The Three-Fund Portfolio

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Re: The Three Fund Portfolio

Postby LadyGeek » Fri Jul 24, 2015 6:30 pm

FYI - New member minimalistmarc is asking for help with his 3-fund portfolio, which I moved into a new thread: The Three Fund Portfolio [Portfolio help, UK]
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"Winning the Loser's Game" with The Three Fund (Market) Portfolio

Postby Taylor Larimore » Fri Jul 24, 2015 10:01 pm

Bogleheads:

I recently added The Loser's Game by Charles Ellis to our Investment Gems. Mr. Ellis strongly recommends the market portfolio. These are excerpts:
"Successful investing does not depend on "beating the market."

"Trying to beat the market is so extraordinarily difficult to do--and so easy while trying to do better-- to do worse."

"Over and over again, facts and figures inform us that investment managers are failing to 'perform,' that is, to beat the market."

"The largest part of any portfolio's total long-term returns will come from the simplest investment decision that can be made, and by far the easiest to implement: buying the market."

"Investors would be wise to devote more attention to understanding the real advantages offered by the market fund."

"Most of the managers and clients who insist on trying to beat the market, either on their own or with professional managers, will be disappointed by the results. It is a loser's game."

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

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Re: The Three Fund Portfolio

Postby fishdrzig » Sat Jul 25, 2015 8:30 pm

A quick question with hopefully a quick answer.
I have enough money to buy the three fund portfolio in Admiral shares.
I do not have enough money to fill my tax deferred accounts and "spill over" into my taxable account.
Would it still be prudent to just put the VBTLX in the tax deferred account for now or just purchase a Target date Fund and call it a day?

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Fund placement

Postby Taylor Larimore » Sat Jul 25, 2015 8:43 pm

fishdrzig:

VBTLX (Vanguard Total Bond Market Admiral) should be in a tax-deferred account. There are exceptions, but most funds are better in a tax-deferred account than in a taxable account.'

If all your funds are in a tax-deferred account, consider the appropriate Target Fund for simplicity.

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

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Re: The Three Fund Portfolio

Postby fishdrzig » Sun Jul 26, 2015 9:01 am

VBTLX = Vanguard Total Bond Market Index Adm not the international.

I guess my question simply is this, "is it wrong to place this fund in a tax deferred account if I have the space for it"? I would prefer just to use the TFP and not a Target retirement fund. thank you

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Re: The Three Fund Portfolio

Postby fishdrzig » Sun Jul 26, 2015 2:58 pm

Just ignore my last question, I had it all backwards went back and reread what I needed to and answered my own question. Sorry for the confusion

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Re: The Three Fund Portfolio

Postby Ma15 » Thu Jul 30, 2015 12:30 am

.....
Last edited by Ma15 on Sun Apr 03, 2016 4:21 am, edited 1 time in total.

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Re: The Three Fund Portfolio

Postby abuss368 » Thu Jul 30, 2015 12:50 am

Ma15 wrote:With thanks to Taylor for this excellent post and to other Bogleheads, I've developed a plan, finalised my portfolio and sent my paperwork to Vanguard (Aus) to invest $100,000:

- 25% Australian Fixed Interest Index Fund (0.24%)
- 12% Australian Shares Index Fund (0.18)
- 63% International Shares Index Fund (0.18%)


Hi Ma15,

I am happy to hear that update and the Three Fund Portfolio.

You are on the road to financial freedom.
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: Fund placement

Postby abuss368 » Thu Jul 30, 2015 12:51 am

Taylor Larimore wrote:fishdrzig:

VBTLX (Vanguard Total Bond Market Admiral) should be in a tax-deferred account. There are exceptions, but most funds are better in a tax-deferred account than in a taxable account.'

If all your funds are in a tax-deferred account, consider the appropriate Target Fund for simplicity.

Best wishes.
Taylor


Thank you Jack Bogle for this 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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Re: The Three Fund Portfolio

Postby fishdrzig » Fri Jul 31, 2015 12:41 pm

I am thinking about adding some TIPS to my 3 fund portfolio. Can anyone comment on VTIP vs VIPSX and why one would be better? Thank you.

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Adding specific funds to The Three Fund Portfolio

Postby Taylor Larimore » Fri Jul 31, 2015 3:27 pm

fishdrzig wrote:I am thinking about adding some TIPS to my 3 fund portfolio. Can anyone comment on VTIP vs VIPSX and why one would be better? Thank you.

fishdrzig:

The primary advantages of The Three Fund Portfolio are its low-cost, broad diversification, and 3-fund simplicity. Adding additional funds to your portfolio may or may not improve performance but they will almost certainly add cost and complexity.

Please post questions about adding specific funds to your personal portfolio on the Help With Personal Investing 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

Postby abuss368 » Fri Jul 31, 2015 10:01 pm

fishdrzig wrote:I am thinking about adding some TIPS to my 3 fund portfolio. Can anyone comment on VTIP vs VIPSX and why one would be better? Thank you.


Hi fishdrzig,

I would pass on the TIPS fund. Vanguard investment experts recommend a Four Fund Portfolio that consists of Total Stock Index (U.S.), Total International Stock Index, Total Bond Index (U.S.), and Total International Bond Index.

It is most important to keep investing simple.

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 bertilak » Sat Aug 01, 2015 7:33 am

fishdrzig wrote:I am thinking about adding some TIPS to my 3 fund portfolio. Can anyone comment on VTIP vs VIPSX and why one would be better? Thank you.

My understanding of TIPS is that they are good for guaranteed income using, for example, a ladder where they mature on a regular basis and do so at their inflation-adjusted values. When investing as part of an overall portfolio as diversification or as a damper on equity volatility, regular bonds are better: they have a higher return AND their prices/returns already account for (expected) inflation. TIPS are a guarantee against UNEXPECTED inflation, a guarantee you pay for via the reduced returns. So, unless you need that guarantee, don't pay for it; go with regular bonds. That is a general statement. All bond prices can be bid up and down for a variety of reasons.

Someone please jump in and correct that if it is off base. (Perhaps there are other good reasons to old TIPS.)
I have a strong moral sense - by my standards. | -- Rex Stout

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Re: The Three Fund Portfolio

Postby abuss368 » Sat Aug 01, 2015 8:19 am

bertilak wrote:
fishdrzig wrote:I am thinking about adding some TIPS to my 3 fund portfolio. Can anyone comment on VTIP vs VIPSX and why one would be better? Thank you.

My understanding of TIPS is that they are good for guaranteed income using, for example, a ladder where they mature on a regular basis and do so at their inflation-adjusted values. When investing as part of an overall portfolio as diversification or as a damper on equity volatility, regular bonds are better: they have a higher return AND their prices/returns already account for (expected) inflation. TIPS are a guarantee against UNEXPECTED inflation, a guarantee you pay for via the reduced returns. So, unless you need that guarantee, don't pay for it; go with regular bonds. That is a general statement. All bond prices can be bid up and down for a variety of reasons.

Someone please jump in and correct that if it is off base. (Perhaps there are other good reasons to old TIPS.)


Nice post.
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 darrvao777 » Sat Aug 01, 2015 9:03 am

Anyone think about deviating from VTIAX given all the international unrest? Or is that the epitome of attempting to market time?

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Re: The Three Fund Portfolio

Postby abuss368 » Sat Aug 01, 2015 1:20 pm

darrvao777 wrote:Anyone think about deviating from VTIAX given all the international unrest? Or is that the epitome of attempting to market time?


It would be considered market timing. I would stay the course and if the fund declines continue to invest.
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 rca1824 » Wed Aug 05, 2015 8:42 am

With TBM yielding 2.13%, why wouldn't one want to consider an FDIC-insured 5y CD with CapitalOne yielding 2.25%, or an EE bond which yields a guaranteed 3.5% over 20 years. Since these assets are illiquid, could a 3-funder hold a small slice of TBM for rebalancing purposes while keeping these other assets?
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Keep investing simple.

Postby Taylor Larimore » Wed Aug 05, 2015 10:00 am

rca1824 wrote:With TBM yielding 2.13%, why wouldn't one want to consider an FDIC-insured 5y CD with CapitalOne yielding 2.25%, or an EE bond which yields a guaranteed 3.5% over 20 years. Since these assets are illiquid, could a 3-funder hold a small slice of TBM for rebalancing purposes while keeping these other assets?

rca1824:

We are constantly tempted to complicate our portfolios with additional securities. The primary benefit of The Three Fund Portfolio (which already holds over 17,000 diversified securities) is its simplicity and superior long-term returns. You can add more securities if you wish, but I urge you to keep investing simple.

Read my link below.

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

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Re: Keep investing simple.

Postby rca1824 » Wed Aug 05, 2015 11:46 am

Taylor Larimore wrote:
rca1824 wrote:With TBM yielding 2.13%, why wouldn't one want to consider an FDIC-insured 5y CD with CapitalOne yielding 2.25%, or an EE bond which yields a guaranteed 3.5% over 20 years. Since these assets are illiquid, could a 3-funder hold a small slice of TBM for rebalancing purposes while keeping these other assets?

rca1824:

We are constantly tempted to complicate our portfolios with additional securities. The primary benefit of The Three Fund Portfolio (which already holds over 17,000 diversified securities) is its simplicity and superior long-term returns. You can add more securities if you wish, but I urge you to keep investing simple.

Read my link below.

Best wishes.
Taylor


Got it.. simplicity for its own sake, even if its not mathematically optimal.

Though is it truly necessary to diversify bonds if the security is already risk-free? If you buy TBM and hold it for 5 years you can expect 2.13% +/- some noise. If you buy a 5-year CD and hold it for 5 years you get exactly 2.25%, with 100% certainty. Now maybe it's not worth adding complexity for an extra 12 bp, but mathematically isn't it optimal to convert some TBM to CDs, once your liquidity needs are met? Isn't the price of TBM distorted because of large institutional investors who don't have access to FDIC insurance, EE bonds, or I bonds? A lot of people here even if they use TSM on the equity side will hold higher yield risk-free alternatives to TBM which seems like a free lunch (not counting cost of managing complexity, which to some hands-on people is a "benefit") TBM contains a lot of treasuries of all maturities, including probably some 5-year treasuries with a yield of only 1.6%, which is a more prominent 65 bp less than the CD. So it doesn't make sense from an efficient market point of view to hold a 5 year treasury over a 5 year CD. It would be interesting if there was a "TBM arbitrage fund" that replaced the treasuries with CDs for higher risk-free yield.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: The Three Fund Portfolio

Postby RevYoung » Wed Aug 05, 2015 12:22 pm

If you have a crystal ball and know the return of TBM for the next 5 to 20 years, then you should definitely go with your crystal ball. I'm not sure why you are asking those of us without crystal balls. ;)

As for me, I will stick with TBM so I am holding it when its return surpassed your CD and/or EE bond. :)

But really, the idea of "bond picking" doesn't appeal to me any more than stock picking. YMMV

Best of luck with whatever you decide to do.
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Optimal portfolios ?

Postby Taylor Larimore » Wed Aug 05, 2015 2:36 pm

Got it.. simplicity for its own sake, even if its not mathematically optimal.

Many academics believe Total Market Index Funds ARE optimal:

Three Proofs that TSM is Efficient

"In my view, owning the market and holding it forever is the ultimate strategy for winners." -- John Bogle.

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

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Re: The Three Fund Portfolio

Postby rca1824 » Fri Aug 07, 2015 1:07 pm

RevYoung wrote:If you have a crystal ball and know the return of TBM for the next 5 to 20 years, then you should definitely go with your crystal ball. I'm not sure why you are asking those of us without crystal balls. ;)

As for me, I will stick with TBM so I am holding it when its return surpassed your CD and/or EE bond. :)

But really, the idea of "bond picking" doesn't appeal to me any more than stock picking. YMMV

Best of luck with whatever you decide to do.



We have a pretty good idea what the return of TBM will be over the next 5 years. It will be the stated SEC yield of 2.13%, +/- volatility from interest rate and credit risk.

CDs, on the other hand, will return exactly 2.25% over the next 5 years if held to maturity.

As KevinM has discovered, interest rate risk is actually mitigated because you have a call option on CDs, forfeiting half year interest to repurchase at the newer rate.

The yield on a CD is 50% greater than a treasury bond of equivalent maturity, it strictly dominates the returns of treasuries even under interest rate risk, because of the call option.

The only downside is it's arguably more complex to trade CDs than treasuries.

Do you disagree?

As I understand it, the option to invest in CDs is a subsidy the FDIC gives small time (<$250K) investors. Why not exploit that subsidy if you qualify?

Ditto for I- and EE-bonds, due to their $10k annual purchase limit. Though I can imagine that not every investor has room for those in their portfolio. CDs are less controversial.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Optimal portfolios ?

Postby rca1824 » Fri Aug 07, 2015 1:15 pm

Taylor Larimore wrote:
Got it.. simplicity for its own sake, even if its not mathematically optimal.

Many academics believe Total Market Index Funds ARE optimal:

Three Proofs that TSM is Efficient

"In my view, owning the market and holding it forever is the ultimate strategy for winners." -- John Bogle.

Best wishes.
Taylor


Taylor, I am a bit confused by Proof 3 using the F-F model. I have some graduate school background so I can read this academic language, but I don't follow his logic.

A portfolio A is “less risky” than a portfolio B if all three of the risk betas for
A are less than or equal to the corresponding risk betas of B, and at least one
of A’s risk betas is strictly less than the corresponding risk beta of B


I don't think is true. I don't think a portfolio needs to have lower loads on all factors to achieve less risk. If the risks are uncorrelated, one can achieve lower aggregate risk by mixing up the factor loads. In other words, instead of (1,0,0) of the market portfolio, one could do (0.6, 0.1, 0.1) which may be less volatile. Isn't it better to mix different uncorrelated risks to get superior risk-adjusted returns?

In other words I am using the formula for summing variances. The variance of a portfolio should the sum of the variance of each risk factor. So if all risks were equal in magnitude (to simply the math), normalized to 1, and uncorrelated, then the variance of the market portfolio is 1. But the variance of my (0.5, 0.5, 0.5) portfolio is only 0.75. Yet it has a total factor loading of 1.5. So the risk-adjusted return is twice that of the broad market.

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Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Total Bond Market returns in rising inflation ?

Postby Taylor Larimore » Fri Aug 07, 2015 4:30 pm

We have a pretty good idea what the return of TBM will be over the next 5 years. It will be the stated SEC yield of 2.13%, +/- volatility from interest rate and credit risk.

RCA 1824:

Vanguard Total Bond Market Index Fund is constantly buying and selling individual bonds to stay within its mandate. It currently holds over 16,000 individual bonds and has a portfolio turnover of 72%/year according to Morningstar. If yields rise, TBM managers will be replacing lower yielding bonds with higher-yielding bonds. For this reason, TBMs current yield will almost certainly understate future returns in a rising yield environment.

In 1976 U.S. inflation was 4.9%. In 1979 it was 13.3%; an increase of 8.4% in 3 years. Meanwhile Barclay's Aggregate Bond Index (benchmark for TBM) total return was:

15.6% in 1976
3.0% in 1977
1.4% in 1978
1.9% in 1979.

Best wishes
Taylor
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Re: The Three Fund Portfolio

Postby Settlement » Thu Aug 13, 2015 12:04 am

Taylor, as an Irish investor investing in euro, is there any reason why I shouldn't pursue this three fund portfolio?

I am not sure that I can use tax advantaged accounts like US residents but are there any other barriers to my investing with this portfolio? I want 75% stocks and 25% bonds

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Merged posts to proper forum

Postby LadyGeek » Fri Aug 14, 2015 7:57 am

Settlement has also requested assistance in 2 different threads. I merged some helpful posts, along with his other threads together and retitled the thread to draw the attention of our non-US members.

Please assist Settlement here: Advice please [Irish citizen, working in Australia]
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VT as alternative to VTI+VXUS: 2 funds instead of 3

Postby Seattlenative » Fri Aug 14, 2015 12:50 pm

I've written about my perspective, as someone who has in the past tended to fiddle around with various flavors of "slice-and-dice" and active buying-and-selling, about the option of using the Vanguard Total World Stock Index (VT) in lieu of separate positions in VTI + VXUS. If you are of the opinion (as is John Bogle himself) that there's relatively little advantage to investing in overseas markets, then by all means just buy VTI as your equity holding.

If you as an individual investor accept that, like it or not, our equity markets are global by nature (a bit over 50% domiciled in the USA - the remainder domiciled in other nations belonging to the capitalist world - I'd like to quote perhaps the best argument I've ever seen for making the Vanguard Total World Stock ETF (VT) a core buy-and-accumulate ETF holding, by Elisabeth Kashner, Director of Research, etf.com:

Passive investing has a deep humility at its core—the aim is not to separate winners from losers, but rather to hold the entire market. The S&P 500 doesn’t hold the entire market. Vanguard offers many fine index funds—none of them broader in focus than the one I mentioned above: the Vanguard Total World Stock ETF. VT is as close as you’re going to come to the entire global equity market. VT holds all 504 securities in the S&P 500, plus 5,673 others. You’ll get exposure to Nestle, Roche, HSBC, Toyota, Samsung and BHP Billiton, as well as up-and-coming U.S. firms like Tesla and LinkedIn.
(bold added for emphasis).

http://www.etf.com/sections/blog/22245-mrs-buffett-about-that-index-fund.html?nopaging=1

If you wished, you could literally construct a two-fund portfolio, with equities covering the entire global stock market: 60% VT, 40% BND (or AGG).

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Re: The Three Fund Portfolio

Postby gvsucavie03 » Fri Aug 14, 2015 6:57 pm

Seattlenative - some of us don't want that much exposure to non-US for the extra risk and volitility it poses.

Also, for someone like me who will use mutual funds for their added simplicity, there are no Admiral shares of a mutual fund corresponding to VT. Holding the two sides separately let's me lower my expenses even more.

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Re: The Three Fund Portfolio

Postby Maxman » Sat Aug 15, 2015 8:51 pm

How do you make regular withdrawals out of the 3 fund portfolio?

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Re: The Three Fund Portfolio -- Making withdrawals?

Postby Taylor Larimore » Sat Aug 15, 2015 9:12 pm

Maxman wrote:How do you make regular withdrawals out of the 3 fund portfolio?

Maxman:

Withdrawing from The Three Fund Portfolio is easy:

Assuming you have all three funds in tax-advantaged accounts, simply withdraw from the over-performing fund(s) for automatic rebalancing.

If you have both tax-advantaged and taxable accounts, it is usually best to withdraw from the taxable account first. Rebalance by exchanging funds in your tax-advantaged account(s).

For more information read this post on our wiki:

Withdrawal Methods

Best wishes.
Taylor
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"Why not diversify beyond The Three Fund Portfolio?"

Postby Taylor Larimore » Sat Aug 15, 2015 10:43 pm

Bogleheads:

Earlier this week a Boglehead asked, "Why not diversify beyond The Three Fund Portfolio?" This was my reply:
The Three Fund Portfolio is already VERY diversified with over 17,000 world-wide securities in what many academics believe is the most efficient combination for maximum return with minimum risk.

The Three Fund Portfolio may appear simple, but it is actually very sophisticated. It is guaranteed to beat the average investor. It lowers costs (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, The Three Fund Portfolio allows the investor to spend more time with family and friends."

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

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Re: The Three Fund Portfolio

Postby Maxman » Sun Aug 16, 2015 12:47 pm

Maxman:

Withdrawing from The Three Fund Portfolio is easy:

Assuming you have all three funds in tax-advantaged accounts, simply withdraw from the over-performing fund(s) for automatic rebalancing.


Taylor, what I do now is have approximately two years spending in Vanguard short term bond index fund. The rest is spread 70/30 in the 3 fund portfolio. I withdrawal from the short term bond fund and if the portfolio is up after a year I add another year to the short term bond fund. If the portfolio is down I don't add any to the short term bond fund. After 2 down years I would have to replenish the short term bond fund for another year. This way hopefully I won't have to sell equities in a down market as most down market don't last 2 years.

My question is at 61 and retired do you think this is a viable strategy and is my 70/30 spread too aggressive as we need it to live on?

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Help with personal investments

Postby Taylor Larimore » Sun Aug 16, 2015 2:53 pm

My question is at 61 and retired do you think this is a viable strategy and is my 70/30 spread too aggressive as we need it to live on?

Maxman:

I think you have a "viable strategy" but I cannot say whether your 70% stock/30% bond spread is too aggressive or not. It depends on your goals, your time-frame, your risk tolerance, and your personal financial situation. Use this Vanguard Tool to help you decide.

If you have more questions about your personal portfolio, please post them in the "Help with Personal Investments Forum" where where you will received more (and perhaps better) replies:

Investing -- Help With Personal Investments [link fixed by admin LadyGeek]

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

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Total Market Index Funds

Postby Taylor Larimore » Thu Aug 20, 2015 8:24 am

Bogleheads:

Toto238 posted a very informative Morningstar chart showing the 23-year returns and volatility of Total Market Index Fund and its sub-allocations of Growth and Value indexes. This was his conclusion:
This is why most BHs here choose Total Funds whenever possible. It maximizes diversification, thus reducing the volatility in our portfolios. And despite us having lower volatility (and therefore less risk), our expected return stays exactly the same. Diversification is the only free lunch in investing. It allows you to reduce risk without reducing expected return.

23-year returns for three Vanguard index funds: Total Stock Market Index (VTSMX); Value Index (VIVAX); and Growth Index (VIGRX).

Best wishes.
Taylor
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"Do Stocks Outperform Bonds? Really"

Postby Taylor Larimore » Fri Aug 21, 2015 10:35 am

Bogleheads:

Boglehead author and advisor, Allan Roth. did an article for AARP magazine. I think you will be surprised, as I was, with the past 15 1/2 years compound returns of the three funds in The Three Fund Portfolio:
"So far this century (15 1/2 years), bonds have beaten U.S. stocks and they’ve clobbered international stocks. Take a look:

Vanguard Total Bond Index Fund (VBMFX), 121.7%.
Vanguard Total Stock Index Fund (VTSMX), 104.1%.
Vanguard Total International Stock Index Fund (VGTSX), 66.8%."

Do Stocks Outperform Bonds? Really?

Best wishes.
Taylor
Last edited by Taylor Larimore on Fri Aug 21, 2015 1:45 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

gvsucavie03
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Re: The Three Fund Portfolio

Postby gvsucavie03 » Fri Aug 21, 2015 11:04 am

Wow, very surprising. Great information, great article! Thank you for sharing!

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Taylor Larimore
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Why Total Bond Market Index Fund "Makes Sense"

Postby Taylor Larimore » Fri Aug 21, 2015 4:51 pm

Bogleheads:

Author of 7 financial books and adviser, Rick Ferri, CFA, made a post today explaining why Total Bond Market Index Fund in The Three Fund Portfolio "makes sense":
There is some equity risk in corporate bond returns at times, and if you feel uncomfortable with that, you might want to own more government backed bonds. My view is to be diversified. It's OK to accept the higher risk of corporate bonds because we're paid for it, but also have government bonds. That's why a Total Bond Market Index fund makes sense. There is both corporate and government.

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

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Re: The Three Fund Portfolio

Postby galeno » Sat Aug 22, 2015 5:08 pm

We use the 2 ETF portfolio. Vanguard total world equity automatically decides our USA vs non-USA equity allocation. It makes investing even simpler vs the 3 fund portfolio.

Cash wrote:Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 2.8%. TER = 0.5%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

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Re: The Three Fund Portfolio

Postby gvsucavie03 » Sat Aug 22, 2015 6:03 pm

galeno wrote:We use the 2 ETF portfolio. Vanguard total world equity automatically decides our USA vs non-USA equity allocation. It makes investing even simpler vs the 3 fund portfolio.

Cash wrote:Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?


This has also been discussed on this and other threads... I for one do not like the added risk in my portfolio from more exposure to the volatile international markets plus currency risk. As another thread has pointed out (perhaps Rick Ferri wrote it) that the S&P 500 already has a very "global" dynamic in that there is a lot of international companies/currency intertwined with the big companies of the S&P.

For those like me that invest in mutual funds and not ETF's, there are no Admiral shares available of the Total World Stock and the ER is relatively high at .27% - which is more than Investor shares of both TSM and TISM. The ETF ER is .17%, which is the same as Investor shares of TSM... you can do better holding the two funds separately.

I can stomach 20% equities in international, but probably no more than that.

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RevYoung
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Re: The Three Fund Portfolio

Postby RevYoung » Sat Aug 22, 2015 6:51 pm

It's funny you mention Rick Ferri. His most recent blog post is about exactly this issue. His Should You Own Foreign Stocks? conclusion?

Industry diversification is where Bogle’s view on forgoing direct foreign stock exposure may break down. Some industries can export more easily and other industries do not have that benefit. Electric utility companies are constrained by local electric utility and are a prime example of a home bias. A direct investment in foreign stocks would round out a global portfolio by including foreign companies with localized industries.

John Bogle doesn’t embrace direct ownership of foreign stocks while I believe there is a worthwhile diversification benefit to owning them. It appears we’re both right in some respects, and perhaps it matters little in the grand scheme of things. Only time will tell. I’m putting information on the table so you can make a more informed investment decision for yourself.


It's a very interesting discussion. I got some great feedback when I asked about the matter not too long along in another thread:

How important is an international allocation?

Perhaps it would make sense to discuss it further outside of the Three Fund Portfolio thread. :)
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Re: The Three Fund Portfolio

Postby gvsucavie03 » Sat Aug 22, 2015 8:51 pm

RevYoung wrote:It's funny you mention Rick Ferri. His most recent blog post is about exactly this issue. His Should You Own Foreign Stocks? conclusion?

Industry diversification is where Bogle’s view on forgoing direct foreign stock exposure may break down. Some industries can export more easily and other industries do not have that benefit. Electric utility companies are constrained by local electric utility and are a prime example of a home bias. A direct investment in foreign stocks would round out a global portfolio by including foreign companies with localized industries.

John Bogle doesn’t embrace direct ownership of foreign stocks while I believe there is a worthwhile diversification benefit to owning them. It appears we’re both right in some respects, and perhaps it matters little in the grand scheme of things. Only time will tell. I’m putting information on the table so you can make a more informed investment decision for yourself.


It's a very interesting discussion. I got some great feedback when I asked about the matter not too long along in another thread:

How important is an international allocation?

Perhaps it would make sense to discuss it further outside of the Three Fund Portfolio thread. :)


I knew I read it somewhere... but to stay on topic, that's the answer to galeno's post about TWSM + TBM. I don't like my allocation that fixed, and I don't think it adds simplicity for the risk I would be assuming.

Honestly, a Target Retirement Fund (30% allocation to International, plus some to Int. Bonds) is the "Big Easy" when it comes to set-and-forget (plus lower ER's than TWSM).

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Taylor Larimore
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Why not Total World + Total Bond Market?

Postby Taylor Larimore » Sat Aug 22, 2015 8:53 pm

Cash wrote: wrote:
Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?

Cash:

You may be surprised to learn that you asked this same question three years ago on page 1. This was my reply (figures updated):

Cash:

I have considered simplifying The Three Fund Portfolio to a Two Fund Portfolio (Total World + Total Bond Market). However, keeping Total U.S. Stock Market and Total International Stock Market separate has several advantages:

Lower Expense Ratio: Total Stock Market (VTSAX) = .05%; Total International (VTIAX) = .14%; Total World (VTWSX) = .27%

Lower Turnover (hidden cost): Total Stock Market = 4.3%; Total International = 2.7%; Total World = 7.3%

Better Tax Efficiency (3 years): Total Stock Market = .49; Total International = .90; Total World = .87

Better diversification (lower risk): Total U.S. Stock Market and Total International (combined) hold 9,701 stocks. Total World holds 7,262.

More U.S. stocks: Total World contains approximately 52% U.S. stocks. Many authorities, including Mr. Bogle, believe this is inadequate for U.S. investors.

Flexibility: The ratio between U.S. Total Stock Market and Total International is flexible for investors wherever they live in the world.

Admiral shares: Unlike Total Stock Market and Total International, Total World has no Admiral shares

Best wishes.
Taylor
Last edited by Taylor Larimore on Sun Aug 23, 2015 7:33 am, edited 1 time in total.
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gvsucavie03
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Re: Why not Total World + Total Bond Market?

Postby gvsucavie03 » Sat Aug 22, 2015 9:17 pm

Taylor Larimore wrote:ETF shares: Unlike Total Stock Market and Total International, Total World has no ETF shares


This is the only major thing that has changed to my knowledge (since you did write it 3 years ago....)

It does not offer Admiral Shares of the mutual fund.

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Re: Why not Total World + Total Bond Market?

Postby Cash » Sun Aug 23, 2015 7:16 am

Taylor Larimore wrote:Cash:

You may be surprised to learn that you asked this same question three years ago on page 1. This was my reply (figures updated):


Fortunately, my memory hasn't failed me yet, and yours obviously hasn't failed you either! :D I did not ask the question again, but it looks like someone quoted my post from 3 years ago.

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Re: "Winning the Loser's Game" with The Three Fund (Market) Portfolio

Postby abuss368 » Sun Aug 23, 2015 8:20 pm

Taylor Larimore wrote:Bogleheads:

I recently added The Loser's Game by Charles Ellis to our Investment Gems. Mr. Ellis strongly recommends the market portfolio. These are excerpts:
"Successful investing does not depend on "beating the market."

"Trying to beat the market is so extraordinarily difficult to do--and so easy while trying to do better-- to do worse."

"Over and over again, facts and figures inform us that investment managers are failing to 'perform,' that is, to beat the market."

"The largest part of any portfolio's total long-term returns will come from the simplest investment decision that can be made, and by far the easiest to implement: buying the market."

"Investors would be wise to devote more attention to understanding the real advantages offered by the market fund."

"Most of the managers and clients who insist on trying to beat the market, either on their own or with professional managers, will be disappointed by the results. It is a loser's game."

Best wishes.
Taylor


Hi Taylor,

I agree with the "market portfolio" as noted. Vanguard recommends the market portfolio using total market index funds. The "difference" (for lack of better terms) is that Vanguard also includes Total International Bond Index as part of the market portfolio.
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 bh7 » Sat Aug 29, 2015 11:11 am

Taylor, loving these quotes. Some of them contradict things I know about some of these authors though

Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-maket index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."


In Malkiel's more recent writings he is advocating above-market concentrations in emerging markets.

Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."


I read an article by Rick Ferri recently where he advocates adding TIPS and REITs to make a 5-fund portfolio.

Warren Buffett, famed investor: “I’d rather be certain of a good return than hopeful of a great one. -- Most investors are better off putting their money in low-cost index funds."


Buffett himself never held an index fund as I understand... he owns Berkshire Hathaway which tries to actively pick winners.

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."


Bernstein has also, at other times, advocating slicing and dicing.

Bill Schultheis, author of The Coffee House Investor: The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market."


Also slice and dicing.

Larry Swedroe, author of 17 financial books: "Over the last 75-years, investors who simply invested passively in the total U.S. stock Market would have doubled their investment approximately every seven years."


Also tilts.


So I am just trying to wrap my head around why these people are listed as 3-funders when they have a large volume of work directly contradicting the 3-fund portfolio

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Re: The Three Fund Portfolio

Postby bh7 » Sat Aug 29, 2015 11:29 am

Re: Rick Ferri. While trying to find that article where he recommends the 5-fund portfolio, I found this other article where he recommends something even crazier: a 10-fund portfolio.

http://awealthofcommonsense.com/rick-fe ... portfolio/

Image

So I'm very disappointed to see these "experts" flip their opinion and offer contradictory advise.

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Re: The Three Fund Portfolio

Postby Rotsevni » Sat Aug 29, 2015 11:47 am

VanGuards funds are great ( and many of them have a low expense ratio ) however my broker doesn't have most VanGuards funds..grrr

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RevYoung
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Re: The Three Fund Portfolio

Postby RevYoung » Sat Aug 29, 2015 11:53 am

People's opinion's change — even from one day to another. They are not "three-funders". They are investors. The quotes are still good (and, in my opinion, true), but even some staunch believers abandon their faith (and vice versa).

My main takeaway is that it's hard to beat the three fund portfolio, but people still have fun trying. :wink:
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Re: The Three Fund Portfolio

Postby LadyGeek » Sat Aug 29, 2015 12:27 pm

Rotsevni wrote:VanGuards funds are great ( and many of them have a low expense ratio ) however my broker doesn't have most VanGuards funds..grrr

Welcome! While Vanguard may have great funds, they are not the only fund company. If you don't have access to Vanguard, why don't you start a new thread in the Investing - Help with Personal Investments forum? Use the Asking Portfolio Questions format.

We'll help you invest using the Bogleheads® investment philosophy. You don't need Vanguard and can use this investing approach world-wide.
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