The Three-Fund Portfolio

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BrightFuture1
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Re: The Three Fund Portfolio

Postby BrightFuture1 » Sun Aug 04, 2013 4:04 pm

Taylor,

I am 35 years old, married with 2 young children. I have been getting into purchasing various mutual funds over the last 3/4 years but your articles really inspired me to think about the 3 Fund Portfolio. I am now thinking of selling my current funds and trying to achieve my financial goals with the 3 Fund Portfolio. I have $50,000 to invest and planning to allocate the following:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - 50%

Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) - 20%

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - 30%

Thanks again for your insights!

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Re: The Three Fund Portfolio

Postby LadyGeek » Sun Aug 04, 2013 4:50 pm

Welcome! The three-fund portfolio is a great start, but there are other aspects that need to be considered as part of your entire portfolio. Why don't you start a new thread in Investing - Help with Personal Investments using the Asking Portfolio Questions format? The format is designed to make you think about the "big picture" while providing the information we need to get you going in the right direction.
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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Re: The Three Fund Portfolio

Postby BrightFuture1 » Sun Aug 04, 2013 5:52 pm

Thanks LadyGeek!

I will try looking into the various materials available on the site. I'm just a little nervous setting all my investable finances into these 3 funds but you guys and ladies have much more knowledge and experience than me so I hope this path is good for myself/family.

Thanks!

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Re: The Three Fund Portfolio

Postby pingo » Sun Aug 04, 2013 9:43 pm

I second LadyGeeks suggestion. And third it.

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Taylor Larimore
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Re: The Three Fund Portfolio

Postby Taylor Larimore » Mon Aug 05, 2013 12:50 pm

BrightFuture:

Welcome to the Bogleheads Forum!

I am pleased that you understand the many advantages of The Three Fund Portfolio.

When moving to a Three Fund Portfolio it is important to consider fees and taxes. It is also important to place funds into your new portfolio using Principles of Tax-Efficient Fund Placement.

Use this link for assistance:

Asking Portfolio Questions

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

BrightFuture1
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Re: The Three Fund Portfolio

Postby BrightFuture1 » Mon Aug 05, 2013 1:35 pm

Thanks Taylor, I will check the articles you listed. I am confident your three fund portfolio will lead me to greater financial success!

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Taylor Larimore
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Three Funds rated "GOLD"

Postby Taylor Larimore » Mon Aug 12, 2013 11:52 am

Bogleheads:

I am pleased to learn that all three funds in the Three Fund Portfolio currently earn Morningstar's highest Analyst Rating -- "GOLD."

I have edited my Opening Post (OP) to include this information.

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

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Re: Three Funds rated "GOLD"

Postby abuss368 » Mon Aug 12, 2013 12:52 pm

Taylor Larimore wrote:Bogleheads:

I am pleased to learn that all three funds in the Three Fund Portfolio currently earn Morningstar's highest Analyst Rating -- "GOLD."

I have edited my Opening Post (OP) to include this information.

Best wishes.
Taylor



Hi Taylor,

That is great!!!

The older I get, the more I am convinced the Three Fund portfolio is an excellent choice for most investors.

It is that hard to beat.

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

Postby Jim180 » Wed Aug 28, 2013 5:48 pm

Taylor,
I mentioned the Three Fund Portfolio idea to a financial advisor that I know. He said that while it's not a bad idea, he claims the Total Stock Market Fund is too heavily weighted to growth stocks. This advisor likes to see more of a balance between growth and value stocks. Your response?

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Re: The Three Fund Portfolio

Postby BrandonBogle » Wed Aug 28, 2013 5:51 pm

Jim180 wrote:Taylor,
I mentioned the Three Fund Portfolio idea to a financial advisor that I know. He said that while it's not a bad idea, he claims the Total Stock Market Fund is heavily weighted to growth stocks. This advisor likes to see more of a balance between growth and value stocks. Your response?


I would say that the Total Stock Market fund represents that market weight of all stocks, regardless of their type. The simplest way to gain their diversity without betting on any specific section, type, size, etc. would be to simply hold it all in their market weights.

I would suggest reading the many pages of this thread (it took me a few days) and the wiki and threads about why one would hold the Total Stock Market fund versus a mixture of funds and then make the decision for yourself.

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Re: The Three Fund Portfolio

Postby pingo » Wed Aug 28, 2013 6:26 pm

Jim180 wrote:I mentioned the Three Fund Portfolio idea to a financial advisor that I know. He said that while it's not a bad idea, he claims the Total Stock Market Fund is too heavily weighted to growth stocks.


I'm not Taylor, so I hope you and he will forgive my commenting on your post.

A Total Stock Market Index Fund holds a neutral amount of growth and value stocks, but that doesn't necessarily mean equal-weighted. Some complain that it means that the market tends to be growth heavy, at least when the market is frothing and more likely to correct or crash, but the market weighting of growth stocks is still "neutral" (if that makes sense). John Bogle likes to say that roughly half the market is growth and half is value, but which stocks are growth and which are value is anybody's guess.

Jim180 wrote:This advisor likes to see more of a balance between growth and value stocks.


If the advisor was referring to a preference for making an even split between growth and value stocks, which is a common practice, the following links may be of interest:

Rick Ferri: Splitting Growth And Value Leads To A Worse Return

Forum Discussion: Splitting Growth And Value Leads To A Worse Return

In my view, a 3 fund portfolio using total market-esque funds is great. When growth stocks are bubbly (or in-favor, or overvalued, etc.), total market equity funds will reflect the bloat, but disciplined rebalancing still shaves off off portions of the overgrown parts of the portfolio to move money to bonds to keep one's risk level/asset allocation in line. When/if equities crash (causing lower valuations), money moves from bonds back into equities as a matter of course (again, disciplined rebalancing) which will purchase more equities when it's probably better to do so.
Last edited by pingo on Thu Aug 29, 2013 1:05 pm, edited 3 times in total.

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Taylor Larimore
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Adding funds to The Three Fund Portfolio ?

Postby Taylor Larimore » Wed Aug 28, 2013 7:51 pm

Jim180 wrote:Taylor,
I mentioned the Three Fund Portfolio idea to a financial advisor that I know. He said that while it's not a bad idea, he claims the Total Stock Market Fund is too heavily weighted to growth stocks. This advisor likes to see more of a balance between growth and value stocks. Your response?

Jim:

The Growth/Value debate is one of the most controversial subjects in academia. This is not the place to argue about it. Our wiki has this excellent analysis: Value Tilting

Our mentor, Jack Bogle, discusses Value vs. Growth in this speech I heard him deliver eleven years ago at a Morningstar Investment Forum in Chicago: The Telltale Chart

If a Boglehead investor wants a value tilt it is easy. Simply add a value fund. But bear in mind that adding funds is likely to add complexity and cost.

When experts disagree it is often because it does not matter.

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

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Re: The Three Fund Portfolio

Postby Jim180 » Wed Aug 28, 2013 8:12 pm

Thank you Taylor! I will relay your response to that advisor along with Rick Ferri's article on why splitting value and growth leads to worse returns. The advisor has a local financial talk show and recently discussed growth/ value on his show. Perhaps I can convince him that the 3-fund approach is all that's necessary.

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Upton Sinclair

Postby Taylor Larimore » Wed Aug 28, 2013 9:12 pm

Jim180 wrote: Perhaps I can convince him that the 3-fund approach is all that's necessary.

Jim:

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

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

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Re: The Three Fund Portfolio

Postby Ingo » Thu Aug 29, 2013 8:39 am

Mr Larimore,
Were you to start over (and given the knowledge you have now for index investing), would you create your families portfolio using exclusively ETF's or mutual funds?

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ETFs or Mutual Funds?

Postby Taylor Larimore » Thu Aug 29, 2013 10:29 am

Ingo wrote:Mr Larimore,
Were you to start over (and given the knowledge you have now for index investing), would you create your families portfolio using exclusively ETF's or mutual funds?

Ingo:

I would probably chose mutual funds. Other's might better chose ETFs. The choice of ETFs or Mutual Funds is far down on the list of what's important.

Use this Forbes article by Boglehead Rick Ferri, author of The ETF Book, to make your own decision:

To ETF Or Not To ETF

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

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Re: The Three Fund Portfolio

Postby 1210sda » Thu Aug 29, 2013 10:47 am

Jim180 wrote:Taylor,
I mentioned the Three Fund Portfolio idea to a financial advisor that I know. He said that while it's not a bad idea, he claims the Total Stock Market Fund is too heavily weighted to growth stocks. This advisor likes to see more of a balance between growth and value stocks. Your response?


Some advisors (not saying this one necessarily) want to give the appearance that they are doing more for you so that they can justify their compensation.

If "all" they do is put you into a three fund portfolio, which you can do yourself at Vanguard, how can they charge so much. They need to show that they are doing more for you than you could do on your own.

Just be careful and be aware of this possible motivation.

1210

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Re: The Three Fund Portfolio

Postby Sunny Sarkar » Thu Aug 29, 2013 2:25 pm

Here's Jack Bogle weighing in on the topic of over-weighting value and/or small stocks...

So Slice and Dice is what you make it. Like all other investment strategies ever devised by the mind of man, sometimes it works and sometimes it doesn't. Uncertainty rules. Even if the overall program appears to outpace the Index, over a long inevitably period-dependent span of years, don't forget how little (!) it costs to emulate the total stock market in the real world nor how much (!) it costs to use active funds to fill the S&D boxes, and even to use passive funds to do so. If we take the extra risk into account, there's a real question about whether the game is worth the candle. And even if you don't accept my challenge to S&D, I urge you, before you plunge into a 4x25 portfolio, to put more than 25% in the total market—say 55%. Then put just 15% in the three slices that you dice, thereby taking much of the risk out of your decision. Think then, about a 1 x 55% + 3 x 15% portfolio. If it is true, as Dr. Fama (and most other academics, to say nothing of many, many practitioners) says, that "for most people, the market portfolio is the most sensible decision," you might as well make the most of it.

The Telltale Chart
"Cost matters". "Stay the course". "Press on, regardless". ― John C. Bogle

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Taylor Larimore
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Help with personal investments

Postby Taylor Larimore » Mon Sep 09, 2013 3:21 pm

[I moved the prior post from Thomasgina into a new thread, see The Three Fund Portfolio [Portfolio help] --admin LadyGeek]

Tom:

Welcome to the Bogleheads Forum!

This Conversation is for general information about The Three Fund Portfolio.

Please ask questions about your personal portfolio here:

Help With Personal Investing

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

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DueDiligence
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Re: The Three Fund Portfolio

Postby DueDiligence » Tue Sep 10, 2013 2:59 pm

I've read BH forum discussions about how to select the foreign equity percentage in a 3-fund portfolio.
The conclusions seem to range mostly 20-50% foreign equity depending on personal preference and that it is important to maintain whatever split is selected.
I have some questions as I try to sort thru this.
(1) Is my interpretation of 20-50% and mostly personal preference consistent with BH conclusions?
(2) What factors to other BHs consider when selecting the foreign equity percentage?
(3) Based on my current understanding, one important consideration for me is tracking error wrt US Market (both for psychological reasons and personal spending is in US dollars). How important is tracking error to others?

In case it matters, total equity percentage ~ 70%, timeframe ~ 30+ years.

Thanks
"Personal preferences, circumstances, and abilities affect portfolio construction in a profound manner..." David Swensen

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Taylor Larimore
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Vanguard Research Report On International Investing

Postby Taylor Larimore » Tue Sep 10, 2013 5:33 pm

DueDiligence:

Welcome to the Bogleheads Forum!

The Three Fund Portfolio allows us to have any international percentage we want. This is a link to Vanguard Research:

International Equity: Considerations and Recommendations

If you have additional questions, please start a new topic.

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

Postby LadyGeek » Tue Sep 10, 2013 5:56 pm

DueDiligence wrote:I've read BH forum discussions about how to select the foreign equity percentage in a 3-fund portfolio.
The conclusions seem to range mostly 20-50% foreign equity depending on personal preference and that it is important to maintain whatever split is selected.
...In case it matters, total equity percentage ~ 70%, timeframe ~ 30+ years.

Welcome! As Taylor Larimore suggests (but worded differently :wink: ), why don't you start a thread in the Investing - Help with Personal Investments forum and post in the Asking Portfolio Questions format? You'll get much better advice, as it will show the "big picture" and make sure that everything is covered.

That being said, a good place to start is mirror what the "pros" do. The Vanguard target retirement funds are nothing more than 3 (or 4) fund Lazy portfolios that automatically rebalance to keep the stock / bond percentages aligned.

If you want 70% stocks, then take a look at Vanguard Target Retirement 2025 Fund (VTTVX) - It's 49% total stock market, 21 % international (70% = 49% + 21 %). Total bonds make up the 30% remainder.

For asset allocation purposes, to the nearest 5% is fine.

If you have any questions on what I've described (or anything else about your portfolio), start a new thread and we'll get you straightened out.
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Re: The Three Fund Portfolio

Postby Milano » Mon Sep 16, 2013 3:03 pm

I have transferred out of the broker in May, the money sits in IRA Vanguard account and a taxable account, the majority circa 80% s in the IRA account. I am reading the Bogleheads Guide to Investing and the information on the Wiki about the three fund portfolio. My question is how to distribute the three funds between the IRA account and the taxable account.

I am very tentative with this since I've never done this.

Thanks.

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Re: The Three Fund Portfolio

Postby pingo » Mon Sep 16, 2013 3:14 pm

^ Milano

LadyGeek was responding to DueDiligence, but her post right above yours still applies:

LadyGeek wrote:Welcome! As Taylor Larimore suggests (but worded differently :wink: ), why don't you start a thread in the Investing - Help with Personal Investments forum and post in the Asking Portfolio Questions format? You'll get much better advice, as it will show the "big picture" and make sure that everything is covered.


:beer
Last edited by pingo on Mon Sep 16, 2013 3:17 pm, edited 2 times in total.

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Re: The Three Fund Portfolio

Postby LadyGeek » Mon Sep 16, 2013 3:14 pm

^^^ Milano - pingo beat me to the post. :happy

Hello,

You are good to be cautious, as it is very stressful to make important investment decisions with your own money.

I think the answer depends on how large each account is relative to each other (taxable vs. tax-deferred). Calm down, take your time, and start a new thread as I suggested in my previous post.
LadyGeek wrote:... why don't you start a thread in the Investing - Help with Personal Investments forum and post in the Asking Portfolio Questions format? You'll get much better advice, as it will show the "big picture" and make sure that everything is covered.
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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Re: The Three Fund Portfolio

Postby pingo » Mon Sep 16, 2013 3:20 pm

LadyGeek wrote:pingo beat me to the post.


That was actually my goal. :wink:

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Taylor Larimore
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Re: The Three Fund Portfolio--Location.

Postby Taylor Larimore » Mon Sep 16, 2013 5:27 pm

Milano wrote:I have transferred out of the broker in May, the money sits in IRA Vanguard account and a taxable account, the majority circa 80% s in the IRA account. I am reading The Bogleheads Guide to Investing and the information on the Wiki about the three fund portfolio. My question is how to distribute the three funds between the IRA account and the taxable account.

I am very tentative with this since I've never done this.

Thanks.

Milano:

The Three Fund Portfolio makes fund location easy:

IRA: :Locate tax-inefficient Total Bond Market here. If more IRA space is available fill it with Total Stock Market.

Taxable Account: Locate any remaining Total Market Index Fund and Total International here. These two funds are very tax-efficient.

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

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Re: The Three Fund Portfolio

Postby abuss368 » Mon Sep 16, 2013 9:05 pm

We love the Three fund portfolio and have recommended it to many friends and family who are very happy with the simplicity and results.

We are thankful (as they are) that this portfolio does not include TIPS and International bonds.

We invest in the Three Fund Portfolio and add REITs (our soft spot) to increase the allocation to real estate.

You may do better but you can definitely do a lot worse!

Thanks Taylor!!!
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"The Case For Index Fund Portfolios"

Postby Taylor Larimore » Sun Oct 06, 2013 1:05 pm

Bogleheads:

Below are the conclusions of a 2012 comprehensive 25-page Study by Rick Ferri, CFA and Alex Benke, CFP. It's titled: A Case for Index Fund Portfolios.
Index funds have a higher probability of outperforming actively managed funds when combined together in a portfolio.

The probability of index fund portfolio outperformance increased when the time period was extended from 5 years to 15 years.

It is possible to outperform a portfolio of index funds using actively managed funds as our analysis shows; it is just not probable.

This (3-fund) index fund portfolio outperformed the randomly selected actively managed fund portfolios 82.9% of the time during this 16-year period (1997 to 2012).

The 17.1% of actively managed fund portfolios that beat the index fund portfolio outperformed by 0.52% annually using the median or middle portfolio return. This additional performance was far too low to make up for the median -1.25% annual shortfall from the 82.9% that did not beat the index fund portfolio.

Index funds, when combined together in a portfolio, have a higher probability of outperforming actively managed funds than they do individually.

We concluded that the longer an index fund portfolio is held, the better its performance becomes relative to an all actively managed portfolio.

A common belief in the investment community is that low-fee actively managed fund portfolios have a meaningfully higher chance for outperforming an all index fund portfolio. We find no evidence to support this view.

Index fund portfolio outperformance increases as funds are combined in a portfolio, as the holding period increases, and as the number of actively managed funds in each asset class increases.

A diversified portfolio holding only index funds in all asset classes is difficult to beat in the short-term and becomes more difficult to beat over time. An investor increases their probability of meeting their investment goals with a diversified all index fund portfolio held for the long term.

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

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Re: The Three Fund Portfolio

Postby chrisc741 » Fri Oct 11, 2013 11:52 am

This makes a lot of sense. Why I didn't start index funds sooner. How can I catch up?

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Re: The Three Fund Portfolio

Postby abuss368 » Fri Oct 11, 2013 11:54 am

chrisc741 wrote:This makes a lot of sense. Why I didn't start index funds sooner. How can I catch up?


Try to increase your contributions consistently over time by always looking for additional money saving oppotunities by eliminating waste or trying to do things smarter.

I always found it amazing with friends and relatives that once you get over the initial "sticker shock" of increasing contributions, it becomes an after thought.
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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Personal finance questions.

Postby Taylor Larimore » Fri Oct 11, 2013 11:58 am

chrisc741 wrote:This makes a lot of sense. Why I didn't start index funds sooner. How can I catch up?

Chris:

Please ask your personal finance questions here: Personal Finance Forum

Thank you and best wishes.
Taylor
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"It's very hard to consistently beat the market."

Postby Taylor Larimore » Fri Oct 18, 2013 7:17 pm

Bogleheads:

This week three economists: Eugene Fama, Robert Shiller and Lars Peter Hansen won the Nobel Award for Economics. I am not smart enough to understand their research, but a writer for The Atlantic summed it up this way:
Fama, Shiller, and Hansen's research suggests it's very hard to consistently beat the market, and if somebody tells you otherwise, you should be very skeptical.

http://www.theatlantic.com/business/arc ... ia/280548/

Best wishes.
Taylor
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Re: "It's very hard to consistently beat the market."

Postby abuss368 » Fri Oct 18, 2013 7:19 pm

Taylor Larimore wrote:Bogleheads:

This week three economists: Eugene Fama, Robert Shiller and Lars Peter Hansen won the Nobel Award for Economics. I am not smart enough to understand their research, but a writer for The Atlantic summed it up this way:
Fama, Shiller, and Hansen's research suggests it's very hard to consistently beat the market, and if somebody tells you otherwise, you should be very skeptical.

http://www.theatlantic.com/business/arc ... ia/280548/

Best wishes.
Taylor


Thanks Taylor.

I hope you are enjoying Bogleheads 13!
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

Postby fish supper » Tue Oct 22, 2013 5:28 pm

I will be mortgage free,next year :sharebeer

so my 10k a year mortgage payment will go into a vanguard lifestyle 60/40

great thread

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Re: The Three Fund Portfolio

Postby HawaiiBrewer » Tue Oct 22, 2013 6:15 pm

After spending multiple days reading and digesting this thread about 3 funds I have to say that I can't believe that such well known financial authors..Larimore, Ferri, et al. actually take an active role in a forum like this. I've only been a member for a few weeks but have to say that I haven't found any other forum.....hobby, investment, etc where notable authors/experts take such an active role. Maybe it's the Boglehead "family" feeling that seems so inviting and conducive to participation in the Forum. Once I get my facts together, I'll reach out on the "help with personal investments" section. The "Wiki" section( yes, the word came from Hawaii) is great too, but it is the participation by the many "experts" that is impressive. I wonder if my Morgan Stanley broker..soon to be ex...has ever logged onto this site?

Aloha.....Paul
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Brokers hate The Three Fund Portfolio

Postby Taylor Larimore » Tue Oct 22, 2013 8:59 pm

I wonder if my Morgan Stanley broker..soon to be ex...has ever logged onto this site?

Paul:

Most Wall Street brokers, advisers, and the media hate Mr. Bogle's simple, low-cost, stay-the-course advice represented by The Three Fund Portfolio. It gives them nothing to do.

Your broker's income depends on making investing appear too complicated for you to do yourself. A broker has a horrible conflict of interest: Feed your family or theirs. We can guess which gets priority. :twisted:
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" -- Upton Sinclair

Best wishes
Taylor
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add Total International Bond Index?

Postby Norske77 » Fri Oct 25, 2013 10:36 am

I'm sure there is a comment on this in the string, but I gave up searching. What is Taylor's thinking on adding this fund and making four? When I got a plan from Vanguard, they recommended a mix of the Three Funds but added this one (10%). Too risky? I'm 64.

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Re: add Total International Bond Index?

Postby umfundi » Fri Oct 25, 2013 11:05 am

Norske77 wrote:I'm sure there is a comment on this in the string, but I gave up searching. What is Taylor's thinking on adding this fund and making four? When I got a plan from Vanguard, they recommended a mix of the Three Funds but added this one (10%). Too risky? I'm 64.

The consensus is, it does not matter.

This fund has the currency risk hedged away, and so the experts say it is just another bond fund, nothing special or unique. Vanguard is adding it as part of the bond allocation in their Target Retirement and LifeStrategy funds.

Edit to add: Cynics (like me) observe that by adding this new fund to the TR and LS funds, it gets a pretty good kick start.

There are a number of threads. Search the Forum (not just this thread) for: International Bond Fund

Keith
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Re: The Three Fund Portfolio

Postby Sunny Sarkar » Fri Oct 25, 2013 11:22 am

Agree with umfundi that "The consensus is, it does not matter".

The point is that low cost, diversification (which the 3 fund portfolio gives you most efficiently and in spades), simplicity, and most importantly - staying the course through sunshine and rain, is what really matters. The rest, including portfolio engineering, is just details.

Here's a quote from Jack Bogle that I keep coming back to whenever I get the inevitable itch to "better" my 3 fund portfolio...
Jack Bogle in 'Six Rules of Investing' wrote:It turns out that successful investing is about following common sense principles, and avoiding the myriad potholes that lie along the road of investing. You win by not losing. There may or may not be better winning strategies than putting, say, 80% of your investments into an equity index fund and 20% into a bond index fund when you begin investing at age 25, gradually reducing the equity ratio over the years so it is 30% when you're 70. But I can absolutely guarantee you that the number of worse strategies is infinite. Infinite!
"Cost matters". "Stay the course". "Press on, regardless". ― John C. Bogle

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Re: add Total International Bond Index?

Postby abuss368 » Fri Oct 25, 2013 12:20 pm

umfundi wrote:
Edit to add: Cynics (like me) observe that by adding this new fund to the TR and LS funds, it gets a pretty good kick start.

Keith


A couple of years ago I wrote this in a thread before the fund was launched. My thought process too was that this was a great way to "kick start" the fund.
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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Taylor Larimore
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Adding Total International Bond Index Fund?

Postby Taylor Larimore » Fri Oct 25, 2013 5:02 pm

Norske77 wrote: What is Taylor's thinking on adding this fund and making four?

Norske77:

You ask a very good question and one that I carefully considered when Vanguard first offered their Total International Bond Fund (VTIBX and Admiral VTABX) on May 31, 2013, and later increased its allocation on May 26, 2015 to 30% of nominal fixed income exposure.

It is always tempting to add additional funds to The Three Fund Portfolio and overlook their additional costs, risk and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.

It is notable that a Target portfolio with a 20% bond allocation will have only 6% international bonds. This is almost meaningless. Adding a Total International Bond fund inside a single Target or Life-Strategy fund adds no complexity to the investor.

Vanguard's diversified Total Bond Market Index Fund has a proven record of providing safety in a portfolio. For example, during the 2008 bear market when Total Stock Market fell -37%, Total Bond market gained +5%.

Adding Total International Bond fund to The Three Fund Portfolio has several disadvantages: Political risk, higher expense ratios, longer duration, relatively week credit quality and more complexity.

Mr. Bogle said this in a Morningstar interview:
The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.

Boglehead author and adviser, Bill Bernstein wrote this article: Don't Bother With International Bonds

During the 2015 Boglehead Conference, my expert co-author, Rick Ferri, told an interviewer: "Forget foreign bonds."

Morningstar article:Vanguard's Total International Bond exchange-traded fund is a poor investment today (8-01-14)

For the above reasons, I will not add Total International Bond Index to the very successful Three Fund Portfolio.

Best wishes.
Taylor
Last edited by Taylor Larimore on Mon Nov 02, 2015 11:10 am, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three Fund Portfolio

Postby Norske77 » Sun Oct 27, 2013 10:43 am

Taylor et al,

Thank you all very much for the replies and education. I think I'll adjust the small allocation they suggested for Intl Bonds and put all bond$ into the Total Bond Fund. I'm all for simplicity.

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Re: The Three Fund Portfolio

Postby Taylor Larimore » Tue Oct 29, 2013 11:00 am

Bogleheads:

I was fortunate to have my picture taken with each of the three fund managers at Bogleheads 12.

I was told that together, these three managers oversee nearly one trillion dollars in assets:

Image

From left to right: Total Bond Manager: Josh Barrickman; Total Stock Manager: Gerry O'Reilly; Taylor Larimore; Total International Manager: Mike Perre

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

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Re: The Three Fund Portfolio

Postby CABob » Tue Oct 29, 2013 12:56 pm

Taylor,
Great photo. I think you ought to consider changing your avatar.
But, I know, the sea keeps calling.
:D
Bob

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Thank you, Bogleheads.

Postby Taylor Larimore » Tue Oct 29, 2013 1:29 pm

CABob wrote:Taylor,
Great photo. I think you ought to consider changing your avatar.
But, I know, the sea keeps calling.
:D

Bob:

You're right. On the waterfront they call me "Taylor the sailor."

The avatar (sailing towards the setting sun) will stay until my voyage ends.

In the meantime, my thanks go out to all the Bogleheads who have made my life fulfilling.

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

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Research: Three Fund Portfolio tops 80% of managed portfolio

Postby Taylor Larimore » Thu Oct 31, 2013 12:27 pm

Bogleheads:

Rick Ferri, author, researcher and adviser, was interviewed by Christine Benz of Morningstar during our recent Boglehead Conference in Pennsylvania. She asked Rick about his latest research comparing The Three Fund Portfolio with a randomly selected portfolio of low-cost managed funds. These are excerpts:
"We wanted to look at how a diversified portfolio of index funds would perform relative to a diversified portfolio of actively managed funds from the same categories."

"We constructed an index fund portfolio. We used a very simple one. It was a three-fund portfolio of total U.S. stock market, total international, and total bond index funds."

"We tried to mimic as close as we could the investor experience, at least randomly selecting funds. Then we compared the two together to see what the performance was, and we did it 5,000 times."

" We looked at a lot of things. We looked at time advantage; we looked at adding more asset classes to a portfolio. Everything we looked at, when we increased the time from five years to 10 years to 15 years, the probability of the all-index fund portfolio outperforming incrementally grew. When we looked at going from three asset classes to five to eight to 10, the probability of the all-index fund portfolio outperforming grew. Then as investors started putting more actively managed funds in the portfolio, two or three per asset class, the probability of the all-index fund portfolio outperforming grew. In the long term, an all-index fund portfolio all the time really has the highest probability of getting people to their financial goals."

"But when you put it together in a portfolio of U.S. stocks, international stocks, and total bond, you put those all together in a portfolio, the probability of the portfolio outperforming a portfolio of active funds actually moves up into the mid-80%."

Why Passive Portfolios Are Better Than Active

This is the complete 25 page study referred to in the interview:

A Case For Index Fund Portfolios

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

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Re: The Three Fund Portfolio--Location.

Postby Evolence » Fri Nov 01, 2013 11:50 pm

Taylor Larimore wrote:The Three Fund Portfolio makes fund location easy:

IRA: :Locate tax-inefficient Total Bond Market here. If more IRA space is available fill it with Total Stock Market.

Taxable Account: Locate any remaining Total Market Index Fund and Total International here. These two funds are very tax-efficient.


Maxing out tax-advantaged accounts is not a problem for me currently, given that I have two IRA's and two 401(k)'s in the family. But how would this advice stack up for a young investor, who say hypothetically wanted a 50/50 AA and was potentially maxing out their IRA (and presumably had no 401(k))? I "get" the placement of bonds in a tax-advantaged account increases the tax efficiency and returns for the asset class. I would lean toward filling a Roth IRA with the highest returning asset-- stock in this case. Then if bonds were needed, I would think that a young investor such as described would probably be in a low tax bracket to begin with-- so take your lumps with owning the bonds in a taxable (or buy tax-deferred EE or I bonds).

As to the 3 Fund Portfolio, I am a fan but not an adherent. My largest core holding is VTIVX-- which is really this exact portfolio, albeit with the recent addition of the Int. Bond Index. I have conviction in this-- thus it is my largest holding.

But I fear I could never be content with just a one-fund or three-fund portfolio. It's not even that I necessarily want to "beat" the market-- it's just that I want to capture the beta from a LOT of different markets. (I do admittedly have some value and size tilts, that is an attempt to outperform.) For instance, Total Bond has no HY or EM bond stakes. Nor bank loans. I know that these bonds tend to be more equity correlated-- so I hold a higher stake of bonds, recognizing that a portion of them are higher risk, equity-like bonds. Then there are commodities. Real Estate. TIPS. All of these things may be unnecessary in the grand scheme of things. However, I feel like I'd get bored if I didn't have a more complicated portfolio to manage. Investing for me is not a chore, so while simplicity may have its advantages (even potentially higher returns), it is something I'm not really ready to embrace.

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Re: The Three Fund Portfolio

Postby Retireyoung » Sat Nov 02, 2013 7:08 pm

Why not hedge this strategy with Treasuries and Gold ??

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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Nov 02, 2013 7:20 pm

Welcome! Because it would no longer be called a three-fund portfolio. Your strategy is an attempt to deviate from the total market approach, which is intent of the three-fund portfolio.

Your total portfolio is the sum of all your investments. Added a Treasury or gold would make this a four (or five) fund portfolio.
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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