The Three-Fund Portfolio

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Re: The Three Fund Portfolio

Post by LadyGeek » Sat Oct 10, 2015 9:48 am

FYI - woodedareas is asking for help with his Vanguard LifeStrategy fund, which I moved into his existing thread: [Asset allocation for a] 75 year old
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Re: The Three Fund Portfolio

Post by small_index » Mon Oct 12, 2015 9:55 am

Answering randomly from the past 20+ posts:

"waiting for 3-fund": If an investor has $5,500 to invest, they might not meet the fund minimums needed for a 3-fund portfolio. So a Target Retirement fund might a place for their money as they build up to the fund minimums for 3 funds.

"bonds in taxable?": I would slice this a little finer. Bonds are a great fit for a Traditional IRA. Bond interest is taxed at ordinary income tax rates, and eventually the Traditional IRA will be taxed at ordinary income tax rates. If you instead put total stock market there, you lose the long-term capital gain tax rate and instead pay ordinary income tax on the gain. Also bonds in general are expected to grow more slowly, so that eventual taxation is on a slower growing investment.

With a Roth IRA, the money won't ever be taxed again. So you might have to weigh if you're paying more tax on total stock market dividends than on total bond fund interest. But in Roth, you're not losing any tax advantage since the investments won't be taxed again (assuming you follow the withdrawal rules).

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Re: The Three Fund Portfolio

Post by Soli » Mon Oct 12, 2015 12:28 pm

This is a really interesting thread.

Besides TIPS what else is missing from the 3 Fund Portfolio?

What about real estate (REITS) and value funds? Where is it under weighted?

What would you add to correct any shortcomings?

Are there any "Everything" funds that Bill Bernstein recommends? :confused

Are any of the simple or Lazy Portfolios just as efficient as the more complicated portfolios by Bernstein, Swedroe, and the other gurus?

Thanks a lot! I learn so much here.

:D

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Re: The Three Fund Portfolio

Post by LadyGeek » Mon Oct 12, 2015 12:54 pm

Hi Soli,

A 3-fund portfolio is a subset of a type of portfolios known as Lazy portfolios.

You'll see Bill Bernstein's "Coward's" portfolio in the wiki article - that's 9 funds and is much more complicated than you need.

Remember that adding more funds increases complexity. You'll have to keep track of everything and also have to understand how to rebalance what you've got.

There's nothing wrong with a plain old Target date retirement fund, if that's what you need it for. Simple is good.

FYI - In another thread, I've requested that Soli update his/her thread Scared to invest, but want to DCA and put some money to work with details using the Asking Portfolio Questions format. Then, we can point Soli in the right direction.
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Adding more funds?

Post by Taylor Larimore » Mon Oct 12, 2015 1:10 pm

What about real estate (REITS) and value funds?

Soli:

The Three Fund Portfolio contains the market weight in thousands of domestic stocks and bonds including REITS and value funds.

Ambassador Laura Dogu is the co-author of "The Bogleheads Guide to Retirement Planning." She wrote:
A simple portfolio is actually the ultimate in sophistication. It almost always lowers cost (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, a simple portfolio allows the investor to spend more time with family and friends."

Jack Bogle wrote:
The enemy of a good plan is the dream of a perfect plan.

Strive for simplicity--not unnecessary complexity.

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

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Re: The Three Fund Portfolio

Post by abuss368 » Mon Oct 12, 2015 1:53 pm

Soli wrote:This is a really interesting thread.

Besides TIPS what else is missing from the 3 Fund Portfolio?

What about real estate (REITS) and value funds? Where is it under weighted?

What would you add to correct any shortcomings?

Are there any "Everything" funds that Bill Bernstein recommends? :confused

Are any of the simple or Lazy Portfolios just as efficient as the more complicated portfolios by Bernstein, Swedroe, and the other gurus?

Thanks a lot! I learn so much here.

:D


Hi Soli,

The Three Fund Portfolio is an excellent portfolio. Jack Bogle has often said that "Simplicity is the Master Key to Financial Success".

Other great alternatives include the Vanguard Four Fund Portfolio and also Rick Ferri's Core Four.

You may wish to start another thread for additional information.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by pingo » Tue Oct 13, 2015 1:42 am

Soli wrote:Besides TIPS what else is missing from the 3 Fund Portfolio?


It's all in one's perspective. The Three Fund Portfolio is missing a whole universe of unnecessary, non-essential and exotic investment vehicles. I liken The Three Fund Portfolio to complete protein. It may not have everything there is and it may not even have everything as you'd prefer, but it has everything you need. Most, if not all, those other vehicles are really using the same assets found in the Three Fund Portfolio, but they're trying to outdo the asset classes with transactional wizardry when there is a total of zero alpha in the world. Read The Tao of Alpha.

Soli wrote:What about real estate (REITS) and value funds? Where is it under weighted?


The Three Fund Portfolio includes REIT and value stocks and is not underweighted in either; rather, the total U.S. and total international equity components are each market neutral (neutrally weighted).

Soli wrote:What would you add to correct any shortcomings?


I don't consider it to have shortcomings. It may not address the desired targets or weighting of certain sub-classes of assets preferred by some investors, but those are not the investors who would be interested in The Three Fund Portfolio.

Soli wrote:Are there any "Everything" funds that Bill Bernstein recommends? :confused


Kind of...? Read Bernstein's article: The One-Fund Holy Grail.

Soli wrote:Are any of the simple or Lazy Portfolios just as efficient as the more complicated portfolios by Bernstein, Swedroe, and the other gurus?


It is a subject of tireless discussion on this forum. They can all be reasonable options and the reasonableness of a portfolio to meet your goals is what counts. The more you read, the more one or another lazy portfolio may appeal to you, if only because of a personal investment philosophy that you develop or relate to, as explained by Rick Ferri in this Morningstar video and this blog article.

For another lazy-type portfolio alternative, you might look here as well.

What is missing from the discussion is how one's account situation has a major impact on all of these decisions. You can have the ideal portfolio in mind, but if, for example, your employer plan doesn't give you the options you need, then you think you need to invest with the options you have. Tax deferral usually trumps portfolio druthers.
Last edited by pingo on Tue Oct 13, 2015 4:41 pm, edited 1 time in total.

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Fidelity Freedom Index Funds

Post by Shald » Tue Oct 13, 2015 3:20 am

[Moved to its own topic]
Last edited by Shald on Tue Oct 13, 2015 12:16 pm, edited 1 time in total.

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Re: The Three Fund Portfolio

Post by aj44 » Tue Oct 13, 2015 11:00 am

I recently changed jobs and the 401k at my current employer has a ton of options which are mostly expensive and managed. They do however have the Vanguard S&P 500, a diamond in the rough at a .05 expense ratio so at least I can work with it and balance with my IRA.

After a year I'll start putting some pressure on them to add the 3 fund portfolio. It is a mid sized company but I have to think if they offer the cheap S&P 500 fund they may be swayed to add additional cheap options.

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Re: The Three Fund Portfolio

Post by cbixel » Tue Oct 13, 2015 1:25 pm

Have you thought about going with 9 funds at three different investment firms, Vanguard, Fidelity, and something else?

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Re: The Three Fund Portfolio

Post by pingo » Tue Oct 13, 2015 5:28 pm

aj44 wrote:After a year I'll start putting some pressure on them to add the 3 fund portfolio. It is a mid sized company but I have to think if they offer the cheap S&P 500 fund they may be swayed to add additional cheap options.


A Vanguard 500 Fund ER 0.05% tells me you may have other usable options which might also be incorporated into the whole of your portfolio. Frequently, newbies rule out viable plan options, thinking the expense ratios are too high to be usable. I'll cobble together an example based on past threads:

48% Vanguard 500 Fund (VFIAX) ER 0.05%
32% American Funds EuroPac Growth (AEPFX) ER 0.59%
20% American Funds Bond Fund of America (ABNDX.lw) 0.62%

Yes, our druthers is achieve max diversification for only a few basis points, but above I listed excellent funds for a diversified 3 fund-style portfolio bearing a weighted ER of 0.34%. I'd say that's lower than average and downright respectable. Weighted ERs can be brought down even lower, depending on how one locates funds across accounts.

Costs are extremely important, but sometimes it's hard to put the issue of costs into perspective without a little personalized guidance a la Asking Portfolio Questions.

Best wishes.

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Re: The Three Fund Portfolio

Post by abuss368 » Tue Oct 13, 2015 6:28 pm

aj44 wrote:I recently changed jobs and the 401k at my current employer has a ton of options which are mostly expensive and managed. They do however have the Vanguard S&P 500, a diamond in the rough at a .05 expense ratio so at least I can work with it and balance with my IRA.

After a year I'll start putting some pressure on them to add the 3 fund portfolio. It is a mid sized company but I have to think if they offer the cheap S&P 500 fund they may be swayed to add additional cheap options.


Hi aj44,

Why not a Jack Bogle two fund portfolio with the S&P 500 and a bond fund?

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Substituting Vanguard S&P 500 Index Fund for TSM

Post by Taylor Larimore » Tue Oct 13, 2015 6:49 pm

I recently changed jobs and the 401k at my current employer has a ton of options which are mostly expensive and managed. They do however have the Vanguard S&P 500, a diamond in the rough at a .05 expense ratio so at least I can work with it and balance with my IRA.

aj44:

The Vanguard S&P 500 Index Fund contains 500 of the largest and most successful companies in the United States. It's performance (risk and return) is very similar to Vanguard Total Stock Market Index Fund.

Although I slightly prefer Total Market Index Fund for its better diversification and its inclusion of small and mid-cap stocks with no front-running, either fund is an excellent choice for the U.S. stock portion of a portfolio.

There is more than one road to Dublin.

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

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Re: The Three Fund Portfolio

Post by aj44 » Tue Oct 13, 2015 10:27 pm

I do have plenty of room in my Vanguard IRA for balancing from previous 401k rollovers so no need to settle for more expensive options for Total International and Total Bond in the 401k and I agree with Taylor that I am fine with the S&P 500 in lieu of Total US.

I still want to push my company to adopt the 3 fund portfolio as an option as cobbling together what they currently offer to achieve the desired portfolio would average a .7 expense ratio and consist of 6 funds.

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Re: The Three Fund Portfolio

Post by michaeljc70 » Fri Oct 16, 2015 4:33 pm

pingo wrote:
Soli wrote:Besides TIPS what else is missing from the 3 Fund Portfolio?


It's all in one's perspective. The Three Fund Portfolio is missing a whole universe of unnecessary, non-essential and exotic investment vehicles. I liken The Three Fund Portfolio to complete protein. It may not have everything there is and it may not even have everything as you'd prefer, but it has everything you need. Most, if not all, those other vehicles are really using the same assets found in the Three Fund Portfolio, but they're trying to outdo the asset classes with transactional wizardry when there is a total of zero alpha in the world. Read The Tao of Alpha.

Soli wrote:What about real estate (REITS) and value funds? Where is it under weighted?


The Three Fund Portfolio includes REIT and value stocks and is not underweighted in either; rather, the total U.S. and total international equity components are each market neutral (neutrally weighted).

Soli wrote:What would you add to correct any shortcomings?


I don't consider it to have shortcomings. It may not address the desired targets or weighting of certain sub-classes of assets preferred by some investors, but those are not the investors who would be interested in The Three Fund Portfolio.

Soli wrote:Are there any "Everything" funds that Bill Bernstein recommends? :confused


Kind of...? Read Bernstein's article: The One-Fund Holy Grail.

Soli wrote:Are any of the simple or Lazy Portfolios just as efficient as the more complicated portfolios by Bernstein, Swedroe, and the other gurus?


It is a subject of tireless discussion on this forum. They can all be reasonable options and the reasonableness of a portfolio to meet your goals is what counts. The more you read, the more one or another lazy portfolio may appeal to you, if only because of a personal investment philosophy that you develop or relate to, as explained by Rick Ferri in this Morningstar video and this blog article.

For another lazy-type portfolio alternative, you might look here as well.

What is missing from the discussion is how one's account situation has a major impact on all of these decisions. You can have the ideal portfolio in mind, but if, for example, your employer plan doesn't give you the options you need, then you think you need to invest with the options you have. Tax deferral usually trumps portfolio druthers.


It is not under weighted in REITs from a stock market perspective. But people argue it is under weighted from an economy perspective.

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Re: The Three Fund Portfolio

Post by gvsucavie03 » Fri Oct 16, 2015 5:24 pm

michaeljc70 wrote:It is not under weighted in REITs from a stock market perspective. But people argue it is under weighted from an economy perspective.


And because of its relatively low correlation to the stock market.

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Re: The Three Fund Portfolio

Post by pingo » Sat Oct 17, 2015 12:13 am

michaeljc70 wrote:It is not under weighted in REITs from a stock market perspective. But people argue it is under weighted from an economy perspective.
gvsucavie03 wrote:And because of its relatively low correlation to the stock market.


True. Adding REITs can be reasonable for a portfolio. I am neutral as to whether they should or should not be added. However, I don't find the Total Economy Portfolio argument appealing for some reason.

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Risk and Return of The Three Fund Portfolio

Post by Taylor Larimore » Thu Oct 22, 2015 5:31 am

Bogleheads:

Risk: In Scott Simon's great book, "Index Funds," he writes (page 129):
"According to Morningstar, the level of risk contained in the stocks that are represented in the S&P 500 and the Wilshire 5000 indexes is about 25% less than the risk in the average active stock fund."

Return: According to this 25 page Study by Rick Ferri, CFA and Alex C. Benke, CFP:
"The Three Fund Portfolio outperformed 87% of managed-fund portfolios during the 16 year period ending in 2013"

Best wishes
Taylor
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8% of portfolio in 10 stocks?

Post by gvsucavie03 » Sat Oct 24, 2015 8:12 pm

A person with an 80/20 portfolio with a 30% international equity holding has 8% of their portfolio in just 10 stocks (the top 10 in TSM). This is probably digressing to the equal market weight theory. I'm also confident it holds true for TISM and TBM. Is this fairly risky? Is there an alternative?

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Three Fund Portfolio Risk?

Post by Taylor Larimore » Sun Oct 25, 2015 8:23 am

gvsucavie03 wrote:A person with an 80/20 portfolio with a 30% international equity holding has 8% of their portfolio in just 10 stocks (the top 10 in TSM). This is probably digressing to the equal market weight theory. I'm also confident it holds true for TISM and TBM. Is this fairly risky? Is there an alternative?

gvsucavie03:

* Diversification reduces risk. The Three Fund Portfolio contains over 17,000 world-wide securities.

* Mr. Bogle wrote: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk."

* Morningstar: "The level of risk contained in the stocks that are represented in the S&P 500 and the Wilshire 5000 indexes is about 25% less than the risk in the average active stock fund."

* The funds in the three fund portfolio never return below average (less costs).

* John Norstad's Study found that no other US stock portfolio can be more efficient than TSM (have lower risk and higher expected return).

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

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Re: The Three Fund Portfolio

Post by seacglk » Sun Oct 25, 2015 3:39 pm

I am 34 and have a high tolerance for risk. Understanding I do not need my money for 30+ years, I really do not see a huge advantage to placing much of my portfolio in bonds. I understand that for 2015, I would be in the positive if I owned more bonds, but I am buying cheaper equities that will increase in value. I am thinking I might reevaluate this position in 10+ years....but it seems to me that to maximize the value of my portfolio, I need to be 100% in equities because the market WILL rebound at some point over 30 years.

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Re: Three Fund Portfolio Risk?

Post by gvsucavie03 » Sun Oct 25, 2015 4:39 pm

Taylor Larimore wrote:
gvsucavie03 wrote:A person with an 80/20 portfolio with a 30% international equity holding has 8% of their portfolio in just 10 stocks (the top 10 in TSM). This is probably digressing to the equal market weight theory. I'm also confident it holds true for TISM and TBM. Is this fairly risky? Is there an alternative?

gvsucavie03:

* Diversification reduces risk. The Three Fund Portfolio contains over 17,000 world-wide securities.

* Mr. Bogle wrote: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk."

* Morningstar: "The level of risk contained in the stocks that are represented in the S&P 500 and the Wilshire 5000 indexes is about 25% less than the risk in the averagke active stock fund."

* The funds in the three fund portfolio never return below average (less costs).

* John Norstad's Study found that no other US stock portfolio can be more efficient than TSM (have lower risk and higher expected return).

Best wishes.
Taylor


I totally get the enormous diversification. Without having gone into too much detailed research, I'd say probably 25% of the portfolio in my example is in about 100 securities. The other 75 would be the other 16,900 securities still placing a significant weight on the large caps. It's still a great option for the simplicity and efficiency!

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Re: The Three Fund Portfolio

Post by michaeljc70 » Mon Oct 26, 2015 3:26 pm

seacglk wrote:I am 34 and have a high tolerance for risk. Understanding I do not need my money for 30+ years, I really do not see a huge advantage to placing much of my portfolio in bonds. I understand that for 2015, I would be in the positive if I owned more bonds, but I am buying cheaper equities that will increase in value. I am thinking I might reevaluate this position in 10+ years....but it seems to me that to maximize the value of my portfolio, I need to be 100% in equities because the market WILL rebound at some point over 30 years.


That's fine. You can do zero or less bonds. I am 45 (and plan on retiring early) and just started adding bonds (I have 20% now).

Some bonds do give you a cushion over a long bear market. A small amount will also not produce a big drag on your overall return.

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Re: The Three Fund Portfolio

Post by Soli » Mon Oct 26, 2015 7:06 pm

Taylor and others,
What is your opinion of the Vanguard High Yield Corporate bond fund VWEAX?

I have read that it has a low default rate and offers a good reward for a moderate amount of risk.

Are riskier bond funds still less risky than stocks?

Does the benefit of the high yield outweigh the risk?

Thanks!

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Off Topic post

Post by Taylor Larimore » Mon Oct 26, 2015 8:38 pm

Soli:

This topic is about The Three Fund Portfolio. To keep the topic manageable, please post your question about Vanguard's High-Yield Fund here.

Thank you and best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by LadyGeek » Mon Oct 26, 2015 8:42 pm

Hi Soli,

That's a good question for your thread here: Scared to invest, but want to DCA and put some money to work

You've already got some suggestions. If you don't understand something or need more info, ask in your thread.
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Re: The Three Fund Portfolio

Post by Soli » Mon Oct 26, 2015 8:57 pm

Thanks Taylor and LadyGeek, I moved the question to my other thread.

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Re: The Three Fund Portfolio

Post by alant » Thu Oct 29, 2015 8:13 am

I am a first-time user/poster on this site. While I've reviewed some of the posts under this topic, I haven't reviewed all, so if the answer to my question is already in this topic's thread, please direct me to it. If my question is new, an answer will be most appreciated.

Question: Because the Vanguard Total Stock Mkt fund, as shown below, significantly outperformed the Vanguard Total Intl Stock fund by large deltas in all time periods, why not just use the Vanguard Total Stock Mkt fund and eliminate the Intl fund, i.e., a two-fund portfolio, including the Total Stock Mkt fund plus the Bond fund? While the world economy is much larger than the US economy, with some regions having significantly higher growth rates than the US economy -- which long term may foster greater gains in global equities -- this hasn't been the case over the last 10 years. It's doubtful that these potential greater gains will be seen in even the intermediate term.

Performance of VTSMX and VGTSX over several time periods:
Average annual performance—quarter end:

Vanguard Total Stock Mkt Idx Inv:
YTD 09/30/2015 -5.59%
1-year -0.67%
3-year 12.34%
5-year 13.15%
10-year 6.97%

Vanguard Total Intl Stock Ix Inv:
YTD 09/30/2015 -6.87%
1-year -10.77%
3-year 3.05%
5-year 2.09%
10-year 2.99%

1-, 3-, 5-, 10-year as of 09/30/2015

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Re: The Three Fund Portfolio

Post by abuss368 » Thu Oct 29, 2015 9:35 am

alant wrote:I am a first-time user/poster on this site. While I've reviewed some of the posts under this topic, I haven't reviewed all, so if the answer to my question is already in this topic's thread, please direct me to it. If my question is new, an answer will be most appreciated.

Question: Because the Vanguard Total Stock Mkt fund, as shown below, significantly outperformed the Vanguard Total Intl Stock fund by large deltas in all time periods, why not just use the Vanguard Total Stock Mkt fund and eliminate the Intl fund, i.e., a two-fund portfolio, including the Total Stock Mkt fund plus the Bond fund? While the world economy is much larger than the US economy, with some regions having significantly higher growth rates than the US economy -- which long term may foster greater gains in global equities -- this hasn't been the case over the last 10 years. It's doubtful that these potential greater gains will be seen in even the intermediate term.

Performance of VTSMX and VGTSX over several time periods:
Average annual performance—quarter end:

Vanguard Total Stock Mkt Idx Inv:
YTD 09/30/2015 -5.59%
1-year -0.67%
3-year 12.34%
5-year 13.15%
10-year 6.97%

Vanguard Total Intl Stock Ix Inv:
YTD 09/30/2015 -6.87%
1-year -10.77%
3-year 3.05%
5-year 2.09%
10-year 2.99%

1-, 3-, 5-, 10-year as of 09/30/2015


Hi alant,

This is the two fund portfolio that Jack Bogle has recommended in countless interviews and his many books.

Keep investing simple!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by bertilak » Thu Oct 29, 2015 9:56 am

alant wrote:Question: Because the Vanguard Total Stock Mkt fund, as shown below, significantly outperformed the Vanguard Total Intl Stock fund by large deltas in all time periods, why not just use the Vanguard Total Stock Mkt fund and eliminate the Intl fund, i.e., a two-fund portfolio, including the Total Stock Mkt fund plus the Bond fund?

Many people would agree with that, including John Bogle. He sees international investing as adding risk without adding return: US companies already have international exposure and are in a more safely-regulated environment (my possibly misunderstood paraphrase).

Other very respectable experts like International. For example William Bernstein in his book(let?) Deep RIsk says international investments help protect against both inflation and deflation. It is not a matter of squeezing out extra return or leveling off short-term fluctuations, but protecting yourself from bad times (aka deep risk).

So you are not alone. I was convinced by Bernstein so moved some of my TSM to international. Things like this make it hard to stay the course, but I was making a big change anyway (paying down mortgage) so folded it in.
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Re: The Three Fund Portfolio

Post by Taylor Larimore » Thu Oct 29, 2015 10:12 am

Alant:

Welcome to the Bogleheads Forum!
Because the Vanguard Total Stock Mkt fund, as shown below, significantly outperformed the Vanguard Total Intl Stock fund by large deltas in all time periods, why not just use the Vanguard Total Stock Mkt fund and eliminate the Intl fund?

This Vanguard Study explains why I included Total International Stock Index Fund in The Three Fund Portfolio. This is a controversial topic so please start a new topic elsewhere for further discussion.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three Fund Portfolio

Post by RevYoung » Thu Oct 29, 2015 12:56 pm

alant, you may be interested to read:

How important is an international allocation?

I've got international, but hearing Jack Bogle talk at Bogleheads got me thinking about it again:

Why Bogle Doesn't 'Do' International Investing

But, as Taylor said, it is probably better to discuss it further in a separate topic. :)
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Re: The Three Fund Portfolio

Post by michaeljc70 » Thu Oct 29, 2015 1:18 pm

Taylor Larimore wrote:Alant:

Welcome to the Bogleheads Forum!
Because the Vanguard Total Stock Mkt fund, as shown below, significantly outperformed the Vanguard Total Intl Stock fund by large deltas in all time periods, why not just use the Vanguard Total Stock Mkt fund and eliminate the Intl fund?

This Vanguard Study explains why I included Total International Stock Index Fund in The Three Fund Portfolio. This is a controversial topic so please start a new topic elsewhere for further discussion.

Thank you and best wishes.
Taylor


Thanks for that link. I was beginning to question whether it was worth it and that settles it for me. It even addresses (and disagrees with) Bogle's recent comment.

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Re: The Three Fund Portfolio

Post by Soli » Thu Oct 29, 2015 5:37 pm

Taylor and others,
In a prolonged bear market, would the S&P 500 Index and the Total Stock Market Index be expected to perform similarly? Is there evidence where they have performed the same in the past?

Why should I select one versus the other for our IRAs and i401k?

Also, can you explain in simple terms what tracking error means?

Thanks to all.

Soli

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TSM or S&P 500?

Post by Taylor Larimore » Thu Oct 29, 2015 6:02 pm

Soli:

I will try to answer your questions:
In a prolonged bear market, would the S&P 500 Index and the Total Stock Market Index be expected to perform similarly?

Yes.
Is there evidence where they have performed the same in the past?

In the 2008 bear market, both funds declined -37% for the year. Some years the S&P outperforms (risk & return), other years TSM outperformes. No one can predict future fund returns.
Why should I select one versus the other for our IRAs and i401k?

Mr. Bogle introduced both funds. He prefers Total Stock Market Index Fund. Vanguard experts selected TSM for their Target and LifeStrategy funds.
Also, can you explain in simple terms what tracking error means?

Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked.

Please post general questions in your existing thread on another forum.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three Fund Portfolio

Post by Soli » Thu Oct 29, 2015 7:32 pm

Thanks, Taylor! That helped!

Soli

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Re: The Three Fund Portfolio

Post by abuss368 » Thu Oct 29, 2015 7:51 pm

Soli wrote:Also, can you explain in simple terms what tracking error means?

Thanks to all.

Soli


Hi Soli,

Tracking error measures how well a fund follows the benchmarked index.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by razeus » Fri Oct 30, 2015 9:45 am

I'm shooting towards a 3 fund portfolio, but I have to admit: I'm not impressed with Vanguard Total International Stock Index Fund. With 3% compounded returns over the last 10 years, I rather just stick with Total Stock Market fund. That fund seems like a dog.

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Re: The Three Fund Portfolio

Post by CABob » Fri Oct 30, 2015 9:56 am

razeus wrote:I'm shooting towards a 3 fund portfolio, but I have to admit: I'm not impressed with Vanguard Total International Stock Index Fund. With 3% compounded returns over the last 10 years, I rather just stick with Total Stock Market fund. That fund seems like a dog.

But it tracks its index so if you don't like it that just means you are uncomfortable investing in international stock or perhaps you don't think index investing is appropriate in international.
Bob

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Eliminating Total International ?

Post by Taylor Larimore » Fri Oct 30, 2015 10:05 am

razeus wrote:I'm shooting towards a 3 fund portfolio, but I have to admit: I'm not impressed with Vanguard Total International Stock Index Fund. With 3% compounded returns over the last 10 years, I rather just stick with Total Stock Market fund. That fund seems like a dog.

razeus:

Welcome to the Bogleheads forum!

Before eliminating Total International from your Three Fund Portfolio, I suggest you read this Vanguard study: Considerations for Investing in Non-U.S. Equities

Past performance does not predict future performance.

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

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Re: The Three Fund Portfolio

Post by Soli » Fri Oct 30, 2015 1:06 pm

Taylor and forum members,
I have just set sail and purchased some TSM Adm shares. :D

“To reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor.”
~ Oliver Wendell Holmes

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Re: The Three Fund Portfolio

Post by razeus » Fri Oct 30, 2015 3:47 pm

CABob wrote:
razeus wrote:I'm shooting towards a 3 fund portfolio, but I have to admit: I'm not impressed with Vanguard Total International Stock Index Fund. With 3% compounded returns over the last 10 years, I rather just stick with Total Stock Market fund. That fund seems like a dog.

But it tracks its index so if you don't like it that just means you are uncomfortable investing in international stock or perhaps you don't think index investing is appropriate in international.


Oh, I'm comfortable investing in international stocks. What I'm not comfortable with is taking on the high risk for low returns. If I wanted 3% returns over 10 years, Vanguard has a nice low risk bond fund I can use.

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Re: The Three Fund Portfolio

Post by TimeToThink » Wed Nov 04, 2015 3:08 pm

With the Three Fund approach I am troubled that part of the allocation gets invested in China. Who knows where they are coming from or what their deal is? Transparency is bad enough to get from markets outside of China. How does one invest in China and sleep well at night?

I will greatly appreciate any and all points of view. Thanks.

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Re: The Three Fund Portfolio

Post by michaeljc70 » Wed Nov 04, 2015 3:21 pm

TimeToThink wrote:With the Three Fund approach I am troubled that part of the allocation gets invested in China. Who knows where they are coming from or what their deal is? Transparency is bad enough to get from markets outside of China. How does one invest in China and sleep well at night?

I will greatly appreciate any and all points of view. Thanks.


China is only 4.6% of VXUS. That isn't very much. A lot of emerging markets are less transparent than the US.

Also, if you go into a 3 fund portfolio, there may be a lot of things you might have done or might not have done had you bought more funds. Some people might want more emerging markets, some might want more small cap value, some want more REITs, more corporate bonds, etc. That is a sacrifice you make for keeping it simple. In the end, it probably won't hurt your returns (at least much) because you think you should have more of X or less of Y.

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Re: The Three Fund Portfolio

Post by bertilak » Wed Nov 04, 2015 3:25 pm

TimeToThink wrote:With the Three Fund approach I am troubled that part of the allocation gets invested in China. Who knows where they are coming from or what their deal is? Transparency is bad enough to get from markets outside of China. How does one invest in China and sleep well at night?

I will greatly appreciate any and all points of view. Thanks.

Take a look at Vanguard's Developed Markets Index Fund (VTMGX Admiral or VDVIX Investor). It has no China. It tracks Total International closely but appears to be a little less volatile.

Other VG international funds will pick up China over the next few months but not this one since China is classed as an emerging market and this fund explicitly avoids EM. So, you do give up EM but perhaps that's not so bad anyway. See http://news.morningstar.com/articlenet/ ... ?id=699863 for Morningstar's discussion.
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Re: The Three Fund Portfolio

Post by TimeToThink » Wed Nov 04, 2015 3:44 pm

Thanks MichaelJC70 and bertilak for your responses.

My thoughts..if I have good reason to believe someone cannot be trusted, I would rather not be involved in their doings. That said where do I draw the line at my trust standard. If I dig enough I could probably find enough dirt that you'll find me hanging out with Bigfoot off the grid for my lack of trust in everyone and everything. On the flip side, I understand the world we live in is not nirvana and must go with the punches sometimes. It almost comes down to an arbitrary choice in a way, that is, unless you believe so strongly about what is guiding you that you let that take hold in your investment decisions. That said, I have had no problem following all of the US-Euro indices. As for China, I'm inclined to avoid them where I can.

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Re: The Three Fund Portfolio

Post by michaeljc70 » Wed Nov 04, 2015 5:31 pm

TimeToThink wrote:Thanks MichaelJC70 and bertilak for your responses.

My thoughts..if I have good reason to believe someone cannot be trusted, I would rather not be involved in their doings. That said where do I draw the line at my trust standard. If I dig enough I could probably find enough dirt that you'll find me hanging out with Bigfoot off the grid for my lack of trust in everyone and everything. On the flip side, I understand the world we live in is not nirvana and must go with the punches sometimes. It almost comes down to an arbitrary choice in a way, that is, unless you believe so strongly about what is guiding you that you let that take hold in your investment decisions. That said, I have had no problem following all of the US-Euro indices. As for China, I'm inclined to avoid them where I can.


Of course, you have to do what makes you feel comfortable.

A couple other points though:

1) If you compare the gains in the Chinese market to the general international market, I think China would have returned way more (I didn't run the numbers though). Of course, that doesn't mean it will continue.

2) There are companies in the Total Stock Market or S&P 500 I would NEVER buy, but I own them through the index. For example, would I buy Amazon or Netflix at its current price? No. Do I trust some companies that have been investigated or are being investigated by the SEC? No. But they are in the indexes.

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Re: The Three Fund Portfolio

Post by selftalk » Wed Nov 04, 2015 6:23 pm

Taylor, why in your own words do you suggest investing in a total international fund ? I read Vanguard`s take on it as you listed above in your post. It seems to me that John Bogle has guided us well with his conservative ways and thoughts throughout the years so why go against his recommendations that are on u tube, television and in his books ? He advocates the Total Stock Market Index fund and the Total Bond Market Index fund only as you well know.

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International stocks?

Post by Taylor Larimore » Wed Nov 04, 2015 7:43 pm

selftalk wrote:Taylor, why in your own words do you suggest investing in a total international fund ? I read Vanguard`s take on it as you listed above in your post. It seems to me that John Bogle has guided us well with his conservative ways and thoughts throughout the years so why go against his recommendations that are on u tube, television and in his books ? He advocates the Total Stock Market Index fund and the Total Bond Market Index fund only as you well know.

selftalk:

In his latest edition of Common Sense on Mutual Funds Mr. Bogle wrote:
So I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds, including BRIC funds, do not exceed one-fifth of an investor's equity position.

The Three Fund Portfolio has no fixed allocations. Investors can allocate whatever they wish (including zero) to international stocks.

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

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Re: The Three Fund Portfolio

Post by selftalk » Sat Nov 07, 2015 3:54 pm

Taylor, from what you just wrote Mr. Bogle is saying no more than 20% in international if you must have it but he still doesn`t really recommend it with all it`s potential problems. I`m sticking with Mr. Bogle via VTSAX / VTI and no international. I`m comfortable with that and I love simplicity and it makes sense to me. My portfolio is a 2 fund one ( VTSAX / VTI and the Total Bond Market Index fund). Different strokes for different folks.

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