The Three-Fund Portfolio

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

Post by LadyGeek » Fri Jan 31, 2014 11:03 am

rjb112-

You are asking good questions, but I think you may be chasing after the wrong target (based on your post in LH's thread).

The fact that you are looking at high-yield bonds and REIT funds means that you wish to invest in something other than the three-fund portfolio. There are plenty of ways to do this, but it's not for this thread. Take a look at: Lazy portfolios

The wiki describes high-yield bonds here: High yield bonds. As for their role in a portfolio, I suggest you hold off until you decide on the "big picture" of how you want to define your asset allocations, meaning how many funds and what level of increased risk are you willing to take. There is no free lunch.

Why don't you start a thread in the Investing - Help with Personal Investments using the Asking Portfolio Questions format? We'll help you get pointed in the right direction.
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Re: The Three Fund Portfolio

Post by abuss368 » Fri Jan 31, 2014 12:32 pm

rjb112 wrote: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!


Hi rjb112,

You have asked many good questions here. Perhaps you may want to consider starting a new thread to ask questions related to your portfolio.

The Three Fund Portfolio is an excellent portfolio regardless of the portfolio size. An investor would of course increase the bond allocation with age. Your stock to bond ratio would be based on risks, goals, and timeframe. This portfolio holds thousands of worldwide securities in a low cost, diversified manner without any style drift and manager risk.

Larger portfolios may benefit from adding REITs, Small Cap Value, and TIPS funds. This is not required and is usually based on investor preference.

If one needs to hold additional bonds and has a taxable account, the Three Fund Portfolio will work with Tax Exempt Bonds (based on investor preference and tax bracket) in place of Total Bond Index. Total Bond Index is typically in your tax advantaged accounts.

Please stop back with any additional questions or concerns you may have.
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 Steven in NC » Wed Feb 05, 2014 7:59 am

Hello Everyone,

I am drawn to the Three Fund Portfolio for the simplicity but having recently discovered this site and Taylor's post I have a few questions.

#1. Which VTSMX should one buy? I see this note: Also available as a lower-cost Admiral™ Shares mutual fund and an ETF.
#2. When should one buy? Realize this is a crystal ball question but is now the right time? One big purchase? Smaller average in purchase?
#3. Are there are the options for income/cash withdrawals on occasion? Although I do not need this income for living I would like $5K or so a year to help with certain expenses such as taxes, family vacation. In other words I want to enjoy some of the earnings now.
#4. I have about $250K of cash to invest. This is in addition to a modest 401K ($400K) of which I continue to fund. My goal is to work 18 more years before I retire.

Thank you.

Steven

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Answer to questions about The Three Fund Portfolio.

Post by Taylor Larimore » Wed Feb 05, 2014 5:09 pm

Steven:

Welcome to the Bogleheads Forum!

I will try to answer your questions about The Three Fund Portfolio:
#1. Which VTSMX should one buy? I see this note: Also available as a lower-cost Admiral™ Shares mutual fund and an ETF.

All three funds are available in both investor shares ($3,000 minimum) and admiral shares ($10,000 minimum). Use admiral shares with their lower Expense Ratio if your investment in any fund is over $10,000.

New investors with less than the $9,000 minimum ($3,000 x 3 funds) can obtain virtually the same combination of funds by using Vanguard's Target and Life Cycle funds with their $1,000 minimum investment.
#2. When should one buy? Realize this is a crystal ball question but is now the right time? One big purchase? Smaller average in purchase?

Bogleheads do not market-time. With a suitable stock/bond allocation, It is probably best to plunge right in. If a sudden stock market decline will cause you to sell or lose sleep, invest over a period of months. Ignore the media and other market forecasts.
#3. Are there are the options for income/cash withdrawals on occasion? Although I do not need this income for living I would like $5K or so a year to help with certain expenses such as taxes, family vacation. In other words I want to enjoy some of the earnings now.

Vanguard allows us to withdraw money by selling fund shares at any time.
#4. I have about $250K of cash to invest. This is in addition to a modest 401K ($400K) of which I continue to fund. My goal is to work 18 more years before I retire.

You should not invest in The Three Fund Portfolio in isolation from the rest of your portfolio. I suggest you get specific advice for your personal overall asset-allocation (and best fund locations) by starting a new Topic on our Help with personal investments forum. Use Laura's post for a guide:

Asking Portfolio Questions

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

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Re: Answer to questions about The Three Fund Portfolio.

Post by Steven in NC » Thu Feb 06, 2014 7:37 am

Taylor Larimore wrote:Steven:

Welcome to the Bogleheads Forum!

You should not invest in The Three Fund Portfolio in isolation from the rest of your portfolio. I suggest you get specific advice for your personal overall asset-allocation (and best fund locations) by starting a new Topic on our Help with personal investments forum. Use Laura's post for a guide:

Asking Portfolio Questions

Best wishes.
Taylor


Thank you Taylor for your reply and guidance. It is an honor to talk with you. I am not fully clear on the isolation note but will take your que and start a new topic as you suggest.

Thank you again,

Regards,
Steven

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Re: The Three Fund Portfolio

Post by mzhuang » Thu Feb 06, 2014 8:36 am

Simplicity is the highest sophistication. For folks who want to keep it simple for themselves and their spouses, this is a great portfolio that will take zero time to manage and consume very little mental energy.
Fan of Jack Bogle, David Swensen, Warren Buffet, Fama & French.

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Re: Answer to questions about The Three Fund Portfolio.

Post by CABob » Thu Feb 06, 2014 12:14 pm

Steven in NC wrote:I am not fully clear on the isolation note but will take your que and start a new topic as you suggest.

I have about $250K of cash to invest. This is in addition to a modest 401K ($400K) of which I continue to fund.

The isolation note has to do with the suggestion that you not look at the current $250K amount for investment all by itself, but, to instead look at your entire investment portfolio which would include the 401k and any other parts to the portfolio to arrive at an overall asset allocation and investment selection.
Bob

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"Retire Rich With Just 3 ETFs"

Post by Taylor Larimore » Thu Feb 06, 2014 3:57 pm

Bogleheads:

The Motley Fools have discovered The Three-Fund Portfolio.

Retire Rich With Just 3 ETFs

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

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Re: The Three Fund Portfolio

Post by Keep It Simple » Thu Feb 06, 2014 4:00 pm

This is fantastic...getting the word out.

The only thing missing is mentioning you, Taylor, as the great proponent of this portfolio!

K.I.S.

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Re: The Three Fund Portfolio

Post by stemikger » Thu Feb 06, 2014 4:32 pm

Keep It Simple wrote:This is fantastic...getting the word out.

The only thing missing is mentioning you, Taylor, as the great proponent of this portfolio!

K.I.S.


I've said it before and I'll say it again.

With all the complicated and confusing messages about investing, the three fund portfolio is a breath of fresh air and the essence of what John Bogle has taught all these years.

I personally am a two funder because I don't feel the need for international, but as far as I'm concerned they are the same fund, mine is just modified to go in the non-international direction. I love them both, it's just a personal choice.

Thank you Taylor for keeping things simple!
Stay the Course!! ~ Press on Regardless!!!

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Re: The Three Fund Portfolio

Post by vested1 » Thu Feb 13, 2014 7:37 pm

I wanted to thank you personally Taylor for your posts and wisdom concerning the three fund portfolio. I finally pulled the trigger and am transferring my Fidelity managed account into a Vanguard account.

45% VTSAX
15% VTIAX
40% VBTLX

I posted a thread asking about trying to time the conversion based on economic calendars and got no response. I was worried that due to the recent downturn in stock that I would be selling low and buying high. It took me a day to realize that I was attempting to time the market and that it was futile so I overcame my jitters and put in the order. The result was that it could have turned out better and it could have turned out worse, as is always the case. I look forward to a more relaxed way of life and an end to over 10k in yearly fees to boot.

Thanks again for your suggestions.

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Re: The Three Fund Portfolio

Post by BrandonBogle » Thu Feb 13, 2014 7:48 pm

vested1 wrote:I posted a thread asking about trying to time the conversion based on economic calendars and got no response. I was worried that due to the recent downturn in stock that I would be selling low and buying high. It took me a day to realize that I was attempting to time the market and that it was futile so I overcame my jitters and put in the order. The result was that it could have turned out better and it could have turned out worse, as is always the case.


And in the long run/years from now, you wouldn't even notice if today was one of those better or worse days! Congrats vested!

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Re: The Three Fund Portfolio

Post by abuss368 » Fri Feb 14, 2014 3:39 pm

vested1 wrote:I wanted to thank you personally Taylor for your posts and wisdom concerning the three fund portfolio. I finally pulled the trigger and am transferring my Fidelity managed account into a Vanguard account.

45% VTSAX
15% VTIAX
40% VBTLX

I posted a thread asking about trying to time the conversion based on economic calendars and got no response. I was worried that due to the recent downturn in stock that I would be selling low and buying high. It took me a day to realize that I was attempting to time the market and that it was futile so I overcame my jitters and put in the order. The result was that it could have turned out better and it could have turned out worse, as is always the case. I look forward to a more relaxed way of life and an end to over 10k in yearly fees to boot.

Thanks again for your suggestions.


I think you have an excellent portfolio going forward that will be very effective and easy to manage. Over time you will appreciate the many benefits of Three Fund Portfolio even more.

As an investor it will become important to "stay the course" as Jack Bogle has so often told us all.

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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Re: The Three Fund Portfolio

Post by abuss368 » Fri Feb 14, 2014 3:41 pm

stemikger wrote:
Keep It Simple wrote:This is fantastic...getting the word out.

The only thing missing is mentioning you, Taylor, as the great proponent of this portfolio!

K.I.S.


I've said it before and I'll say it again.

With all the complicated and confusing messages about investing, the three fund portfolio is a breath of fresh air and the essence of what John Bogle has taught all these years.

I personally am a two funder because I don't feel the need for international, but as far as I'm concerned they are the same fund, mine is just modified to go in the non-international direction. I love them both, it's just a personal choice.

Thank you Taylor for keeping things simple!


I think your two fund portfolio is an excellent choice. Jack Bogle has noted in Common Sense on Mutual Funds that most investors would be well served by a single balanced fund. He went on to note that many more investors would be well served with a two fund Total Stock Index and Total Bond Index. One can also substitute Intermediate Term Tax Exempt in a taxable account.

Stay the course!
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 abuss368 » Sat Feb 15, 2014 3:26 pm

Have any additional Bogleheads considered moving to the Three Fund Portfolio for the new year?
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 Nowizard » Sat Feb 15, 2014 6:32 pm

It would be interesting to see the 1, 5, 10 year returns for this portfolio against others. Looks like it would be about12% for a 60/40 portfolio.

Tim

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Re: The Three Fund Portfolio

Post by CABob » Sat Feb 15, 2014 7:17 pm

Nowizard wrote:It would be interesting to see the 1, 5, 10 year returns for this portfolio against others. Looks like it would be about12% for a 60/40 portfolio.

Tim

viewtopic.php?f=10&t=132189
Bob

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Re: The Three Fund Portfolio

Post by longinvest » Sat Feb 15, 2014 7:26 pm

CABob wrote:
Nowizard wrote:It would be interesting to see the 1, 5, 10 year returns for this portfolio against others. Looks like it would be about12% for a 60/40 portfolio.

Tim

viewtopic.php?f=10&t=132189

Here's the Wiki page for these reports:
http://www.bogleheads.org/wiki/Madsinge ... ly_reports
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Re: The Three Fund Portfolio

Post by bryantwfox » Sat Feb 22, 2014 11:40 pm

For those who do not have the Total US Stock and Total Bond options, how could you imitate the fund strategy as close as possible using the following options?


Vanguard Intermediate-Term Bond Index
Vanguard Short-Term Investment Grade Bond
Vanguard Target Retirement 2035
Vanguard Institutional Index Fund
Vanguard Balanced Index Fund
Vanguard Target Retirement 2015
Vanguard Target Retirement 2025
Vanguard Target Retirement 2045
Vanguard Target Date 2055
Vanguard Total International Stock Fund
Vanguard Growth Fund
Vanguard Extended Market Index Inv

Thank you all for your wisdom.

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Re: The Three Fund Portfolio

Post by BrandonBogle » Sun Feb 23, 2014 1:47 am

The Institutional Index fund is Vanguard's S&P 500 fund (I have the same one). There is also Extended Mkt Index in your list. This wiki entry will help you.

http://www.bogleheads.org/wiki/Approxim ... ock_market

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Personal Finance Questions

Post by Taylor Larimore » Sun Feb 23, 2014 8:40 am

CK:

Please post questions about your personal portfolio on the Personal Finance Forum.:

PERSONAL FINANCE FORUM

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

Post by LadyGeek » Sun Feb 23, 2014 10:36 am

^^^ Taylor is responding to CK's post (TxPanther), which I have moved into a new thread. See: The Three Fund Portfolio [Portfolio Help]
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Re: The Three Fund Portfolio

Post by robolove » Wed Feb 26, 2014 12:28 pm

Hi, Since 2009, I have stayed the course and ignored the noise with "The Three Fund Portfolio."

VFWAX Vanguard FTSE All-World ex-US Index Fund Admiral AA 40%
VBTLX Vanguard Total Bond Market Index Fund Admiral Shares AA 20%
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares AA 40%
(Automatically upgraded to Admiral by Vanguard)

Results so far: One happy bogle-bot. I`m so glad I joined this forum after reading your book.

Constantly being educated and Inspired by this community. Thank you!
-robolove

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Re: The Three Fund Portfolio

Post by abuss368 » Wed Feb 26, 2014 10:26 pm

robolove wrote:Hi, Since 2009, I have stayed the course and ignored the noise with "The Three Fund Portfolio."

VFWAX Vanguard FTSE All-World ex-US Index Fund Admiral AA 40%
VBTLX Vanguard Total Bond Market Index Fund Admiral Shares AA 20%
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares AA 40%
(Automatically upgraded to Admiral by Vanguard)

Results so far: One happy bogle-bot. I`m so glad I joined this forum after reading your book.

Constantly being educated and Inspired by this community. Thank you!
-robolove


Glad to hear it. I could not help but note that you split the US and International equities 50% and 50%.
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 robolove » Thu Feb 27, 2014 11:20 am

abuss368 wrote:Glad to hear it. I could not help but note that you split the US and International equities 50% and 50%.


The split is like that because I currently reside in Tokyo and have no idea if I will return to the states or move to another country. Nor do I really know if splitting equities like that is good or bad. :D Actually, to keep it simple, I invest into equities that way since I am still accumulating or playing catch up. I just checked the portfolio analysis, in reality, I`m at 59% US and 41% international.

I have never sold anything to re-balance yet. Just pumping money into the funds to keep it 80/20. Since I`m 38, perhaps I should change increase the bond to 38%.. but I`ve been able to sleep fine the past five years.

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Re: The Three Fund Portfolio

Post by LadyGeek » Thu Feb 27, 2014 4:02 pm

^^^ Did you know we have a wiki article for investing in Japan? Investing in Japan

(If you have any personal finance questions, start a new thread.)
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Re: The Three Fund Portfolio

Post by Barry Barnitz » Thu Mar 06, 2014 6:27 pm

HI:

Taylor's initial post is now available to a wider web audience: The Three Fund Portfolio | Bogleheads® Blog

regards,
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Re: The Three Fund Portfolio

Post by ualdriver » Fri Mar 07, 2014 4:34 pm

Barry Barnitz wrote:HI:

Taylor's initial post is now available to a wider web audience: The Three Fund Portfolio | Bogleheads® Blog

regards,


That was a nice introduction to the 3 fund portfolio. I liked the link to the Vanguard "risk quantifier" (for lack of a better term). It's a simple little tool for someone new to the 3 fund portfolio idea. I hadn't seen that tool before.

I was kind of surprised to read in that table, though, that Vanguard Total International and Vanguard Total Bond market pre-tax and post-tax performance wasn't higher? I would have expected all 3 to rank in the top 20%-ish, especially after a 15 year examination.

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Re: The Three Fund Portfolio

Post by JV » Fri Mar 07, 2014 8:09 pm

I am happy to report I am now a proud 3-Funder. I've had a modified slice and dice for some time now, but was way overweighted in small caps, and decided to simplify. The only thing I'm keeping "separate" from the 3-Fund is the Wellesley, which is for my Roth IRAs (I've had 2 Roths maxed out since 2008 with that fund, and it has been wonderful, and I love the conservative allocation as I can tap contributions if needed). Otherwise I am using the LifeStrategy Modified Growth Fund for my rollover IRA, wife's 403(b), and everything else fits the 3-Fund profile. The trouble I'm having now is carving out a proper 3-Fund portfolio for my 401(k), which has [(poor) --admin LadyGeek] choices via Fidelity. Those Fidelity Freedom Index Funds have a bad rap and a ton of cash in them. I'm trying to work on combining the 401(k) and a new taxable account to make it all work out, as money if fungible, as we all know, and my choices include at least a total bond and total international fund via Vanguard. I think I'm going to use the total bond and total international in my 401(k), and add the total stock via taxable.

So thanks to Taylor, along with Abuss368, for the many comments and instruction.

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Re: The Three Fund Portfolio

Post by pingo » Sat Mar 08, 2014 5:47 pm

ualdriver wrote:I was kind of surprised to read in that table, though, that Vanguard Total International and Vanguard Total Bond market pre-tax and post-tax performance wasn't higher? I would have expected all 3 to rank in the top 20%-ish, especially after a 15 year examination.


Don't be sad. :|

Taylor's original post was in Jan 2013. Since then he has updated the ranking information 2 times (that's 3 total). The rankings vary from year to year and they are period dependent because they reflect whatever has happened the 15 years prior. Shifting the period by one year can make a difference in the rankings. They ranked higher when he posted in 2012 and 2013. Over the short term, I always expect that index funds to rank in the middle of their categories and even 15 years isn't always enough time to see big differences. Over decades and decades…

Vanguard Total Stock Market Index Fund - Investor (VTSMX)
All large blend funds combined
Image

Vanguard International Stock Index Fund - Investor (VGTSX)
All foreign blend funds combined
Image

Vanguard Total Bond Index Fund - Investor (VBMFX)
All intermediate-term bond funds combined
Image

…the difference becomes the most pronounced. We use low cost index funds because it improves our odds of ranking in the upper 50 percentile of returns for each category, but how high up in the category will depend on the length of the period and the specific period measures and there will always be other funds that look like winners over the short and somewhat long-term (i.e. 15 years). Since I have no control over performance, I have to accept that "good" is good enough.

If it makes you feel better, the ten year rankings are higher (not that it matters):

Vanguard Total Stock (VTSMX) Top 18% pre-tax
Vanguard Total International (VGTSX) Top 38% pre-tax
Vanguard Total Bond (VBMFX) Top 49% pre-tax

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Re: The Three Fund Portfolio

Post by ualdriver » Sat Mar 08, 2014 7:11 pm

pingo wrote:
ualdriver wrote:I was kind of surprised to read in that table, though, that Vanguard Total International and Vanguard Total Bond market pre-tax and post-tax performance wasn't higher? I would have expected all 3 to rank in the top 20%-ish, especially after a 15 year examination.


Don't be sad. :|

Taylor's original post was in Jan 2013. Since then he has updated the ranking information 2 times (that's 3 total). The rankings vary from year to year and they are period dependent because they reflect whatever has happened the 15 years prior. Shifting the period by one year can make a difference in the rankings. They ranked higher when he posted in 2012 and 2013. Over the short term, I always expect that index funds to rank in the middle of their categories and even 15 years isn't always enough time to see big differences. Over decades and decades…If it makes you feel better, the ten year rankings are higher (not that it matters):

Vanguard Total Stock (VTSMX) Top 18% pre-tax
Vanguard Total International (VGTSX) Top 38% pre-tax
Vanguard Total Bond (VBMFX) Top 49% pre-tax


Yeah, I get that. But one would think that after 15 years (pick a rolling period, doesn't matter) that one would really start to see a divergence between active and passive performance. I was just surprised that the Total Bond and Total International didn't beat active management by more of a margin after such a long time. I would have expected both to have performance similar to what was shown for Total Stock.

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Re: The Three Fund Portfolio

Post by longinvest » Sun Mar 09, 2014 1:35 pm

ualdriver wrote:Yeah, I get that. But one would think that after 15 years (pick a rolling period, doesn't matter) that one would really start to see a divergence between active and passive performance. I was just surprised that the Total Bond and Total International didn't beat active management by more of a margin after such a long time. I would have expected both to have performance similar to what was shown for Total Stock.

You should not be surprised. Index funds are supposed to give you market returns (minus a small fee). What is the market made of? It's made of all funds, active and passive, and all other buyers and sellers. We can't expect the market to return more than itself!

All in all, we can say that Vanguard's total stock, international, and bond market index funds did remarkably well delivering market returns.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: The Three Fund Portfolio

Post by ualdriver » Sun Mar 09, 2014 4:57 pm

longinvest wrote:
ualdriver wrote:Yeah, I get that. But one would think that after 15 years (pick a rolling period, doesn't matter) that one would really start to see a divergence between active and passive performance. I was just surprised that the Total Bond and Total International didn't beat active management by more of a margin after such a long time. I would have expected both to have performance similar to what was shown for Total Stock.

You should not be surprised. Index funds are supposed to give you market returns (minus a small fee). What is the market made of? It's made of all funds, active and passive, and all other buyers and sellers. We can't expect the market to return more than itself!

All in all, we can say that Vanguard's total stock, international, and bond market index funds did remarkably well delivering market returns.


No, I wasn't surprised by the performance of the two funds as far as how much they earned. I was surprised by their performance relative to their actively managed peers.

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Re: The Three Fund Portfolio

Post by longinvest » Sun Mar 09, 2014 5:49 pm

ualdriver wrote:No, I wasn't surprised by the performance of the two funds as far as how much they earned. I was surprised by their performance relative to their actively managed peers.

Let me try another way. Let's divide the market in two parts: passively managed funds, and the rest. By construction, the passively managed funds will get market return (minus fees). It follows that the rest will also get market return (minus fees). The only differential between the two should be the difference in fees.

Maybe you expected the fee differential to be bigger? That's possible because, often, expensive and badly performing fund returns disappear from results because the funds are closed. So, you can expect reported active performance to be better than what really happened.

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"Total Market Investors Are Not Dumb"

Post by Taylor Larimore » Mon Mar 10, 2014 3:34 pm

Bogleheads:

Rick Ferri, CFA, author and adviser, wrote this article about Total Market Investors:

TOTAL MARKET INVESTORS ARE NOT DUMB

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Taylor
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Re: "Total Market Investors Are Not Dumb"

Post by abuss368 » Mon Mar 10, 2014 5:50 pm

Taylor Larimore wrote:Bogleheads:

Rick Ferri, CFA, author and adviser, wrote this article about Total Market Investors:

TOTAL MARKET INVESTORS ARE NOT DUMB

Best wishes
Taylor


Great article by Rick once again!

Thank you for sharing Taylor.
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The Evolution of The Three Fund Portfolio

Post by Taylor Larimore » Tue Mar 11, 2014 12:10 pm

Bogleheads:

This is a copy of another Conversation from a year ago. It belongs here:

The Evolution of The Three Fund Portfolio

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Taylor
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Twenty largest stock mutual funds.

Post by Taylor Larimore » Tue Mar 11, 2014 1:15 pm

Three Fund Investors:

The latest issue of Kiplinger magazine (April 2014) lists the 5-year returns (longest period shown) of the 20 largest stock mutual funds. Vanguard's Total Stock Market Index Fund (VTSMX) is the largest fund and also had the second highest return (before taxes).

Past performance does not predict future performance.

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Taylor
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Re: Twenty largest stock mutual funds.

Post by Leeraar » Tue Mar 11, 2014 1:33 pm

Taylor Larimore wrote:Three Fund Investors:

The latest issue of Kiplinger magazine (April 2014) lists the 5-year returns (longest period shown) of the 20 largest stock mutual funds. Vanguard's Total Stock Market Index Fund (VTSMX) is the largest fund and also had the second highest return (before taxes).

Past performance does not predict future performance.

Best wishes
Taylor

Which means it will only get bigger. It's not often pointed out that successful active funds get too big for their managers' tactics to persist. With passive index funds that is much less likely to (cannot?) happen.

L.
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Re: The Three Fund Portfolio

Post by abuss368 » Tue Mar 11, 2014 2:25 pm

This may very well be the best overall thread in the history of this forum.

It is notable that Vanguard (fortunately or unfortunately) now recommends a 4 fund portfolio with the addition of the Vanguard Total International Bond Index Fund.

As a side note, Dodge & Cox is also in the process of registering for this asset class and will be offering this fund in 2014. They now offer the same 4 asset classes as vanguard (i.e. 6 funds total - ignore global and balanced as they holdings are already in the US Stock, International Stock, US Bonds, and soon to be International Bonds).

I am starting to wonder if a lot of folks are pushing back against the Total International Bond fund because it is new and we naturally resist change. I am curious if 2 -5 years from now a lot more of us will own this fund and asset class.
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Re: The Three Fund Portfolio

Post by Leeraar » Tue Mar 11, 2014 2:57 pm

abuss368 wrote:This may very well be the best overall thread in the history of this forum.

It is notable that Vanguard (fortunately or unfortunately) now recommends a 4 fund portfolio with the addition of the Vanguard Total International Bond Index Fund.

As a side note, Dodge & Cox is also in the process of registering for this asset class and will be offering this fund in 2014. They now offer the same 4 asset classes as vanguard (i.e. 6 funds total - ignore global and balanced as they holdings are already in the US Stock, International Stock, US Bonds, and soon to be International Bonds).

I am starting to wonder if a lot of folks are pushing back against the Total International Bond fund because it is new and we naturally resist change. I am curious if 2 -5 years from now a lot more of us will own this fund and asset class.

abuss,

I believe the consensus is that since the International Bond Fund is hedged for currency risk, it is a slightly more expensive way to buy vanilla.

L.
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Re: The Three Fund Portfolio

Post by abuss368 » Tue Mar 11, 2014 3:18 pm

Leeraar wrote:
abuss368 wrote:This may very well be the best overall thread in the history of this forum.

It is notable that Vanguard (fortunately or unfortunately) now recommends a 4 fund portfolio with the addition of the Vanguard Total International Bond Index Fund.

As a side note, Dodge & Cox is also in the process of registering for this asset class and will be offering this fund in 2014. They now offer the same 4 asset classes as vanguard (i.e. 6 funds total - ignore global and balanced as they holdings are already in the US Stock, International Stock, US Bonds, and soon to be International Bonds).

I am starting to wonder if a lot of folks are pushing back against the Total International Bond fund because it is new and we naturally resist change. I am curious if 2 -5 years from now a lot more of us will own this fund and asset class.

abuss,

I believe the consensus is that since the International Bond Fund is hedged for currency risk, it is a slightly more expensive way to buy vanilla.

L.


I understand that point of view. I guess I am thinking out loud here in terms of the Three Fund Portfolio and the possible evolution of this portfolio. Is it time to think critically about adding Total International Bond Index to make a Four Fund Portfolio and be in alignment with Vanguard? At one time, Vanguard recommended the Three Fund Portfolio on their website. This has now been updated to the Four Fund Portfolio.

While it is a little more costly than the Total Bond Index, I would expect there is an increase in diversification which is often called the only free lunch in investing. Has this asset class declined in cost over the years (and hopefully Vanguard will continue to lower the cost) to make it more accessible to investors?
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Why not add Vanguard's new International bond fund?

Post by Taylor Larimore » Tue Mar 11, 2014 4:07 pm

abuss368 wrote:Is it time to think critically about adding Total International Bond Index to make a Four Fund Portfolio and be in alignment with Vanguard?

abuss:

Earlier in this thread (page 11) I explained why I have not added Vanguard's new international bond index fund to The Three Fund Portfolio:
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
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Re: The Three Fund Portfolio

Post by abuss368 » Tue Mar 11, 2014 4:11 pm

Has the thought process changed since the inception of the fund?

I read on Vanguard's website that the fund is now a $21 BILLION fund. That is a lot of assets in a short time. I would expect that by having both the Target and Life Strategy funds allocate assets to this fund, there was an immediate increase in this funds size.
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Fund size.

Post by Taylor Larimore » Tue Mar 11, 2014 4:26 pm

I read on Vanguard's website that the fund is now a $21 BILLION fund. That is a lot of assets in a short time. I would expect that by having both the Target and Life Strategy funds allocate assets to this fund, there was an immediate increase in this funds size to a portfolio.

A fund's size has almost nothing to do with adding funds to a portfolio.

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"Why Index Portfolios Win"

Post by Taylor Larimore » Mon Mar 17, 2014 1:27 pm

Bogleheads:
But what really stood out was the combined performance of the index funds. When the authors examined the individual performance of each index fund in the portfolio, they all tended to outperform comparable active funds—but the result was higher when taking the three index funds together.

Why Index Fund Portfolios Win

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by Leeraar » Mon Mar 17, 2014 1:41 pm

Following Taylor around!

Further reading:

https://www.betterment.com/blog/2014/02 ... olios-win/

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Re: The Three Fund Portfolio

Post by SlowlyButSurely » Thu Mar 20, 2014 12:55 pm

Hey all,

I've been looking at a 3 fund portfolio to replace my single Vanguard Target Retirement Account (2040) fund. The TRA fund is 100% of my retirement portfolio.

I was wondering though, since the TRA fund has my desired AA, is there any point in changing to a 3 fund portfolio at this time? The TRA fund is in a tax deferred account and I have no assets in taxable accounts. I understand that a TRA fund would not be tax efficient in a taxable account due to the bond component but I don't have this issue.

Is there anything I'm missing or am I just over thinking it?

Thanks for your help. This forum is invaluable.

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Re: The Three Fund Portfolio

Post by dbr » Thu Mar 20, 2014 4:50 pm

SlowlyButSurely wrote:Hey all,

I've been looking at a 3 fund portfolio to replace my single Vanguard Target Retirement Account (2040) fund. The TRA fund is 100% of my retirement portfolio.

I was wondering though, since the TRA fund has my desired AA, is there any point in changing to a 3 fund portfolio at this time? The TRA fund is in a tax deferred account and I have no assets in taxable accounts. I understand that a TRA fund would not be tax efficient in a taxable account due to the bond component but I don't have this issue.

Is there anything I'm missing or am I just over thinking it?

Thanks for your help. This forum is invaluable.


TR funds follow a glide-path changing the asset allocation as time goes on. Do you or do you not want to stay on this particular glide-path? If yes, then the TR fund is a good idea, otherwise, not. If you were not aware of this plan, then you should most definitely not own such a fund because the TR fund method has mislead you into a bad decision.

Also, it has happened in the past that such funds have changed their asset allocation plan without investors necessarily being acutely aware of the change.

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Re: The Three Fund Portfolio

Post by LadyGeek » Thu Mar 20, 2014 4:57 pm

SlowlyButSurely wrote:Hey all,

I've been looking at a 3 fund portfolio to replace my single Vanguard Target Retirement Account (2040) fund. The TRA fund is 100% of my retirement portfolio.

Welcome!

First, there's absolutely nothing wrong with a Target date retirement funds. In fact, that's how I started. After a while, I wanted a little more control over my asset allocation, so I went to a Lazy portfolio.

Speed, complexity, cost - pick any two. Going to separate funds will mean:

- more complex (more funds to manage)
- slightly less cost (expense ratio is slightly less)
- Annual (or more frequent) rebalancing is required - you'll have to spend a few minutes, perhaps an hour, at least once a year to do the rebalancing. Are you comfortable doing this?

A tax advantaged account has no penalty to move funds. If you want to give it a try, go ahead. If you don't like it, just move the funds back.

As to which funds to choose, start a thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions format and we'll help you out.
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