The Three-Fund Portfolio

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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Taylor Larimore
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"The Simplest Wealth Plan Ever"

Postby Taylor Larimore » Thu May 08, 2014 5:54 pm

Bogleheads:

The Three Fund Portfolio is featured in Forbes:
* Save 15 percent of your salary annually and put it into a 401(k), Individual Retirement Account, taxable account or all three.

* Put equal amounts of that 15 percent in a) US Total Stock Market Index Fund, b) International Total Stock Market Index fund, and c) US Total Bond Market Index Fund.

* Rebalance once a year to ensure that each fund contains equal amounts (one-third to each for those doing the brutal arithmetic)

The Simplest Wealth Plan Ever

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

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Re: The Three Fund Portfolio

Postby tsturbo » Thu May 08, 2014 7:13 pm

I like it, but don't think I could only hold 33% bond! I currently do age -10 for bonds and some days I think it is too conservative and other days not conservative enough. I am however a big time believer of the 3 fund portfolio as the foundation of a portfolio, I just spice mine up a little with some of my Companies stock <5% and also hold intermediate treasuries and tips in addition to total bond. These minor tweaks may or may not make a difference, but they are available to me, so why not, just to vary things slightly :greedy

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Re: The Three Fund Portfolio

Postby aj44 » Sat May 10, 2014 11:34 am

I finally went ahead and put all of my investments to the tune of the 3 fund portfolio, for a long time I was 95% there but sold my dividend and sector funds and it is all due to the wonderful advice of all the members of this board. The only challenge now is taking advantage of the lowest expense ratio in each of my wife and my accounts (Her TSP, my 401k, Roth IRA/brokerage at Vanguard). I've even had a couple friends/family members ask me to look at their 401k offerings and I convinced them to switch to low cost index funds from some ridiculously high expense ratio managed funds.

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A first post.

Postby Taylor Larimore » Tue May 13, 2014 12:46 pm

aj44:

Welcome to the Bogleheads Forum!

This is your first post. Congratulations. It took me nearly 50 years to appreciate the many benefits of The Three Fund Portfolio.

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

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Re: The Three Fund Portfolio

Postby longinvest » Tue May 13, 2014 4:02 pm

Here's some good news for Canadian Bogleheads.

Vanguard Canada has just announced the creation of a FTSE All-World ex Canada ETF. By combining this ETF with the FTSE Canada All Cap Index ETF and Canadian Aggregate Bond Index ETF, it will now be possible to hold a Three Fund Portfolio appropriate for Canadians. (It will actually be a 3-ETF portfolio, as Vanguard Canada doesn't offer mutual funds).

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"The Simplest Way to Best Return"

Postby Taylor Larimore » Fri May 16, 2014 1:35 pm

Bogleheads:

Boglehead Rick Ferri, CFA, is interviewed by Morningstar about the simplest way to achieve the best return. Rick explains why he recommends The Three Fund Portfolio:

The Simplest Way To Best Return

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

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Re: The Three Fund Portfolio

Postby BogleInvestorLondon » Fri May 16, 2014 5:54 pm

Thanks a lot Taylor.

I noticed that Rick would include TIPS and REIT's (both of which I do not have). If owning your own property, I guess you get exposure that way to any price appreciation. Also (just for my own knowledge) do you know how investing in REIT's fare generally compared to simply buying and renting out properties yourself?

Lastly, I am an investor with a fairly high risk tolerance. Would you consider these essential from a long-term point of view? I simply am holding Vanguard LifeStrategy 80/20 along with VWRL and will hold it and add to it for at least 20 years.

Thank you.

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Adding a REIT fund ?

Postby Taylor Larimore » Fri May 16, 2014 8:25 pm

I noticed that Rick would include TIPS and REIT's (both of which I do not have). If owning your own property, I guess you get exposure that way to any price appreciation. Also (just for my own knowledge) do you know how investing in REIT's fare generally compared to simply buying and renting out properties yourself?

Lastly, I am an investor with a fairly high risk tolerance. Would you consider these essential from a long-term point of view? I simply am holding Vanguard LifeStrategy 80/20 along with VWRL and will hold it and add to it for at least 20 years.

BogleInvestorLondon:

The three funds in The Three Fund Portfolio contain more than 10,000 worldwide individual stocks (including REITs) and U.S. bonds. This is incredible diversification that was unknown during my early years as an investor. Consider carefully before adding more funds with their added cost and complexity.

I don't know (nor does anyone) if adding more REIT stocks will help or hurt. We forget that Vanguard's REIT fund plunged -68.3% in 2007-2008. Personally, I doubt if small investors who own real estate should add a separate REIT fund. REITs are tax-inefficient and take up precious room in tax-advantaged accounts. They also add cost and complexity.

This is not the place to discuss personal portfolios, but consider carefully about maintaining a brokerage account for a single overlapping fund (VWRL).

Strive for simplicity--not complexity.

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

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Re: The Three Fund Portfolio

Postby White Coat Investor » Fri May 16, 2014 9:22 pm

The losses in REITs in the last bear were worse than that Taylor, it was 78% from peak to trough. Here's the post I made almost exactly at the bottom when I was wondering if they could go to zero.

viewtopic.php?f=10&t=33849

That'll give you a sense of what it is like to hold this asset class in a big bear market (painful and scary.)
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: The Three Fund Portfolio

Postby Leeraar » Fri May 16, 2014 11:33 pm

I have gone with Vanguard's LifeStrategy funds as a relatively pure (and simple to manage) implementation of the 3-fund portfolio. Since I am on the same bus as Mike Piper, that seems pretty good to me.

Rick Ferri makes a case that you might add real estate that is under-represented in the Total Stock Market and bonds that are not in the Total Bond Market indexes. His reasoning (to better represent the total market) is different than someone who might tell you to tilt this way or that because the alpha is just waiting to be picked up.

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Re: The Three Fund Portfolio

Postby cfs » Fri May 16, 2014 11:55 pm

Wow

EmergDoc wrote
The losses in REITs in the last bear were worse than that Taylor, it was 78% from peak to trough . . .

All I have to say is Wow - I was not aware of this number because I do not follow REITS, but just wondering the percentage of the buy-and-holders that actually had the stomach to watch that fund losing 70 plus percent. Yes, Virginia, sometimes investing is painful.

Thanks
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Re: "The Simplest Way to Best Return"

Postby abuss368 » Sat May 17, 2014 7:39 pm

Taylor Larimore wrote:Bogleheads:

Boglehead Rick Ferri, CFA, is interviewed by Morningstar about the simplest way to achieve the best return. Rick explains why he recommends The Three Fund Portfolio:

The Simplest Way To Best Return

Best wishes.
Taylor


Hi Taylor,

I watched the entire interview and I believe that was one of Rick's best. Rick's note about the older he gets and the Three Fund Portfolio was priceless. The addition of REITs, TIPS, and High Yield was compelling.

Thank you for posting.
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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Three Fund Portfolio wins in latest study

Postby Taylor Larimore » Fri May 23, 2014 7:10 pm

Bogleheads:

The Three Fund Portfolio was used in an award winning study comparing index fund portfolios with actively managed portfolios. This is the Newswire Announcement:
NEW YORK, May 22, 2014 /PRNewswire/: Two researchers from the United States have claimed first prize (USD $30,000) for their study on the outperformance of diversified portfolios of index fund portfolios to portfolios of actively managed funds in S&P Dow Jones Indices' third annual SPIVA Awards program. Second prize (USD $15,000) in the SPIVA Awards program went to a team of researchers from universities across the U.S. for their study of explicit indexing.

The winning paper, "A Case of Index Fund Portfolios," published by (Boglehead) Richard Ferri of Portfolio Solutions®, LLC and Alex Benke of Betterment, shows that an all index fund strategy in portfolios is favorable over portfolios of actively managed funds. Two distinct strategies were compared in the report: one that selects low-cost market-tracking index funds exclusively and a second that selects from actively managed funds that attempt to outperform the markets. The study revealed that the probability of outperformance using the simplest index fund portfolio started in the 80th percentile and increased over time. A broader portfolio holding multiple low-cost index funds began at close to the 90th percentile.

A Case for Index Fund Portfolios

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

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Re: The Three Fund Portfolio

Postby LadyGeek » Fri May 23, 2014 7:33 pm

To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: The Three Fund Portfolio

Postby js12337 » Fri May 23, 2014 8:04 pm

Been watching this for a while. Aside from simplicity, how does one think about HY Savings, CDs, I-bonds, TIPS or a Treasury fund vs Total US Bond Market fund? Does the Total US Bond fund provide the portfolio buffer on the equity side, or is it more of an income / return driven selection?

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HY Savings, CDs, I-bonds, TIPS, Treasuries ?

Postby Taylor Larimore » Fri May 23, 2014 8:51 pm

js12337:

Welcome to the Bogleheads Forum!
Been watching this for a while. Aside from simplicity, how does one think about HY Savings, CDs, I-bonds, TIPS or a Treasury fund vs Total US Bond Market fund? Does the Total US Bond fund provide the portfolio buffer on the equity side, or is it more of an income / return driven selection?

A fundamental benefit of The Three Fund Portfolio is its simplicity. Diversified Total Bond Market Index Fund serves the purpose of providing the portfolio with safety and income in a single high-quality, very diversified, low-cost, index fund.

Your post about the characteristics of "HY Savings, CDs, I-bonds, TIPS or a Treasury fund vs Total US Bond Market fund" can be very complex and deserves its own topic thread for discussion.

Please start a new topic post with your question and you will undoubtedly receive many replies.

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

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Re: The Three Fund Portfolio

Postby triggerfish10 » Fri May 23, 2014 9:11 pm

I am curious as to whether equal allocation in the 3 arms of the 3-fund portfolio (1/3 of the total portfolio in each) should hold true regardless of age. I know that as people get closer to retirement it is often recommended that they increase their bond allocation, but might it be a better idea to maintain that original asset allocation. Taylor, is your AA still 1/3 in each of total US stock, total US bond, and total International stock?
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Re: The Three Fund Portfolio

Postby tj » Fri May 23, 2014 9:21 pm

triggerfish10 wrote:I am curious as to whether equal allocation in the 3 arms of the 3-fund portfolio (1/3 of the total portfolio in each) should hold true regardless of age. I know that as people get closer to retirement it is often recommended that they increase their bond allocation, but might it be a better idea to maintain that original asset allocation. Taylor, is your AA still 1/3 in each of total US stock, total US bond, and total International stock?



A specific percentage allocation to each fund is nowhere specified in this thread. It depends on each person's risk tolerance and such.

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Re: The Three Fund Portfolio

Postby LadyGeek » Fri May 23, 2014 9:26 pm

The wiki explains about percentage allocation ("Asset allocation"): Three-fund portfolio

The importance of asset allocation, ratio of stocks / bonds, is also explained here.
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Re: The Three Fund Portfolio

Postby triggerfish10 » Fri May 23, 2014 10:02 pm

* Save 15 percent of your salary annually and put it into a 401(k), Individual Retirement Account, taxable account or all three.

* Put equal amounts of that 15 percent in a) US Total Stock Market Index Fund, b) International Total Stock Market Index fund, and c) US Total Bond Market Index Fund.

* Rebalance once a year to ensure that each fund contains equal amounts (one-third to each for those doing the brutal arithmetic)


Perhaps I misinterpreted, but I was under the impression that this quote specified putting an equal percentage in each of the 3 funds, and rebalancing once a year to keep it that way.
"One does not discover new lands without consenting to lose sight of the shore for a very long time" - Andre Gide

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Re: The Three Fund Portfolio

Postby LadyGeek » Fri May 23, 2014 10:19 pm

That would be from this post: "The Simplest Wealth Plan Ever"

No, you didn't misinterpret anything. What wasn't clear is that equal percentages are just one way of doing things - it's simple and it works. However, that's a general recommendation without knowing the individual investor's situation. If you don't know anything, then start with that. With more information, you can modify the percentages to what you're comfortable with.

Rebalancing once a year is also a general recommendation, but I'd stick with that.
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Re: The Three Fund Portfolio

Postby Namashkar » Sat May 24, 2014 8:06 pm

In addition to the three funds as mentioned, I was recommended the Vanguard Total International Bond Market fund as part of the bond allocation by the Vanguard financial planning analyst.

Mr. Larimore, any pros and/or cons, please?

Thanks,

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Adding International Bond Index Fund?

Postby Taylor Larimore » Sat May 24, 2014 8:44 pm

Namashkar wrote:In addition to the three funds as mentioned, I was recommended the Vanguard Total International Bond Market fund as part of the bond allocation by the Vanguard financial planning analyst.

Mr. Larimore, any pros and/or cons, please?

Thanks,

Namashkar:

This is the reply I gave to a similar question:
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. Not to be overlooked is the fact that Total Bond Market already includes about 7% foreign bonds.


Mr. Bogle said this in a recent Morningstar interview:
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 one.


Strive for simplicity -- not complexity.

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

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Re: The Three Fund Portfolio

Postby pingo » Sun May 25, 2014 2:23 am

Namashkar wrote:In addition to the three funds as mentioned, I was recommended the Vanguard Total International Bond Market fund as part of the bond allocation by the Vanguard financial planning analyst.


Namashkar,

I recommend the following discussions as food for thought:

How important are Int'l bonds?

International Bond Allocation?

A few highlights (I think) I recall from those discussions: A broad, low-cost International bond index fund like Vanguard's is neither essential nor dangerous. There is no wrong allocation for it (even if that allocation is 0%). There was probably no clear "sweet spot" for international bonds, so Vanguard decided a reasonable approach (read: educated guess) was to allocate 20% of one's bond allocation to international bonds. If you do that, you probably won't see a difference in your returns, but the choice may come down to whether or not you believe there is a need for bond diversification to the nth degree beyond U.S. borders.

The classic Three Fund Portfolio does not include international bonds, but they're may be ways to include them, if desired, that do not complicate a portfolio anymore than using a 3-fund portfolio would. It depends on what you desire and what your account situation is, but you'd have to start a thread to include the recommended information (click this link). If you don't know whether or not to include international bonds right now, it's okay to skip them for the time being.
Last edited by pingo on Mon May 26, 2014 10:36 am, edited 2 times in total.

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Re: The Three Fund Portfolio

Postby 1210sda » Sun May 25, 2014 7:27 am

Namashkar,

Another bit of guidance that Vanguard provides is the allocation of it's Life Strategy funds.

For example, the Life Strategy Moderate Growth fund is essentially the classic 60/40 portfolio but with the following refinements.

1. Vanguard Total Stk Mkt Index Fund............. 42%
2. Vanguard Total Intnl Stk Index Fund.............18%
3. Vanguard Tot Bond Mkt Index Fund...............32%
4. Vanguard Tot Intnl Bond Index Fund...............8%

1210

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Re: The Three Fund Portfolio

Postby Namashkar » Sun May 25, 2014 12:54 pm

Thank you Mr. Larimore and all for very helpful information.
Namashkar

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Re: The Three Fund Portfolio

Postby pingo » Sun May 25, 2014 6:15 pm

Sometimes confusion arises from uses such as "percent of equity" and "percent of bonds" versus "percent of portfolio". I'll add blue to my earlier post and to 1210's for clarity:

pingo wrote:Vanguard decided a reasonable approach (read: educated guess) was to allocate 20% of ones' bond allocation to international bonds.


1210sda wrote:1. Vanguard Total Stk Mkt Index Fund............. 42%
2. Vanguard Total Intnl Stk Index Fund.............18%
3. Vanguard Tot Bond Mkt Index Fund...............32%
4. Vanguard Tot Intnl Bond Index Fund............…8% <--Equals 20% of the bond allocation (20% x 40% bond allocation = 8%)


All the best!

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Re: Three Fund Portfolio wins in latest study

Postby abuss368 » Tue May 27, 2014 10:31 am

Taylor Larimore wrote:Bogleheads:

The Three Fund Portfolio was used in an award winning study comparing index fund portfolios with actively managed portfolios. This is the Newswire Announcement:
NEW YORK, May 22, 2014 /PRNewswire/: Two researchers from the United States have claimed first prize (USD $30,000) for their study on the outperformance of diversified portfolios of index fund portfolios to portfolios of actively managed funds in S&P Dow Jones Indices' third annual SPIVA Awards program. Second prize (USD $15,000) in the SPIVA Awards program went to a team of researchers from universities across the U.S. for their study of explicit indexing.

The winning paper, "A Case of Index Fund Portfolios," published by (Boglehead) Richard Ferri of Portfolio Solutions®, LLC and Alex Benke of Betterment, shows that an all index fund strategy in portfolios is favorable over portfolios of actively managed funds. Two distinct strategies were compared in the report: one that selects low-cost market-tracking index funds exclusively and a second that selects from actively managed funds that attempt to outperform the markets. The study revealed that the probability of outperformance using the simplest index fund portfolio started in the 80th percentile and increased over time. A broader portfolio holding multiple low-cost index funds began at close to the 90th percentile.

A Case for Index Fund Portfolios

Best wishes.
Taylor


Hi Taylor,

That is awesome news for Rick and the Three Fund Portfolio!

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

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Re: The Three Fund Portfolio

Postby gabriel1970 » Sun Jun 01, 2014 9:12 am

I read this and felt something is missing. Thought about it some more and realized I am thinking of munis. Actually there is not a lot of mentioning of munis in the forum. Could you shed light on why?

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Munis ?

Postby Taylor Larimore » Sun Jun 01, 2014 9:26 am

gabriel1970 wrote:I read this and felt something is missing. Thought about it some more and realized I am thinking of munis. Actually there is not a lot of mentioning of munis in the forum. Could you shed light on why?

Gabriel:

Welcome to the Bogleheads Forum!

Muni (tax-exempt) bonds are recommended when tax-advantaged accounts are full of higher-yielding taxable bonds. This seldom happens for most investors who have access to tax-advantage accounts (IRAs, 401Ks, 403Bs etc.).

Best wishes.
Taylor
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Best IRA funds.

Postby gabriel1970 » Sun Jun 01, 2014 5:15 pm

Thank you, Taylor. I still have some VTSAX (Total Stock Market) in rollover IRA, I will switch that to bond. I just want to make sure of the following. Morningstar says the 30-day SEC yield is 1.86%. Does that mean VTSAX on average pays 1.86% of dividend per year? If so, it does not belong to rollover IRA, bond funds do.


Nearly all funds are best in tax-advantaged accounts (rollover IRA), including VTSAX. However, when there is no more room in an IRA, VTSAX is an excellent tax-efficient fund to put in a taxable account.

Best wishes.
Taylor

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Re: The Three Fund Portfolio

Postby tj » Sun Jun 01, 2014 5:58 pm

gabriel1970 wrote:Thank you, Taylor. I still have some VTSAX in rollover IRA, I will switch that to bond. I just want to make sure of the following. Morningstar says the 30-day SEC yield is 1.86%. Does that mean VTSAX on average pays 1.86% of dividend per year? If so, it does not belong to rollover IRA, bond funds do.



There is no "on average" when it comes to equity dividends. Dividends change every year (every quarter actually). And the percentage obviously changes based on the growth/loss of the fund.

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Re: The Three Fund Portfolio

Postby abuss368 » Mon Jun 02, 2014 1:34 pm

gabriel1970 wrote:I read this and felt something is missing. Thought about it some more and realized I am thinking of munis. Actually there is not a lot of mentioning of munis in the forum. Could you shed light on why?


Hi gabriel1970,

Muni or Tax Exempt Bond funds can be used in taxable accounts in place of the Total Bond Index fund which is a taxable bond fund. Often investors look at their tax rate and compare if the after tax returns are higher with a tax exempt or taxable bond fund.

Tax Exempt bonds are not taxable at the federal level. In addition, a portion of the income, or perhaps all of the income (depending on the fund involved) is exempt from state taxation.

I hope this helps.

Please stop back with any follow up questions you may have.

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

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Re: The Three Fund Portfolio

Postby Clive » Sat Jun 21, 2014 11:55 am

BogleInvestorLondon wrote:I noticed that Rick would include TIPS and REIT's (both of which I do not have). If owning your own property, I guess you get exposure that way to any price appreciation. Also (just for my own knowledge) do you know how investing in REIT's fare generally compared to simply buying and renting out properties yourself?

Consider that long term broadly long dated gilts (treasury) prices yield 0% nominal, but pay interest that broadly paces inflation. Cash (short duration gilts) broadly pay interest that paces inflation. Gold - paces inflation. House prices - pace inflation. Share prices excluding dividends - pace inflation. Each of those however do so with varying levels of volatility.

Add on stock dividends and stocks appear to be the more attractive overall choice - especially as dividend values also broadly tend to rise with inflation.

However, if you live in a owned home you avoid having to pay rent. You could sell, invest the proceeds in stocks and the dividend might cover the rent on a equivalent sized/location home and the share price rises might broadly compare to house price rises. In effect your home is stock-like, having a price that rises with inflation and provides a imputed 'dividend' (rent not paid).

Land or a home can yield dividends, grow crops that are sold, renting a property or garage out, or imputed dividend via rent not paid.

Also consider human capital. If you work or have a pension of say £12,000 (around $20,000 US$ - arbitrary figure for perhaps a minimum barebones cost of living) then that's a form of dividend. If you combine that with 30 years of such spending = £360K which you might invest in inflation bonds (index linked gilts/TIPS). Leaving those bonds as-is (rolling maturing bonds) and you have a capital value that rises with inflation (bonds) and that might be considered as having paid a dividend (human capital £12K wages/pension element).

A third in each of stocks (business), home (land) and cash/reserves (combined with wages/pension), and you have three distinct 'assets' that each can individually provide stock-like rewards - but that are diversified enough to reduce overall 'portfolio' volatility.

£360K in index linked gilts + £12k pension
£360K in a home + avoid paying £12K in rent
£360K in stocks that pay £12K in dividends

In difficult times when stock dividends dry up/decline, you've the bonds to fall back upon. In good times when stock dividends might be above average top bonds up again. Collectively the capital value of the portfolio rises with inflation, and pays 'dividends' that also broadly rise with inflation.

For the last 50 odd years the capital value assuming periodic rebalancing when sizeable deviations away from a third each had occurred generated a 3% real (i.e. exceeded inflation by 3%). Over 100 years the figure was 2% (much of the earlier 1900's saw capital values just broadly pacing inflation, but a dip down below during the lead up to and including the WW1 years). Such that assuming broadly 3.3% average 'dividends' - supplemented with a 2% to 3% real capital gain = total gains were around 5% to 6% (but that includes an element of human capital (wages/pension) of around 12K/(3 x 360K) = 1.1%).

So if you rent, holding some REIT may be a reasonable choice. If you own your home the need to hold some/any REIT's is lower. Inflation bonds/index linked gilts/TIPS can be useful in providing a degree of safety (inflation stable cash-flow (bond draw-down)) when inflation may have risen sharply and the income from all other assets had declined in real terms.

Of course the amounts and weightings to each of the assets will differ according to each investors preferences and/or tax efficiencies. Perhaps Index Linked Gilts in tax efficient (ISA); Home is capital gains tax (CGT) exempt and imputed 'dividend' (rent not paid) is tax efficient. Stock capital gains can be yearly CGT harvested; Dividends can be tax efficient; Barebones cost of living wages/pension can also be tax efficient (£10K/year zero rate tax band). Whilst some might not mind trading up (or down) their home (value), others - who perhaps live in a long standing family home might be more objectionable to moving home (in which case REIT's, ground rents, land, garages ....etc might be 'traded'). As far as I know trading land/residential/commercial properties etc are as equally as rewarding as holding REIT's - but direct/physical may involve more effort/risks - depending upon how you opt to hold physical (tenants can default, if you are your own 'tenant' however then that risk is eliminated etc.).

fopa17
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Re: The Three Fund Portfolio

Postby fopa17 » Mon Jun 23, 2014 11:50 am

You should not have ANY long bonds now. 10 year rate going up about 30-50% i would say.

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Total Bond Market Index Fund

Postby Taylor Larimore » Mon Jun 23, 2014 12:47 pm

fopa17 wrote:You should not have ANY long bonds now. 10 year rate going up about 30-50% i would say.

Fopa:

Welcome to the Bogleheads Forum!

Bogleheads do not market-time or attempt to forecast the stock and bond markets. Reliable research has proven it is fruitless.

The Bogleheads Investment Philosophy

Total Bond Market in the Three Fund Portfolio was selected because it contains thousands of diversified, high-quality U.S. bonds of various maturities (85% of TBMs maturities are currently less than 10 years). TBMs diversification assures investors that we will never have all our bonds in the same under-performing category.
"The only function of economic forecasting is to make astrology look respectable." -- John Kenneth Galbraith


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

fopa17
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Re: Total Bond Market Index Fund

Postby fopa17 » Mon Jun 23, 2014 1:02 pm

Taylor Larimore wrote:
fopa17 wrote:You should not have ANY long bonds now. 10 year rate going up about 30-50% i would say.

Fopa:

Welcome to the Bogleheads Forum!

Bogleheads do not market-time or attempt to forecast the stock and bond markets. Reliable research has proven it is fruitless.

The Bogleheads Investment Philosophy

Total Bond Market in the Three Fund Portfolio was selected because it contains thousands of diversified, high-quality U.S. bonds of various maturities (85% of TBMs maturities are currently less than 10 years). TBMs diversification assures investors that we will never have all our bonds in the same under-performing category.
"The only function of economic forecasting is to make astrology look respectable." -- John Kenneth Galbraith


Best wishes.
Taylor


Thanks Taylor!
Just wanted to point it out.

fopa17
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Re: The Three Fund Portfolio

Postby fopa17 » Tue Jun 24, 2014 2:39 am

What is your opinion? I watch some other "indicators" but have no idea if this could be true.


Edit: Removed the link..
Last edited by fopa17 on Fri Jun 27, 2014 4:58 pm, edited 1 time in total.

pingo
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Re: The Three Fund Portfolio

Postby pingo » Tue Jun 24, 2014 4:34 am

Edited in attempt to not lose too much focus:

fopa17,

The link of your inquiry serves to distract and confuse investors, offering no worthwhile plan with which to navigate the crisis it contemplates. Besides, will acting on its warnings turn those warnings into self-fulfilling *or* self-defeating prophecies?

The venerable Three Fund Portfolio is a marvelously simple and effective way to invest. The Three Fund Portfolio is a great way to implement Strategic Asset Allocation. (Click here, too.) The Three Fund Portfolio and SAA are advocated by Bogleheads. A Three Fund Portfolio of "total" market funds makes it easier to ignore market noise so that you can obtain just the right level of risk and obtain your fair share of market returns based on your personal willingness, need and tolerance for risk. Continuously updated Morningstar data confirms SAA and the folly of making stock and bond decisions based on past performance or market predictions and expectations.

Take the long view. It should not matter whether a bond run happens now or later, or if it never happens at all. It's better to stay put, ignore the noise and continue the course per one's Investment Policy Statement, which is one's actionable plan. I can't use Total Bond alone, but its composition informs my choice of funds in order to duplicate key characteristics as best I can. If bonds go down in value (losses), my IPS says I must purchase more to restore my portfolio's asset allocation so as to avoid too much *and* too little risk. There are no guarantees, but I believe the plan is supported by the data and by my piece of mind.
Last edited by pingo on Sat Jun 28, 2014 9:10 am, edited 39 times in total.

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Market Timing posts belong elsewhere.

Postby Taylor Larimore » Tue Jun 24, 2014 7:20 am

Bogleheads:

This thread is about The Three Fund Portfolio. Market Timing posts belong elsewhere.

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

gvsucavie03
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The Three Fund Portfolio [Portfolio help]

Postby gvsucavie03 » Tue Jun 24, 2014 9:50 pm

pufferfish wrote:In regards to Asset Allocations. Planning on adding a taxable brokerage account.

Say I wanted a 60% stocks and 40% bonds allocation such as
40% VBTLX
20% VTIAX
40% VTSAX

Is the percentage PER investment vehicle such as 401K, ROTH IRA, brokerage account or total of all accounts?

Should I have 60/40 in my 401K, in my ROTH IRA, etc or as long as I have 60/40 overall in all 3?

Currently have the following:
ROTH IRAs - $170K
ROTH 401K - $180K


You should post allocation and portfolio questions in a new thread...

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Re: The Three Fund Portfolio

Postby abuss368 » Tue Jun 24, 2014 9:59 pm

pufferfish wrote:In regards to Asset Allocations. Planning on adding a taxable brokerage account.

Say I wanted a 60% stocks and 40% bonds allocation such as
40% VBTLX
20% VTIAX
40% VTSAX

Is the percentage PER investment vehicle such as 401K, ROTH IRA, brokerage account or total of all accounts?

Should I have 60/40 in my 401K, in my ROTH IRA, etc or as long as I have 60/40 overall in all 3?

Currently have the following:
ROTH IRAs - $170K
ROTH 401K - $180K


I would consider a new thread for better responses and feedback. Lets try to keep this thread on course with the Three Fund Portfolio!

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

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Re: The Three Fund Portfolio

Postby LadyGeek » Tue Jun 24, 2014 10:06 pm

FYI - I moved pufferfish's posts into a stand-alone thread: The Three Fund Portfolio [Portfolio help]

Those wishing to help pufferfish should post there.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

pingo
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Re: The Three Fund Portfolio

Postby pingo » Thu Jun 26, 2014 8:15 pm

Per Taylor's gentle reminder above (if not rebuke), I have edited my last post. I hope it conforms a little better to the topic at hand. His thread, his rules. My intent was to not come off as "market-timey", but I may have done so.

Regardless, I like it better now.

:beer
Last edited by pingo on Thu Jun 26, 2014 10:35 pm, edited 2 times in total.

gvsucavie03
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Re: The Three Fund Portfolio

Postby gvsucavie03 » Thu Jun 26, 2014 8:25 pm

I agree with pingo. I just read this entire thread last night and decided to scrap the 5, 6, 7 fund idea to a simple 3-fund portfolio. Will be most if not all tax-advantaged. Thanks Taylor!

acegolfer
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Re: The Three Fund Portfolio

Postby acegolfer » Fri Jun 27, 2014 5:48 am

I did a quick search but couldn't find any related post. Here's my question.

If you know 2-funds separation theorem, which states,

The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.


source: http://financial-dictionary.thefreedict ... on+Theorem

then do you think ppl use TBM as a proxy for the risk-free asset, or is it part of the market portfolio?

Note 1: I'm not arguing 3 fund portfolio is wrong. Instead, I'm trying to understand the theoretical rationale behind 3 fund strategy and I found 2-funds separation theorem seems to be the closest. If there's a better theory (not an anecdote or empirical results) that proves one should hold these 3 funds, then I welcome your suggestion.
Note 2: I'm not stating that 2-funds separation theorem is right. So please do not discuss whether this theory is correct or wrong, unless you provide a better theory that justifies 3 fund portfolio.
Note 3: If I don't get any response in 10 days, I'll open a new thread to get more attention because not everyone checks this thread. Let me know if this against the forum policy.

dbr
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Re: The Three Fund Portfolio

Postby dbr » Fri Jun 27, 2014 8:35 am

acegolfer wrote:I did a quick search but couldn't find any related post. Here's my question.

If you know 2-funds separation theorem, which states,

The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.


source: http://financial-dictionary.thefreedict ... on+Theorem

then do you think ppl use TBM as a proxy for the risk-free asset, or is it part of the market portfolio?

Note 1: I'm not arguing 3 fund portfolio is wrong. Instead, I'm trying to understand the theoretical rationale behind 3 fund strategy and I found 2-funds separation theorem seems to be the closest. If there's a better theory (not an anecdote or empirical results) that proves one should hold these 3 funds, then I welcome your suggestion.
Note 2: I'm not stating that 2-funds separation theorem is right. So please do not discuss whether this theory is correct or wrong, unless you provide a better theory that justifies 3 fund portfolio.
Note 3: If I don't get any response in 10 days, I'll open a new thread to get more attention because not everyone checks this thread. Let me know if this against the forum policy.


I would go back and read the first post in this thread which contains a list of reasons why the three fund portfolio makes sense. None of that discussion attempts to "PROVE [my emphasis] that one should hold these 3 funds." Rather the discussion is a practical one based on common knowledge and common sense. The closest the discussion appears to come to modern portfolio theory is a reference to "efficient" in an article by John Norstad that argues that the total stock market is efficient.

All that said, if you want to relate the three fund portfolio to Markowitz theory, then I would say that, yes, TBM might seem to play the role of "the" risk free asset and the stock allocation the role of "the market." Naturally the correspondence is somewhat imperfect.

I think you are going to have a difficult time trying to consider the possible advice for the three fund portfolio on primarily theoretical grounds, because the advice does not mostly come from such considerations.

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Taylor Larimore
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"2-Funds Separation Theorem"

Postby Taylor Larimore » Fri Jun 27, 2014 8:45 am

If I don't get any response in 10 days, I'll open a new thread to get more attention because not everyone checks this thread.

acegolfer:

Good idea--Open a new thread about the "2-Funds Separation Theorem."

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

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Taylor Larimore
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"If You Can"

Postby Taylor Larimore » Fri Jun 27, 2014 9:28 am

Bogleheads:

Bill Bernstein may be the most intelligent man (and one of the nicest) I ever met. He recommends The Three Fund Portfolio (without international bonds) in his latest book:

If You Can

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

selftalk
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Re: The Three Fund Portfolio

Postby selftalk » Sun Jun 29, 2014 7:01 am

This works for me but I have no bond fund whatsoever because I have a solid pension and am receiving social security. I only have the Total Stock Market Index fund and the Total International fund ( VTI, VXUS ) 60% and 40% respectively. I trust the both of these funds are good selections for the taxable and tax sheltered accounts aren`t they?


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