The Three-Fund Portfolio

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Taylor Larimore
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Re: The Three-Fund Portfolio

Postby Taylor Larimore » Wed May 18, 2016 9:00 pm

Franko1966 wrote:Over 15,000 non-overlapping securities is very impressive! I own Lifestrategy Growth in my Roth and 2030 Target Fund in my Tradational IRA...with the Vanguard International Bond what would that number be of non-overlapping securities? Just curious!

Franko1966:

Below are the current numbers of securities in each Vanguard index fund:

3,668 Total U.S. Stock Market
8,006 Total U.S. Bond Market
6,050 Total International Stock
4,009 Total International Bond

21,733 Non-overlapping securities.

Best wishes.
Taylor
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Re: The Three-Fund Portfolio

Postby abuss368 » Wed May 18, 2016 9:53 pm

Taylor Larimore wrote:
Franko1966 wrote:Over 15,000 non-overlapping securities is very impressive! I own Lifestrategy Growth in my Roth and 2030 Target Fund in my Tradational IRA...with the Vanguard International Bond what would that number be of non-overlapping securities? Just curious!

Franko1966:

Below are the current numbers of securities in each Vanguard index fund:

3,668 Total U.S. Stock Market
8,006 Total U.S. Bond Market
6,050 Total International Stock
4,009 Total International Bond

21,733 Non-overlapping securities.

Best wishes.
Taylor


That is a tough investment portfolio to beat.
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 Fieldsy1024 » Thu May 19, 2016 2:35 pm

The VGTSX (Total Int'l Stock) has been dropping and dropping it seems like. I am getting frustrated with it.

How much percentage is in everyone's 3 fund?

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Re: The Three-Fund Portfolio

Postby Jacklh » Thu May 19, 2016 3:20 pm

abuss368 wrote:
phanas wrote:ok Taylor, now I understand this issue better.

So I have a single Vanguard Target Retirement Fund in IRA account, a single Fidelity Target Retirement in employee 401k account. In taxable account I have a few slice-dice funds mostly tilted towards emerging markets and US small value stocks. I am trying to gradually simplify and align to 3 funds model but the Bond money will need tax-free fund. What will be best way to manage 20% Bond potion in Taxable account? Vanguard Tax Exempt Bond Index Fund?

I now understand the implication of managing across tax and tax deferred accounts using Target Funds. I basically am forced to manage separate buckets with Target Funds sitting in Tax advantaged accounts and becoming core holding. Taxable account is a bit of patch work to maintain overall AA.


Hi phanas,

One option that would work is to place a Target fund in each tax advantaged account and the Three Fund Portfolio in the taxable account. With the taxable account you could select Total Stock, Total International, and Intermediate Term Tax Exempt. Run each account separately but review everything overall.


I like this solution as I prefer using the three fund portfolio separately for each account instead of across all accounts. I use the accounts for different purposes and I would like to keep the diversification risks similar. Since I have to take money out of my IRA when I'm 70.5 years old (65 now,) I'll use that for current income. My Roth will be for leaving to my heirs and my taxable account will be for other purposes like new vehicles, trips, gifts, etc. I know this method may not be quite as efficient but I'll take that trade-off for the extra individual account diversification. In my mind, it also simplifies re-balancing and easily allows use of Life Strategy or Target Retirement funds in the tax deferred accounts and the three fund portfolio in the taxable account using either municipals or taxable bonds whichever is appropriate.

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Re: The Three-Fund Portfolio

Postby bertilak » Thu May 19, 2016 4:56 pm

Fieldsy1024 wrote:The VGTSX (Total Int'l Stock) has been dropping and dropping it seems like. I am getting frustrated with it.

How much percentage is in everyone's 3 fund?


Here's a thought that might ease the pain and frustration. The more poorly it does, the smaller percentage of your portfolio it becomes so the less it matters! No need to sell! The hope, with reasonable justification, is that it will recover, perhaps offsetting something else that is not doing as well at the time.

To answer your question:

My international is 20% of my equity which is 60% of the portfolio making 12% international overall. It is down a little but I am still a good way from my rebalance threshold.
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Re: The Three-Fund Portfolio

Postby LadyGeek » Thu May 19, 2016 6:56 pm

Fieldsy1024 wrote:The VGTSX (Total Int'l Stock) has been dropping and dropping it seems like. I am getting frustrated with it.

How much percentage is in everyone's 3 fund?

The asset allocation in a 3-fund portfolio follows the same rules as one that is not.

My asset allocation percentages will be different than your percentages because I may have a different tolerance to risk than you. See this wiki page: Risk tolerance

If the market is making you jittery, then readjust the allocations to one that you'll feel more comfortable with.
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 dbr » Thu May 19, 2016 8:50 pm

Fieldsy1024 wrote:The VGTSX (Total Int'l Stock) has been dropping and dropping it seems like. I am getting frustrated with it.

How much percentage is in everyone's 3 fund?


The extremes at which 3-fund reaches the end of rational definition are 0% and 100%. I don't really know what the distribution looks like but I suppose there are more portfolios in the range 70/30 to 30/70 than outside that range, though 100% stocks or 90/10 are certainly spoken of enough on this forum as are less than 50% stocks.

One can either change one's asset allocation to a more tolerable one or mend one's psychological state. Getting frustrated because something is dropping probably indicates psychological measures rather than altering the portfolio. Of course the question has to be answered how the asset allocation was determined in the first place.

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Re: The Three-Fund Portfolio

Postby boglephreak » Thu May 19, 2016 10:12 pm

Fieldsy1024 wrote:The VGTSX (Total Int'l Stock) has been dropping and dropping it seems like. I am getting frustrated with it.

How much percentage is in everyone's 3 fund?

the cheapness is part of the reason i ultimately decided to add int'l instead of just doing US Total Mkt for equities. i am buying a ton of it while its low with the hope that it eventually goes up whereas US seems high right now. i havent decided yet between 10 or 20% of total portfolio yet though.

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Total Bond Market

Postby Taylor Larimore » Fri May 20, 2016 6:07 pm

Bogleheads:

Morningstar has posted an article by senior editor Karen Wallace recommending 4 bond funds (out of 958) in the intermediate-term category for risk-averse Investors. Vanguard Total Bond Market Index Fund (VBTLX) made the cut.

4 Bond Funds for Risk-Averse Investors

Best wishes.
Taylor
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Re: The Three-Fund Portfolio

Postby wizzard » Mon May 23, 2016 3:00 pm

This is possibly the best thread I've come across in a long time.
I would like to thank everyone that posted and provided input on AA.

My current AA is as follows:

Total US Stock----60%
Total US Bond-----25%
REIT---------------10% (I might eliminate this since I have a rental property, still debating)
International------5%

Note to self:
I will re-balance this once a year (bond % will increase by 1%/year)
I will use DCA (eliminates trying to predict market)
I will have 6mo salary in the savings
Stick with it, be patient, and do not worry what the market is doing :sharebeer
"In uncertain times, show equanimity. Otherwise you are an unfit shareholder" -Charlie Munger

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"The Dream of a Perfect Plan"

Postby Taylor Larimore » Tue May 24, 2016 9:55 pm

Three-Fund investors:

I accidentally came across a wonderful speech that our mentor, Jack Bogle, gave to a Boston "Money Matters" conference in October, 1999. You will be reassured, as I am, when you read these timeless quotes:
The greatest enemy of a good plan is the dream of a perfect plan.

I warn you that complexity—which I call "witchcraft"—may seem to offer a perfect plan, but it rarely delivers on the dream it promises.

Of 145 equity mutual funds that have in fact survived the past three decades, only 15 have outpaced the stock market as a whole. That is, the fund investor had only about one chance out of ten to surpass the market's return.

Clearly, the odds against implementing a perfect plan by selecting winning funds are long and the penalties for failure disproportionately large.

An all-stock-market index fund, in substance, owns shares in every publicly held business in America, and holds it for as long as the business exists. There is no advisory fee, for there is no adviser; no sales charges, for there need be no broker; nominal fund transaction costs, for there is almost no portfolio turnover; with so little turnover, few realized gains and minimal taxes. It is fair to say that the all-market index fund is the croupier's worst nightmare. And, therefore, the investor's sweetest dream. The simplest of all approaches to equity investors, then, is to invest solely in the shares of a single, all-market equity index fund—just one fund. It is a good plan. And it works.

By periodically investing in an index fund … the know-nothing investor can actually outperform most investment professionals. (Warren Buffett quote)

The return for the average fund investor was just 10.3% per year. By way of contrast, a low-cost, no-load, low-turnover all-market index fund would have provided an annual rate of return of 15.2% to the investor—nearly 50% higher.

Reversion to the mean, then, seems almost preordained in fund performance, frustrating the dreams of so many investors who invest on the basis of past returns.

To me, the character, integrity, stability, and judgment of a fund's management are the qualities on which your dream of the perfect plan should rely.

Don't Own Too Many Funds—And Don't Trade Them --Funds may have been ill-selected in the first instance—funds with inflated performance, funds investing in hot market sectors, funds advertised on television, funds that trade actively and relinquish much of their profit to taxes, funds with high costs that didn't seem to matter when their past records looked so good. But the worst aspect of trading funds is that it allows the counterproductive emotions of investing to supersede the productive economics of investing.

Almost alone, the index fund follows a strategy designed to protect your capital from the many croupiers who haunt the stock market casino. It is for that reason that the index fund has proved to be the optimal way "to realize the highest possible portion—albeit slightly less than 100%—of the return earned in the market."

Thank you Mr. Bogle.

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

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Re: The Three-Fund Portfolio

Postby Ironfist » Wed May 25, 2016 7:30 am

Hello Taylor,

I have been studying this thread as i have recently come to take an interest in investing. I was discuss this with some co-workers and i have a question that maybe you can answer:

Would you say using ETF's is way easier for the lay investor because you don't need as much up front dough as you would if you used index funds?

And

so if you put in $500 now, what would it be in 20 years?
Would It depend on the market or....?

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Re: The Three-Fund Portfolio

Postby bertilak » Wed May 25, 2016 9:17 am

Ironfist wrote:Hello Taylor,

I have been studying this thread as i have recently come to take an interest in investing. I was discuss this with some co-workers and i have a question that maybe you can answer:

Would you say using ETF's is way easier for the lay investor because you don't need as much up front dough as you would if you used index funds?

And

so if you put in $500 now, what would it be in 20 years?
Would It depend on the market or....?

I'm not Taylor, but here's my take...

  1. Growth of $500 absolutely depends on market return. You need to have faith in the market. That means faith in free market capitalism. This is a LONG TERM commitment. Short term fluctuations (even a couple of year) can swamp the overall trend.

  2. If you don't have enough to meet the minimum requirements for a fund it hardly matters what you do with the money. You might as well save up until you do have enough.
My personal preference is for the basic funds, not the ETFs. But there are reasonable people who prefer the ETFs. This is a matter of opinion, all else being equal. It might be that depending on circumstances only one or the other is available to you so it's nice to have a choice.
I have a strong moral sense - by my standards. | -- Rex Stout

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Getting Started

Postby Taylor Larimore » Wed May 25, 2016 9:35 am

Ironfist wrote:Hello Taylor,

I have been studying this thread as i have recently come to take an interest in investing. I was discuss this with some co-workers and i have a question that maybe you can answer:

Would you say using ETF's is way easier for the lay investor because you don't need as much up front dough as you would if you used index funds?

Several Vanguard funds have $1,000 minimum investments. Our wiki has this good discussion of ETFs vs. Mutual Funds

So if you put in $500 now, what would it be in 20 years?
Would It depend on the market or....?


Yes, it would depend on the market.

If you had put $3,000 (the minimum) into Vanguard Total Stock Market Index fund 20 years ago it would now be worth $13,288. The next 20 years? No one knows.


I suggest you save at least $1,000 in a bank or savings account before investing. Consider a Vanguard Target Fund with its $1,000 minimum. This is the link:

https://investor.vanguard.com/mutual-fu ... irement/#/

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

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Re: The Three-Fund Portfolio

Postby Windwalker » Thu May 26, 2016 7:52 am

At this current historic time in high probability of raising interest rates after 40 years of decreasing rates, wouldn't a laddered new issue bank cd's portfolio of say 1-5 years, be better than the bond mutual fund you mention to cover all possible outcomes? Not only are they federally insured, but Vanguard has no expenses for these and will help set up and assist to maintain if needed. I totally agree in normal periods and the past decade, the bond mutual fund was great for that asset class. Just to get an idea of what might happen, take a look at your bond mutual funds total performance on 2013.

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Re: The Three-Fund Portfolio

Postby Taylor Larimore » Thu May 26, 2016 9:48 am

Windwalker:

Welcome to the Bogleheads forum!

Vanguard's Total Bond Market Index Fund's worst annual loss since its 1986 inception was -2.66% in 1994. It is now the largest bond fund in the world and provides safety and income in The Three-Fund Portfolio.

There are many securities that provide safety and income--including laddered CDs. Debating the merits of each could be endless. Please post your question here:

posting.php?mode=post&f=10

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 gvsucavie03 » Thu May 26, 2016 4:36 pm

Windwalker wrote:At this current historic time in high probability of raising interest rates after 40 years of decreasing rates, wouldn't a laddered new issue bank cd's portfolio of say 1-5 years, be better than the bond mutual fund you mention to cover all possible outcomes? Not only are they federally insured, but Vanguard has no expenses for these and will help set up and assist to maintain if needed. I totally agree in normal periods and the past decade, the bond mutual fund was great for that asset class. Just to get an idea of what might happen, take a look at your bond mutual funds total performance on 2013.


Have you considered both?

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Re: The Three-Fund Portfolio

Postby Hector » Thu May 26, 2016 4:52 pm

Windwalker wrote:At this current historic time in high probability of raising interest rates after 40 years of decreasing rates, wouldn't a laddered new issue bank cd's portfolio of say 1-5 years, be better than the bond mutual fund you mention to cover all possible outcomes? Not only are they federally insured, but Vanguard has no expenses for these and will help set up and assist to maintain if needed. I totally agree in normal periods and the past decade, the bond mutual fund was great for that asset class. Just to get an idea of what might happen, take a look at your bond mutual funds total performance on 2013.


Take a look at the same fund's annual return for the year 2014.

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Re: The Three-Fund Portfolio

Postby Windwalker » Thu May 26, 2016 7:43 pm

Just saying, duration of this bond fund is 5.8 I believe. Therefore every 1% rise in interest rates drops the NAV of this bond fund by 5.8%. 2% rise, then 11.6% drop, etc. Could take some years to break even. With federally insured new issue bank CD's they mature at par and do not go down in price. I've been investing my personal and Corp. retirement plan money for over 35 years, and only last couple of years have I thought this way, due to this unique historic point in interest rates.
I am brand new to this blog and this may have already been discussed. If your objective with this asset class is to smooth the ride, not hit home run nor strike out, give this some thought. Taylor, your very correct, the issues of either is many, and only future will decide. However, I see no risk on the CD ladder I proposed, but do see a potential negative with bond fund going forward.
Thanks for excellent blog, I am a strong advocate of Mr. Bogle and Vanguard!

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Re: The Three-Fund Portfolio

Postby tooluser » Sat May 28, 2016 9:31 pm

I don't post very often, but I've been reading along the past four years. Simplicity has intrigued me since day one. Turning towards retirement I've decided that investing is no longer a hobby for me, but personal financial management will always be. So I am simplifying as best I can after 34 years of investing. A total market approach seems to be a can't-lose proposition.

1/3 per Vanguard Lifestrategy funds (tax-deferred four fund portfolio).
1/3 per a modified 10-speed portfolio (taxable with a bit of fun factor).
1/3 of various cats and dogs that are too expensive to get out of, or are used to balance things out. (taxable and IRAs)

A three-portfolio meta-portfolio? I'm still actively contributing to all three. Overall goal is to target my desired stock/bond ratio across all three at one financial provider. Not quite there yet but I have the path laid out thanks to some deep thought and spreadsheet calculations.

Thanks to Taylor in particular for laying out all the best arguments. Four years later I can't defeat them.
Early to bed and early to rise, makes a man healthy, wealthy, and wise. -- Some Dead Guy

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Total Bond Market in Rising Inflation

Postby Taylor Larimore » Sun May 29, 2016 9:25 am

Duration of this bond fund is 5.8 I believe. Therefore every 1% rise in interest rates drops the NAV of this bond fund by 5.8%. 2% rise, then 11.6% drop, etc. Could take some years to break even.

windwalker:

Below are U.S. inflation figures, and Vanguard Total Bond Market returns, since Mr. Bogle introduced TBM in 1986:

YEAR..INFLATION....RETURN
1986-------1.1%--------15.2%
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9 (Inflation increased 5.0% -- TBM average return 9.86%)

1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.7)
1995-------2.5----------18.5
1996-------3.3-----------3.6

1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6 (Inflation increased 1.7% --TBM average return 7.3%)

2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4 (Inflation increased 1.8% -- TBM average return 5.9%)

2006-------2.5-----------4.3
2007-------4.1-----------7.0

2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7 (Inflation increased 2.9% -- TBM average return 6.3%)

2012-------1.7-----------4.3
2013-------1.5---------(-2.0)
2014-------0.8-----------6.0
2015-------0.7-----------0.5

Observations:

* During ALL four periods of rising inflation since 1986, Total Bond Market enjoyed positive returns.

* Total Bond Market's worst annual loss was -2.7% in 1994

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

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Re: The Three-Fund Portfolio

Postby Youngblood » Sun May 29, 2016 10:05 am

Windwalker,

Bill Gross' Janus Unconstrained Bond Fund has a duration of 1.13 years.

That might be telling us something in regards to your question of bonds vs. CDS.

With so many investors looking for yield...

As gvsucavie03 posted, consider both.

Good luck with your decision.
"I made my money by selling too soon." | Bernard M. Baruch

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Re: The Three-Fund Portfolio

Postby gvsucavie03 » Sun May 29, 2016 8:08 pm

Heck, put $10-15k away in a credit union checking account! Some yield 3-4%! Yes, it would mix savings and checking, but you could just do a seperate tab. Not a lot of $, but more yield than any CD I know of at this point...

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Re: Getting Started

Postby Ironfist » Wed Jun 01, 2016 6:41 am

Taylor Larimore wrote:
Ironfist wrote:Hello Taylor,

I have been studying this thread as i have recently come to take an interest in investing. I was discuss this with some co-workers and i have a question that maybe you can answer:

Would you say using ETF's is way easier for the lay investor because you don't need as much up front dough as you would if you used index funds?

Several Vanguard funds have $1,000 minimum investments. Our wiki has this good discussion of ETFs vs. Mutual Funds

So if you put in $500 now, what would it be in 20 years?
Would It depend on the market or....?


Yes, it would depend on the market.

If you had put $3,000 (the minimum) into Vanguard Total Stock Market Index fund 20 years ago it would now be worth $13,288. The next 20 years? No one knows.


I suggest you save at least $1,000 in a bank or savings account before investing. Consider a Vanguard Target Fund with its $1,000 minimum. This is the link:

https://investor.vanguard.com/mutual-fu ... irement/#/

Best wishes.
Taylor


so those who "get rich quickly" would that have to do with the market there in and how would it differe from say this one?

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Re: The Three-Fund Portfolio

Postby Fieldsy1024 » Wed Jun 08, 2016 6:58 am

I wish I could get rich quickly since I am much more educated on how to keep that quick money. The 3 fund is doing me just fine though :happy

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Re: The Three-Fund Portfolio

Postby JoshuaKM1 » Fri Jun 10, 2016 6:03 pm

This question is directed at Mr. Larimore but really is open to any forum members/moderators.

I currently have the entirety of my Vanguard IRA assets allocated to the 2045 Target Retirement Fund. I am thinking of moving my money from the Target Retirement Fund into either a 3 or 4 fund approach.

My two questions:

(1) If I re-create the 3-fund admiral share approach that espoused by this thread (Total US Stock Market, Total International Stock Market, and Total Bond Market) do most experts still advise the 80/20 ratio of US stocks to International Stocks? Vanguards Target 2045 currently employs a 60/40 ratio.

(2) Is there really any huge difference between going with a 3-fund vs. the 4-fund approach (including international bonds) in one's portfolio?

Thanks so much!!

Josh

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Re: The Three-Fund Portfolio

Postby gvsucavie03 » Fri Jun 10, 2016 6:26 pm

JoshuaKM1 wrote:This question is directed at Mr. Larimore but really is open to any forum members/moderators.

I currently have the entirety of my Vanguard IRA assets allocated to the 2045 Target Retirement Fund. I am thinking of moving my money from the Target Retirement Fund into either a 3 or 4 fund approach.

My two questions:

(1) If I re-create the 3-fund admiral share approach that espoused by this thread (Total US Stock Market, Total International Stock Market, and Total Bond Market) do most experts still advise the 80/20 ratio of US stocks to International Stocks? Vanguards Target 2045 currently employs a 60/40 ratio.

(2) Is there really any huge difference between going with a 3-fund vs. the 4-fund approach (including international bonds) in one's portfolio?

Thanks so much!!

Josh


I don't understand how holding the 4 funds separately is that much different than the TR fund...

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Re: The Three-Fund Portfolio

Postby LadyGeek » Fri Jun 10, 2016 6:36 pm

JoshuaKM1 wrote:This question is directed at Mr. Larimore but really is open to any forum members/moderators.

First and foremost, are you comfortable with a 60% stock / 40% bond asset allocation?

Next, do not be persuaded by other members' situations. Those 80/20 recommendations are for members who have the ability, willingness, and need to take a long-term view and can stomach the market as it zigs and zags along the way.

There's absolutely nothing wrong with a Target date retirement fund. It's simple and easy to manage. Everything is taken care of for you, including automatic rebalancing.

Remember that this is an investment forum whose members eat this stuff for lunch. If you want to break down your Target Retirement fund into separate funds, we'll be more than happy to show you how. However, you need to decide if the added complexity is worth it - for your situation.

FYI - JoshuaKM1 is requesting help here: New Boglehead: Recreating Target Retirement Fund w/ Admiral Shares, further replies should be in JoshuaKM1's thread.
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 » Fri Jun 10, 2016 7:58 pm

LadyGeek wrote:
JoshuaKM1 wrote:This question is directed at Mr. Larimore but really is open to any forum members/moderators.

First and foremost, are you comfortable with a 60% stock / 40% bond asset allocation?

Next, do not be persuaded by other members' situations. Those 80/20 recommendations are for members who have the ability, willingness, and need to take a long-term view and can stomach the market as it zigs and zags along the way.

There's absolutely nothing wrong with a Target date retirement fund. It's simple and easy to manage. Everything is taken care of for you, including automatic rebalancing.

Remember that this is an investment forum whose members eat this stuff for lunch. If you want to break down your Target Retirement fund into separate funds, we'll be more than happy to show you how. However, you need to decide if the added complexity is worth it - for your situation.

FYI - JoshuaKM1 is requesting help here: New Boglehead: Recreating Target Retirement Fund w/ Admiral Shares, further replies should be in JoshuaKM1's thread.


It isn't 60/40... it's 90/10 until the glide path starts.

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Re: The Three-Fund Portfolio

Postby LadyGeek » Fri Jun 10, 2016 8:22 pm

I stand corrected, as I was going by JoshuaKM1's post. Vanguard Target Retirement 2045 Fund (VTIVX) (89.81% Stocks / 10.11% Bonds / 0.08% Short-term reserves) which is 90% / 10% (rounded).

I wanted to show the glide path on Vanguard's site, but I get an an error when I click on the Target 2045 block (about 30 years to retirement): Vanguard Target Retirement Funds :annoyed

Instead, here's the wiki article: Glide paths
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Answer to questions

Postby Taylor Larimore » Sat Jun 11, 2016 5:48 pm

JoshuaKM1 wrote:This question is directed at Mr. Larimore but really is open to any forum members/moderators.

I currently have the entirety of my Vanguard IRA assets allocated to the 2045 Target Retirement Fund. I am thinking of moving my money from the Target Retirement Fund into either a 3 or 4 fund approach.

My two questions:

(1) If I re-create the 3-fund admiral share approach that espoused by this thread (Total US Stock Market, Total International Stock Market, and Total Bond Market) do most experts still advise the 80/20 ratio of US stocks to International Stocks? Vanguards Target 2045 currently employs a 60/40 ratio.

Joshua: The percent of international stocks to total stocks is a controversial topic with no definitive answer. Vanguard Research suggests "For many investors, an allocation between 20% and 40% should be considered reasonable." When experts disagree, it is often because it makes no foreseeable difference.

(2) Is there really any huge difference between going with a 3-fund vs. the 4-fund approach (including international bonds) in one's portfolio? No. Mr. Bogle has stated he would not use international bonds. On page 11 of this topic (about 2/3 down) I gave the reasons I have not included international bonds in The Three-Fund Portfolio.


Joshua, it is important to concentrate on your overall stock/bond ratio which is the primary determinant of your expected risk and expected return. Use this Vanguard tool for assistance: Vanguard Investor Questionnaire.

You will get specific answers to questions about your personal portfolio on the Help With Personal Investments Forum

Best wishes.
Taylor
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Re: The Three-Fund Portfolio

Postby JoshuaKM1 » Mon Jun 13, 2016 9:44 am

Thanks Taylor!

As I get deeper in Bogle's seminal work "Common Sense on Mutual Funds" I am starting to wonder why more people are not Bogle purists. It seems like two potential "purist" Bogle strategies would be the following holdings for a younger, aggressive investor.

80% Vanguard Total US Stock Market Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

OR

40% Vanguard S&P 500 Admiral Shares
40% Vanguard Total US Stock Market Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

OR

80% Vanguard S&P 500 Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

I'm going to be a buy and hold / lazy portfolio kind of dude. I am in this for the long run since I have great cash flow from my job. I guess I feel the need to be convinced that adding international exposure is a good idea since it does not seem to be heavily endorsed by Bogle.

School me! Like I've said before I've spent my last 15+ years learning medicine so I am trying to become finance/investing savvy. :)

Josh

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Re: The Three-Fund Portfolio

Postby dbr » Mon Jun 13, 2016 10:01 am

JoshuaKM1 wrote:Thanks Taylor!

As I get deeper in Bogle's seminal work "Common Sense on Mutual Funds" I am starting to wonder why more people are not Bogle purists.



All you have to do is look on any forum about anything and see how many posts include the word "best" in the title. As soon as you ask for "best" instead of "good enough" the discussion will be endless.

It can be challenge to people's manhood (yes, women are challenged on their "manhood" as well) not to exert oneself to be a "winner."

The ethic that intelligence and hard work is both a necessary and sufficient condition for success means that thinking a lot about investing and working hard at it is important.

For some people it is a great fear that they might not be secure and that there is some magic formula to ensure invulnerability.

Whenever there is a plethora of choices there is paralysis and consternation regarding how to choose even if it doesn't make any difference.

Finally, a lot of people are just curious about how things work and enjoy the discussion even though there is little specific action to be taken.

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Re: The Three-Fund Portfolio

Postby Cruncher » Mon Jun 13, 2016 1:46 pm

Josh,

As Lady Geek has posted, manage your Risk first.

If you are comfortable with a 90/10 mix than go for it. When the market "corrects", you be able to wake up, drink a cup of coffee then go play golf. The market jitters can't make you watch CNBC, nor worry about the "current" state of your accounts (a 90/10 mix would indicate your willingness to accept a lot of volatility).

That being said, if you decided to go the 3-fund route over a single target dated retirement fund, you'd save a little off expense ratios, but you'd spend quite a bit more time managing it.

If I may do a quick quantitive analysis of a hypothetical account.

Assumption: $1 million with access to the best VG MFs available (institutional funds)

The difference between VTIVX (0.16%) & personally managing a 0.05% er 3-fund portfolio (VITSX, VTSNX & VBTIX) is 0.11% ($1,100 annually). So you have to ask if this is worth your time? Since you mentioned medical school, I'm going to take a guess your "free" time can best be done doing something more important enjoying life.

I'm just a normal guy, so take the above as just one opinion.

Cheers,

Adam

PS Lacking access to the institutional funds I mentioned above, the spread drops some. Ah, just re-read one of your options below (40/40/20 Admiral Shares plan), the difference between just selecting an All-in-one fund and managing your portfolio drops to $800 /year. Or, 0.08% of whatever your real account value is.

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Re: The Three-Fund Portfolio

Postby Cruncher » Mon Jun 13, 2016 1:53 pm

Actually, with your lifetime income potential, I can't think of a time when it'll be more beneficial for you to NOT select a target dated retirement fund over managing even a 3-fund portfolio yourself, at least from a cost perspective.

Assuming your career stays in medicine.

As your portfolio grows (& the corresponding costs go up), your "time" will still be more worthwhile doing something other than playing with spreadsheets, watching finance "entertainment tv" or worrying about the markets.

Again, just one opinion.

:beer

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Re: The Three-Fund Portfolio

Postby JoshuaKM1 » Mon Jun 13, 2016 2:14 pm

Hey Adam,

That is super helpful information actually.

I agree that there isn't a great overall savings by switching to an actively managed 3 fund portfolio but it seems like it is super easy to maintain a 3-fund portfolio and just rebalance once a year unless I am missing something. The expense ratio on my Target Retirement Fund is .16% and it looks like the expense ratio for the Admiral Shares Total Stock Market is 0.05%.

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Re: The Three-Fund Portfolio

Postby gvsucavie03 » Mon Jun 13, 2016 7:02 pm

JoshuaKM1 wrote:Thanks Taylor!

As I get deeper in Bogle's seminal work "Common Sense on Mutual Funds" I am starting to wonder why more people are not Bogle purists. It seems like two potential "purist" Bogle strategies would be the following holdings for a younger, aggressive investor.

80% Vanguard Total US Stock Market Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

OR

40% Vanguard S&P 500 Admiral Shares
40% Vanguard Total US Stock Market Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

OR

80% Vanguard S&P 500 Admiral Shares
20% Vanguard Total US Bond Market Admiral Shares

I'm going to be a buy and hold / lazy portfolio kind of dude. I am in this for the long run since I have great cash flow from my job. I guess I feel the need to be convinced that adding international exposure is a good idea since it does not seem to be heavily endorsed by Bogle.

School me! Like I've said before I've spent my last 15+ years learning medicine so I am trying to become finance/investing savvy. :)

Josh


The bulk of Bogle's career was during they hayday of the US economy. Sure he saw some recessions, but the long bull markets made him a fortune while the rest of the world was somewhat asleep. It ebbs and flows and you need the international exposure to truly hedge against risk. All of that to say I think Bogle is biased towards the US based on his experience and not necessarily the global economy.

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Re: The Three-Fund Portfolio

Postby LadyGeek » Mon Jun 13, 2016 9:12 pm

^^^ Jack Bogle gets asked this question every year, you can search the forum as well - "Why not international?".

Instead, I would recommend taking a look at 3-fund portfolios in general: Three-fund portfolio and Lazy portfolios.

Or, you can make a 3-fund portfolio by sneaking a peak at what the pros do with the target date retirement funds: Approximating Vanguard target date funds - just pick a fund that matches your desired asset allocation. Note they use international stocks.

The main point here is to consider opinions other than Jack Bogle - International stock is important.
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Re: The Three-Fund Portfolio

Postby wizzard » Wed Jun 15, 2016 11:55 am

LadyGeek wrote:^^^ Jack Bogle gets asked this question every year, you can search the forum as well - "Why not international?".

Instead, I would recommend taking a look at 3-fund portfolios in general: Three-fund portfolio and Lazy portfolios.

Or, you can make a 3-fund portfolio by sneaking a peak at what the pros do with the target date retirement funds: Approximating Vanguard target date funds - just pick a fund that matches your desired asset allocation. Note they use international stocks.

The main point here is to consider opinions other than Jack Bogle - International stock is important.


Very true, I took the fundamentals of the 3-fund portfolio (actually 4-fund) and tweaked it to my desired AA.

60%---Total US
25%---US Bond
10%---REIT
5%---International

There is not one supreme all mighty portfolio, just tweak it to what you can handle and stick with it!
"In uncertain times, show equanimity. Otherwise you are an unfit shareholder" -Charlie Munger

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Re: The Three-Fund Portfolio

Postby Drz » Thu Jun 16, 2016 7:24 am

Novice question, apologies if I have missed a proper wiki page/article regarding my question.

I've been using the three-portofilio with BND, VXUS and VTI, asset allocations are 20%, 16% and 64% and i've holding this portfolio for 3 months now, so my question is: When do I switch the money from my "get rich money" pocket to "stay rich" pocket? my VTI for example is +536€ and I could easily just sell 50% of that and my International stock is -176€ today anjd I could easily just reallocate that there, i'm not saying I want to do that but i'm just expressing options.

The point and the gist of my question is, when do I do remanage my portfolio? Every 4 months? every 6 months? Once annually? Is there a proper wiki page about this management and timing?

Thank you kindly for anyone who answers this. :sharebeer

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Re: The Three-Fund Portfolio

Postby dbr » Thu Jun 16, 2016 9:20 am

Drz wrote:Novice question, apologies if I have missed a proper wiki page/article regarding my question.

I've been using the three-portofilio with BND, VXUS and VTI, asset allocations are 20%, 16% and 64% and i've holding this portfolio for 3 months now, so my question is: When do I switch the money from my "get rich money" pocket to "stay rich" pocket? my VTI for example is +536€ and I could easily just sell 50% of that and my International stock is -176€ today anjd I could easily just reallocate that there, i'm not saying I want to do that but i'm just expressing options.

The point and the gist of my question is, when do I do remanage my portfolio? Every 4 months? every 6 months? Once annually? Is there a proper wiki page about this management and timing?

Thank you kindly for anyone who answers this. :sharebeer


It is called rebalancing and this article explains things pretty well: https://www.bogleheads.org/wiki/Rebalancing

My advice is to make less of this rather than more. The main issue is for people who have a lot invested to not let the portfolio become excessively risky as stocks generally will have grown over time faster than bonds. In practice a person might end up doing something serious once in a few years though it is certainly practical to direct new investments where they are needed as time goes by. How you direct new money has a bigger effect on small portfolios with large contributions being made.

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Re: The Three-Fund Portfolio

Postby Taylor Larimore » Thu Jun 16, 2016 9:20 am

Drz wrote:Novice question, apologies if I have missed a proper wiki page/article regarding my question.

I've been using the three-portofilio with BND, VXUS and VTI, asset allocations are 20%, 16% and 64% and i've holding this portfolio for 3 months now, so my question is: When do I switch the money from my "get rich money" pocket to "stay rich" pocket? my VTI for example is +536€ and I could easily just sell 50% of that and my International stock is -176€ today anjd I could easily just reallocate that there, i'm not saying I want to do that but i'm just expressing options.

The point and the gist of my question is, when do I do remanage my portfolio? Every 4 months? every 6 months? Once annually? Is there a proper wiki page about this management and timing?

Thank you kindly for anyone who answers this. :sharebeer

Drz:

Welcome to the Bogleheads Forum!

If the desired asset-allocation of any portfolio is properly chosen, there can be many years before it is necessary to change (rebalancing assumed). These are two general rules:

1. Review your asset-allocation plan anytime you have a significant life-change (marriage, divorce, new baby, job-loss, inheritance, etc.).

2. Review your asset-allocation every 5-10 years (age related).

This Vanguard asset-allocation tool may be helpful: https://personal.vanguard.com/us/FundsI ... unds/tools

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

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Re: The Three-Fund Portfolio

Postby 2015 » Thu Jun 16, 2016 10:17 am

dbr wrote:
JoshuaKM1 wrote:Thanks Taylor!

As I get deeper in Bogle's seminal work "Common Sense on Mutual Funds" I am starting to wonder why more people are not Bogle purists.



All you have to do is look on any forum about anything and see how many posts include the word "best" in the title. As soon as you ask for "best" instead of "good enough" the discussion will be endless.

It can be challenge to people's manhood (yes, women are challenged on their "manhood" as well) not to exert oneself to be a "winner."

The ethic that intelligence and hard work is both a necessary and sufficient condition for success means that thinking a lot about investing and working hard at it is important.

For some people it is a great fear that they might not be secure and that there is some magic formula to ensure invulnerability.

Whenever there is a plethora of choices there is paralysis and consternation regarding how to choose even if it doesn't make any difference.

Finally, a lot of people are just curious about how things work and enjoy the discussion even though there is little specific action to be taken.


Thank you for such an insightful post that pretty much sums up the debates that take place here, IMHO. I also like LadyGeek's characterization above: "Remember that this is an investment forum whose members eat this stuff for lunch" (to which I might add, "for breakfast and for dinner, too" :wink: )

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Jane Bryant Quinn on "The Three-Fund Portfolio"

Postby Taylor Larimore » Thu Jun 16, 2016 9:37 pm

Bogleheads:

I recently finished reading Jane Bryant Quinn's latest book, How to Make Your Money Last. Ms. Quinn is a highly respected author and financial columnist. I was pleased to read that she recommends a portfolio of two or three total market index funds. These are quotes:
You'll need to own investments that grow. When you do this, we can share in that growth without breaking a sweat by buying and holding just two or three well-diversified stock-owning mutual funds.

If you're lucky, you company menu will include "index funds." You might also be offered managed funds invested in particular sectors of the stock market. But you don't need to buy these sectors separately. Your index funds own them all.

You can create a regular retirement income using the 4 or 4.5% (withdrawal) rule with as few as two mutual funds--a U.S. Total Market Fund and a Total Bond Fund.

After bear markets, the broad stock market has always recovered. Individual stocks might not, which is why it is so risky to be a stock picker: But the price of a broad-based mutual fund will go back up.

A common piece of advice is to buy a total market fund, then add a couple of other funds that you imagine will beat the market. That's called "tilting" your portfolio. I don't tilt, myself. I'm not smart enough to know which particular industry will do the best.

My inclination is always to make things easier. I'd vote for holding one or two broadly diversified stock funds rather than a large collection. You might add an international stock fund. That's three funds.

Rick Ferri and Alex Benke tested a portfolio of a three index-fund portfolio against 5,000 simulations of similar and randomly chosen managed portfolios. -- The index-fund portfolio outperformed the stock picker's portfolios more than 80% of the time.

International bond funds provide you with currency diversification against the dollar: But they cost more to own and complicate your investment plan. The simpler your bond bucket, the easier it is to rebalance.-- Stick with high quality.

You can manage a retirement account yourself if you keep it really simple--say, just two or three low-cost index funds. The more funds you have, the more complicated your withdrawal math.

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

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Re: The Three-Fund Portfolio

Postby Taylor Larimore » Sun Jun 19, 2016 12:48 pm

Bogleheads:

This article from InvestorPlace explains many of the reasons I chose Vanguard Total Stock Market Index Fund for The Three-Fund Portfolio:

Vanguard Total Stock Market Index – A True One-Stop Shop

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

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Re: The Three-Fund Portfolio

Postby wizzard » Sun Jun 19, 2016 1:17 pm

Taylor Larimore wrote:Bogleheads:

This article from InvestorPlace explains many of the reasons I chose Vanguard Total Stock Market Index Fund for The Three-Fund Portfolio:

Vanguard Total Stock Market Index – A True One-Stop Shop

Best wishes.
Taylor


Excellent read "If you can’t beat the market, join it it" :happy
"In uncertain times, show equanimity. Otherwise you are an unfit shareholder" -Charlie Munger

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Re: The Three-Fund Portfolio

Postby JoshuaKM1 » Mon Jun 20, 2016 8:41 pm

Taylor & Bogle geniuses,

What are your thoughts on the ideal ratio between total US stock market & total international stock market for aggressive investors? I've decided that I am going to go pretty aggressive in my retirement asset allocation with 90/10 stocks to bonds because of my high, consistent salary but I am on the fence as to whether to be a bogle purist (80/20 US to international) vs. trying to mimic the retirement 2045 account (60/40).

Cheers,

Josh

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Re: The Three-Fund Portfolio

Postby VAslim16 » Mon Jun 20, 2016 8:54 pm

I'm pretty extreme for this site. I chose 50/50 when I first started and even tho int has been getting crushed I'm staying the course. I bet most on here would agree that sticking with what you decided initially is super important.

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Re: The Three-Fund Portfolio

Postby LadyGeek » Mon Jun 20, 2016 10:11 pm

JoshuaKM1 - I gave a detailed answer in your other thread. See this post: Re: New Boglehead: Recreating Target Retirement Fund w/ Admiral Shares
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Re: The Three-Fund Portfolio

Postby JoshuaKM1 » Mon Jun 20, 2016 11:04 pm

Awesome thanks.


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