The Three-Fund Portfolio

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CyclingDuo
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Re: The Three-Fund Portfolio

Post by CyclingDuo » Wed Jan 18, 2017 8:46 am

Taylor Larimore wrote:
Is there an easy way to see returns for comparable lazy portfolios of Vanguard funds? I am interested to see how they compare to portfolios that have the same philosophy (I think) but are more complex


MarketWatch has a comparison of eight "Lazy Portfolios." The Three-Fund Portfolio (Second Grader) had the top return during the past 1-year and 10-years. It also did well in the 5-year and 15-year periods.

Past performance does not forecast future performance.

Total Returns For Eight Lazy Portfolios


Excellent!

Serious questions: For those of you who moved from a different investing strategy to the Three Fund Portfolio, what did you do with your prior investments (namely individual stocks and actively managed funds)? Did you allocate all new money and investments into the Three Fund Portfolio? Did you sell everything (including in taxable accounts), pay the cap gains and move it into the appropriate AA for the Three Fund Portfolio? Did you do this over time to spread out the tax implications (say 2 - 3 years)?

We are trying to get simplified with a Three Fund Portfolio by moving from one of way too much complexity. All of our long term buy and hold investments in taxable accounts would take quite a tax hit if sold and moved. We've already managed to start making keen adjustments in tax deferred and retirement accounts (Ages 55 & 59 and contributing about 14.5% into pensions each year). So we were curious how some of the rest of you handled the switch in portfolio strategy.

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Re: The Three-Fund Portfolio

Post by dandypandys » Wed Jan 18, 2017 8:57 am

I am about to open my first Vanguard IRA trad account today, with 5.5k, so excited.
Earlier in the thread, thanks to all your help I managed to get an equivalent to the 3 fund in my 403b.
You helped me choose:

Standard Stable Asset Fund ii
Vanguard Total Stock Index
Vanguard Developing Markets Index
Vanguard Emerging Markets Index


My understanding after reading here is that I should open this IRA account and use it to get the Vanguard Total Bond index, because it tax inefficient. Do you think I should just slowly get out of the Standard Stable Asset then, I have 18k in it right now? I am also looking forward to being able to access the Vanguard Total International which my 403b doesn't have hence my combo of developing and emerging.
Thanks, love this thread and hope this is a simple enough Q not to start a personal thread, I think it is..
next I need to worry about whether i do it today, tomorrow, or the next - i know i shouldn't time the market, but but but

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Taylor Larimore
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"Harvard vs Taylor Larimore’s Passive Portfolio"

Post by Taylor Larimore » Fri Jan 20, 2017 4:41 pm

Bogleheads:

Investors in The Three-Fund Portfolio will appreciate this part of The Biglaw Investor newsletter designed "to help lawyers and other high-income professionals learn about personal finance and investing":
HARVARD vs. TAYLOR LARIMORE'S PASSIVE PORTFOLIO
Let’s pretend that you don’t have access to the Harvard investment management team. Let’s further pretend that you’re a lawyer, or other hustling professional, and that you’re too busy with your career to wade into all the confusing fancy intricacies of professional investing advice (that’s mainly coming at you from people that are really salespeople, trying to sell you something).

And let’s further pretend that you decide to adopt Taylor Larimore’s Lazy 3-Fund Portfolio. Don’t let the name fool you. Mr. Larimore is anything but lazy and his portfolio of low-fee index funds is about as sharp as as you can get. In fact, it only consists of three core Vanguard index funds (ETF versions below):

Vanguard Total Stock Market ETF (VTI)
Vanguard Total International Stock ETF (VXUS)
Vanguard Total Bond Market ETF (BND)

The lazy component is that you can pick whatever allocation suits you, or even split it up 1/3, 1/3 and 1/3 if you don’t want to make up your mind.

How would this lazy portfolio compare to the Harvard whiz kids?

As you might expect at this point in the article, the lazy portfolio destroys Harvard.

HARVARD LOST BILLIONS. WOULD YOU?

Stay-the-course.

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

selftalk
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Re: The Three-Fund Portfolio

Post by selftalk » Fri Jan 20, 2017 4:56 pm

Thank you Taylor. That was really good !

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Re: "Harvard vs Taylor Larimore’s Passive Portfolio"

Post by PhysicianOnFIRE » Fri Jan 20, 2017 5:19 pm

Taylor Larimore wrote:Bogleheads:

Investors in The Three-Fund Portfolio will appreciate this part of The Biglaw Investor newsletter designed "to help lawyers and other high-income professionals learn about personal finance and investing":
HARVARD vs. TAYLOR LARIMORE'S PASSIVE PORTFOLIO
HARVARD LOST BILLIONS. WOULD YOU?

Stay-the-course.

Best wishes.
Taylor


Great article, Taylor. Thanks for sharing. I thought the attempt to recreate the Endowment's portfolio with Vanguard ETFs and coming out nearly 5% ahead in the 2016 backtest was enlightening, as well. The endowment loses 2%, while the Vanguard portfolio gained nearly 3%.

Image

:beer
-PoF

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Re: The Three-Fund Portfolio

Post by Biglaw Investor » Sat Jan 21, 2017 10:07 am

Taylor, thank you for the mention and the inspiration to write the article. Without your contribution there would be nothing to write about.

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Re: The Three-Fund Portfolio

Post by leecming » Tue Jan 24, 2017 10:39 pm

It seems odd to kick a fuss about beating the Harvard endowment for 2016 and then mention in passing that the endowment's beaten a traditional 60/40 portfolio over the past 2 decades.

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Re: "Harvard vs Taylor Larimore’s Passive Portfolio"

Post by Biglaw Investor » Wed Jan 25, 2017 5:34 pm

Taylor Larimore wrote:HARVARD LOST BILLIONS. WOULD YOU?

Stay-the-course.

Best wishes.
Taylor


Apparently, Harvard has taken notice of your advice Taylor.

According to the Wall Street Journal, the Harvard Endowment to Lay Off Half Its Staff.

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Re: The Three-Fund Portfolio

Post by LadyGeek » Wed Jan 25, 2017 7:07 pm

That article was under discussion here: Harvard Endowment laying off half its staff. Note that the topic is locked for the reasons stated in the thread. (Please don't start a new discussion.)
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Taylor Larimore
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Vanguard Total Stock Market Index Fund

Post by Taylor Larimore » Thu Jan 26, 2017 12:44 am

Bogleheads:

This is a post I made on another forum about Vanguard Total U.S. Stock Market Index Fund in The Three-Fund Portfolio. Jim Dahle, The White Coat Investor posted a Reply at the bottom:
Question: Which Vanguard fund is this?

* Ten consecutive years in the top half of its category.

* Top 16% in its category for 10-year return.

* Top 6% in its category for 10-year after-tax return.

* Vanguard's lowest-cost fund.

* Vanguard's largest mutual fund.

* Top GOLD Morningstar Analyst Rating

* The only U.S. stock fund in The Three-Fund Portfolio

Only one guess.

Best wishes.
Taylor


Also my favorite fund and a large part of my portfolio. I actually own all three "retail" versions of it bought at three different brokerage companies right now in one account or another.

1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Jim Dahle)
"Simplicity is the master key to financial success." -- Jack Bogle

chatbotte
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Re: The Three-Fund Portfolio

Post by chatbotte » Mon Jan 30, 2017 3:40 am

Why not a market-cap weighted four-fund portfolio? It's a better proxy for the global portfolio.

selftalk
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Re: The Three-Fund Portfolio

Post by selftalk » Mon Jan 30, 2017 6:43 am

chatbotte, it`s like Quaker Oats. When you have a good thing don`t change it.

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Re: The Three-Fund Portfolio

Post by chatbotte » Mon Jan 30, 2017 7:29 am

selftalk,
Bill Sharpe recommends a four-fund portfolio, not a three-fund portfolio.

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Taylor Larimore
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Adding more funds

Post by Taylor Larimore » Mon Jan 30, 2017 8:55 am

Bogleheads:

There are hundred's of different portfolios and there is a temptation to add to each of them.

To keep this topic manageable, please limit replies to The Three-Fund Portfolio which already contains over 18,000 world-wide securities.

Note: Read the "Simplicity" link below.

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

selftalk
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Re: The Three-Fund Portfolio

Post by selftalk » Wed Feb 01, 2017 12:32 pm

Reputable people in this business recommend lots of different portfolios. I wish I knew which one will finish best in 10-20 years but that`s impossible so I made mine (VTI / VTSAX) up and I will stay with it. One of the worst things you can do is give into temptation and keep switching funds ie. adding to or subtracting some. I like simplicity and simplicity has worked for me in the past so I`ll stay with it all the while knowing that some allocations will perform better than the one I have. I`ll just take what the market gives me over time. Did you ever see a dog chewing on a bone he seems to be enjoying and then 10 feet away you show him another bone and the dog leaves the first bone to get to the second bone. Meanwhile the first bone may have more meat on it than the second one. Imagination and hope are strong feelings.

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Re: The Three-Fund Portfolio

Post by chatbotte » Wed Feb 01, 2017 12:43 pm

selftalk wrote:I wish I knew which one will finish best in 10-20 years but that`s impossible so I made mine (VTI / VTSAX) up and I will stay with it.

selftalk,

You don't seem to be following the recommendations of a Nobel laureate based on whose ideas you're trying to invest. In other words, if you hold VTI and nothing but VTI, then you're not holding the market. If that's your intention, i.e. not hold the market, then you're doing fine.

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Re: The Three-Fund Portfolio

Post by selftalk » Wed Feb 01, 2017 6:20 pm

chatbotte, the reason I have no bonds is because I receive a very good pension monthly and my social security benefits are fine also. Of course having that allocation means no rebalancing. It`s as simple as that and I`m satisfied.

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Re: The Three-Fund Portfolio

Post by chatbotte » Thu Feb 02, 2017 5:39 am

selftalk wrote:chatbotte, the reason I have no bonds is because I receive a very good pension monthly and my social security benefits are fine also. Of course having that allocation means no rebalancing. It`s as simple as that and I`m satisfied.

selftalk,
Okay, makes more sense now.

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Re: The Three-Fund Portfolio

Post by dmolesky » Thu Feb 02, 2017 9:22 am

I had a question about the 3 fund portfolio.

I read the Bogleheads Guided to Investing book (2nd Edition) and it talks about asset allocation based on age. It has the following age groups:

Young Investor:
Total Stock Market Index Fund 80%
Total Bond Market Index Fund 20%

Middle Ages Investor:
Total Stock Market Index Fund 45%
Total Bond Market Index Fund 20%
Total International 10%
REIT 5%
Inflation-Protected Securities 20%

Investor In early retirement:
Total Stock Market Index Fund 30%
Total Bond Market Index Fund 30%
Total International 10%
Inflation-Protected Securities 30%

Investor In late retirement:
Total Stock Market Index Fund 20%
Total Bond Market Index Fund 40%
Inflation-Protected Securities 40%


I had 2 questions:

1.) What would be the age range for the "Young Investor" and Middle Age" investor groups?
2.) The young investor doesn't have the Total International that the Three Fund Portfolio strategy calls for. Why is that? Is the new boglehead way of thinking that even a young Investor should have the Total International?


BTW - I'm 31 years old.

Thank you for any replies!

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Re: The Three-Fund Portfolio

Post by Duffydog1 » Thu Feb 02, 2017 9:41 am

After a great deal of research the 3 fund portfolio looks like that will be the direction in which I am head. At age of 76 I have determined my AA is 70 bonds and 30 equity and I assume the 3 fund portfolio should be adjusted accordingly. Would it make sense to amend the bond component with short and intermediate term corporate and a small % of high yield. I am unable to determine if these bond type funds are already in the total bond market index?

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Taylor Larimore
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Adding bond funds?

Post by Taylor Larimore » Thu Feb 02, 2017 9:55 am

Duffydog1:

Vanguard's Total Bond Market Index Fund is an extremely diversified and low-cost bond fund. You can see for yourself here.

I think it would be a mistake to complicate your portfolio by adding more bond funds.

Read the "Simplicity" link below.

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

chatbotte
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Re: Adding bond funds?

Post by chatbotte » Thu Feb 02, 2017 10:55 am

Taylor Larimore wrote: I think it would be a mistake to complicate your portfolio by adding more bond funds.

Taylor,

Why not hold the average portfolio? Please explain.

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Re: The Three-Fund Portfolio

Post by CABob » Thu Feb 02, 2017 11:14 am

dmolesky wrote:
I had 2 questions:

1.) What would be the age range for the "Young Investor" and Middle Age" investor groups?
2.) The young investor doesn't have the Total International that the Three Fund Portfolio strategy calls for. Why is that? Is the new boglehead way of thinking that even a young Investor should have the Total International?

Opinions may vary and I think that assets affect the distinctions. Personally I think that a young investor is in the neighborhood of age 35 (+/-) and perhaps a portfolio of up to $35K. There is certainly nothing wrong and it may be desirable for a young investor to have international exposure. The problem is often that with a small portfolio it may be difficult to be able to purchase small amounts of international.
I think that middle age if perhaps age 35 to 55.
Realize of course there is no one size fits all.
Bob

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Taylor Larimore
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Re: Adding bond funds?

Post by Taylor Larimore » Thu Feb 02, 2017 11:34 am

chatbotte wrote:
Taylor Larimore wrote: I think it would be a mistake to complicate your portfolio by adding more bond funds.

Taylor,

Why not hold the average portfolio? Please explain.

chatbotte:

I don't know what the "average portfolio" is.

Bonds are primarily for safety. Vanguard Total Bond Market Index Fund is simple, diversified and does the job. It's worst annual loss since inception was -2.7% in 1994 (in 1995 it gained +16%).

Read the "Simplicity" link below.

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

Duffydog1
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Re: Adding bond funds?

Post by Duffydog1 » Thu Feb 02, 2017 4:17 pm

Thanks that link was very helpful. I am 76 and have struggled with an AA but still run my business and am starting conservatively with 70/30 AA. Sticking to the 3 fund portfolio in that ratio will simplify my life. In making such a decision I am also thinking of my wife who with some guidance can manage such a simple portfolio and rebalancing when necessary. Taylor when you suggest holding the "average portfolio" I am assuming you mean staying with 3 funds, and not any specific AA within that 3 fund category.
Thanks


quote="Taylor Larimore"]Duffydog1:

Vanguard's Total Bond Market Index Fund is an extremely diversified and low-cost bond fund. You can see for yourself here.

I think it would be a mistake to complicate your portfolio by adding more bond funds.

Read the "Simplicity" link below.

Best wishes.'
Taylor[/quote]

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Re: The Three-Fund Portfolio

Post by selftalk » Thu Feb 02, 2017 4:37 pm

I`m comfortable to do what Buffett and Bogle suggest and that is own the S&P 500 for Buffett and the Total Stock Market Index Fund suggested by Bogle. Both funds have earned almost exactly the same results over the long term. My proxy for a bond fund however is my monthly income from my pension and my monthly income from social security. How can you argue against what these two masters advocate. I try to learn from the best and not chase rainbows ( other allocations ) written by other authorities to beat the major index.

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Taylor Larimore
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More than one road to Dublin

Post by Taylor Larimore » Thu Feb 02, 2017 5:09 pm

Taylor when you suggest holding the "average portfolio" I am assuming you mean staying with 3 funds, and not any specific AA within that 3 fund category.

Duffydog1:

I cannot find any suggestion of mine to hold the "average portfolio." I don't even know what the "average portfolio" is.

I mean staying with the 3 total market index funds should be good enough (actually better than most). Adjust the three fund allocations to suit yourself. Add or eliminate a fund if you must.
This Vanguard Investor Questionnaire may help.

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: Adding bond funds?

Post by frankyo » Sat Feb 04, 2017 6:13 pm

Taylor Larimore wrote:Duffydog1:

Vanguard's Total Bond Market Index Fund is an extremely diversified and low-cost bond fund. You can see for yourself here.

I think it would be a mistake to complicate your portfolio by adding more bond funds.

Read the "Simplicity" link below.

Best wishes.'
Taylor


Taylor, I would like your opinion on adding BNDX as a fourth found. All the LifeStrategy funds have it. Is BND enough? Thanks.

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Re: Adding bond funds?

Post by gvsucavie03 » Sat Feb 04, 2017 6:59 pm

frankyo wrote:
Taylor Larimore wrote:Duffydog1:

Vanguard's Total Bond Market Index Fund is an extremely diversified and low-cost bond fund. You can see for yourself here.

I think it would be a mistake to complicate your portfolio by adding more bond funds.

Read the "Simplicity" link below.

Best wishes.'
Taylor


Taylor, I would like your opinion on adding BNDX as a fourth found. All the LifeStrategy funds have it. Is BND enough? Thanks.


I find it interesting that BNDX was added when the US Bond market was sluggish and wonder what will happen now that the fund has slowed down a bit (probably due to international stocks rising). Vanguard has it in all of their TR and LS funds, a seemingly 'core fund' now in it's short existence.

Playing devil's advocate - Bogle doesn't even recommend international securities to begin with.

IMO - Taylor's advice to keep it simple really overrides it all... We could play the "what about fund x, fund y" game our entire life when the TFP is probably a good choice to start with. I'd stick with keeping it simple.

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Re: Adding bond funds?

Post by chatbotte » Sat Feb 04, 2017 7:46 pm

gvsucavie03 wrote:
frankyo wrote:
Taylor Larimore wrote:Duffydog1:

Vanguard's Total Bond Market Index Fund is an extremely diversified and low-cost bond fund. You can see for yourself here.

I think it would be a mistake to complicate your portfolio by adding more bond funds.

Read the "Simplicity" link below.

Best wishes.'
Taylor


Taylor, I would like your opinion on adding BNDX as a fourth found. All the LifeStrategy funds have it. Is BND enough? Thanks.


I find it interesting that BNDX was added when the US Bond market was sluggish and wonder what will happen now that the fund has slowed down a bit (probably due to international stocks rising). Vanguard has it in all of their TR and LS funds, a seemingly 'core fund' now in it's short existence.

Playing devil's advocate - Bogle doesn't even recommend international securities to begin with.

IMO - Taylor's advice to keep it simple really overrides it all... We could play the "what about fund x, fund y" game our entire life when the TFP is probably a good choice to start with. I'd stick with keeping it simple.

gvsucavie03,

So why not two funds? Or one? That's even simpler than TFP.

If you hold VTI+VXUS in their market proportions, then TFP more than DOUBLES your exposure to US bonds compared to the global market portfolio.

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Taylor Larimore
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International bonds?

Post by Taylor Larimore » Sat Feb 04, 2017 8:32 pm

Taylor, I would like your opinion on adding BNDX as a fourth found. All the LifeStrategy funds have it. Is BND enough? Thanks.

Franko/gvsucavie03,:

You will find my somewhat lengthy opinion on page 11 of this Conversation. If you disagree or want more discussion of International Bond funds, please start a new topic here:

Investment Theory

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

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Taylor Larimore
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"How the Bogle (Three-Fund) Model Beats the Yale Model"

Post by Taylor Larimore » Mon Feb 06, 2017 10:50 am

Bogleheads:

Dan Carlson, CFA and author of "A Wealth of Common Sense" reported a ten-year study of more than 800 expertly managed college endowment funds .

The Vanguard Three-Fund (Bogle Model) Portfolio beat the average college endowment funds for 3-, 5- and 10-year returns.

Link: viewtopic.php?p=3226035#p3226035

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

selftalk
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Re: The Three-Fund Portfolio

Post by selftalk » Mon Feb 06, 2017 12:44 pm

Taylor, I saw that early this morning. All those "brainy people" running the endowment and hedge funds and using the most sophisticated data money can buy cannot beat the 3 fund portfolio. Amazing ! We can beat them in returns if we don`t outsmart ourselves.

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Re: The Three-Fund Portfolio

Post by Duffydog1 » Sun Feb 12, 2017 9:03 am

Taylor
Int the age of 76 I must know move into the market which i have resisted for many reasons, primarily I have a business and don't need risk, I am now retiring and will be using the 3 fund portfolio adjusted to my age. My accountant and financial advisor are very concerned about a large position in the Vanguard Total Bond Index, as they anticipate bonds to be hit by slowly increasing interest rates.With 70% in bonds, wouldn't a person of my AA be taking on significant risk? They suggest that instead of the bond component to let it stay in cash. For a younger person there would be a better distribution between assist classes.
I would appreciate your thoughts as I have very little experience.

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Taylor Larimore
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Safety of Total Bond Market

Post by Taylor Larimore » Sun Feb 12, 2017 2:11 pm

Duffydog1:

I think your accountant and adviser are unduly concerned about the safety of diversified Vanguard Total Bond Market Index Fund. Its worst annual loss since its 1986 inception was -2.66% in 1994 (it gained +16% in 1995). I am 93 and TBM is my only bond fund.

If you don't need the higher expected return of TBM, I see nothing wrong by holding cash. At our ages, the important thing is to not risk losing what we've saved.

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 steve roy » Sun Feb 12, 2017 2:50 pm

What I discovered in the course of running a 401(k) Plan is, most people investing for retirement aren't that interested in investment theory, and just want something safe and steady and easily explainable.

The Three Fund Portfolio does that in spades. I think one of its biggest advantages is that it keeps people from making mistakes, and it's easy to understand. There are a bajillion ways to "enhance" the Portfolio, but there are equal numbers of ways to louse it up.

So why louse it up? Why get complicated? Why not pitch the ball down the center of the pipe and and do very well?

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Better investment strategies?

Post by Taylor Larimore » Sun Feb 12, 2017 3:05 pm

steve roy wrote: I think one of its biggest advantages is that it keeps people from making mistakes, and it's easy to understand.

Mr. Bogle agrees:
"There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

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

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Re: Better investment strategies?

Post by bertilak » Sun Feb 12, 2017 5:44 pm

Taylor Larimore wrote:
steve roy wrote: I think one of its biggest advantages is that it keeps people from making mistakes, and it's easy to understand.

Mr. Bogle agrees:
"There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

Best wishes.
Taylor

Pick any one of those worse ways and somebody will have a really good story on why it is a better way! This is a danger but at least as dangerous is repeatedly jumping from one strategy to another.
Listen very carefully. I shall say this only once. (There! I've said it.)

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Re: Safety of Total Bond Market

Post by woodedareas » Sun Feb 12, 2017 7:16 pm

Taylor Larimore wrote:Duffydog1:
Taylor
You are very wise.
Thanks
I think your accountant and adviser are unduly concerned about the safety of diversified Vanguard Total Bond Market Index Fund. Its worst annual loss since its 1986 inception was -2.66% in 1994 (it gained +16% in 1995). I am 93 and TBM is my only bond fund.

If you don't need the higher expected return of TBM, I see nothing wrong by holding cash. At our ages, the important thing is to not risk losing what we've saved.

There is more than one road to Dublin.

Best wishes.
Taylor

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Re: The Three-Fund Portfolio

Post by waters96 » Sun Feb 12, 2017 7:26 pm

Assuming that half my assets are IRA and the other half are non-IRA, that I go for the three fund strategy holding all three in equal amounts, further assuming I'm in the 33% tax bracket, how should I divide them between IRA and non-IRA to obtain the most tax-efficient strategy?

Thanks in advance.

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Re: The Three-Fund Portfolio

Post by gvsucavie03 » Sun Feb 12, 2017 7:53 pm

waters96 wrote:Assuming that half my assets are IRA and the other half are non-IRA, that I go for the three fund strategy holding all three in equal amounts, further assuming I'm in the 33% tax bracket, how should I divide them between IRA and non-IRA to obtain the most tax-efficient strategy?

Thanks in advance.


Read up on how to ask specific portfolio questions. We'd need more info than what you've given. Generally bonds go in tax deferred accounts and domestic stocks can be in taxable if there is no more room.

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Re: The Three-Fund Portfolio

Post by CABob » Sun Feb 12, 2017 7:56 pm

waters96 wrote:Assuming that half my assets are IRA and the other half are non-IRA, that I go for the three fund strategy holding all three in equal amounts, further assuming I'm in the 33% tax bracket, how should I divide them between IRA and non-IRA to obtain the most tax-efficient strategy?

Usually one would put all of their bonds in the IRA. Everything else can go where you wish. If you are forced to put bonds in a not tax deferred account many would suggest they be munis.
Bob

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Taylor Larimore
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Fund Placement

Post by Taylor Larimore » Sun Feb 12, 2017 11:31 pm

waters96 wrote:Assuming that half my assets are IRA and the other half are non-IRA, that I go for the three fund strategy holding all three in equal amounts, further assuming I'm in the 33% tax bracket, how should I divide them between IRA and non-IRA to obtain the most tax-efficient strategy?

waters96:

Your fund placement question is answered in the Opening Post:
Fund Placement For Maximum Tax-Efficiency: Place Total Bond Market in tax-advantaged account(s). If full, use a tax-exempt bond fund in a taxable account. Place Total Stock Market and Total International Stock Market in either a tax-advantaged account (best) or a taxable account.

If you want a complicated answer read this: https://www.bogleheads.org/wiki/Tax-eff ... _placement

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

Duffydog1
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Re: The Three-Fund Portfolio

Post by Duffydog1 » Sat Feb 18, 2017 9:09 am

Finally I understand the bond or fixed income part of the 3 fund portfolio. I watched a brief video today on the Vanguard site where the CEO explained why my view of a declining bond fund is not that problematic if my time horizon is longer than the duration of the bonds. Instead of focusing on the declining value of the fund, realize that increasing rates (go up as bonds value goes down) are actually benificial as the bonds in the portfolio will go up over time and the fund will yield greater returns. I have been very short sited and only concerned with the immediate value of the fund and ignored the future uptick in returns as the higher yields come into play with the turn over to newer bonds. I guess this gets back to staying the course if you have enough time. Does the smoke sense?????

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Taylor Larimore
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The Three-Fund Portfolio Wins Again

Post by Taylor Larimore » Mon Feb 20, 2017 12:11 am

Bogleheads:

The Three-Fund Portfolio (Second Grader Starter) is now the highest returning of eight "Lazy Portfolio" for 1-year, 5-year, and 10-year returns.

http://www.marketwatch.com/lazyportfolio

Past performance does not forecast future performance.

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

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dual
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Re: The Three-Fund Portfolio

Post by dual » Mon Feb 20, 2017 1:21 am

CyclingDuo wrote:Serious questions: For those of you who moved from a different investing strategy to the Three Fund Portfolio, what did you do with your prior investments (namely individual stocks and actively managed funds)? Did you allocate all new money and investments into the Three Fund Portfolio? Did you sell everything (including in taxable accounts), pay the cap gains and move it into the appropriate AA for the Three Fund Portfolio? Did you do this over time to spread out the tax implications (say 2 - 3 years)?

We are trying to get simplified with a Three Fund Portfolio by moving from one of way too much complexity. All of our long term buy and hold investments in taxable accounts would take quite a tax hit if sold and moved. We've already managed to start making keen adjustments in tax deferred and retirement accounts (Ages 55 & 59 and contributing about 14.5% into pensions each year). So we were curious how some of the rest of you handled the switch in portfolio strategy.


That is a good question. Very few people will start out with a simple portfolio. I certainly did not so I have a lot of different funds most with a fairly large unrealized capital gain. Obviously a good problem to have. :D

I think the answer on transitioning depends on your age and income streams. I am retired with a relatively small social security income but good savings.Here is my plan:

1. turn off all dividend reinvestment on current funds and direct those and other income that I want to invest to the three funds.
2. sell fixed number of shares of funds in my tax deferred accounts and invest them in the fixed income fund on a regular basis. This way I take out more money when the share price is high and less when the price is low.
3. I am doing regular Roth conversions from my IRAs and I will invest the Roth in the 3 income portfolio.

I will not sell the funds with large capital gains--the tax hit would be too large. Almost all are in index funds and are not generating much capital gain dividends so I think they approximate a broad market fund. It would be better to have a single fund from the administering point of view but so be it. I can live with the complexity.

I suppose if God forbid we have a large stock market crash then the tax problem will go away and I can move into the simple portfolio. :wink:

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CyclingDuo
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Re: The Three-Fund Portfolio

Post by CyclingDuo » Mon Feb 20, 2017 7:23 am

dual wrote:
CyclingDuo wrote:Serious questions: For those of you who moved from a different investing strategy to the Three Fund Portfolio, what did you do with your prior investments (namely individual stocks and actively managed funds)? Did you allocate all new money and investments into the Three Fund Portfolio? Did you sell everything (including in taxable accounts), pay the cap gains and move it into the appropriate AA for the Three Fund Portfolio? Did you do this over time to spread out the tax implications (say 2 - 3 years)?

We are trying to get simplified with a Three Fund Portfolio by moving from one of way too much complexity. All of our long term buy and hold investments in taxable accounts would take quite a tax hit if sold and moved. We've already managed to start making keen adjustments in tax deferred and retirement accounts (Ages 55 & 59 and contributing about 14.5% into pensions each year). So we were curious how some of the rest of you handled the switch in portfolio strategy.


That is a good question. Very few people will start out with a simple portfolio. I certainly did not so I have a lot of different funds most with a fairly large unrealized capital gain. Obviously a good problem to have. :D

I think the answer on transitioning depends on your age and income streams. I am retired with a relatively small social security income but good savings.Here is my plan:

1. turn off all dividend reinvestment on current funds and direct those and other income that I want to invest to the three funds.
2. sell fixed number of shares of funds in my tax deferred accounts and invest them in the fixed income fund on a regular basis. This way I take out more money when the share price is high and less when the price is low.
3. I am doing regular Roth conversions from my IRAs and I will invest the Roth in the 3 income portfolio.

I will not sell the funds with large capital gains--the tax hit would be too large. Almost all are in index funds and are not generating much capital gain dividends so I think they approximate a broad market fund. It would be better to have a single fund from the administering point of view but so be it. I can live with the complexity.


Makes sense. As mentioned in the post, we are not retired, but since asking the question a month ago have begun moving what we could (in our retirement accounts first, and adding the initial Vanguard ETF's in our taxable). Took advantage of adding Roth IRA's for 2016 and 2017 to direct new investments there. We can certainly use the current dividend stream we receive to add to the new investments as well.

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Re: The Three-Fund Portfolio

Post by Kohaku » Tue Feb 21, 2017 9:17 pm

CyclingDuo wrote:
Serious questions: For those of you who moved from a different investing strategy to the Three Fund Portfolio, what did you do with your prior investments (namely individual stocks and actively managed funds)? Did you allocate all new money and investments into the Three Fund Portfolio? Did you sell everything (including in taxable accounts), pay the cap gains and move it into the appropriate AA for the Three Fund Portfolio? Did you do this over time to spread out the tax implications (say 2 - 3 years)?


This may not be useful information for you because you're at a point where you worry about taxes, but I'm at 25 year old recent college graduate and really had no strategy to speak of (nor any meaningful awareness/knowledge of investing) until this year.

I had under $10,000 sitting around in both taxable and Roth IRA Scottrade accounts for years, mostly in cash. Sometimes I would contribute if I remembered to, but usually not. I went 3-4 years without adding anything to my Roth IRA. I was undisciplined with my money -- my principal would probably be double what it is today if I'd reeled in the expensive hobbies.

At one point about a year ago, I used Scottrade's portfolio planning tool and bought shares of a dozen or more actively-managed mutual funds in the various suggested categories (small cap, mid cap, international, etc.) for a growth-oriented portfolio. Also a few biotech mutual funds because those sounded cool, lol. But, the majority of my account balance was still in cash while I still had accounts at Scottrade.

I started lurking on the forum over the past year. Read The Bogleheads' Guide to Investing over the 2016-2017 winter holidays, sold everything, moved both accounts over to Vanguard, and am now in a three-fund portfolio with a 80/20 split (40% international). I believe I have a high risk tolerance, so I'll draw down my bond allocation over time by putting new money into equities.
So yes, I did allocate into the Three-Fund Portfolio and will continue to do so, since that seems like the best strategy for an unsophisticated newbie investor. I paid the appropriate taxes but my tax bracket and wealth are low enough that it doesn't really hurt.

Anyway, just wanted to say hi to the Bogleheads. Lurking here has been immensely educational and I hope I can contribute more to discussion one day.

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Re: The Three-Fund Portfolio

Post by flyboy400 » Thu Mar 02, 2017 3:59 pm

With regard to fund allocations within various taxable and tax-deferred accounts, wouldn't it be a good strategy, when RMDs begin from IRAs/401Ks, to maintain 4-5 years worth of anticipated RMDs in short-term bonds, CDs, or cash? Isn't this analogous to maintaining liquid assets for known short-term obligations? What does everyone think?

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Re: The Three-Fund Portfolio

Post by bertilak » Thu Mar 02, 2017 4:46 pm

flyboy400 wrote:With regard to fund allocations within various taxable and tax-deferred accounts, wouldn't it be a good strategy, when RMDs begin from IRAs/401Ks, to maintain 4-5 years worth of anticipated RMDs in short-term bonds, CDs, or cash? Isn't this analogous to maintaining liquid assets for known short-term obligations? What does everyone think?

Not really. If there is a market downturn, that much less will be needed to satisfy RMDs. Admittedly this is a bit loose because the market might crash shortly after 12/31, but the general trend should mostly hold: up market, more owed in RMD; down market, less owed.

So, maybe a year but not four or five. Also, one has a whole year from Jan 1 to "time the market" for taking an RMD.
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