The Three-Fund Portfolio

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Taylor Larimore
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William Bernstein recommends The Three Fund Portfolio

Post by Taylor Larimore » Fri Oct 10, 2014 5:11 pm

Bogleheads:

William Bernstein is a very respected physician, adviser and author of six highly praised investment books. His seventh, and latest book, If You Can. How Millennials Can Get Rich Slowly begins with this question:
Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90% of finance professionals in the long run, and make you a millionaire over time?

Well, it is true, and here it is: Start by saving 15% of your salary at age 25 into a 401(k) plan, an IRA, or a taxable account (or all three). Put equal amounts of that 15% into just three different mutual funds:

* A U.S. total stock market index fund.
* An international total stock market index fund.
* A U.S. total bond market index fund.

Sound advice from Bill Bernstein.

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

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Re: The Three Fund Portfolio

Post by LadyGeek » Fri Oct 10, 2014 6:25 pm

I should mention that William Bernstein's book is a FREE download. See the wiki: Books: recommendations and reviews, 2nd paragraph.
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Re: The Three Fund Portfolio

Post by gvsucavie03 » Sat Oct 11, 2014 6:52 pm

LadyGeek wrote:I should mention that William Bernstein's book is a FREE download. See the wiki: Books: recommendations and reviews, 2nd paragraph.


Free for prime members, but .99 isn't much to complain about!

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Re: The Three Fund Portfolio

Post by LadyGeek » Sat Oct 11, 2014 6:59 pm

On Amazon.com, it's 0.99 (with an occasional sale at 0.00). However, it's totally free from his website.

Click on the the wiki link: Free download, which goes to his website. It's the 3rd paragraph under the book cover.
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Re: The Three Fund Portfolio

Post by selftalk » Sun Oct 12, 2014 7:41 am

It would be nice to be 25 years old now and purchase the 3 funds over time.

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Re: The Three Fund Portfolio

Post by LHerr » Sun Oct 12, 2014 8:08 am

In addition to investing in three funds, I would add a risk reduction model to accompany this approach to investing. Sometime over the next few weeks I'll run an analysis to explain what I mean by reducing portfolio risk.

BTW, my three securities of choice are: VTI, VEU, and BND.

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Re: The Three Fund Portfolio

Post by HawaiiBrewer » Fri Oct 17, 2014 9:08 pm

I learned of the 3 fund portfolio only after having my "Big House" broker's people create a suggested portfolio that would have cost me $18,000+ a year for them to manage for me. :shock: I turned to the internet and found this site, built up confidence with the support of Taylor, et al and have almost cleaned out my "Big House" account and moved it to Vanguard and a 5 Fund plus "cash" portfolio. It's only grown 5% since I started the move a year ago, but I sleep well knowing I'm covered in all market situations....because I started saving when I was 25 I can now be heavy into the capital preservation mode. In this first year, interestingly, my AA has changed less than 1% in each category, hence no rebalancing.
25% domestic stocks, 10% non-US stocks, 29% bonds, 30% "no risk CD's, Savings Bonds, Mny Market, 5% REIT, 1% cash. Just retired in June at 63 yrs old and hope to delay SS until way after 66 seeing how its my only inflation indexed "fixed investment".

Life is good thanks to the BH portfolio and KISS philosophy.

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Re: The Three Fund Portfolio

Post by columbia » Wed Oct 22, 2014 5:22 pm

Taylor,

If I may ask, at what age did you add TIPS to your portfolio?
Alternately, is there any rule of thumb for when investors should seriously consider the idea?

Thanks

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Re: The Three Fund Portfolio

Post by fourwedge » Wed Oct 22, 2014 6:35 pm

Taylor added tips??? When, I must have missed something. That would be a fourth fund, wouldn't it?
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.

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Re: The Three Fund Portfolio

Post by Dick D » Wed Oct 22, 2014 7:14 pm

I have been doing the three fund portfolio for a number of years now. I do not worry if the market goes up or down. I do not care what all of the talking heads say about the market. I am not involved in the angst, and I will look at my portfolio in January to decide if I will rebalance, do a Roth conversion etc and be done with it for another year.

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Taylor Larimore
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Re: The Three Fund Portfolio

Post by Taylor Larimore » Wed Oct 22, 2014 9:48 pm

Columbia:
If I may ask, at what age did you add TIPS to your portfolio?

I added Vanguard's TIPS fund (VIPSX) shortly after its inception in June, 2000. I was age 76.
Alternately, is there any rule of thumb for when investors should seriously consider the idea?

There is no "rule of thumb." The expertly designed Vanguard Target Fund 2015 is the youngest target date fund containing Short-Term TIPS (VTAPX) -- less than 8% of the portfolio. Target 2015 is recommended for investors age 62-66.

If I could start over, I would probably not add additional funds to The Three Fund Portfolio.


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

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Re: The Three Fund Portfolio

Post by b767capt » Wed Oct 22, 2014 9:58 pm

Taylor or someone else, can you tell me what the three fund portfolio would have paid out in Dividends and Interest, year to date 2014, on a 1 million dollar portfolio. 60/40 AA.
Thanks

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Re: The Three Fund Portfolio

Post by CABob » Wed Oct 22, 2014 10:05 pm

columbia wrote:Alternately, is there any rule of thumb for when investors should seriously consider the idea?

Not a rule of thumb, but, I am lead to believe that as long as one has a significant percentage of equities in portfolio their growth will reflect inflation and therefore TIPS are not needed. Someone with a small percentage of stocks should perhaps consider TIPS. Where is the dividing line? I don't know, but, would proposed 50%. If one holds less that 50% stocks their bond portfolio should include TIPS.
Bob

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Re: The Three Fund Portfolio

Post by columbia » Thu Oct 23, 2014 5:57 am

Thanks for your responses, Taylor and CABob.

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Taylor Larimore
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The Best Fund for a Passive Allocation to U.S. Equities

Post by Taylor Larimore » Fri Oct 24, 2014 11:20 am

Bogleheads:

Michael Rawson on Morningstar Research Team writes:
Picking the Best ETFs:
This list (6 total market ETFs) really has no bad options, although I do have my favorites. I like Vanguard Total Stock Market ETF (VTI) because of its low expense ratio, low trading costs, tight tracking, broadest coverage, historical tax efficiency, and excellent stewardship from Vanguard. (underline mine)

Finding the Best Fund for a Passive Allocation to U.S. Equities

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

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Re: The Three Fund Portfolio

Post by kkhanmd » Sat Nov 08, 2014 1:53 pm

For a 3 fund portfolio, how do we know if it contains the right mix of small, mid and large caps? For eg. I have VTSAX, if I am correct it has 65 % Large cap, 28 % Mid -cap and 7% Small cap. If I follow three fund portfolio, how do I know, 1) 7% small cap is right for me? 2) How does the fund itself determines 7% small cap is what they should have?

K

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Re: The Three Fund Portfolio

Post by tj » Sat Nov 08, 2014 1:59 pm

kkhanmd wrote:For a 3 fund portfolio, how do we know if it contains the right mix of small, mid and large caps? For eg. I have VTSAX, if I am correct it has 65 % Large cap, 28 % Mid -cap and 7% Small cap. If I follow three fund portfolio, how do I know, 1) 7% small cap is right for me? 2) How does the fund itself determines 7% small cap is what they should have?

K


Market weight. The market decides.

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Re: The Three Fund Portfolio

Post by Leeraar » Sat Nov 08, 2014 1:59 pm

kkhanmd wrote:For a 3 fund portfolio, how do we know if it contains the right mix of small, mid and large caps? For eg. I have VTSAX, if I am correct it has 65 % Large cap, 28 % Mid -cap and 7% Small cap. If I follow three fund portfolio, how do I know, 1) 7% small cap is right for me? 2) How does the fund itself determines 7% small cap is what they should have?

K

The fund invests in the total (cap weighted) market, so there is no wiggle room to tilt to some segment or another. It is what it is.

L.
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Re: The Three Fund Portfolio

Post by Pocket Cruiser » Sat Nov 08, 2014 2:55 pm

b767capt wrote:Taylor or someone else, can you tell me what the three fund portfolio would have paid out in Dividends and Interest, year to date 2014, on a 1 million dollar portfolio. 60/40 AA.
Thanks

Year to the day of your post, 10/22/2014, if you bought all shares on the first trading day of the year on 1/2/2014:
Distributions from a $1MM 60/40 portfolio consisting of 30% VTSAX, 30% VTIAX, 40% VBTLX, totaled $19,397.21.
Distributions from a $1MM 60/40 portfolio consisting of 45% VTSAX, 15% VTIAX, 40% VBTLX, totaled $17,822.28.

With the 3 fund portfolio, you tailor your domestic/international split to suit yourself. Therefore, distributions will vary from one portfolio to the other.

VBTLX distributions: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
VTIAX ditributionns: https://personal.vanguard.com/us/funds/ ... =INT#tab=4
VTSAX distributions: https://personal.vanguard.com/us/funds/ ... =INT#tab=4

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Re: The Three Fund Portfolio

Post by b767capt » Sat Nov 08, 2014 3:03 pm

Pocket Cruiser,
Thanks very much for looking that up.
My advisor thinks he can beat that by buying more dividend/interest producing type ETF's and Index funds.
Since income is very important in retirement I'm worried about the three fund producing enough income.
What say you Bogleheads?

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Re: The Three Fund Portfolio

Post by Pocket Cruiser » Sat Nov 08, 2014 3:25 pm

b767capt wrote:Pocket Cruiser,
Thanks very much for looking that up.
My advisor thinks he can beat that by buying more dividend/interest producing type ETF's and Index funds.
Since income is very important in retirement I'm worried about the three fund producing enough income.
What say you Bogleheads?

Anybody can buy products that produce more current income. They buy riskier assets. Current income, meaning because of the increased risk, it may not last your lifetime, or even 5 years. It might, though. That's the risk they will take.

That's not to say that the 3 fund portfolio IS NOT risky. It is. Dividends were cut by 25% in the 08-09 crash. They were cut in half during the Great Depression.
However, most portfolios that yield more than what the 3 fund produces probably does so with additional risk. At least, that's what people say in these forums and books recommended by people in these forums.

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Re: The Three Fund Portfolio

Post by Taylor Larimore » Sat Nov 08, 2014 3:55 pm

b767capt wrote:My advisor thinks he can beat that by buying more dividend/interest producing type ETF's and Index funds.

Perhaps he can beat a market portfolio -- but it is unlikely. For example, for the 10-years, 2002-2013, the 3-fund portfolio outperformed managed portfolio's 87.7% of the time. Author Rick Ferri, CFA, explains in this research paper:

A Case For Index Fund Portfolios
b767capt wrote:Since income is very important in retirement I'm worried about the three fund producing enough income. What say you Bogleheads?

Read this link and the Conclusion below: Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

"Compared with the income-only approach, the total-return approach is likelier to increase the longevity of the portfolio, increase its tax-efficiency, and reduce the number of times the portfolio needs to be re-balanced. In addition, for most investors, a total-return approach can produce the same cash flow as an income-only approach with no decrease in return and lower tax-liability."

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 » Sat Nov 08, 2014 3:59 pm

Pocket Cruiser wrote:Anybody can buy products that produce more current income. They buy riskier assets. Current income, meaning because of the increased risk, it may not last your lifetime, or even 5 years. It might, though. That's the risk they will take.


Jack Bogle noted on a recent interview that the further out on a tree branch an investor goes, the higher the chance the branch will snap and the investor will crash. I think of this analogy when looking at risky asset classes such as international and emerging market bonds.
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 b767capt » Sat Nov 08, 2014 4:00 pm

My entire portfolio is from IRA and 401k.
Will that link apply to that?

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"Help with Personal Investments"

Post by Taylor Larimore » Sat Nov 08, 2014 4:17 pm

b767capt wrote:My entire portfolio is from IRA and 401k.
Will that link apply to that?

b767capt:

I believe that my links, above, apply except for the "tax-efficiency" part.

Please post questions about your personal portfolio on the Investing - Help with Personal Investments 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 kkhanmd » Sat Nov 08, 2014 4:20 pm

Are REITS, TIPS included in three fund portfolios according to their market caps or they missing from it?

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Re: The Three Fund Portfolio

Post by Taylor Larimore » Sat Nov 08, 2014 4:21 pm

kkhanmd wrote:Are REITS, TIPS included in three fund portfolios according to their market caps or they missing from it?

kkhanmd:

REITS are included. TIPS are not.

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

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Re: The Three Fund Portfolio

Post by kkhanmd » Sat Nov 08, 2014 4:27 pm

1) what about MLPs? 2) When should one add TIPS to the portfolio? Are TIPS needed if you have bonds?

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Re: The Three Fund Portfolio "Efficiency"

Post by Taylor Larimore » Sat Nov 08, 2014 4:33 pm

Most portfolios that yield more than what the 3 fund produces probably does so with additional risk.


Broad market index funds in The Three Fund Portfolio are Efficient in the sense that no other stock portfolio can have lower risk with higher expected return.

Three Proofs that TSM is Efficient

Best wishes.
Taylor
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Advantages of Fewer Funds.

Post by Taylor Larimore » Sat Nov 08, 2014 5:17 pm

kkhanmd wrote:1) what about MLPs? 2) When should one add TIPS to the portfolio? Are TIPS needed if you have bonds?

kkhanmd:

MLP's (Master Limited Partnerships) are not included. The Three Fund Portfolio is recommended by many authorities (page 1) for its performance and simplicity. Some investors, hoping to "beat the market," may add TIPS and other funds with accompanying complexity.

Fewer funds result in a simpler portfolio with numerous advantages:

* Fewer funds mean larger funds; therefore, earlier eligibility for premium services (Admiral, Voyager).

* Larger funds usually have lower expense ratios, less turnover costs and better tax-efficiency

* Easier to manage by the shareholder, spouse, caregivers and heirs.

* Avoidance of low-balance fees.

* Less distortion from contributions and withdrawals.

* Less re-balancing.

* Less chance of errors.

* Easier tax-preparation.

* Less paperwork, storage, etc..

* Less stress and never a fear of under-performing the market.

* More free-time with family and friends.

"Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one." -- Jack Bogle


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

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Re: The Three Fund Portfolio

Post by b767capt » Sat Nov 08, 2014 7:59 pm

Thanks Taylor,
I will post over there. Thanks for ref the article.

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Re: The Three Fund Portfolio

Post by BrandonBogle » Sat Nov 08, 2014 11:54 pm

abuss368 wrote:
Pocket Cruiser wrote:Anybody can buy products that produce more current income. They buy riskier assets. Current income, meaning because of the increased risk, it may not last your lifetime, or even 5 years. It might, though. That's the risk they will take.


Jack Bogle noted on a recent interview that the further out on a tree branch an investor goes, the higher the chance the branch will snap and the investor will crash. I think of this analogy when looking at risky asset classes such as international and emerging market bonds.



Abuss, great quote! Good thing to keep in mind when people look to eek out more returns (regardless of if its equity, stock, domestic, foreign, corporate, muni, etc.). It's not that you can't do those things, but as another poster said, it's the result of taking on more risk. Even dialing up the risk, I would rather do some with the simply approach of the Three Fund Portfolio rather than one that takes too many levels and components that I stop enjoying my life or not spending the time to do investing right.

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Re: The Three Fund Portfolio

Post by kkhanmd » Sun Nov 09, 2014 10:40 pm

BrandonBogle wrote:
abuss368 wrote:
Pocket Cruiser wrote:Anybody can buy products that produce more current income. They buy riskier assets. Current income, meaning because of the increased risk, it may not last your lifetime, or even 5 years. It might, though. That's the risk they will take.


Jack Bogle noted on a recent interview that the further out on a tree branch an investor goes, the higher the chance the branch will snap and the investor will crash. I think of this analogy when looking at risky asset classes such as international and emerging market bonds.



Abuss, great quote! Good thing to keep in mind when people look to eek out more returns (regardless of if its equity, stock, domestic, foreign, corporate, muni, etc.). It's not that you can't do those things, but as another poster said, it's the result of taking on more risk. Even dialing up the risk, I would rather do some with the simply approach of the Three Fund Portfolio rather than one that takes too many levels and components that I stop enjoying my life or not spending the time to do investing right.



This brings the question, would the risk be even further reduced if you also have TIPS, REITS and MLPs in your portfolios? If a three fund portfolio existed that included TIPS and MLPs (REITS as Taylor said are already included), would you buy that three fund portfolio over the current three fund portfolio?

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Morningstar: "Three Funds You Can Hold Forever."

Post by Taylor Larimore » Wed Nov 12, 2014 5:10 pm

Bogleheads:

Morningstar recommends three Vanguard index funds that can be held 'forever':
Vanguard Total Stock Market (VTI) or (VTSAX)
This total market tracker is the consummate core buy-and-hold investment for investors with long time horizons. It offers exposure to U.S. stocks of all sizes and styles, and could reasonably serve as an investor's sole equity fund. Ultralow costs, for both the ETF and the traditional index-fund alternative, provide a long-term tailwind.

Vanguard Total International Stock Market (VXUS) or (VTIAX)
The foreign-stock counterpart to Vanguard Total Stock Market Index, this fund provides exposure to all manner of foreign stocks, from developed-markets giants like Toyota (TM) and Royal Dutch Shell (RDS.A) to small-cap and emerging-markets names. Low expenses--surprise surprise--burnish its appeal.

Vanguard Total Bond Market Index (BND) or (VBTLX)
Experts may debate whether the Barclays U.S. Aggregate Bond Index, which this fund tracks, is representative of the U.S. bond market, but there can be little doubt that these funds--both the ETF and traditional index mutual fund--provide a lot of diversification in a single, low-cost shot. The fund has held its ground reliably when equities have hit the skids, and that uncorrelated performance pattern is a key reason investors hold bonds.

http://news.morningstar.com/articlenet/ ... ?id=673342

Good news for Three Fund Portfolio investors.

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 » Wed Nov 12, 2014 5:14 pm

kkhanmd wrote:This brings the question, would the risk be even further reduced if you also have TIPS, REITS and MLPs in your portfolios? If a three fund portfolio existed that included TIPS and MLPs (REITS as Taylor said are already included), would you buy that three fund portfolio over the current three fund portfolio?


Hi kkhanmd,

I would encourage you to take the time to read through this thread to better understand the advantages of The Three Fund Portfolio. It will be time well invested. This thread should clear up and confusion regarding REITs, MLPs, and TIPS.

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 iw90qkmq » Tue Nov 18, 2014 9:34 am

I stick with 90% VT (total world stock) en and 10% BND (total bond market).

Perhaps a value tilt in the future when a good total world value fund will become available for low cost. Why is it still not there?!!

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Wrong topic

Post by Taylor Larimore » Tue Nov 18, 2014 10:02 am

iw90qkmq wrote:I stick with 90% VT (total world stock) en and 10% BND (total bond market).

Perhaps a value tilt in the future when a good total world value fund will become available for low cost. Why is it still not there?!!

iw90qkmq:

This thread is about The Three Fund Portfolio. Please ask your question HERE

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

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Re: Wrong topic

Post by iw90qkmq » Wed Nov 19, 2014 3:24 pm

Hi Taylor

thanks for reminding, the question just popped up. I will post it in the other thread.

Taylor Larimore wrote:
iw90qkmq wrote:I stick with 90% VT (total world stock) en and 10% BND (total bond market).

Perhaps a value tilt in the future when a good total world value fund will become available for low cost. Why is it still not there?!!

iw90qkmq:

This thread is about The Three Fund Portfolio. Please ask your question HERE

Thank you and best wishes.
Taylor

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Re: The Three Fund Portfolio

Post by SpartanFan » Wed Nov 19, 2014 3:53 pm

No International Bonds ?

(Just askin)
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Re: The Three Fund Portfolio

Post by backpacker » Wed Nov 19, 2014 4:25 pm

^ The case for international bonds is surprisingly weak. This white paper from Vanguard claims that splitting bonds between domestic and international reduces risk about .2% for a 60/40 portfolio. This white paper puts the cost drag of hedging for a bond fund at .2%. That means that Vanguard's 60/40 investor is giving up 7 basis points in annualized return for a 20 basis point reduction in volatility. That's not necessarily a terrible trade. But it's not a good enough trade IMO to merit adding yet another fund to your portfolio.

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Re: The Three Fund Portfolio

Post by SpartanFan » Wed Nov 19, 2014 4:41 pm

We would like to simplify our investments but we have some substantial unrealized CG in our taxable stock mutual fund holdings.

Michigan also adds another 4.25% state tax on any CG. Our Fed tax bracket is 15% and we are both retired (age 55 and 62).

Is there a workable strategy to accomplish this 3 fund strategy in our scenario ?
"There's a crack in everything, that's how the light gets in" - Leonard Cohen

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Re: The Three Fund Portfolio

Post by tj » Wed Nov 19, 2014 5:01 pm

tommoran2 wrote:We would like to simplify our investments but we have some substantial unrealized CG in our taxable stock mutual fund holdings.

Michigan also adds another 4.25% state tax on any CG. Our Fed tax bracket is 15% and we are both retired (age 55 and 62).

Is there a workable strategy to accomplish this 3 fund strategy in our scenario ?


What mutual funds do you own? They may or may not be good enough to warrant keeping and redirecting dividends you don't spend to the broad indexes.

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Re: The Three Fund Portfolio

Post by pingo » Wed Nov 19, 2014 5:03 pm

@tommoran2: It would be best to post the question along with all the relevant information per general recommendations for asking portfolio questions, but it is possible to pay zero federal capital gains taxes (within limits) when one is in the 15% bracket.

As for a workable plan, more details are in order and that should be done in a separate thread with the above recommended financial details.
Last edited by pingo on Wed Nov 19, 2014 5:05 pm, edited 2 times in total.

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Re: The Three Fund Portfolio

Post by LadyGeek » Wed Nov 19, 2014 5:04 pm

To deep dive into details, I recommend starting a new thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions.

Update: pingo beat me to the post.
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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SpartanFan
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Re: The Three Fund Portfolio

Post by SpartanFan » Wed Nov 19, 2014 5:05 pm

tj wrote:
tommoran2 wrote:We would like to simplify our investments but we have some substantial unrealized CG in our taxable stock mutual fund holdings.

Michigan also adds another 4.25% state tax on any CG. Our Fed tax bracket is 15% and we are both retired (age 55 and 62).

Is there a workable strategy to accomplish this 3 fund strategy in our scenario ?


What mutual funds do you own? They may or may not be good enough to warrant keeping and redirecting dividends you don't spend to the broad indexes.



Funds owned are VPCCX PrimeCap Core and VWIAX Wellesley
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Re: The Three Fund Portfolio

Post by pingo » Wed Nov 19, 2014 5:06 pm

@ LadyGeek: A rare occurrence, indeed. But It always sounds better coming from you. :wink:
Last edited by pingo on Wed Nov 19, 2014 5:08 pm, edited 1 time in total.

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Re: The Three Fund Portfolio

Post by SpartanFan » Wed Nov 19, 2014 5:07 pm

LadyGeek wrote:To deep dive into details, I recommend starting a new thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions.

Update: pingo beat me to the post.



OK. Will do ...
"There's a crack in everything, that's how the light gets in" - Leonard Cohen

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Re: The Three Fund Portfolio

Post by kolea » Tue Nov 25, 2014 2:33 pm

Pocket Cruiser wrote:However, most portfolios that yield more than what the 3 fund produces probably does so with additional risk. At least, that's what people say in these forums and books recommended by people in these forums.


The converse is also of course true - that the three fund portfolio perhaps has more risk than justifies its use. At least for those of us that are shy of risk.

A couple of data points to consider:
- VTIAX (Vanguard Total International Stock Index Fund Admiral Shares) has the highest Vanguard risk index (5)
- VTIAX has a low Sharpe ratio - 0.70 - compared to the Sharpe ratio of 1.96 for VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares).
- VTIAX has a poor tax-cost ratio (1.40) compared to that of VTSAX (0.79)
- VTIAX is highly correlated with VTSAX (at least historically it has been)

Bottom line is there is more risk with a three fund portfolio than a two fund portfolio. The three-fund strategy puts a lot of weight on international equities. Is that justifiable? Each investor of course needs to weigh the risk/reward for any investment strategy and make his own assessment as to what is right for him (or her). My point here is that I do not think the three fund portfolio is necessarily a slam-dunk decision for everyone.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: The Three Fund Portfolio

Post by LadyGeek » Wed Nov 26, 2014 1:52 pm

The discussion on risks of 3-fund vs. 2-fund portfolios has been split into a new thread: Risk of Three-Fund Portfolio vs. Two-Fund Portfolio

Please continue risk comments in that thread.
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Three Fund Portfolio Tax Efficiency

Post by Taylor Larimore » Wed Nov 26, 2014 8:32 pm

Bogleheads:

Vanguard has posted "Year-End Capital-Gain Estimates" for the three funds in the Three Fund Portfolio:

Total U.S. Stock Market Index Fund: "None"
Total International Stock Index Fund: "None"
Total Bond Market Index Fund: "0.28%" *

* Total Bond Market Index Fund should normally be in tax-advantaged accounts.
The recent round of distributions argues that if investors want to help protect against unwanted distributions, their best defense will be broad-market equity exchange-traded funds or index funds, which tend to distribute few, if any capital gains. -- Morningstar Article

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

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