The Three-Fund Portfolio

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Evolence
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Re: The Three Fund Portfolio

Post by Evolence » Sat Nov 02, 2013 9:30 pm

Lady Geek, I definitely agree that by adding extra funds you are defeating the purpose of the "three fund portfolio" and it ceases to only be a three fund portfolio. But where I take issue is your statement-- "you are deviating from the total market." If anything, a portfolio that only includes equity and investment grade bond exposure is not truly indicative of the "total market" to begin with, because it is not capturing the risk and potential returns of other assets within the global economy. Is the trading of gold not also part of the "total" global economic market footprint? Same question regarding broad commodities.

Or is the theory that by having companies engaged in the exploration/production of gold/commodities in your equity exposure effectively capturing this economic footprint?

I'll expand the question to include bonds. The "total" marketplace includes high yield, bank loan, etc. bonds that are not included in the "Total Bond Market" portfolio. So in a sense, this portfolio is deviating from the "total market" by virtue of this exclusion.

Another area of interest is real estate. Publicly traded real estate is included in this portfolio. But there is an academic argument to be made that the "total market" exposure for the economic footprint of real estate is actually much larger than what is represented by a portfolio such as this-- due largely to the high amount of privately held real estate. It is for this reason that I have seen some convincing arguments that real estate should be overweighted relative to equity benchmarks.

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Re: The Three Fund Portfolio

Post by umfundi » Sat Nov 02, 2013 10:07 pm

Evolence,

Welcome to the forum!

I think the preference is that you should start a new thread with a question like this. An Admin like LadyGeek will either tell you this, or will graft your message to a new thread.

I think the three-fund portfolio is gaining increasing understanding and relevance, and that tilts to whatever flavor of the day are proving to be less important in what investors should do.

You raise some good points about the what the total market is, particularly about the composition of the Vanguard TBM Fund. But really, for most investors, is this of any real relevance? If they are subscribing to the three-fund philosophy, they are 90+ percent there anyway.

Best wishes,

Keith
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Evolence
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Re: The Three Fund Portfolio

Post by Evolence » Sat Nov 02, 2013 10:21 pm

Yes, feel free to merge into a new thread if that is more appropriate! Thanks for the welcome as well.

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Re: The Three Fund Portfolio

Post by BrandonBogle » Sat Nov 02, 2013 11:13 pm

For many, the simplicity of a 3 Fund portfolio is great and will provide a sufficient approximation of "everything" that the lack of complexity is worth the trade off in areas that may not give the complete picture.

That said, I personally feel that 3 Fund portfolio is a great core to then build/tilt from that foundation where/if necessary. For instance, I have some Vanguard LT Municipal in my taxable account. But it someone asked me for "basically" what portfolio I have, I would say its Taylor's Three Fund.

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Re: The Three Fund Portfolio

Post by LadyGeek » Sun Nov 03, 2013 10:18 am

Let me address this here, as it's relevant to the discussion. (Also, a belated welcome to the forum.)
Evolence wrote:Lady Geek, I definitely agree that by adding extra funds you are defeating the purpose of the "three fund portfolio" and it ceases to only be a three fund portfolio. But where I take issue is your statement-- "you are deviating from the total market." If anything, a portfolio that only includes equity and investment grade bond exposure is not truly indicative of the "total market" to begin with, because it is not capturing the risk and potential returns of other assets within the global economy. Is the trading of gold not also part of the "total" global economic market footprint? Same question regarding broad commodities.

Or is the theory that by having companies engaged in the exploration/production of gold/commodities in your equity exposure effectively capturing this economic footprint?

I'll expand the question to include bonds. The "total" marketplace includes high yield, bank loan, etc. bonds that are not included in the "Total Bond Market" portfolio. So in a sense, this portfolio is deviating from the "total market" by virtue of this exclusion.

Another area of interest is real estate. Publicly traded real estate is included in this portfolio. But there is an academic argument to be made that the "total market" exposure for the economic footprint of real estate is actually much larger than what is represented by a portfolio such as this-- due largely to the high amount of privately held real estate. It is for this reason that I have seen some convincing arguments that real estate should be overweighted relative to equity benchmarks.

First, the three-fund portfolio is a subset of a general category called Lazy portfolios - there are quite a lot of them. What they have in common is that they are "set and forget" portfolios, meaning that they are simple to manage and will do OK over the long term.

What's important here is that a lazy portfolio is not required to follow the "total market" approach". For example, David Swenson's lazy portfolio (uses REITs) or the Permanent Portfolio (discussed quite a lot in this forum). If you wish to include gold, real estate, or to have a higher exposure to another asset class, then pick from the selection shown.

The "External links" section of Lazy portfolios contains a number of references which show past performance of these portfolios. "Couch potato" is another name which refers to lazy portfolios.

What is the difference between lazy portfolios and the three-fund portfolio? Quite simply, the level of risk. Investing in the "total market" approach (the Bogleheads investing philosophy) is a low risk approach. A three-fund portfolio is an easy to use, low risk portfolio that will get you to retirement. Can you do better? Maybe. It depends on your level of expertise and time horizon. You also take on additional risk.

For investors who would like more control than a Target date retirement fund, the three-fund portfolio is the next step in complexity. In increasing order of complexity (and risk) are the lazy portfolio, then Slice and dice (not recommended unless you understand the complexity and risks involved).

BTW, there's nothing wrong with a target date retirement fund, either. If having a single fund prevents you from doing the wrong thing (like not understanding how to rebalance, or investing in a high risk fund), then stick with a target date retirement fund.
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Re: The Three Fund Portfolio

Post by Retireyoung » Mon Nov 04, 2013 6:22 pm

"Investing in the "total market" approach (the Bogleheads investing philosophy) is a low risk approach" i am not sure it is low risk when compared to the permanent portfolio.
I computed the maximum draw-down of the three fund , i got -38% (during 2008 bear market), it is not considered low risk unless you have a very long investment horizon allowing the market to recover.
Is there any way to share pics? i will show you the graph of the 3 fund portfolio form 1995 till today.

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Taylor Larimore
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Re: The Three Fund Portfolio vs The Permanent Portfolio

Post by Taylor Larimore » Mon Nov 04, 2013 7:48 pm

Retireyoung wrote:"Investing in the "total market" approach (the Bogleheads investing philosophy) is a low risk approach" i am not sure it is low risk when compared to the permanent portfolio.
I computed the maximum draw-down of the three fund , i got -38% (during 2008 bear market), it is not considered low risk unless you have a very long investment horizon allowing the market to recover.
Is there any way to share pics? i will show you the graph of the 3 fund portfolio form 1995 till today.

Retireyoung:

It appears that you do not understand The Three Fund Portfolio.

There is no single risk measurement because the Three Fund Portfolio is adaptable to any risk-level desired by changing its stock/bond allocation and therefore can be different for every investor.

Harry Browne's Permanent Portfolio of 25% S&P 500 stocks; 25% 30-year US Treasury Bonds; 25% Gold; and 25% Cash is fixed and therefore is the same for every investor.

NOTE: My opening post contains this Asset-Allocation Tool to help investor's determine their most appropriate stock/bond ratio.

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

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Re: The Three Fund Portfolio

Post by Retireyoung » Tue Nov 05, 2013 3:58 am

Taylor you are right, I referred to equal allocation to each fund. thanks!

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Re: The Three Fund Portfolio

Post by abuss368 » Tue Nov 05, 2013 10:31 am

The Three Fund Portfolio is an excellent low cost and diversified portfolio that will work for the majority of investors. I have family in the Three Fund Portfolio for years and they love it in all types of markets.

Personally we have a "slight" change to the Three Fund Portfolio where we add REITs. Other than that we did not make any other changes. Effective investment approach, low costs, diversified, tax friendly, one bond fund, easy to rebalance, and best of all simple with peace of mind.
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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Adding funds to The Three Fund Portfolio

Post by Taylor Larimore » Tue Nov 05, 2013 1:07 pm

abuss368 wrote:The Three Fund Portfolio is an excellent low cost and diversified portfolio that will work for the majority of investors. I have family in the Three Fund Portfolio for years and they love it in all types of markets.

Personally we have a "slight" change to the Three Fund Portfolio where we add REITs. Other than that we did not make any other changes. Effective investment approach, low costs, diversified, tax friendly, one bond fund, easy to rebalance, and best of all simple with peace of mind.


Abuss368:

Unfortunately, your post gives an example of why adding funds to the Three Fund Portfolio can significantly reduce returns.

Below are annualized before-tax returns during the past five years for Vanguard's Total Stock Market Index fund (VTSMX) and Vanguard's REIT (VGSIX) fund:

FUND ---- 1-year --- 3-years ---- 5-years
VTSMX--- 29.43% --- 15.78% ----- 15.30%
VGSIX --- 10.91% --- 10.89% ----- 15.21%

Past performance does not forecast future performance.

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

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Re: Adding funds to The Three Fund Portfolio

Post by abuss368 » Tue Nov 05, 2013 1:29 pm

Taylor Larimore wrote:
abuss368 wrote:The Three Fund Portfolio is an excellent low cost and diversified portfolio that will work for the majority of investors. I have family in the Three Fund Portfolio for years and they love it in all types of markets.

Personally we have a "slight" change to the Three Fund Portfolio where we add REITs. Other than that we did not make any other changes. Effective investment approach, low costs, diversified, tax friendly, one bond fund, easy to rebalance, and best of all simple with peace of mind.


Abuss368:

Unfortunately, your post gives an example of why adding funds to the Three Fund Portfolio can significantly reduce returns.

Below are annualized before-tax returns during the past five years for Vanguard's Total Stock Market Index fund (VTSMX) and Vanguard's REIT (VGSIX) fund:

FUND ---- 1-year --- 3-years ---- 5-years
VTSMX--- 29.43% --- 15.78% ----- 15.30%
VGSIX --- 10.91% --- 10.89% ----- 15.21%

Past performance does not forecast future performance.

Best wishes.
Taylor


Hi Taylor,

I know but when I look at Vanguard's website for the 10 year and since inception to get a more long term view I see the following:

10 year - TSM - 8.03%
10 year - REIT - 9.81%

Inception - TSM - 9.29%
Inceptions - REIT - 10.67%

Past performance is no guarantee and the whole reversion to the mean. I guess it passes the sleep test that Warren Buffett so often recommends.

There is more than one road to Rome.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by parsi1 » Tue Nov 05, 2013 1:43 pm

Vanguard Target dated funds were perfect 3-Fund portfolios until they added the International Bond to the mix. What do you all think about adding the international bond to the 3 fund portfolio? It seems like the international bond has lower yield than the total US bonds.

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Adding International Bonds to a Three Fund Portfolio ?

Post by Taylor Larimore » Tue Nov 05, 2013 2:04 pm

parsi1 wrote:Vanguard Target dated funds were perfect 3-Fund portfolios until they added the International Bond to the mix. What do you all think about adding the international bond to the 3 fund portfolio? It seems like the international bond has lower yield than the total US bonds.

Norske77 asked a similar question in an earlier post. This was my reply:
Norske77:

You ask a very good question and one that I carefully considered when Vanguard first offered their Total International Bond Fund (VTIBX and Admiral VTABX) on May 31, 2013.

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

It is notable that Vanguard added only a small amount of the new bond fund to their Target and Life Strategy funds. Total International Bond fund represents only 2.0% of the 2060 Target Fund and only 4.0% of the Life Strategy Growth Fund. It's largest allocation is 14% in the Target Retirement Income fund. These allocations are nearly meaningless.

Adding another fund inside a single Target or Life-Strategy fund adds no complexity to the investor. However, I doubt if it is worth complicating the Three Fund Portfolio with another small fund containing several disadvantages: More political risk; higher expense ratios (.23% and .20% Adm.); longer duration (6.6 years) and relatively week credit quality compared with Total Bond Market which is already in the Three Fund Portfolio to provide safety and income.

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

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Re: The Three Fund Portfolio

Post by whoever » Thu Nov 14, 2013 7:38 pm

pingo wrote:@ whoever: The inclusion of international bonds in the Vanguard Target funds are no reason to avoid them. It's just my opinion, but while international bonds are not absolutely necessary nor absolutely essential for a good portfolio, I do not believe they hurt Vanguard's Target Retirement series. They increase diversification without increasing complexity for the investor. One of the most important reasons for the 3-fund portfolio is simplicity (for which there are always trade-offs) balanced with the need for ample diversification and assets that'll get the job done.

The 3-Fund Portfolio gets the job done. So do Vanguard's Target Retirement funds.

The only question remaining is whether a target fund is appropriate for you situation when considering the number, location and types of accounts you have.


Here is the thread I have opened viewtopic.php?f=1&t=125001

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Re: The Three Fund Portfolio

Post by LadyGeek » Thu Nov 14, 2013 8:49 pm

^^^ I moved several posts into whoever's thread: Help me with my investment strategy
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Re: The Three Fund Portfolio

Post by Clive » Sat Nov 16, 2013 5:02 pm

Retireyoung wrote:"Investing in the "total market" approach (the Bogleheads investing philosophy) is a low risk approach" i am not sure it is low risk when compared to the permanent portfolio.
I computed the maximum draw-down of the three fund , i got -38% (during 2008 bear market), it is not considered low risk unless you have a very long investment horizon allowing the market to recover.
Is there any way to share pics? i will show you the graph of the 3 fund portfolio form 1995 till today.

A three-fund comprised of 12.5% VTSMX, 12.5% VGTSX (i.e. 25% stocks), 70% VBMFX, 5% UGLD would have provided a higher reward with a lower standard deviation than the Permanent Portfolio (4x25) since 1972.

Whilst LETF's don't go back that far, a very close proxy of 100% in GLD is 33.3% in UGLD, 66.7% in VBMFX - provided rebalanced back to those target weightings once each year or so.

i.e. a conservative 3-fund asset allocation (25% stocks split equally between TSM and International Stocks), mostly bonds, but with some gold exposure mixed in.

You might of course hold 15% in gold rather than 5% in the 3x leveraged gold ETF (LETF). A benefit of the LETF however is that the manager in effect adds more gold exposure as the price rises, reduces as the price declines and as such there's a bias towards amplifying up-trends, slowing down trends (LEFT's typically are rebalanced daily by the fund manager). The 5% allocation also ensures that the most you'll lose in any one year is that -5%. In the event of gold rising rapidly for whatever reason, the 3x might rise >3 times the non leveraged (underlying), possibly 5 or 6 times - maybe even more.

There are however different risks involved. Each form of gold exposure have their own distinct pro's and con's.

Another benefit of using LETF's is that of adding in additional debt exposure. A typical stock might have a 1:1 debt/equity ratio such that the 'lending' and 'borrowing' are matched (neutral overall). The less stock you hold the more the portfolio tends to be net lending (less borrowing). During times when its more beneficial to be a borrower than a lender the portfolio will relatively suffer (but equally will do better during times when its more beneficial to be a lender than a borrower). 5% in a 3x LETF adds a further 10% of 'borrowing', making the relatively stock light portfolio closer towards being more debt/lend neutral. BRK is one example of a deviant away from borrowing. Its large cash float (no debt, cash surplus) from its insurance business makes BRK more biased towards being an overall lender and as such it performs better during times of positive real yields, but less well during times of negative real yields.

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Re: The Three Fund Portfolio

Post by abuss368 » Sun Nov 17, 2013 5:50 pm

Rick Ferri posted an excellent interview discussing the Three Fund Portfolio.
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Re: The Three Fund Portfolio

Post by LadyGeek » Sun Nov 17, 2013 7:30 pm

The interview is now in the wiki: Bogleheads® 12 videos

Here's the direct link: Ferri: 3-Fund Portfolio the Simplest Way to Best Return
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Re: The Three Fund Portfolio

Post by dbr » Sun Nov 17, 2013 10:02 pm

LadyGeek wrote:The interview is now in the wiki: Bogleheads® 12 videos



I seem to be both blind and totally confused but so far cannot find on this page:

http://www.bogleheads.org/wiki/Main_Page

any mention whatsoever of this page:

http://www.bogleheads.org/wiki/Boglehea ... _12_videos

Have I misunderstood something here?

I spend a lot of time earlier today trying to figure out what Mel was talking about regarding where which Q&A videos from BH12 are posted.

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Re: The Three Fund Portfolio

Post by LadyGeek » Sun Nov 17, 2013 10:17 pm

There is no relation between the 2 links. One is to the wiki home page, http://www.bogleheads.org/wiki/Main_Page, the other to the videos: http://www.bogleheads.org/wiki/Boglehea ... _12_videos.

If you have further questions, start a new thread in the Forum Issues and Administration forum.
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Re: The Three Fund Portfolio

Post by dbr » Sun Nov 17, 2013 10:35 pm

LadyGeek wrote:There is no relation between the 2 links. One is to the wiki home page, http://www.bogleheads.org/wiki/Main_Page, the other to the videos: http://www.bogleheads.org/wiki/Boglehea ... _12_videos.

If you have further questions, start a new thread in the Forum Issues and Administration forum.


Sorry. My mistake. I have only just figured out that to find an index of the pages available in the Wiki one can start on the main page and go to "Browse site" and then to the bottom of that page where there is a link to "Complete page list" which then gives an entry form for displaying pages in the Wiki. Question answered.

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Re: The Three Fund Portfolio

Post by abuss368 » Thu Nov 21, 2013 3:24 pm

Hi Taylor,

We must continue to spread the word about the overall simplicity and advantages of the Three Fund Portfolio. It has been very nice lately to watch and read Rick Ferri's recent interviews discussing the Three Fund Portfolio!

What else can we do to get the message out? Keep pounding the tables here on the forum?

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by Taylor Larimore » Thu Nov 21, 2013 5:11 pm

abuss368 wrote:Hi Taylor,

We must continue to spread the word about the overall simplicity and advantages of the Three Fund Portfolio. It has been very nice lately to watch and read Rick Ferri's recent interviews discussing the Three Fund Portfolio!

What else can we do to get the message out? Keep pounding the tables here on the forum?

Best.

Abuss:

The sophisticated, but simple-appearing, Three Fund Portfolio is seldom advocated by advisers. They make more money pretending that investing is too complicated for investors to do themselves. Rick Ferri, and a relatively few other advisers, are exceptions. I admire them greatly.

Although I believe The Three Fund Portfolio is nearly ideal, I realize it cannot be achieved by every investor--many of whom believe they can "beat the market."

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

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Re: The Three Fund Portfolio

Post by abuss368 » Fri Nov 22, 2013 10:30 am

Thank you Taylor.

Excellent points indeed.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three Fund Portfolio

Post by scubablue » Fri Nov 22, 2013 12:05 pm

Greetings- Question on getting to the 3- fund portfolio, specifically on the fixed income side. I currently have Int. Term Tax Exmpt (VWIUX), Lt. Term Tax Empt (VMLUX), and TTl Bond Index (VBTLX), all in the taxable side (tax advantaged is full). In order to consolidate, would I exchange TTL Bond and LT Tax Exmpt into Int Term Tax Exmpt or go all into TTL Bond. I am currently in the 28% bracket but have early-retired and will have substantially lower income beginning this year. I'd really like to simplify things and this portfolio really has my interest! Thanks for any input!

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Personal finance questions.

Post by Taylor Larimore » Fri Nov 22, 2013 12:23 pm

scubablue:

Questions about your personal portfolio belong on the Help With Personal Investing Forum. To receive the most informed replies, please use this format when posting:

ASKING PORTFOLIO QUESTIONS

I will look for your post and help if I can.

Thank you and best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by scubablue » Fri Nov 22, 2013 2:09 pm

Thank you for the response Taylor- my intention was to be generic rather than garnering specific portfolio advise. In his recent article, Rick Ferri made a quick mention that Intermediate Munis could substitute for Total Bond in a taxable account. Was just looking for some further thoughts on that statement. Sorry for the mis-posting.

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Bond Calculator

Post by Taylor Larimore » Fri Nov 22, 2013 3:07 pm

scubablue wrote: Rick Ferri made a quick mention that Intermediate Munis could substitute for Total Bond in a taxable account. Was just looking for some further thoughts on that statement. Sorry for the mis-posting.

scubablue:

Rick is correct. Vanguard's Intermediate-Term Tax-Exempt Bond Fund (VWITX) is usually preferred over Total Bond Market Index Fund if bonds MUST be located in a taxable account.

Use this Morningstar tool to determine whether to use a taxable or municipal bond fund in a taxable account:

Tax Equivalent Bond Calculator

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

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Re: The Three Fund Portfolio

Post by abuss368 » Fri Nov 22, 2013 3:23 pm

Rick has also noted that the TIPS fund can be included in a taxable account in terms of "equal location". There are state tax benefits.
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Re: The Three Fund Portfolio

Post by LondonJimmy » Thu Nov 28, 2013 5:56 am

I have read this forum a lot and am so grateful for all the amazing advice from the people on here. I feel priveledged and super lucky to have come across such an amazing place.

It has also taken me a while to understand the value of indexing. I have followed this thread closely. I know some (or plenty) would hate my style, but I have put everything I have in stocks. I am 100% stocks 0% bonds :D I understand the risks but won't withdraw any money from this until around 20 years from now. I think I will start to rebalance and include some bonds in around 15 years from now. If there is a crash right before I do so then so be it, you can't eliminate all risk, and I am not even that bothered. You only live once.

Good luck to all here!

:sharebeer

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More Support for The Three Fund Portfolio

Post by Taylor Larimore » Fri Nov 29, 2013 10:41 am

Bogleheads:

My friend, Allan Roth, CPA, CFP, author and adviser, has written an important article for CBS MoneyWatch with this comment:
Stay away from any narrow investment strategy, especially if it has recently been hot. Broader low cost funds like total U.S. stock, total international stock, and total bonds are much better.

Investing: Why Broader is Better

Happy Thanksgiving!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: More Support for The Three Fund Portfolio

Post by abuss368 » Fri Nov 29, 2013 10:37 pm

Taylor Larimore wrote:Bogleheads:

My friend, Allan Roth, CPA, CFP, author and adviser, has written an important article for CBS MoneyWatch with this comment:
Stay away from any narrow investment strategy, especially if it has recently been hot. Broader low cost funds like total U.S. stock, total international stock, and total bonds are much better.

Investing: Why Broader is Better

Happy Thanksgiving!
Taylor


Thanks Taylor!

More support for the Three Fund 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

Post by YoungBoglehead » Fri Dec 06, 2013 1:06 am

Outside of my employer provided 401k plan (4% addition matched to 3.5%)

I'm in the 3 fund portfolio.

VTSAX (and VTI, same idea)
VXUS
and BND (about 8% of portfolio now I need to get that up to 20% soon)
Started investing around 21, joined Bogleheads at 23.

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BrandonBogle
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Re: The Three Fund Portfolio

Post by BrandonBogle » Fri Dec 06, 2013 1:11 am

YoungBoglehead wrote:Outside of my employer provided 401k plan (4% addition matched to 3.5%)

I'm in the 3 fund portfolio.

VTSAX (and VTI, same idea)
VXUS
and BND (about 8% of portfolio now I need to get that up to 20% soon)


Great job!! Simplicity really is the best way to go (or at least the easiest on life!). Just don't forget to look at your total picture, including what's in your 401k. Hopefully it offers equivalent funds or component funds (like an S&P 500 fund) that can be used to mimic the Three Fund Portfolio.

krick
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Re: The Three Fund Portfolio

Post by krick » Sat Dec 07, 2013 12:37 am

When you have both taxable and tax-advantaged accounts, how do you determine which fund (and how much of each) goes in which account?
It seems like rebalancing will be a pain as account values change.

EDIT: personal information removed and a new thread started in the "Help with Personal Investments" forum as suggested by Pingo.
Last edited by krick on Sat Dec 07, 2013 4:01 am, edited 1 time in total.

pingo
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Re: The Three Fund Portfolio

Post by pingo » Sat Dec 07, 2013 12:54 am

Welcome to the forum! :D

krick wrote:When you have both taxable and tax-advantaged accounts, how do you determine which fund (and how much of each) goes in which account?
It seems like rebalancing will be a pain as account values change.


You'd be surprised how frequently using a 3-fund portfolio strategy with taxable and/or several other accounts is still possible and easily managed. (Hint: it's because money is fungible.) However, this isn't the place to show you how and why. Try starting a separate thread that includes the following recommended format for asking portfolio questions, so that posters can show you how it works.
Last edited by pingo on Sat Dec 07, 2013 9:47 am, edited 1 time in total.

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Taylor Larimore
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Fund location and rebalancing?

Post by Taylor Larimore » Sat Dec 07, 2013 7:57 am

When you have both taxable and tax-advantaged accounts, how do you determine which fund (and how much of each) goes in which account?

Krick:

This is briefly answered in the Opening Post (OP):

* Place Total Bond Market in a tax-advantaged account.
* In taxable accounts (when tax-advantaged accounts are full) high-income investors should substitute a tax-exempt bond fund for Total Bond Market.


It seems like rebalancing will be a pain as account values change.

Rebalancing is much easier with three total market index funds: Sub-categories rebalance themselves. Fewer funds = less rebalancing.

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

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Taylor Larimore
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Inspirational Post

Post by Taylor Larimore » Mon Dec 09, 2013 11:46 am

Growing up in the Soviet Union, I could not imagine in my wildest dreams that I would live in the United States, become a capitalist by the virtue of owning shares of companies, own the entire market using index funds, and shake hands with the greatest patron of the individual investors.--Victoria

Jack Bogle and Victoria using the Boglehead secret INDEX-finger handshake

One of the most inspiring posts ever made on the Boglehead Forum!

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

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BrandonBogle
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Re: The Three Fund Portfolio

Post by BrandonBogle » Mon Dec 09, 2013 11:58 am

Great video Taylor! Thank you for sharing. Wish I could have made it to this conference, but planning on the next one!

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bengal22
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Re: The Three Fund Portfolio

Post by bengal22 » Mon Dec 09, 2013 12:28 pm

LadyGeek wrote:The interview is now in the wiki: Bogleheads® 12 videos

Here's the direct link: Ferri: 3-Fund Portfolio the Simplest Way to Best Return


Actually, Mr. Ferri appears to be saying that he uses the 3 fund portfolio as his core but he tilts by adding REIT, hi-yield, and TIPS fund. While he did not mention it in the interview, I think that he also tilts to small cap value.

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500Kaiser
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Re: The Three Fund Portfolio

Post by 500Kaiser » Mon Dec 09, 2013 2:25 pm

I am interested in how people approach withdrawals from the three fund portfolio, during their retirement.

Is there a stated or preferred approach?

1) diverting gains to a seperate cash account?
2) having some cash or cash equivalents for a fixed timeframe of expenditures?
3) withdrawing directly from one or more of the three funds?

This part confuses me, especially with all the recent threads about matching liabilities. I would say I am a 90% follower of the Three fund portfolio. I hope to get convinced to get to 100%!

The simplicity as i get older and worry about how others may have to step in someday to help manage things is a huge advantage to me of this portfolio.
Higher risk = higher HOPEFUL returns, not expected returns.

longinvest
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Re: The Three Fund Portfolio

Post by longinvest » Mon Dec 09, 2013 3:13 pm

500Kaiser wrote:I am interested in how people approach withdrawals from the three fund portfolio, during their retirement.

Is there a stated or preferred approach?

1) diverting gains to a seperate cash account?
2) having some cash or cash equivalents for a fixed timeframe of expenditures?
3) withdrawing directly from one or more of the three funds?

This part confuses me, especially with all the recent threads about matching liabilities. I would say I am a 90% follower of the Three fund portfolio. I hope to get convinced to get to 100%!

The simplicity as i get older and worry about how others may have to step in someday to help manage things is a huge advantage to me of this portfolio.


There is not a single approach. So, as usual, the simplest approach is probably best: take distributions as cash and top that off by trimming the fund that has outgrown its target ratio in your asset allocation (AA).

As for the size of withdrawals, I think that you can easily get it right enough by simply picking an appropriate retirement AA (near 50/50) and not spending much more than 4% of its annual balance, each year, before hitting 75, then increase that by 1% per decade. If you spend more one year, try to spend less than the ratio, next year.

I have devised a "variable percentage withdrawal" scheme to better estimate the maximal withdrawal amount (search the forum). But the rule of thumb, above, is probably sufficient for 90% of people.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Taylor Larimore
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Order of withdrawals

Post by Taylor Larimore » Mon Dec 09, 2013 5:59 pm

500Kaiser wrote:I am interested in how people approach withdrawals from the three fund portfolio, during their retirement.


Kaiser:

The Three Fund Portfolio makes withdrawal's easy. In general withdraw in this order:

1. Required Minimum Distributions (RMDs) if any.
2. Taxable accounts: Withdraw over-weighted stock shares with lowest-tax basis.
3. Traditional IRA funds.
4. Roth IRA funds (most valuable for heirs).

Don't forget to rebalance after making a large withdrawal (or large contribution).

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

Gaston
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Re: The Three Fund Portfolio

Post by Gaston » Sat Dec 28, 2013 11:29 am

Great initial post and subsequent discussion on Three Fund Portfolios (TFP's). For those who have been investing for a while and who have a larger number of funds or stocks, however, the tax cost of selling and moving to a TFP is simply too high. Unless the bulk of your investments are in tax-free or tax-deferred accounts, you likely never will recover from the tax cost of moving to a TFP. And starting a TFP later in life (in addition to your existing investments) means it will only ever be a small percentage of your overall portfolio. So as much as I like the TFP strategy, it seems like you have to adopt a TPF approach in early to mid adulthood. Sound right?

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BrandonBogle
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Re: The Three Fund Portfolio

Post by BrandonBogle » Sat Dec 28, 2013 12:46 pm

Gaston wrote:Great initial post and subsequent discussion on Three Fund Portfolios (TFP's). For those who have been investing for a while and who have a larger number of funds or stocks, however, the tax cost of selling and moving to a TFP is simply too high. Unless the bulk of your investments are in tax-free or tax-deferred accounts, you likely never will recover from the tax cost of moving to a TFP. And starting a TFP later in life (in addition to your existing investments) means it will only ever be a small percentage of your overall portfolio. So as much as I like the TFP strategy, it seems like you have to adopt a TPF approach in early to mid adulthood. Sound right?


In my personal situation, I had many individual large cap stock holdings that had significant gains, so it did not make sense (tax-wise) to sell those. Thus, I "lumped" them as S&P 500 "equivalent" and adjusted accordingly. Ideally, I have a TFP, but the devil is in the details. In my 401k, I have an S&P 500 index fund and a Russel 2000 index fund, but no total market fund. Following the wiki entry of Approximating Total Stock Market, I approximated the Total US Stock Market using my taxable "S&P 500 equivalent" in taxable and my two funds in my 401k.

You should be able to approximate a TFP using a similar method of approximating the TFP funds with what you already have in taxable holdings.

BrightFuture1
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Re: The Three Fund Portfolio

Post by BrightFuture1 » Sun Dec 29, 2013 9:06 pm

I have almost completely my moved to the three fund portfolio. Vanguard Total Stock Market and Vanguard Total International in a regular Vanguard taxable account and the Vanguard Total Bond in a Vanguard Roth IRA.

My question is this the most tax efficient and best placement of the funds? Or should I eventually move the Vanguard Total Stock Market and Vanguard Total International into my Roth IRA?

thanks.

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Taylor Larimore
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Re: The Three Fund Portfolio

Post by Taylor Larimore » Mon Dec 30, 2013 8:02 am

BrightFuture1 wrote:I have almost completely my moved to the three fund portfolio. Vanguard Total Stock Market and Vanguard Total International in a regular Vanguard taxable account and the Vanguard Total Bond in a Vanguard Roth IRA.

My question is this the most tax efficient and best placement of the funds? Or should I eventually move the Vanguard Total Stock Market and Vanguard Total International into my Roth IRA?

thanks.

Bright Future:
It is nearly always better to place ANY fund in a tax-advantaged account if you have room. However, if your Roth is limited, you did the right thing by placing the most tax-inefficient fund (Total Bond Market) in your Roth first.

Happy Holiday!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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stemikger
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Re: The Three Fund Portfolio

Post by stemikger » Mon Dec 30, 2013 8:09 am

Taylor I love the simplicity of the three fund portfolio. I personally practice the two fund portfolio. I don't have the international percentage, but I still consider it to be about the same. Over the years are the returns very similar or does that international exposure mean more then I'm assuming.

As always Taylor, thanks for all the help you have given me over the years.

Steve G.
Stay the Course!! ~ Press on Regardless!!!

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Taylor Larimore
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Owning the world's marketable corporations -- feels great.

Post by Taylor Larimore » Mon Dec 30, 2013 11:00 am

stemikger wrote:Taylor I love the simplicity of the three fund portfolio. I personally practice the two fund portfolio. I don't have the international percentage, but I still consider it to be about the same. Over the years are the returns very similar or does that international exposure mean more then I'm assuming.

As always Taylor, thanks for all the help you have given me over the years.

Steve G.

Steve:

I believe a two-fund total-market portfolio can be just as good as a three-fund total-market portfolio for many investors. No one can predict which portfolio will perform better (risk & return) over various periods.

By owning a piece of nearly every marketable corporation in the world, it's hard to be wrong.

Thank you for your appreciation.

Happy Holiday!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Owning the world's marketable corporations -- feels grea

Post by abuss368 » Mon Dec 30, 2013 11:04 am

Taylor Larimore wrote:
stemikger wrote:Taylor I love the simplicity of the three fund portfolio. I personally practice the two fund portfolio. I don't have the international percentage, but I still consider it to be about the same. Over the years are the returns very similar or does that international exposure mean more then I'm assuming.

As always Taylor, thanks for all the help you have given me over the years.

Steve G.

Steve:

I believe a two-fund total-market portfolio can be just as good as a three-fund total-market portfolio for many investors. No one can predict which portfolio will perform better (risk & return) over various periods.

By owning a piece of nearly every marketable corporation in the world, it's hard to be wrong.

Thank you for your appreciation.

Happy Holiday!
Taylor


I would agree with Taylor here. I have one relative who has a two fund portfolio that is comprised of Total Stock and Total Bond. Bonds are equal to age. They have worked with this portfolio for many years and are very happy with the results and simplicity. You may do better but you could definitely do a lot worse.
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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