The Three-Fund Portfolio

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abuss368
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Re: Three Fund Portfolio Tax Efficiency

Postby abuss368 » Wed Nov 26, 2014 8:43 pm

Taylor Larimore wrote: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


Hi Taylor,

Thank you for providing this information.

Have a great Thanksgiving.

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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A retiree credits his Three Fund Portfolio

Postby Taylor Larimore » Sat Dec 06, 2014 7:38 pm

Bogleheads:
jvclark02 wrote:I recently retired for the third time and with my ever growing three fund portfolio (+ reits), I am now faced with learning to spend more.....a nice situation to be in.

Thank you for sharing your Three Fund Portfolio (+reits) success.

Best wishes.
Taylor
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Re: Three Fund Portfolio Tax Efficiency

Postby kkhanmd » Wed Dec 10, 2014 1:39 am

abuss368 wrote:
Taylor Larimore wrote: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


Hi Taylor,

Thank you for providing this information.

Have a great Thanksgiving.

Best.


So I am little confused, on the Vanguard website the SEC yield for VTSAX is listed as 1.78%. So where is the year end capital gain 0%? is it not 1.78%? Or am I missing something simple?
Why does this wiki article is saying I should put bonds in taxable?
http://www.bogleheads.org/wiki/Principl ... _placement

Please help me learn.

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Re: The Three Fund Portfolio

Postby Taylor Larimore » Wed Dec 10, 2014 9:26 am

So I am little confused, on the Vanguard website the SEC yield for VTSAX is listed as 1.78%. So where is the year end capital gain 0%? is it not 1.78%? Or am I missing something simple?
Why does this wiki article is saying I should put bonds in taxable?
http://www.bogleheads.org/wiki/Principl ... _placement

Please help me learn.

kkhanmd:

"Dividends," "Capital-gain distributions" and "Fund placements" are lengthy and sometimes controversial topics. Please ask these questions by starting another topic HERE.

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 pingo » Wed Dec 10, 2014 1:48 pm

Edited:

@ kkhanmd

Taylor's right, but the answer to the SEC yield/capital gains question is that SEC yield is referring to dividend and/or interest income, not capital gains. Capital gains occur when assets increase in value (like a house), but they're not taxable until you have those earnings in hand upon "realization" (the house gets sold). SEC yield is income produced from (some of) those assets during their holding period (like a rental house producing an income stream.) The income is cash in hand, so it gets taxed as it is received.

The equity funds in The Three Fund Portfolio tend to be tax-efficient for a taxable account because most of the growth comes from the asset appreciation (captial gains) and the funds rarely have to liquidate assets. For you the investor, that means that asset turnover does not cause capital gains taxation to slowly grind away at your returns. Capital losses can also be used to your benefit through tax loss harvesting. The index funds of a Three Fund Portfolio allow you to decide the best way to proceed tax-wise.
Last edited by pingo on Thu Dec 18, 2014 7:51 pm, edited 9 times in total.

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Re: The Three Fund Portfolio

Postby kkhanmd » Wed Dec 10, 2014 4:31 pm

pingo wrote:@ kkhanmd

Taylor's right, but the answer to the SEC yield/capital gains question is that SEC yield is referring to dividend and/or interest income, not capital gains. Capital gains is when assets increase in value, but unrealized gains do not translate into cash in your hands until sold (like a house). One gets taxed when that profit has been realized. SEC yield is cash that such assets may throw off during the period they are held (like a rental house producing an income stream.) Those get taxed as they come.

The equity funds in The Three Fund Portfolio tend to be tax-efficient because most of the growth comes from the appreciation of asset value and the funds rarely have to liquidate the assets. For you the investor, that means that you are not forced through asset turnover to have capital gains slowly grind away at your returns and you get more control over when, how and by how much you will pay the capitals because you decide the best way to proceed tax-wise.


Thank you Pingo, that was a great explanation

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Re: The Three Fund Portfolio

Postby Badmash » Fri Dec 12, 2014 4:38 pm

Our portfolio is all mutual (DFA) and exchange traded Index funds, 50-50 bonds/stocks, with the usual slicing and dicing on the stock side- big, small, emerging, foreign, REIT,etc – and three bond funds with different maturities. About a dozen funds, in all. The portfolio was smartly put together, and it's lived up to expectations.

We are living off it, but I have to keep an eye on it (what's up, what's down, internal rebalancing, etc.) to harvest cash. I'm getting too old for this. Is there some tool that would allow me to pick a date (for example, 2000, the year I established the portfolio) enter the names of all these funds with a nominal valuation for each in their proper proportions for a portfolio total of say $100,000, then enter the names of the Vanguard funds, or to make it simpler maybe just two funds (total stock and total bond) allocate them 50-50, start them off in the same year with the same number, and see how they compare?

The idea: maybe I'd have to give up a few bucks, a point or two here or there, but I'd trade that for a simpler life. Assume no big capital gains hit if I made the switch.

I suppose I could do it with a spreadsheet, but it sounds like a lot of work.

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Re: The Three Fund Portfolio

Postby BogleInvestorLondon » Fri Dec 12, 2014 6:04 pm

Badmash wrote:Our portfolio is all mutual (DFA) and exchange traded Index funds, 50-50 bonds/stocks, with the usual slicing and dicing on the stock side- big, small, emerging, foreign, REIT,etc – and three bond funds with different maturities. About a dozen funds, in all. The portfolio was smartly put together, and it's lived up to expectations.

We are living off it, but I have to keep an eye on it (what's up, what's down, internal rebalancing, etc.) to harvest cash. I'm getting too old for this. Is there some tool that would allow me to pick a date (for example, 2000, the year I established the portfolio) enter the names of all these funds with a nominal valuation for each in their proper proportions for a portfolio total of say $100,000, then enter the names of the Vanguard funds, or to make it simpler maybe just two funds (total stock and total bond) allocate them 50-50, start them off in the same year with the same number, and see how they compare?

The idea: maybe I'd have to give up a few bucks, a point or two here or there, but I'd trade that for a simpler life. Assume no big capital gains hit if I made the switch.

I suppose I could do it with a spreadsheet, but it sounds like a lot of work.



I think you might need to create your own thread for responses since this thread is limited to discussion solely regarding the Three Fund Portfolio.

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Help With Personal Investments

Postby Taylor Larimore » Fri Dec 12, 2014 6:20 pm

Badmash:

As BogleInvestorLondon helpfully suggests, simply copy your question and post it as a "New Topic" here:

Help With Personal Investments

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

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"Why does everybody recommend complex portfolios?"

Postby Taylor Larimore » Fri Dec 12, 2014 9:28 pm

Bogleheads:

A reader wrote to Mike Piper, editor of The Oblivious Investor, asking:
“On the Bogleheads forum I see people recommending The Three Fund Portfolio with Total Stock Market, Total International Stock, and Total Bond Market funds. But I never see something this basic anywhere else?"

Mike is a straight talker. He concludes:
In many cases, it’s more profitable to talk about something else.

Why Does Everybody Recommend Complex Portfolios?

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

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Re: "Why does everybody recommend complex portfolios?"

Postby Leeraar » Fri Dec 12, 2014 9:50 pm

Taylor Larimore wrote:Bogleheads:

A reader wrote to Mike Piper, editor of The Oblivious Investor, asking:
“On the Bogleheads forum I see people recommending The Three Fund Portfolio with Total Stock Market, Total International Stock, and Total Bond Market funds. But I never see something this basic anywhere else?"

Mike is a straight talker. He concludes:
In many cases, it’s more profitable to talk about something else.

Why Does Everybody Recommend Complex Portfolios?

Best wishes.
Taylor

Taylor,

I might add that Mike Piper personally uses the Vanguard LifeStrategy funds, which are about as pure a one-fund implementation of the three-fund portfolio as you can get.

Best wishes,

L.
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Life Strategy and Target Funds alternative

Postby Taylor Larimore » Fri Dec 12, 2014 10:16 pm

I might add that Mike Piper personally uses the Vanguard LifeStrategy funds, which are about as pure a one-fund implementation of the three-fund portfolio as you can get.

Leeraar:

Mr. Piper is a very knowledgeable investor who is on our Panel of Experts at Boglehead Conferences. I agree with Mike that for an investor without a taxable account (Total Bond Market is tax-inefficient), a single Vanguard Life Strategy or Target Fund can be an excellent alternative.

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

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Re: Life Strategy and Target Funds alternative

Postby Leeraar » Fri Dec 12, 2014 10:29 pm

Taylor Larimore wrote:
I might add that Mike Piper personally uses the Vanguard LifeStrategy funds, which are about as pure a one-fund implementation of the three-fund portfolio as you can get.

Leerarr:

Mr. Piper is a very knowledgeable investor who is on our Panel of Experts at Boglehead Conferences. I agree with Mike that for an investor without a taxable account (Total Bond Market is tax-inefficient), a single Vanguard Life Strategy or Target Fund can be an excellent alternative.

Best wishes.
Taylor

Taylor,

Maybe we should take a closer look at the supposed tax inefficiency of the Vanguard LifeStrategy funds. I am not sure that I see it.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: The Three Fund Portfolio

Postby RhoRho » Mon Dec 15, 2014 11:25 am

So does this mean that if I am only investing in my company's Traditional 401k (which does not have Vanguard) and Vanguard for my Roth IRA, there is no advantage to using the 3-fund portfolio if I am able to use Target Retirement?

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Re: The Three Fund Portfolio

Postby Taylor Larimore » Mon Dec 15, 2014 12:19 pm

RhoRho wrote:So does this mean that if I am only investing in my company's Traditional 401k (which does not have Vanguard) and Vanguard for my Roth IRA, there is no advantage to using the 3-fund portfolio if I am able to use Target Retirement?

RhoRho:

In this situation The Three Fund Portfolio has the advantage of allowing you to select the best (usually lowest cost) fund in your 401k and use your Roth to complete your asset-allocation plan.

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

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Re: The Three Fund Portfolio

Postby pingo » Mon Dec 15, 2014 6:15 pm

RhoRho wrote:So does this mean that if I am only investing in my company's Traditional 401k (which does not have Vanguard) and Vanguard for my Roth IRA, there is no advantage to using the 3-fund portfolio if I am able to use Target Retirement?


Taylor's right, but I'm not sure your question is as specific as you think it is and it may require an orientation that should only be done knowing your account situation and options. If Taylor's response doesn't answer your question, click here to start a "personal portfolio help" thread and click here to use forum guidelines so we can have all the pertinent information.

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Re: The Three Fund Portfolio

Postby RhoRho » Tue Dec 16, 2014 10:34 am

pingo wrote:
RhoRho wrote:So does this mean that if I am only investing in my company's Traditional 401k (which does not have Vanguard) and Vanguard for my Roth IRA, there is no advantage to using the 3-fund portfolio if I am able to use Target Retirement?


Taylor's right, but I'm not sure your question is as specific as you think it is and it may require an orientation that should only be done knowing your account situation and options. If Taylor's response doesn't answer your question, click here to start a "personal portfolio help" thread and click here to use forum guidelines so we can have all the pertinent information.


I just did that yesterday afternoon! My post is here: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=153103&newpost=2295916

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Re: Life Strategy and Target Funds alternative

Postby abuss368 » Tue Dec 16, 2014 4:56 pm

Taylor Larimore wrote:
I might add that Mike Piper personally uses the Vanguard LifeStrategy funds, which are about as pure a one-fund implementation of the three-fund portfolio as you can get.

Leeraar:

Mr. Piper is a very knowledgeable investor who is on our Panel of Experts at Boglehead Conferences. I agree with Mike that for an investor without a taxable account (Total Bond Market is tax-inefficient), a single Vanguard Life Strategy or Target Fund can be an excellent alternative.

Best wishes.
Taylor


The older I get, the more I appreciate investment simplicity and the all in one funds (i.e. Target Retirement and Life Strategy) that are available with Vanguard.

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: Life Strategy and Target Funds alternative

Postby BrandonBogle » Tue Dec 16, 2014 8:47 pm

abuss368 wrote:The older I get, the more I appreciate investment simplicity and the all in one funds (i.e. Target Retirement and Life Strategy) that are available with Vanguard.

Best.


Especially as Vanguard opens up institutional versions of the Target Date funds. This Institutional Target 2030 fund only has a 0.07% ER vs the 0.17% Er for the Investor version!

Investor:
https://personal.vanguard.com/us/funds/ ... IntExt=INT

Institutional Plus:
https://investor.vanguard.com/mutual-fu ... Fund=false

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Is there an Australian version of the 3 fund portfolio?

Postby Gateway » Sat Dec 20, 2014 2:18 am

Hi Guys

I am based in Australia.

We have Vanguard and its various ETF's now.

My mother has just retired on a Superannuation pension and has to invest in something with proceeds from the sale of investment properties (it was getting to hard to look after them). Is there an Aust version of the 3 fund strategy? She is 69years old and would like dividends to replace the rental income if that's possible.

Thanks
Gateway
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Re: The Three Fund Portfolio

Postby CoolHobieCat » Fri Dec 26, 2014 2:16 pm

Because I have been a Schwab client for decades, and because Schwab offers many ETFs at zero commission, that is where I live as a Boglehead. My portfolio is very light in the bond department, holding equal amounts of SCHP (TIPS) and SCHZ (Aggregate), but 95% of my account is in equities. I hold roughly equal amounts of SCHB, SCHD, SCHG, and SCHV.

Because I am retired, my ROTH IRA is all in, and I add to it as dividends are distributed. I chose to invest my dividends myself as they are distributed rather than automatically have them reinvested, but the net result has no real distinction. It is enjoyable to decide when and where to invest the dividends, so I allow myself that pleasure. My stock picking days are over. That era was fun, and I actually did very well at it, but being an index investor requires far less time and effort, and it also results in far less pressure on me to prove anything.

I am of the opinion that cheap crude oil, cheap natural gas, and low interest rates are going to be rocket fuel for the Market in 2015. I am buckled up, ready to ride, and prepared to stay the course.

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Re: The Three Fund Portfolio in Australia funds.

Postby Taylor Larimore » Fri Dec 26, 2014 3:34 pm

Is there an Australian version of the 3 fund portfolio?

Gateway:

I am not familiar with Vanguard's Australian funds and procedures to give you reliable advice. I suggest that you contact their Australian home office here:

https://www.vanguardinvestments.com.au/ ... t/home.jsp

In my opinion, Australian investors should not have the majority of their stocks in American companies.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Postby LadyGeek » Fri Dec 26, 2014 5:10 pm

CoolHobieCat wrote:Because I have been a Schwab client for decades, and because Schwab offers many ETFs at zero commission, that is where I live as a Boglehead. My portfolio is very light in the bond department, holding equal amounts of SCHP (TIPS) and SCHZ (Aggregate), but 95% of my account is in equities. I hold roughly equal amounts of SCHB, SCHD, SCHG, and SCHV.

Because I am retired, my ROTH IRA is all in, and I add to it as dividends are distributed. I chose to invest my dividends myself as they are distributed rather than automatically have them reinvested, but the net result has no real distinction. It is enjoyable to decide when and where to invest the dividends, so I allow myself that pleasure. My stock picking days are over. That era was fun, and I actually did very well at it, but being an index investor requires far less time and effort, and it also results in far less pressure on me to prove anything.

I am of the opinion that cheap crude oil, cheap natural gas, and low interest rates are going to be rocket fuel for the Market in 2015. I am buckled up, ready to ride, and prepared to stay the course.

Welcome! Yes, staying the course is a good approach. Your fund selections are somewhat more involved than a 3-fund portfolio (this thread).

Did you have any questions on your portfolio? If so, please start a new thread in Investing - Help with Personal Investments using the Asking Portfolio Questions format.

Here's a Schwab version, from: Three-fund portfolio (Other than Vanguard, Boglehead-style)

* Schwab Total Stock Market Index (SWTSX)
* Schwab International Index (SWISX)
* Schwab Total Bond Market (SWLBX)
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Re: The Three Fund Portfolio

Postby chaz » Fri Dec 26, 2014 5:26 pm

I gave up 3 funds for the simplicity of 1 fund, the Balanced Index fund. :D
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Re: The Three Fund Portfolio

Postby GloballyYours » Mon Dec 29, 2014 9:34 pm

One of the advantages of a simple three fund approach is that the temptation to churn one's own account is greatly reduced. So is the temptation to 'out smart' the market.

With that said, I have about 5 funds, having added an REIT fund, and a balanced income fund.

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Re: The Three Fund Portfolio

Postby GloballyYours » Mon Dec 29, 2014 9:38 pm

CoolHobieCat wrote:
I am of the opinion that cheap crude oil, cheap natural gas, and low interest rates are going to be rocket fuel for the Market in 2015. I am buckled up, ready to ride, and prepared to stay the course.


Nonsense. Everybody knows that these low energy prices will hurt economic growth world-wide. I know this is true because I head it on TV. And read it on the Internet. :D

Is there a sarcasm Smiley???

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Re: The Three Fund Portfolio

Postby Leeraar » Mon Dec 29, 2014 9:51 pm

GloballyYours wrote:Is there a sarcasm Smiley???

:P
L.
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Re: The Three Fund Portfolio

Postby LadyGeek » Mon Dec 29, 2014 10:09 pm

Please stay on-topic.
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Re: Life Strategy and Target Funds alternative

Postby BabylonOrBust » Tue Dec 30, 2014 6:09 pm

BrandonBogle wrote:
Especially as Vanguard opens up institutional versions of the Target Date fund. This Institutional Target 2030 fund only has a 0.07% ER vs the 0.17% Er for the Investor version!


If only there were an Admiral version! I've been invested solely in a Target Date fund for years, until I realized that I was paying a .10% fee premium over assembling the same portfolio myself with their Admiral shares and/or ETFs. I've switched to doing it this way now, even if it requires checking in to tweak it periodically.
Last edited by BabylonOrBust on Tue Dec 30, 2014 9:22 pm, edited 1 time in total.

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Re: The Three Fund Portfolio

Postby LadyGeek » Tue Dec 30, 2014 7:46 pm

Welcome! Here's the definition of Vanguard share classes: Vanguard share classes

Institutional shares have lower costs because, well, they're for the big players ("institutions") who have $5 mil+ to invest.

You are correct in that the Vanguard target retirement funds only use the investor share class. Why? I don't know.

Individual Admiral fund shares are the best an individual can do. However, there's nothing wrong with a target date fund - especially for its simplicity. If you want to only manage one fund, use a target date fund.
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Re: The Three Fund Portfolio vs. Target & Life Cycle funds.

Postby Taylor Larimore » Tue Dec 30, 2014 9:12 pm

Bogleheads:

The Three Fund Portfolio and Vanguard's Target and LifeStrategy funds have very similar expected risk and expected return -- assuming their stock/bond ratios are similar.

The Three Fund Portfolio is superior for investors with both taxable and tax-advantaged accounts because tax-efficient stock funds can be placed in the taxable account and tax-inefficient bond funds can be placed in tax-advantaged accounts.

For investors with only IRA's, I suggest a suitable (stock/bond ratio) target fund for its one-fund simplicity. This is especially true for a first time investor who can start-out with a low-cost, diversified, expertly designed, all-indexed portfolio with as little as $1000.

Best wishes.
Taylor
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Three Fund Portfolio Update

Postby Taylor Larimore » Thu Jan 01, 2015 2:13 pm

Bogleheads:

I have updated in red the Opening Post to include 2014 data.

Best wishes.
Taylor
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Re: The Three Fund Portfolio vs. Target & Life Cycle funds.

Postby abuss368 » Sat Jan 03, 2015 4:39 pm

Taylor Larimore wrote:Bogleheads:

The Three Fund Portfolio and Vanguard's Target and LifeStrategy funds have very similar expected risk and expected return -- assuming their stock/bond ratios are similar.

The Three Fund Portfolio is superior for investors with both taxable and tax-advantaged accounts because tax-efficient stock funds can be placed in the taxable account and tax-inefficient bond funds can be placed in tax-advantaged accounts.

For investors with only IRA's, I suggest a suitable (stock/bond ratio) target fund for its one-fund simplicity. This is especially true for a first time investor who can start-out with a low-cost, diversified, expertly designed, all-indexed portfolio with as little as $1000.

Best wishes.
Taylor


Hi Taylor,

I have a relative who moved to a simple Target Fund in the IRA and a Three Fund Portfolio in taxable. Total Stock, Total International, and Intermediate Tax Exempt. Asset Allocation is the same in both accounts. They are very happy with the simplicity!
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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Total Bond Fund vs. Tax-Exempt Intermediate-

Postby Taylor Larimore » Sat Jan 03, 2015 11:53 pm

Abuss368 wrote:
I have a relative who moved to a simple Target Fund in the IRA and a Three Fund Portfolio in taxable. Total Stock, Total International, and Intermediate Tax Exempt. Asset Allocation is the same in both accounts. They are very happy with the simplicity!

Abuss:

I see nothing seriously wrong using Vanguard Intermediate-Term Tax-Exempt Bond Fund in a taxable account instead of Total Bond Market. However, it is nearly always more efficient (higher return with less risk) to use taxable bonds in tax-deferred accounts than to use a similar tax-exempt fund in a taxable account. For example, Vanguard's Intermediate-Term Tax-Exempt Bond Fund (VWITX) has a 15-year average return of 4.84% VS. 5.47% for the less risky Total Bond Market Index Fund (VBMFX).

Best wishes.
Taylor
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Broad Market Index Funds, if left alone, can be lucrative

Postby Taylor Larimore » Sun Jan 04, 2015 11:11 am

Bogleheads:

More support for The Three Fund Portfolio in today's Yahoo Finance Page.

"Broad, relatively conservative investments like index funds and ETFs, if left largely alone, can be lucrative."

The Most Successful Investors Leave Their Money Alone"

Happy New Year!
Taylor
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Re: The Three Fund Portfolio

Postby Colorado Mac » Mon Jan 05, 2015 10:39 pm

I have what may be a very simple question.

Currently, I have about $400k of invested assets - about $250k is in a few retirement accounts (401K, IRA, etc.) and $150k in taxable accounts. Assuming I have decided my asset allocation percentages, should it matter if, for example, I put the equity funds in the tax deferred accounts and the bond fund? does it matter, or should I split each account between the same three funds?

I hope my question makes sense!

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Taylor Larimore
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Efficient Fund Placement

Postby Taylor Larimore » Tue Jan 06, 2015 9:37 am

Colorado Mac:

Welcome to the Bogleheads Forum!

If you split each account between the same three funds, either the stock funds or the bond funds will be in the wrong type account. You will also have twice as many funds as necessary. Follow this suggestion in the Opening Post:
Fund Placement for maximum tax-efficiency: Place Total Bond Market in a tax-advantaged account. Place Total Stock Market and Total International in either a tax-advantaged account or in a taxable account.

You can read more about efficient fund placement here.

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

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Re: The Three Fund Portfolio

Postby abuss368 » Tue Jan 06, 2015 10:46 am

Colorado Mac wrote:I have what may be a very simple question.

Currently, I have about $400k of invested assets - about $250k is in a few retirement accounts (401K, IRA, etc.) and $150k in taxable accounts. Assuming I have decided my asset allocation percentages, should it matter if, for example, I put the equity funds in the tax deferred accounts and the bond fund? does it matter, or should I split each account between the same three funds?

I hope my question makes sense!


Hi Colorado Mac,

It really is your call in terms of the best strategy that works for your needs and goals. Rick Ferri and his firm Portfolio Solutions recommended an "equal location" over "asset location" strategy. You can read an excellent article from Rick on this subject here:

http://www.rickferri.com/blog/strategy/ ... ake-sense/

Their are numerous advantages and disadvantages to both. The tax code is always in a state of change so it is difficult to base your strategy on the current tax code. In terms of the Three Fund Portfolio, a tax advantage account could include Total Stock, Total International, and Total Bond. A taxable account could include Total Stock, Total International, and Intermediate Term Tax Exempt. Both accounts would have the same asset allocation between stocks and bonds.

Please confine your questions to the Three Fund Portfolio or consider starting a new thread for specific questions on your personal needs.

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 LadyGeek » Tue Jan 06, 2015 4:30 pm

Colorado Mac wrote:I have what may be a very simple question.

Currently, I have about $400k of invested assets - about $250k is in a few retirement accounts (401K, IRA, etc.) and $150k in taxable accounts. Assuming I have decided my asset allocation percentages, should it matter if, for example, I put the equity funds in the tax deferred accounts and the bond fund? does it matter, or should I split each account between the same three funds?

I hope my question makes sense!

Also, welcome! I don't think you need to deep-dive into Tax-adjusted asset allocation (we can discuss this ad-nauseum - but not on this thread, please).

As abuss368 suggests, why don't you start a new thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions format?

The format is designed to make you think about the "big picture" while giving us the information we need to answer your questions. The answer does depend on your specific situation. We may find something you've overlooked, or suggest something you haven't thought about. Give it a shot?
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 columbia » Mon Jan 12, 2015 8:20 pm

Good news for the 403b plan at work:

I spoke with the chief benefits manager today and they are adding TSM, TISM and TBM to our available options through TIAA-CREF.

The current options for simulating Taylor's portfolio are:

CREF Stock (.49%)
TIAA S&P 500 (.32%)
Thornburg International Value Fund (1.25%)
Pimco Total Return (.85%)

The word is spreading..... :sharebeer
VT + TIAA Traditional

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Re: The Three Fund Portfolio

Postby ramkolluri » Sat Jan 17, 2015 11:27 am

Why not take this thought one step forward and invest in Vanguard Life Strategy Funds which allocate and rebalance your investments annually - using the three fund portfolio mentioned in the article. This approach allows for customization of investor risk (volatility) and income objectives. Once implemented, you can set and forget the portfolio (promise yourself not to panic for short - term volatility). For additional information on these funds, please visit: https://investor.vanguard.com/mutual-fu ... trategy/#/. If this thought is already discussed in the forum, my apologies in advance for the repetition.

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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Jan 17, 2015 12:42 pm

Welcome! We actually do take this one step forward, but it goes beyond the focus of this thread. This thread is focused only on the 3-fund portfolio, as it's one of the easiest things to do - once you are ready to go beyond the "fund-of-funds" approaches (Target retirement, Life Strategy, etc.).

The Vanguard LifeStrategy funds and Three-fund portfolio are part of a general class of investing techniques called Lazy portfolios.
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 GrandDesigns » Sat Jan 17, 2015 12:57 pm

LadyGeek wrote:Welcome! We actually do take this one step forward, but it goes beyond the focus of this thread. This thread is focused only on the 3-fund portfolio, as it's one of the easiest things to do - once you are ready to go beyond the "fund-of-funds" approaches (Target retirement, Life Strategy, etc.).

The Vanguard LifeStrategy funds and Three-fund portfolio are part of a general class of investing techniques called Lazy portfolios.


Yes, the 3 fund portfolio is great for me because I can shift my bonds to tax advantaged accounts unlike with a "fund of funds," but at the same time the amount of effort I have to put in my portfolio is pretty minimal.

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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Jan 17, 2015 1:21 pm

To be clear, there's absolutely nothing wrong with a "fund-of-funds". If you have one and like it, don't change anything - you're doing just fine.

For those that feel the need to have more control, or just simply want to play with something more complicated, the 3-fund portfolio is the next step.
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 gvsucavie03 » Sun Jan 18, 2015 9:20 am

I went with a three fund portfolio in my HSA (well, 4 to mix S&P 500 with mid-cap 80/20 to approximate the total market) and will do the same with retirement accounts. So simple, so effective, so peaceful.

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Re: The Three Fund Portfolio

Postby Jhwkzo » Sun Jan 18, 2015 11:17 am

Being an amateur at this, I am trying to understand the (practical) process of investing using a 3 Fund Portfolio.

If I wished to invest $11,500 annually in a 3 Fund Portfolio while meeting the following requirements:

1. max my Roth IRA contribution ($5500)
2. use a 60:40 stock:bond allocation

what could be some ways to do it (or alternate solutions)?

Also, since some of the funds would lie in taxable accounts, would a yearly rebalancing be impacted by taxes?

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Re: The Three Fund Portfolio

Postby Leeraar » Sun Jan 18, 2015 12:08 pm

Jhwkzo wrote:Being an amateur at this, I am trying to understand the (practical) process of investing using a 3 Fund Portfolio.

If I wished to invest $11,500 annually in a 3 Fund Portfolio while meeting the following requirements:

1. max my Roth IRA contribution ($5500)
2. use a 60:40 stock:bond allocation

what could be some ways to do it (or alternate solutions)?

Also, since some of the funds would lie in taxable accounts, would a yearly rebalancing be impacted by taxes?

I'd just invest it all in Vanguard LifeStrategy Moderate which is 60/40, and be done. There will be some taxes due to distributions in the taxable account. Do not let the tax tail wag the dog.

L.
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Re: The Three Fund Portfolio

Postby CABob » Sun Jan 18, 2015 12:20 pm

Jhwkzo wrote:If I wished to invest $11,500 annually in a 3 Fund Portfolio while meeting the following requirements:

1. max my Roth IRA contribution ($5500)
2. use a 60:40 stock:bond allocation

what could be some ways to do it (or alternate solutions)?

Also, since some of the funds would lie in taxable accounts, would a yearly rebalancing be impacted by taxes?

Is there also a 401k account available? One would need a bit more detail as far as account types and contributions now and in the future, but, my general approach would be:
1. Put the total bond fund allocation into the Roth.
2. Fill the rest of the Roth with total stock market fund.
3. Divide the balance of the total stock market fund and the total international stock fund as needed to maintain your desired asset allocation and put into a taxable account.

Any sale of funds (or transfer) in a taxable account would be a taxable event. Generally, I think you should be able to keep your asset allocation desired balance with new contributions and may not need to transfer between funds.
Bob

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Re: The Three Fund Portfolio

Postby Taylor Larimore » Sun Jan 18, 2015 12:39 pm

Jhwkzo wrote:Being an amateur at this, I am trying to understand the (practical) process of investing using a 3 Fund Portfolio.

If I wished to invest $11,500 annually in a 3 Fund Portfolio while meeting the following requirements:

1. max my Roth IRA contribution ($5500)
2. use a 60:40 stock:bond allocation

What could be some ways to do it (or alternate solutions)?

Also, since some of the funds would lie in taxable accounts, would a yearly rebalancing be impacted by taxes?

Jhwkzo:

Welcome to the Bogleheads Forum!

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

If the links in my Opening Post about "Asset Allocation" and "Fund Placement for Maximum Tax-Efficiency" do not answer your question, please ask your question with a new post on the "Help with Personal Investments" forum".
Since some of the funds would lie in taxable accounts, would a yearly rebalancing be impacted by taxes?

The answer is "probably yes." Our wiki has this excellent article about "Rebalancing."

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

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Re: Life Strategy and Target Funds alternative

Postby chaz » Sun Jan 18, 2015 12:48 pm

Taylor Larimore wrote:
I might add that Mike Piper personally uses the Vanguard LifeStrategy funds, which are about as pure a one-fund implementation of the three-fund portfolio as you can get.

Leeraar:

Mr. Piper is a very knowledgeable investor who is on our Panel of Experts at Boglehead Conferences. I agree with Mike that for an investor without a taxable account (Total Bond Market is tax-inefficient), a single Vanguard Life Strategy or Target Fund can be an excellent alternative.

Best wishes.
Taylor

Taylor,

Is the Balanced Index fund all right though it has only 2 funds?

Thanks.
Chaz | | | | “Money is better than poverty, if only for financial reasons." Woody Allen | | | | http://www.bogleheads.org/wiki/index.php/Main_Page


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