investor (www.coffeehouseinvestor.com).......

40% Total Bond Market Index (VBMFX) (0.22%)
10% S&P 500 Index (VFINX) (0.1
10% Value Index (VIVAX) (0.26%)
10% Small-Cap Index (NAESX) (0.28%)
10% Small-Cap Value Index (VISVX) (0.28%)
10% Total International Stock Index (VGTSX) (0.34%)
10% REIT Index (VGSIX) (0.26%)
Shaoya,

I have 5 main objections to Mr. Schulthies' portfolio.
1) Assumption that available tax-advantage space is sufficient to handle all tax-INefficient holdings.
2) REITs are not appropriate for everyone..... I own $0 in REITs.
3) Underweight Mid Caps (excluding the REITs fund).
... 18 15 08
... 08 06 05
... 17 14 09
4) Overweight Domestic/Foreign stocks (5 to 1) compared to global weights.
5) Absence of Foreign Small Caps.

Would it work better than your 3-fund portfolio in the next X years?.... we will only know when we get there.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Trev H
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Post by Trev H » Sun Sep 20, 2009 1:55 pm

OP said...

"my only beef with coffeehouse is possible regret if value lags growth over the next few decades. this concept/possibility never occurs to some"

my only beef with Lumping (TSM, Total Intl) is possible regret if growth lags value, large lags small, over the next few decades (like it has for many decades in the past). This concept/possibility never occurs to some.

Perhaps it has occurred to the Original Poster and that's why Coffeehouse is being considered.

Good for them !!!

To diversify the equity holdings follow these simple guidelines...

Invest near 50/50 in US and International Equity.
Invest near 50/50 in Large and Small Equity.
Invest near 50/50 in Market and Value Equity.

If I had to choose between the two portfolio's mentioned above - would pick Coffeehouse any day.

I would add that where Coffeehouse falls short is the Bias to US equity, and lack of International Small Caps. Add in a slice of International Small (and Vanguards FTSE X-US Intl Small Cap would do nicely for that) and you have a much better mix.

On the Coffeehouse mix I would also suggest that you simplify the US Equity down to US Large Market (TSM or Large Cap Index or 500 index) and Small Value Index.

25% Large Cap Index
25% Small Value Index
25% FTSE X-US Intl Large Market
25% FTSE X-US Intl Small Market

Would work for general equity mix.

Keep that 10% slice of REIT if you can, just reduce the others a bit.

If you have room in IRA type accounts hold the Small's and REIT there.

Best of Luck !

===

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Post by retiredjg » Sun Sep 20, 2009 3:14 pm

Shaoya, you have just made a huge change. And you are reading. I suspect that every book is going to have something in it that is compelling. Would it be smart to change your portfolio every time you read a new book?

I suggest you sit back and leave things alone for a year. Read about different styles of investing until the big picture makes sense to you. Then decide which, if any, change in style is right for you.

Many people here, but certainly not all, believe a small value tilt is going to pay out more in the end. There are many ways to get that tilt and Coffeehouse is only one. TrevH has his way of getting there (although I thought the international large cap was supposed to be value?). Other posters have their ways of getting that tilt. But first, you need to decide if you want it and then decide how far out on that limb you want to be.

There is no need to rush into this. Let the portfolio take care of itself while you are learning more. Then do something if you decide to. Think of your 3 fund portfolio as white icing. It is fine just as it is. It could also be fine with a few colored roses on it. But dozens of colored roses is going to ruin the cake. Chose your roses carefully.

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Post by KyleAAA » Sun Sep 20, 2009 3:16 pm

Your portfolio is fine.

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Taylor Larimore
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Fund locations ?

Post by Taylor Larimore » Sun Sep 20, 2009 3:23 pm

Shaoya:
I’ve gone ahead and shifted my (many) expensive actively traded funds to just VBMFX, VGTSX, and VTSMX in both taxable and tax-advantaged accounts,
Your three funds (if that's all you have) should not have VBMFX (Total Bond Index Fund) in a taxable account. There may be other mistakes (if I read your post correctly).

Please share your current portfolio for our assessment and suggestions.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Three Index Funds vs "The Coffeehouse Portfolio&

Post by nisiprius » Sun Sep 20, 2009 3:28 pm

Shaoya wrote:I’ve gone ahead and shifted my (many) expensive actively traded funds to just VBMFX, VGTSX, and VTSMX in both taxable and tax-advantaged accounts, per the suggestions of several Bogleheads...

I’ve also been re-reading Bill Schultheis’ The Coffeehouse Investor (www.coffeehouseinvestor.com). From that, comes the Coffeehouse Portfolio (below) where one covers each section of the equity/bond/REIT market with an index fund (here, with Vanguard examples).
40% Total Bond Market Index (VBMFX) (0.22%)
10% S&P 500 Index (VFINX) (0.1
10% Value Index (VIVAX) (0.26%)
10% Small-Cap Index (NAESX) (0.28%)
10% Small-Cap Value Index (VISVX) (0.28%)
10% Total International Stock Index (VGTSX) (0.34%)
10% REIT Index (VGSIX) (0.26%)

What do you all have to say about doing it this way versus a three-way diversification of Total Bond Market index (VBMFX), Total International Stock Index (VGTSX), and Total Stock Market Index (VTSMX)?
I have two reactions. Just my $0.02. First, you shouldn't go shifting and tinkering with your portfolio all the time. If you've just made an extreme makeover to your portfolio, take a year to think things over before making any more changes, or you'll soon be thrashing around in analysis paralysis.

I really think it's wise to cultivate a deliberate, conscious policy of inertia, friction, and general sales resistance. Make your bed fairly well, then lie in it and get some sleep. Don't hop up every half hour to see if there's a better way to arrange the blankets. There probably is, but if you're warm and covered, why bother? Remember, the investment industry is going to be pitching new, really interesting ideas at you all the time, and trying to make you discontented or fearful of what you have now; it's their job.

Second, if we classify the portfolio you posted, it is 50% domestic stocks (including REITS as stocks), 10% Total International, and 40% Total Bond Market. I just don't believe the difference between that and 50% total stock market, 10% Total International, and 40% Total Bond Market can possibly be enough to make an awful lot of difference, certainly not in the short run. The portfolio you posted is a sort of lumpy puree of domestic stocks. Total Stock Market has some of everything that's in that puree, it's just a smooth puree instead of a lumpy puree, all the same ingredients but a slightly different recipe and taste. It's mostly a matter of taste. Concerning taste, there can be no argument.

You can argue about it until the cows come home but you're never going to get a definitive answer on "total market" versus "slice and dice." So the best thing to do is shrug and say it doesn't matter a lot.

I think myself that within some range of reasonableness there's value in self-discipline--making a decision, however arbitrary, and then sticking with it--I think that may be more important than the decision itself. In this case, you've made a decision to use the 3-fund portfolio, so why not stick with it for a while?

I don't think any advocate of slice-and-dice is going to say you're going to ruin your retirement with that three-fund portfolio. What they'll say is that over your investment lifetime a slice-and-dice portfolio will do enough better than the simple portfolio to be meaningful. But even if they're right, let's say you mull it over for a few years first, is the difference between (say) 35 years of slice-and-dice goodness and 33 really going to make a life-changing difference?

And, yes, if you'd said you had the coffeehouse portfolio and asked whether you should simply to a three-fund portfolio, I'd say the same thing. Stick with what you've got... for a while. Let the itch to "do something" wear off.
Last edited by nisiprius on Sun Sep 20, 2009 3:34 pm, edited 4 times in total.
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epictetus
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portfolio changes

Post by epictetus » Sun Sep 20, 2009 3:31 pm

It is hard to know what to do. There are many good books and many smart people on this forum. And there is agreement and disagreement about the best way to proceed.

I agree with the suggestion of giving what you have a little time.

I have done investing wrong about every way you can. I"ve read most of the books and have followed this forum for years (and the Mstar forum before then).

Ultimately you have to find something that fits you.

Your basically portfolio now will help you avoid about 90% or more of the problems that people get into in investing.

One problem that is common is the tendency to change strategies too frequently.

For me, for now, after much complexity in the past, I have a very basic and simple portfolio. It may or may not make as much as a more complex approach. But I am less likely to tinker with and re-think my current strategy. And that has helped me whereas before with each new piece of data, each new idea I would re-think the whole thing and usually end up making a move that was a goof.

That doesn't mean the more complex portfolios are bad/wrong, and in fact they may well produce a better return that what I am doing.

I think the key is to find something that fits you that you will stick with. The "behavioral" piece of investing is as big or bigger an issue than the "math" piece.

Good luck and I hope this helps,
Kelly

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Shaoya
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Post by Shaoya » Sun Sep 20, 2009 11:04 pm

Ut-oh! I should have been clearer: I’m not looking to change things to the Coffeehouse Portfolio, especially after just dramatically revamping things two weeks ago. [Chasing the strategy du jour would surely lead to insanity (and poverty).] I need to let my new portfolio (below) sit for a while...

My OP was a theoretical/academic one designed to get opinions, which it did! I was just curious.

But lest you think that your recent (much appreciated) advice went unheeded, here’s my current - Bogleheaded - portfolio.

Note: Windsor II (in a Roth) and PRIMECAP (taxable) have been left "as is." I've yet to decide what to do with them - keep them, collapse them into VTSAX, or....Any ideas?

Taxable
43.2% Vanguard Total Stock Mkt Idx Admiral (VTSAX) (0.08%)
15.3% Total Int'l Stock Index (VGTSX) (0.34%)
10.3% Vanguard PRIMECAP (VPMCX) (0.50%)

Tax-advantaged
IRA
11.3% Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA
4.8% Vanguard FTSE All-World Except US (VFWIX) (0.40%)
5.8% Windsor II (VWNFX) (0.39%)
2.1% Vanguard Total Stock Mkt Idx Inv (VTSMX) (0.18%)


Her 457
5.4% Vanguard Total Bond Market Index Fund – Signal Shares (VBTSX) (0.14%)

His 457
1.9% Intermediate Bond Option (0.09%)

Thank you - Shaoya

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Post by House Blend » Mon Sep 21, 2009 8:32 am

Shaoya wrote:Note: Windsor II (in a Roth) and PRIMECAP (taxable) have been left "as is." I've yet to decide what to do with them - keep them, collapse them into VTSAX, or....Any ideas?
My opinion, the Windsor II holding is fine -- keep it or not, doesn't matter.

But the Primecap holding in taxable is a trickier. I'm sure there are a lot of fans of this fund (and more who wish they could buy shares), but holding it in a taxable account is suboptimal. I notice that last year, during the Great Haircut of 2008, it had a capital gain distribution on the order of 8%. Ouch!

If you have capital losses in this fund, I'd be inclined to cash them out and grab the tax deduction.

If you like having some active management in your portfolio and want to keep a slice of Primecap, you'll have to reconcile that against the large tax bite this fund can generate. Doesn't look like an easy decision.

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Post by livesoft » Mon Sep 21, 2009 9:59 am

We have had shares of Windsor II in one account or another since its inception.

We had PRIMECAP for more than a decade in a taxable account before we woke up and got rid of it due to its tax-inefficiency. As it grew in value, it was more and more of an annoyance at tax time.

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Shaoya
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Post by Shaoya » Mon Sep 21, 2009 10:11 am

Thank you all for your ideas; they're appreciated.

Any other opinions on our current portfolio?

Shaoya

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Taylor Larimore
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Comments on new portfolio.

Post by Taylor Larimore » Mon Sep 21, 2009 1:13 pm

Shaoya wrote:Thank you all for your ideas; they're appreciated.

Any other opinions on our current portfolio?

Shaoya
Hi Shaoya:

Thank you for returning with your current portfolio. In my opinion you have accomplished a great improvement! I'll offer a few comments:

* Your most important portfolio decision is your overall stock/bond ratio. I am happy to see it's about 80/20% which was your initial plan. However, that's more risky than Mr. Bogle's rough guideline that bonds should about equal your age. You might give this a second thought.

* I don't think you have given us the gain or loss in your taxable Primecap fund. If it is a loss, there is no doubt you should get it out of your taxable account immediately. If you're enamoured with it (using a rear-view mirror), buy it back in a tax-deferred account. This move may save you about .75%/year in taxes the rest of your life (~50 years). Also, Primecap's expense ratio is several times higher than TSM which is another saving you can control.

If you have a gain in Primecap, perhaps it will be offset by your losses in the other taxable funds you sold. In which case, sell. If you still have a gain, I'd probably sell knowing that the capital gain now will reduce the ending capital gain by the same amount and also result in lower taxes the rest of your life. Also, the current capital gain maximum rate of 15% is now the lowest in memory. It probably won't last. The longer you wait to sell, the more costly the exchange will be. Outperformance never lasts forever (TSM is outperforming Primecap in 2009).

* Primecap is currently closed to new investors. I'm not sure if Vanguard will allow an exchange to a tax-deferred account at this time. Check with Vanguard if you decide to exchange to a tax-deferred account.

* Your decision to hold Windsor II or Primecap in one of your tax-deferred accounts is of relatively minor importance compared with keeping Primecap in taxable. You can later sell or exchange these managed funds if you want. In tax-deferred accounts it's mostly a trade off between hope and simplicity. Past performance is no guarantee of future performance.

You have already made a major improvement in your portfolio. I'm impressed.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by retiredjg » Mon Sep 21, 2009 4:05 pm

I'm impressed too. I have nothing to add. Primecap is not optimal for a taxable location. Windsor II is not hurting anything if you want to keep it.

Good job!

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Post by Triple digit golfer » Wed Sep 23, 2009 7:05 pm

my only beef with Lumping (TSM, Total Intl) is possible regret if growth lags value, large lags small, over the next few decades (like it has for many decades in the past). This concept/possibility never occurs to some.


Trev,

What about microcaps?
Nanocaps?
Why would you hold any cap-weighted funds?
What if Exxon beats Starbuck's? You will have regret because surely your 50/50 U.S./int'l, 50/50 value/market, 50/50 large/small holds more Exxon than Starbuck's.

Based on your statements about regret and all you've said about 50/50 on everything, the only viable portfolio for you on the equity side would be to hold 1/10,000th or whatever it is of every single publicly traded company in the world. And certainly NO cap-weighted funds.

:)

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Post by Jacotus » Wed Sep 23, 2009 8:36 pm

I use the same three fund approach - VBMFX, VTSMX, VGTSX. It's cheap and simple. The only thing I am thinking about doing now is changing my bond portfolio to be half TIPS with VIPSX.

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