The Three-Fund Portfolio

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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stemikger
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Re: The Three Fund Portfolio

Post by stemikger » Mon Dec 30, 2013 5:26 pm

Thank you Taylor and abuss368!
Stay the Course!! ~ Press on Regardless!!!

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Taylor Larimore
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Re: The Three Fund Portfolio

Post by Taylor Larimore » Thu Jan 09, 2014 1:38 pm

Bogleheads:

I have updated The Three Fund Portfolio in red.

HAPPY NEW YEAR!
Taylor
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Re: The Three Fund Portfolio

Post by Dave55 » Thu Jan 09, 2014 2:07 pm

Taylor what are your thoughts on adding VTABX Vanguard Total International Bond Index to the 3 fund portfolio?
Thanks.
Dave

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Adding Total International Bond Fund (VTABX) ?

Post by Taylor Larimore » Thu Jan 09, 2014 2:23 pm

Dave55 wrote:Taylor what are your thoughts on adding VTABX Vanguard Total International Bond Index to the 3 fund portfolio?
Thanks.
Dave

Dave:

This is what I wrote in an earlier reply:

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.

I feel the same today.

The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.

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

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Re: The Three Fund Portfolio

Post by Dave55 » Thu Jan 09, 2014 2:43 pm

Thanks Taylor.
Dave

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Taylor Larimore
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"Buy the haystack"

Post by Taylor Larimore » Fri Jan 10, 2014 9:47 pm

Bogleheads:

The Callan Table of Investment Returns shows the impossibility of forecasting which asset-class will lead or lag during any one year.

Image

Mr. Bogle likes to say: "Don't look for a needle in the haystack--own the haystack."

The Three Fund Portfolio contains Three "Haystacks."

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

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Re: "Buy the haystack"

Post by abuss368 » Sat Jan 11, 2014 4:58 pm

Taylor Larimore wrote:Bogleheads:

The Callan Table of Investment Returns shows the impossibility of forecasting which asset-class will lead or lag during any one year.

Image

Mr. Bogle likes to say: "Don't look for a needle in the haystack--own the haystack."

The Three Fund Portfolio contains Three "Haystacks."

Best wishes.
Taylor


This is an excellent post from Taylor.

I have seen this table in Vanguard's research reports and have found it very informative. Predicting the performance of asset classes and the attempt to market time by moving both in and out at the right moment is fruitless.

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 selftalk » Sun Jan 12, 2014 11:15 am

Taylor, in general does slice and dice return more that the 3 fund portfolio?

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Slice & Dice

Post by Taylor Larimore » Sun Jan 12, 2014 12:05 pm

selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?

Selftalk:

"Slice and dice" refers to over-weighting categories within total markets. During various periods sub-categories will over-perform and under-perform. Picking the winning categories in advance is the problem.

From Page 1 (written in 2012):
I really like the three fund portfolio, but I can't resist the urge to season mine with a few extra REIT's and TIP's. So I guess the cajun in me likes something slightly more spicy.

This is what happened to these Vanguard funds the following year (2013):

Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%

Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.

"The enemy of a good plan is the dream of a perfect plan."

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 » Sun Jan 12, 2014 12:43 pm

It was a U.S. Large Cap year indeed.
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Re: The Three Fund Portfolio

Post by Leeraar » Mon Jan 13, 2014 3:21 am

selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?

See the wiki: http://www.bogleheads.org/wiki/Three-fund_portfolio
A three-fund portfolio is a portfolio which does not slice and dice, ...

In my opinion, it is important to note that the TFP comes at this as a simplification of needlessly complicated other portfolios. It does not build up from one is not enough, two is better, three is good enough.

The TFP is a very sophisticated conclusion of work and thought by some brilliant people over many years. It's not just Mr. Taylor Larimore (bless him!), one has only to look at the basics of the Vanguard LifeStrategy and Target Retirement Funds to see they implement the same basic idea.

Further than that is the component funds themselves. Total Stock Market indexing, for example, is not just a simple idea. It is a very sophisticated concept put together, over time, by some very smart and perceptive people.

In my opinion, pick the Vanguard LifeStrategy fund that best approximates your AA and be done.

There are perhaps two good arguments to supplement (slice and dice) the TFP:

First: The three funds are not representative of the total economy. Mr. Rick Ferri argues for REITS, since (he says) real estate is under represented in the metric of the Total Stock Market. Both Ferri and Mr. Jack Bogle say that the Total Bond Market does not adequately include corporate bonds, etc.

Second: There are market inefficiencies to be exploited, because some sectors like small company value have added returns that outweigh their added risks. Mr. Larry Swedroe is a notable proponent.

A third (not good) reason is that you have some insight others do not. So, add gold, commodities, emerging markets, ... This is simply speculation, in my opinion.

The Three-Fund Portfolio is, indeed, majestically simple. And, very sophisticated.

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

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Re: The Three Fund Portfolio

Post by abuss368 » Mon Jan 13, 2014 9:39 am

Leeraar wrote:
selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?

See the wiki: http://www.bogleheads.org/wiki/Three-fund_portfolio
A three-fund portfolio is a portfolio which does not slice and dice, ...

In my opinion, it is important to note that the TFP comes at this as a simplification of needlessly complicated other portfolios. It does not build up from one is not enough, two is better, three is good enough.

The TFP is a very sophisticated conclusion of work and thought by some brilliant people over many years. It's not just Mr. Taylor Larimore (bless him!), one has only to look at the basics of the Vanguard LifeStrategy and Target Retirement Funds to see they implement the same basic idea.

Further than that is the component funds themselves. Total Stock Market indexing, for example, is not just a simple idea. It is a very sophisticated concept put together, over time, by some very smart and perceptive people.

In my opinion, pick the Vanguard LifeStrategy fund that best approximates your AA and be done.

There are perhaps two good arguments to supplement (slice and dice) the TFP:

First: The three funds are not representative of the total economy. Mr. Rick Ferri argues for REITS, since (he says) real estate is under represented in the metric of the Total Stock Market. Both Ferri and Mr. Jack Bogle say that the Total Bond Market does not adequately include corporate bonds, etc.

Second: There are market inefficiencies to be exploited, because some sectors like small company value have added returns that outweigh their added risks. Mr. Larry Swedroe is a notable proponent.

A third (not good) reason is that you have some insight others do not. So, add gold, commodities, emerging markets, ... This is simply speculation, in my opinion.

The Three-Fund Portfolio is, indeed, majestically simple. And, very sophisticated.

L.


Well said.
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: Slice & Dice

Post by HawaiiBrewer » Mon Jan 13, 2014 9:43 pm

Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%

Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.

"The enemy of a good plan is the dream of a perfect plan."

Best wishes.
Taylor



Taking what Taylor shows above and based on my allocations.....I netted out about a 20% gain in my portfolio. I'll take that all the way to the bank without any regrets about not getting the maximum possible returns....slice/dice, market timing, etc. makes my head hurt and keeps me up at night....I'd rather go brew some beer.

Aloha... :beer
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Re: The Three Fund Portfolio

Post by asherah » Sun Jan 19, 2014 4:43 pm

In a German financial forum a chart has been posted showing the yearly returns based on several MSCI indices and different portfolios build on them, yearly rebalanced.

http://www.wertpapier-forum.de/index.php?app=core&module=attach&section=attach&attach_rel_module=post&attach_id=83588

I would like to point out the comparison between the MSCI ACWI IMI (total stock world) and a portfolio combined out of 75 % world, 10 % EM and small stocks 5 % each USA, Europe and EM which is quite similar to the ACWI IMI. Due to the yearly rebalancing the return of the multi indices variant is about 1 percent higher per year (2.35 vs. 3.43 from 2001 till a fee days ago). The benefit of rebalancing within equity might be a reason for a more complex portfolio

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Re: Slice & Dice

Post by abuss368 » Mon Jan 20, 2014 1:20 pm

Taylor Larimore wrote:
selftalk wrote:Taylor, in general does slice and dice return more that the 3 fund portfolio?

Selftalk:

"Slice and dice" refers to over-weighting categories within total markets. During various periods sub-categories will over-perform and under-perform. Picking the winning categories in advance is the problem.

From Page 1 (written in 2012):
I really like the three fund portfolio, but I can't resist the urge to season mine with a few extra REIT's and TIP's. So I guess the cajun in me likes something slightly more spicy.

This is what happened to these Vanguard funds the following year (2013):

Total Stock Market gained +33.35%; REIT stocks gained +2.31%.
Total Bond Market fell -2.02%; TIPS (VIPSX) fell -8.92%

Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.

"The enemy of a good plan is the dream of a perfect plan."

Best wishes.
Taylor


Excellent information Taylor.

After looking at the results, I guess you and I are somewhat similar in our investing styles. I have the REITs and no TIPS (at least yet). You have the TIPS and no REITs. At least the REITs had a positive return! The TIPS fund was just plain awful last year but appears to be positive this year to date.

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: Slice & Dice

Post by abuss368 » Sat Jan 25, 2014 4:57 pm

Taylor Larimore wrote:
Inasmuch as no one can accurately forecast the stock and bond markets, I doubt if the additional risk, complexity, costs and tax-inefficiency of "slice and dice" is worth the effort. Mr. Bogle agrees.

"The enemy of a good plan is the dream of a perfect plan."

Best wishes.
Taylor


Thank you Taylor.

Happy Birthday!
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 Dave55 » Sun Jan 26, 2014 1:29 pm

Taylor, Thank you for the 3 fund portfolio. At 56 I have been thru 2 advisors, then 5 years of my own efforts chasing alpha and the light bulb went off last fall. I moved everything to Vanguard and now I am using the 3 fund portfolio - thanks again Taylor and Happy Birthday!
Dave

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Rick Ferri and The Three Fund Portfolio

Post by Taylor Larimore » Sun Jan 26, 2014 5:00 pm

Dave:

We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.

Best wishes.
Taylor
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Re: Rick Ferri and The Three Fund Portfolio

Post by abuss368 » Sun Jan 26, 2014 5:34 pm

Taylor Larimore wrote:Dave:

We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.

Best wishes.
Taylor


Hi Taylor,

That is great to hear Rick & Mel were a part of your birthday. It is also reassuring to hear Rick is a proponent of the Three Fund Portfolio.

I hope you had a great birthday. Congrats on the sailing win!

Best.
Tony
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Re: Rick Ferri and The Three Fund Portfolio

Post by Leeraar » Mon Jan 27, 2014 2:32 am

Taylor Larimore wrote:Dave:

We had the S.E. Florida Boglehead Chapter meeting at my home this afternoon. Author & adviser, Rick Ferri showed up for my birthday, shared ideas, and answered questions. You will be pleased to know that at one point Rick strongly endorsed your Three Fund Portfolio.

Best wishes.
Taylor

Taylor, congratulations! You sure have made a difference in our lives.

If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.

L.
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Re: Rick Ferri and The Three Fund Portfolio

Post by abuss368 » Mon Jan 27, 2014 12:41 pm

Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.

L.


I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?
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Re: Rick Ferri and The Three Fund Portfolio

Post by Leeraar » Mon Jan 27, 2014 1:22 pm

abuss368 wrote:
Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.

L.


I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?

I have no knowledge of what Mr Ferri or the company, Portfolio Solutions, does with their clients' investments.

However, my impression is that he is increasingly of the opinion that the 3-fund portfolio is good enough and it does not need to be more complicated than that.

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

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Re: Rick Ferri and The Three Fund Portfolio

Post by abuss368 » Mon Jan 27, 2014 1:47 pm

Leeraar wrote:
abuss368 wrote:
Leeraar wrote:
If I may add, Rick Ferri is an interesting study in how (it seems to me) he is being persuaded by the evidence. Not only is the 3-Fund Portfolio good enough, it is good enough that it does not need tilting or slicing and dicing, or any other secret sauce.

L.


I have seen this written on a few threads now. Is Rick Ferri moving towards a Three Fund Portfolio and eliminating a lot of the slice and dice funds?

I have no knowledge of what Mr Ferri or the company, Portfolio Solutions, does with their clients' investments.

However, my impression is that he is increasingly of the opinion that the 3-fund portfolio is good enough and it does not need to be more complicated than that.

L.


Was it not Warren Buffett that said there is a human characteristic to make easy things more complicated?
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Re: Rick Ferri and The Three Fund Portfolio

Post by Leeraar » Mon Jan 27, 2014 2:29 pm

abuss368 wrote:Was it not Warren Buffett that said there is a human characteristic to make easy things more complicated?


There is an Einstein quote along those lines: As simple as possible but not more so.

For me: Simple but not simplistic.

But, I really think Taylor Larimore has it right when he says: Majestic in its simplicity.

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

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Re: The Three Fund Portfolio

Post by Dave55 » Mon Jan 27, 2014 4:24 pm

Taylor thanks again, glad you enjoyed your birthday and had a good meeting. Not surprised Rick Ferri endorsed your 3 fund portfolio that I happen to have adapted.
Best
Dave :moneybag :moneybag :moneybag

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Re: The Three Fund Portfolio

Post by Dave55 » Mon Jan 27, 2014 4:30 pm

Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave

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Re: The Three Fund Portfolio

Post by abuss368 » Mon Jan 27, 2014 4:35 pm

Dave55 wrote:Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave


That is a great way of thinking about the Three Fund Portfolio (or any portfolio).

Thank you for the perspective!

Best Wishes.
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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The Three Fund Portfolio holds thousands of corporations.

Post by Taylor Larimore » Mon Jan 27, 2014 5:07 pm

Dave55 wrote:Taylor I have a friend who will also have the 3 fund portfolio in the coming days. I mentioned to him that, by having VTI Vanguard Total Stock US (ETF)and VXUS Vanguard Total Int Stock (ETF) you will have about 8904 companies throughout the world whose employees get up every morning to go to work for you. I love that concept of all those good people and companies working for me every day.
Best,
Dave


Dave:

I am glad you reminded us of this important concept.

For more than 200 years U.S. and foreign corporations have more-or-less steadily grown larger and more profitable as they provide us with goods and services. It is reasonable to assume that, in total, they will continue to grow and earn profits.

It is very comforting to know that I am a small shareholder in nearly all these great corporations.

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

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Re: The Three Fund Portfolio

Post by Code Commit » Mon Jan 27, 2014 5:14 pm

abuss368 wrote:It was a U.S. Large Cap year indeed.

Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.

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Adding a small-cap fund to The Three Fund Portfolio?

Post by Taylor Larimore » Mon Jan 27, 2014 5:43 pm

Code Commit wrote:
abuss368 wrote:It was a U.S. Large Cap year indeed.

Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.

Code Commit:

Total Market Index Funds are an average of all the stocks (and bonds) in the index. There will always be sub-categories within the total market that do better or worse during various periods.

If you think you can select a winning sub-category in advance with its additional risk, complexity, cost and tax-inefficiency -- add a small-cap fund, or any other fund, to The Three Fund Portfolio.

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

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Re: Adding a small-cap fund to The Three Fund Portfolio?

Post by abuss368 » Mon Jan 27, 2014 6:25 pm

Taylor Larimore wrote:
Code Commit wrote:
abuss368 wrote:It was a U.S. Large Cap year indeed.

Emphasis mine. For the record, Vanguard Small-Cap Index returned 37.64% in 2013.

Code Commit:

Total Market Index Funds are an average of all the stocks (and bonds) in the index. There will always be sub-categories within the total market that do better or worse during various periods.

If you think you can select a winning sub-category in advance with its additional risk, complexity, cost and tax-inefficiency -- add a small-cap fund, or any other fund, to The Three Fund Portfolio.

Best wishes.
Taylor


Thank you for putting that in better perspective Taylor!

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

Code Commit
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Re: The Three Fund Portfolio

Post by Code Commit » Mon Jan 27, 2014 6:35 pm

Taylor, I completely agree with your point that we will never know in advance which sub-category of the total market will outperform in the future. That is different than saying "it was a US Large Cap year". That statement by abuss was about the past year and I only offered a minor correction about the past performance.
By the way, Happy Birthday and here is to many more :sharebeer .

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Re: The Three Fund Portfolio

Post by AndrewXnn » Mon Jan 27, 2014 8:51 pm

Fairly new to the Three Fund Portfolio, so thought to use Morningstar to
research the funds that are being recommended.

Here is a summary of what was found:

Image

First, I am concerned with the erosion of book value in each of these funds.
Notice that it is particularly pronounced with the International Fund (VGTSX),
but also evident with total US Market Fund (VTSMX).
Notice too, that the S&P500 is growing book value at nearly 7% annually
which is healthy and in line with historical norms.

Does anybody have an explanation for the book value losses?

Similarly concerned with Sales Growth in VGTSX at -40%!!
I realize the global economy is having some problems, but
how can there be a 40% loss?

Lastly, notice that Historical Earnings (H Earn) is growing modestly within the S&P500.
However, declining within VTSMX and falling within VGTSX where Cash Flow is crashing.

Again; any good explanations?

Thanks!

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"Predicting the Past"

Post by Taylor Larimore » Mon Jan 27, 2014 9:42 pm

Andrew:

On of the many advantages of The Three Fund Portfolio is that it is a minimum-maintenance, stay-the-course portfolio needing only occasional rebalancing. It's statistics are interesting -- but time-consuming and nearly meaningless.

You might be interested in this post from a wise old investor named Ozark:

Predicting the Past

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by AndrewXnn » Mon Jan 27, 2014 10:59 pm

I'm concerned with generally accepted accounting principles:

http://en.wikipedia.org/wiki/Generally_ ... principles

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abuss368
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Re: The Three Fund Portfolio

Post by abuss368 » Tue Jan 28, 2014 8:34 am

AndrewXnn wrote:I'm concerned with generally accepted accounting principles:

http://en.wikipedia.org/wiki/Generally_ ... principles


What does GAAP have to do with a 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 AndrewXnn » Tue Jan 28, 2014 6:19 pm

abuss368;

The equity funds that are part of the Three Fund Portfolio have book values that
are falling and it is GAAP that defines how book value is calculated.

Book value for VTSMX is declining 3.12% per year.
Book value for VGTSM fell 28.42% per year (that's a lot).

In contrast Book value for the S&P 500 is rising 6.84% per year.

Somebody thought this was statistics, but it's not.
Instead, it is the change in carrying value of these funds
according to generally accepted accounting principles.

80% of VTSMX is basically the S&P 500. Since its book value
fell 3%, that tells me that the other 20% of the fund is comprised of
stocks whose book value fell almost 43% = (-3.12-0.8*6.84)/0.2.
Again, that a significant loss.

While the S&P500 has proven itself over time, you will find that
it's because its book value has appreciated over time as well.
That the book value of the equity of the three fund portfolio
outside of the S&P500 is declining so much is problematic.
Market prices don't necessarily move along with book value
over the short term. However, they do over the longer term.

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Re: The Three Fund Portfolio

Post by pingo » Tue Jan 28, 2014 8:36 pm

AndrewXnn wrote:Image


@AndrewXnn

I'm in over my head here, but I'll try to offer some perspective. To me, your questions re-enforce the benefits of a 3-fund portfolio, target fund, balanced fund or other lazy portfolio. It is difficult, if not impossible, for even a pro to read the tea leaves and know what markets will do, let alone whether circumstances will change in the future that might turn any negative figures around. That said, a simple 3-fund portfolio with a relatively static asset allocation plan (no market timing) tends to take advantage of market valuations, allowing a Boglehead to ignore them.

AndrewXnn wrote:First, I am concerned with the erosion of book value in each of these funds.
Notice that it is particularly pronounced with the International Fund (VGTSX),
but also evident with total US Market Fund (VTSMX).
Notice too, that the S&P500 is growing book value at nearly 7% annually
which is healthy and in line with historical norms.


Earnings, Book Value and Dividends grow and contract independent each other and independent of market movements but we look at those figures in relation to market movements. Market surges may outpace earnings growth, book value growth and/or Dividend Growth, causing a high P/E, high P/B and/or lower Dividend Yield. A sudden plunge in stock prices can leave one with lower P/E, P/BV and/or a higher Dividend. (There are no absolutes.) The higher the P/E or P/BV, the lower the expected long-term returns from new investment purchases because as an investor you are paying a higher price relative to the actual growth potential of the asset.

U.S. stock prices ballooned last year at higher than historical averages. My portfolio *loved* it. As a result, current P/E and P/B are (presumably) higher than a year ago, and the Dividend Yield may be lower. (I haven't checked.) It tells me that future long-term expected returns of U.S. stocks are lower. And it makes sense that the Total Stock Market has a higher P/E than the S&P 500 because Total Stock includes all Mid and Small Caps which ballooned more than U.S. Large Caps.

Ex-U.S. companies didn't do as well and there is fear about Emerging Markets so it is no surprise that International equity prices didn't move up as high and that, as a result, they have more attractive valuations (lower P/E and lower P/B relative to the U.S.). The Dividend is also more attractive. The resulting conclusion: potentially higher long-term returns from the broad International market.

Bogleheads with a 3-fund portfolio tend to have fairly stable, "static" asset allocations. All a Boglehead has to know is that there's too much money in the U.S stock fund per his/her desired asset allocation, so the fund must be sold down to the appropriate allocation. They can ignore P/E, P/B, dividends, etc. because the fund's bloat coincides with less attractive valuations. The proceeds from the sale must necessarily be fed into International equities to bring the portfolio back into balance. Proceeds will also land into the relative safety of bonds. (We'll call it "taking profits" for sake of the illustration.) Talk about the majesty of simplicity!

To Bogleheads, the worst performing asset is most attractive so it receives more new money going forward. To average investors, the worst performing asset is the least attractive which is why they weren't buying equities in March of 2009 (when they should have) and they weren't selling bonds to buy those equities when doing so would have been best for their portfolios.

Imagine the following asset allocation at the beginning of 2013:

60% Total U.S. Stock (VTSMX)
20% Total International (VGTSX)
20% Bonds (VBMFX)

Left alone, the portfolio looks like this at the end of 2013:

65% Total U.S. Stock (VTXMX) <--Too much U.S. Stock. Less attractive valuations. Must sell back down to 60%.
19% Total International (VGTSX) <--Too little Ex-U.S. More attractive valuations. Must buy back up to 20%.
16% Bonds (VBMFX) <--Need more safety. Profit from U.S. stocks buy bonds back up to 20%.

I hope all that blathering was helpful. :wink:
Last edited by pingo on Thu Jan 30, 2014 7:04 pm, edited 15 times in total.

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Re: The Three Fund Portfolio

Post by AndrewXnn » Tue Jan 28, 2014 9:29 pm

Pingo;

Appreciate your response.

I suspect the answer is not simple or obvious,
so I'll be thinking this over some more.

Thanks!

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Re: The Three Fund Portfolio

Post by LadyGeek » Tue Jan 28, 2014 9:39 pm

I'm wondering if you are alluding to characterization of stock performance by the book values. If so, it's been done in a different form as the price/book ratio and with the size of the fund (market cap). See: Fama and French three-factor model More thinking.
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Re: The Three Fund Portfolio

Post by Barry Barnitz » Wed Jan 29, 2014 2:53 am

HI:

Allan Roth - Bogleheads makes the case for the three-fund portfolio in Roth: Simple ETF Strategies Work.

I’ve long said that a simple three-fund portfolio will beat the vast majority of investors. This simple portfolio can easily be constructed with ETFs from families such as Vanguard, iShares and Schwab.


This ETF portfolio, also known as the Second Grader portfolio, is one of the MarketWatch Lazy Portfolios Paul Farrell often writes about. According to MarketWatch, of the eight Lazy Portfolios, the Second Grader portfolio is in either first or second place in all of the time frames [1-year; 3-year; 5-year; 10-year]


Note indexuniverse.com is now ETF.com

regards,
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Re: The Three Fund Portfolio

Post by abuss368 » Wed Jan 29, 2014 7:06 am

Barry Barnitz wrote:HI:

Allan Roth - Bogleheads makes the case for the three-fund portfolio in Roth: Simple ETF Strategies Work.

I’ve long said that a simple three-fund portfolio will beat the vast majority of investors. This simple portfolio can easily be constructed with ETFs from families such as Vanguard, iShares and Schwab.


This ETF portfolio, also known as the Second Grader portfolio, is one of the MarketWatch Lazy Portfolios Paul Farrell often writes about. According to MarketWatch, of the eight Lazy Portfolios, the Second Grader portfolio is in either first or second place in all of the time frames [1-year; 3-year; 5-year; 10-year]


Note indexuniverse.com is now ETF.com

regards,



I have not been on the CBS website in a while. It is nice to see the Three Fund Portfolio outperform!

Simplicity is the master key to financial success.

Thank you Jack Bogle!
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 rjb112 » Thu Jan 30, 2014 7:22 pm

Taylor,

I read your outstanding post of Jan 1, 2012 on The Three Fund Portfolio.
viewtopic.php?f=10&t=88005

I have a question for you about this Three Fund Portfolio, but it doesn't seem like anyone has posted on that thread since Jan 2, 2012 and don't know if you will even receive this question.

I don't see any way to email you or send this message to you directly.

Please reply if you become aware of my post, and once I know that you will receive this, I'll formulate my question, which is a fundamental question about the Three Fund Portfolio and how to invest

thanks!
rjb112

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Re: The Three Fund Portfolio

Post by dbr » Thu Jan 30, 2014 8:51 pm

rjb112 wrote:
I don't see any way to email you or send this message to you directly.



If you go to Taylor's post you will see on the right hand side Taylor's name and a little symbol marked PM. That means "personal message." You can click on that and be taken to a form to send a personal message. It is not e-mail but Taylor will get an e-mail that he has a personal message. When he answers, you will get e-mail that you have a personal message, and at the top of your Bogleheads web page you will see the User Control Panel where you can click to read the message.

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Re: The Three Fund Portfolio

Post by Leeraar » Thu Jan 30, 2014 9:11 pm

He is missing that there are multiple pages of posts.

L.
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Re: The Three Fund Portfolio

Post by winguy » Thu Jan 30, 2014 9:14 pm

Whenever I'm tempted by individual stocks or home bias, I check back in here to keep my sanity. Thanks Bogleheads!

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Re: The Three Fund Portfolio

Post by rjb112 » Thu Jan 30, 2014 9:52 pm

Thanks dbr..........by dbr » Thu Jan 30, 2014 6:51 pm
Thanks Leeraar...... by Leeraar » Thu Jan 30, 2014 7:11 pm

got it.......I'm pretty new here; this is an outstanding place!


rjb112

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Making contact about The Three Fund Portfolio

Post by Taylor Larimore » Thu Jan 30, 2014 11:31 pm

rjb:

I will look for your question here.

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

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Re: The Three Fund Portfolio

Post by rjb112 » Fri Jan 31, 2014 12:45 am

I have some questions about the Three Fund Portfolio:

With interest rates having gone down for 30 years, is it wise for one to have all (or even most) of one's fixed income investments in the Barclay’s Index? With a yield on the Index of only 2.2% (per Morningstar), interest rates can rise a lot more than they can fall. On 9/30/1981, the 10 year Treasury closed at a yield of 15.84%. Today that same 10 year Treasury yields 2.71%. Interest rates have been artificially kept down by extraordinary, unprecedented action by the Federal Reserve, and that Fed action is being tapered, with an end to the QE program envisioned for the near future.

With a yield of only 2.2%, is an investor getting paid enough to take the interest rate risk?

Also, do high yield bonds and municipal bonds, not in the Index, have any place in a portfolio?

Finally, should the Vanguard REIT Index fund play a fundamental role in a portfolio, and more importantly, how does one even go about researching this issue?

thanks!

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Lengthy discussions.

Post by Taylor Larimore » Fri Jan 31, 2014 8:38 am

rjb112:

We have had many lengthy discussions about the Barclay Index (benchmark for Total Bond Market), high-yield bonds and municipal bonds in today's low interest-rate environment. Adding REITs to a portfolio is also a topic that is often discussed on the forum. There is no definite answer.

Please use the forum's "Search" box to find other threads where these topics are discussed and debated.

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

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