The Three-Fund Portfolio

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pingo
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Re: The Three Fund Portfolio

Post by pingo »

captainperson wrote:Do most people do 33.33% of each of the 3 funds index in their portfolio?
Honestly, that's not bad.

Usually the first order of business (from the simplified Boglehead perspective) is to determine how much risk you want to accept. Translation: determine how much you want in stocks by assuming they'll crash by 50% every so often, and that you'll be staying the course throughout those crashes. The rest will go into bonds. Next, determine how much of those stocks to hold in foreign markets. Marketweight is currently about half of all stocks (and your initial idea follows marketweight). The usual recommendation is a minimum of 20% of stocks (not of the whole portfolio) in international equities, with the historical sweet-spot or middle ground at 30% of stocks, all the way up to market weight.

The percent you determine for International stocks goes into a "total" international index fund. The rest goes into a "total" U.S. market index fund. Nice and easy.

As time passes you may realize that your tolerance, need or willingness for risk goes down, especially if you believe you will meet your goals. Increasing the allocation to bonds through new contributions or rebalancing is the principle way to lower your equity risk and sleep well at night.

There is a broad range of what is reasonable, as long as you can stick with your asset allocation through the rough times. The Three Fund portfolio is great because it so easily and effectively adapts to one's willingness, need and tolerance for risk.

Some links:

Wiki: Domestic/International

Discussion: Domestic vs. International

International vs. Domestic Equity Percentage 2011

Discussion : International investing: A good call by our mentor

Discussion: Need for International Investing?
gvsucavie03
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

I think much of the resistance to the TFP is that the Wiki makes it appear to have a fixed AA to each of the three funds. People get really confused by the illustration that shows 33/33/34. Unless you have read this entire thread, it can easily be mis-interpreted. Maybe if the illustration showed 40/20/40, folks would get a little better idea of the balance between foreign and domestic stocks. I'm not saying 2/3 to 1/3 US/INT is the "correct" ratio, but it is closer to what is recommended in the BH books and Wiki pages.

The big key - many people don't take the time to read and want to jump to the illustrations and the "how" rather than the "what." The TFP pie is not fixed!
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Fifteen Advantages of Index Funds

Post by Taylor Larimore »

Bogleheads:

The Three Fund Portfolio contains three index funds. Below are 15 reasons I prefer index funds:

1. Low cost: Research has shown that "low-cost" is the best predictor of future returns. Index funds have much lower costs than most managed funds.

2. Higher returns: Index funds (on average) have higher returns than managed funds (play the odds).

3. Lower risk: The increased diversification of index funds results in lower risk. Baer & Ginsler did a study of Standard Deviation for actively managed funds vs. the total stock market over both 5 and 10-year periods. Their conclusion: "The returns of actively managed funds were 20 to 25% more volatile than the broad market."

4. Consistency: Vanguard's Total Stock Market Index Fund ranked among the top 25% of large-blend funds in just two of the past 10 years. Nevertheless, because of it's consistency (never falling below average) it outpaced 90% of all large-blend stocks after taxes (8-12-2014).

5. Continuation: Of 355 actively managed equity mutual funds around in 1974, less than half survive today. Indexers do not have to worry that their fund will disappear.

6. No style drift: We know that asset allocation determines about 90% of portfolio performance. Managed fund allocations often change.

7. No overlap: It is almost inevitable that a portfolio of managed funds will have overlap. This is not a problem with index funds.

8. No manager changes: History tells us that the average manager leaves within five years. Index fund investors do not worry about manager changes.

9. No worry about under-performing a benchmark index: Many current best performing managed funds later seriously under-perform. Legg Mason Value Trust (LMNVX), the only fund to beat the S&P 500 Index 15 years in a row, now ranks in the bottom 1% of all funds in its category for 10-year returns (8-12-2014).

10. No worry about "asset bloat" which often causes large successful funds to under-perform. Magellan, once the world's largest fund, now ranks in the bottom 5% of all funds in its category for 10-year returns (8-12-2014).

11. Less cash dilution: Index funds hold less cash than active funds.

12. Less worry that a manager has "lost his touch": Index funds are expected to return to profitability.

13. Tax-Efficient: Index funds are significantly more tax-efficient than most managed funds. It is after-tax return that counts.

14. Low maintenance: Index funds are simple, predictable, and easy to understand, explain, and maintain.

15. Peace of mind: Indexers know the averages are always working for them. The index investor has much less worry and more free time to spend with family, friends, and other more enjoyable endeavors.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three Fund Portfolio

Post by LadyGeek »

gvsucavie03 wrote:I think much of the resistance to the TFP is that the Wiki makes it appear to have a fixed AA to each of the three funds. People get really confused by the illustration that shows 33/33/34. Unless you have read this entire thread, it can easily be mis-interpreted. Maybe if the illustration showed 40/20/40, folks would get a little better idea of the balance between foreign and domestic stocks. I'm not saying 2/3 to 1/3 US/INT is the "correct" ratio, but it is closer to what is recommended in the BH books and Wiki pages.

The big key - many people don't take the time to read and want to jump to the illustrations and the "how" rather than the "what." The TFP pie is not fixed!
Thanks for the suggestion. Is this what you intended? In Three-fund portfolio, I put a big notice in stating:
Figure 1 shows an example asset allocation using equal splits of stocks, international stocks, and bonds. The actual percentages should be chosen as described in the following discussion.
If people are using the illustration to be the defining portfolio, then it's better that they see an eye-catching notice that they should read the text instead.

If this isn't what you intended, or have any other suggestions, just post here.
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

LadyGeek wrote:
gvsucavie03 wrote:I think much of the resistance to the TFP is that the Wiki makes it appear to have a fixed AA to each of the three funds. People get really confused by the illustration that shows 33/33/34. Unless you have read this entire thread, it can easily be mis-interpreted. Maybe if the illustration showed 40/20/40, folks would get a little better idea of the balance between foreign and domestic stocks. I'm not saying 2/3 to 1/3 US/INT is the "correct" ratio, but it is closer to what is recommended in the BH books and Wiki pages.

The big key - many people don't take the time to read and want to jump to the illustrations and the "how" rather than the "what." The TFP pie is not fixed!
Thanks for the suggestion. Is this what you intended? In Three-fund portfolio, I put a big notice in stating:
Figure 1 shows an example asset allocation using equal splits of stocks, international stocks, and bonds. The actual percentages should be chosen as described in the following discussion.
If people are using the illustration to be the defining portfolio, then it's better that they see an eye-catching notice that they should read the text instead.

If this isn't what you intended, or have any other suggestions, just post here.
This is better, why not change the graphic to reflect what the BH founders "recommend"... closer to a 40/20/40?
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Re: The Three Fund Portfolio

Post by Barry Barnitz »

gvsucavie03 wrote:
This is better, why not change the graphic to reflect what the BH founders "recommend"... closer to a 40/20/40?
Hi:

How does this version stack up------> User:Blbarnitz - Bogleheads

regards,
Additional administrative tasks: Financial Page bogleheads.org. blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; La Guía Bogleheads® España site.
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Taylor Larimore
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Re: The Three Fund Portfolio allocations

Post by Taylor Larimore »

This is better, why not change the graphic to reflect what the BH founders "recommend"... closer to a 40/20/40?
The Three Fund Portfolio was never meant to have a fixed allocation. There is no such thing as a recommended allocation. It depends on each investor's unique goal(s); time-frame; risk-tolerance; and personal financial situation.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by LadyGeek »

To address gvsucavie03's concern, I placed Barry Barnitz's text inside a big blue information box.

Also note the 5 new example portfolios in the Vanguard funds section "Sample three-fund portfolios."

See: User:Blbarnitz - Bogleheads

(To explain, the wiki uses the same software as Wikipedia. Editors will sometimes use their own pages for drafting new concepts. The content will be moved to the "live version" (Three-fund portfolio) if we have a consensus.)

I think the new draft page is a huge improvement.
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Re: The Three Fund Portfolio

Post by BTDT »

Excellent!
If past history was all that is needed to play the game of money, the richest people would be librarians.
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

LadyGeek wrote:To address gvsucavie03's concern, I placed Barry Barnitz's text inside a big blue information box.

Also note the 5 new example portfolios in the Vanguard funds section "Sample three-fund portfolios."

See: User:Blbarnitz - Bogleheads

(To explain, the wiki uses the same software as Wikipedia. Editors will sometimes use their own pages for drafting new concepts. The content will be moved to the "live version" (Three-fund portfolio) if we have a consensus.)

I think the new draft page is a huge improvement.
It definitely clarifies things for someone glancing through on a google search and wondering why this group is a bunch of simpletons. I'm not saying we are, nor is The Three Fund Portfolio an overly-simplistic investment style, but it took quite a bit of reading and learning on my part to appreciate the TFP because I had it locked in my mind that the allocation was fixed.
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Wall Street Journal article

Post by Taylor Larimore »

Today's Wall Street Journal featured an article titled: "Is Your Portfolio Too Diversified?" This is a portion:
Do you really need to load up with every new product that comes along? Or can a straightforward mix of stocks and bonds get you to—and through—retirement just fine?

The Wall Street Journal asked Chicago-based investment researcher Morningstar to set up a portfolio consisting of a broadly diversified mix of 70% U.S. stocks and 30% U.S. bonds.

Morningstar also created six additional portfolios, inserting a new asset class at each step along the way: first foreign stocks of developed countries, then emerging-market stocks, international bonds, real-estate investment trusts, commodities and, finally, hedge funds. That resulted in seven portfolios, each with an increasingly diverse blend of indexes representing the different investments.

The portfolio that generated the highest return over the 20-year stretch was the simple 70-30 mix of U.S. stocks and bonds, with an annualized gain of 9.1%.

You can create a fully diversified portfolio of U.S. stocks, foreign stocks and U.S. bonds with just three index funds or ETFs: a total U.S. stock-market index fund, a total U.S. bond-market index fund and a developed-foreign-markets index fund.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Wall Street Journal article

Post by gvsucavie03 »

Taylor Larimore wrote: Today's Wall Street Journal featured an article titled: "Is Your Portfolio Too Diversified?"
Here is the link http://online.wsj.com/articles/is-your- ... 1408032582
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

Should you diversify even more? That is a judgment call. If inflation is a concern, you might consider a Treasury inflation-protected securities bond fund
Definitely agree
...or perhaps a real-estate or natural-resources fund, although you already get some exposure to these sectors in a total stock-market fund.
Sort of contradicted the findings of the article... interesting how they bring up REITs and NRs as an extra diversifier, then say "you get it anyway in TSM." I guess it illustrates our human (American?) nature to complicate things and constantly look towards improving or upgrading something that is already a good plan.
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Re: The Three Fund Portfolio

Post by Sunny Sarkar »

Hi Taylor,

Now that it seems TBM has "term-creeped" to long-term (link), does this change anything regarding its membership in the 3-fund portfolio - which, I believe, is using TBM to implement its allocation to intermediate-term bonds?

Regards,
Sunny
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

Sunny Sarkar wrote:Hi Taylor,

Now that it seems TBM has "term-creeped" to long-term (link), does this change anything regarding its membership in the 3-fund portfolio - which, I believe, is using TBM to implement its allocation to intermediate-term bonds?

Regards,
Sunny
TBM was also down-graded from Gold to Silver by M*. Link explains that the longer-than-average duration and lag on performance due to larger treasury holdings is the reason for the downgrade. One key note is that the fund made 5.2% in the economic down-turn while the category return for intermediate-term bonds was negative 3.3%.
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Re: The Three Fund Portfolio and Total Bond Market Index Fun

Post by Taylor Larimore »

Sunny:

Total Bond Market Index Fund continues to be categorized as "Intermediate-Term" by both Vanguard and Morningstar. In my view, BOTH "long-term" and "intermediate-term" are misleading. This is Vanguard's Summary:
This fund is designed to provide broad exposure to U.S. investment grade bonds. Reflecting this goal, the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues).
The Three Fund Portfolio will stay-the-course.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by LadyGeek »

FYI - New member goplan has questions about the 3-fund portfolio and other topics which I've moved into a separate thread. See: [Help with] The Three Fund Portfolio
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Re: The Three Fund Portfolio

Post by b767capt »

* Automatic rebalancing within each fund.
This is one of the benefits that Taylor sites for the 3 Fund Portfolio.

If I use the 3 Fund Portfolio, wouldn't I simply rebalance between those three funds?. How could rebalancing "within each fund" have anything to do with my own yearly rebalancing efforts.? What am I missing here on that "automatic" rebalancing comment?

Thanks
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Re: The Three Fund Portfolio

Post by abuss368 »

b767capt wrote:
* Automatic rebalancing within each fund.
This is one of the benefits that Taylor sites for the 3 Fund Portfolio.

If I use the 3 Fund Portfolio, wouldn't I simply rebalance between those three funds?. How could rebalancing "within each fund" have anything to do with my own yearly rebalancing efforts.? What am I missing here on that "automatic" rebalancing comment?

Thanks
b767capt
You would rebalance by a) selling shares or b) new contributions to your original asset allocation.
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Re: The Three Fund Portfolio

Post by LadyGeek »

b767capt wrote:
* Automatic rebalancing within each fund.
This is one of the benefits that Taylor sites for the 3 Fund Portfolio.

If I use the 3 Fund Portfolio, wouldn't I simply rebalance between those three funds?. How could rebalancing "within each fund" have anything to do with my own yearly rebalancing efforts.? What am I missing here on that "automatic" rebalancing comment?

Thanks
b767capt
Let me try a different explanation. Each of those 3 funds contains a LOT of individual securities. Each fund manager (US Stock, International Stock, Bonds) buys and sells "rebalances" within each fund to keep things on-track. Perhaps "automatic" isn't quite the way to phrase it. It's how a fund works internally - you don't have to worry about anything "under the hood."

Your job is to make those funds balance out to the asset allocation (ratio of stocks / bonds) you want. That's the yearly rebalancing part. See: Rebalancing
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Re: The Three Fund Portfolio

Post by b767capt »

Thanks Lady Geek.
I understand "rebalancing" as it relates to my individual portfolio. I've got that. However, when Taylor mentioned that one of the benefits to the 3 Fund Portfolio is "automatic balancing", and since the topic is why one should use a 3 fund portfolio as a personal investment strategy, I assumed that he's talking about your personal portfolio. Hence, my question, how could it automatically rebalance my personal portfolio.? Indeed, I don't believe it can in the traditional sense. So then, I thought, well it must happen within each fund that makes up the Total Stock Market, Total Intl and Total Bond. Something like you said.
Another way to ask this is, if I had 8 funds that made up my equity allocation, large cap, small cap, value, growth, etc,etc, I would rebalance them manually say each year if they are out of my AA proportions. All of those index funds are in the Total Stock Market Fund. So, within that fund, does the manager keep them in a certain percentage or what.?
If not, then the only "rebalancing" one needs to do with a 3 Fund Portfolio is between stocks, bonds and Intl funds. Which would not be automatic.
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Re: The Three Fund Portfolio

Post by longinvest »

b767capt wrote:
* Automatic rebalancing within each fund.
This is one of the benefits that Taylor sites for the 3 Fund Portfolio.

If I use the 3 Fund Portfolio, wouldn't I simply rebalance between those three funds?. How could rebalancing "within each fund" have anything to do with my own yearly rebalancing efforts.? What am I missing here on that "automatic" rebalancing comment?

Thanks
b767capt
b767capt, while the internal rebalancing applies to both stock and bond total market funds, it is easier to understand on the bond side.

Every month, there are some bonds that cross below 1-year maturity. As the total bond market index does not contain bonds with maturities shorter than 1 year, it drops them. At the same time, new bonds are created by companies and the government. The index adds them. There are also some bonds that are callable and get called. The index drops them. The index only includes investment grade bonds, so when a bond crosses the junk-bond threshold, it is dropped or added, depending on being downgraded or upgraded.

All this leads to weighing variations within the index. The total bond market fund that tracks it must buy and sell accordingly.

Stock indices also have variations due to stocks being added or dropping to penny-stock status. There's also stock buybacks and probably other things I forgot about.

Taylor's benefit is about this "internal rebalancing" inside each fund. It has nothing to to with the rebalancing among the three funds, which must be done by the investor.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Rebalancing The Three Fund Portfolio

Post by Taylor Larimore »

b767capt wrote: If I use the 3 Fund Portfolio, wouldn't I simply rebalance between those three funds?
Yes. Rebalancing the three funds once or twice a year to your desired asset-allocation plan is all there is to it.

Best wishes.
Taylor
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Re: The Three Fund Portfolio

Post by b767capt »

Thanks longinvest. I think that answers it.
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Re: The Three Fund Portfolio

Post by Mr. Digweed »

Why is it some would poopoo ETF's in general. In other words, what could possibly be wrong with a ETF portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated?
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

Mr. Digweed wrote:Why is it some would poopoo ETF's in general. In other words, what could possibly be wrong with a ETF portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated?
It's generally not suited for the average investor in a retirement account. No ability to automatically invest each month, always looking at account balance to determine allocation, need to know more about bid-ask spreads and other stuff I don't fully understand... Mutual funds do the equivalent much easier and "hand's offs"
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Re: The Three Fund Portfolio

Post by abuss368 »

Mr. Digweed wrote:Why is it some would poopoo ETF's in general. In other words, what could possibly be wrong with a ETF portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated?
Hi Mr. Digweed,

You received a good response to your question. I will also add that Jack Bogle has mentioned that total market ETF's that the investor does not engage in trading appear fine too. He does prefer index funds. There is a higher degree of risk as Mr. Bogle always notes in terms of trading all day with the market movements.

If you would like to discuss in additional detail, please consider starting a new thread. You will probably received more focused responses.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three Fund Portfolio

Post by LHerr »

Michael Edessess and his three co-authors of "The 3 Simple Rules of Investing," also recommend a simple portfolio similar to The Three Fund Portfolio. The book is an interesting read as these authors dismantle many investment myths.
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Re: The Three Fund Portfolio

Post by abuss368 »

LHerr wrote:Michael Edessess and his three co-authors of "The 3 Simple Rules of Investing," also recommend a simple portfolio similar to The Three Fund Portfolio. The book is an interesting read as these authors dismantle many investment myths.
Hi LHerr,

I have read more about the Three Fund Portfolio the last few years than ever before. The benefits are overwhelming. I was disappointed when Vanguard added the new Total International Bond Index Fund as I thought the Three Fund Portfolio did the trick!

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three Fund Portfolio

Post by LHerr »

Hi LHerr,

I have read more about the Three Fund Portfolio the last few years than ever before. The benefits are overwhelming. I was disappointed when Vanguard added the new Total International Bond Index Fund as I thought the Three Fund Portfolio did the trick!

Best.
I agree as the expense ratios are lower for the Three Fund (ETF) Portfolio vs. going the VT route.

Lowell
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
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Re: The Three Fund Portfolio

Post by abuss368 »

gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
Excellent question! The Total Bond Index fund includes the market weight in Treasuries. Approximately 45% of the fund is now Treasuries. Good chapter in Mr. Bogle's book too!

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three Fund Portfolio

Post by Johm221122 »

gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
Have you seen the WIKI
http://www.bogleheads.org/wiki/Three-fund_portfolio

John
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Re: The Three Fund Portfolio

Post by gvsucavie03 »

Johm221122 wrote:
gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
Have you seen the WIKI
http://www.bogleheads.org/wiki/Three-fund_portfolio

John
Didn't find it on there...
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Re: The Three Fund Portfolio

Post by dbr »

gvsucavie03 wrote:
Johm221122 wrote:
gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
Have you seen the WIKI
http://www.bogleheads.org/wiki/Three-fund_portfolio

John
Didn't find it on there...
You are right that the Wiki does not discuss the nuances of total bond fund assets. There may be better articles in the Wiki, but I suggest a couple of other sources below.

Treasury fixed income includes Bills, Notes, and Bonds which are just distinctions in maturity. Bills are less than one year, as short as one month. T Bills as such are certainly not an essential asset class. For a given individual for a given purpose T Bills could be a good choice, but it is unlikely that anyone holding any significant fixed income will hold only T Bills. TBM is 42% Government bonds, Treasury and Agency. I am not sure what fraction of that is actual T Bills, but probably very small. Treasury Bonds also include TIPS, and I and EE savings bonds. Those are not included in TBM. Inflation indexed bonds, TIPS and I bonds, are arguably a different asset class from nominal bonds, so it is reasonable to not have them in TBM.

You can go here for more info on Treasury debt:

http://www.treasurydirect.gov/indiv/indiv.htm

A good resource on bonds in general is Swedroe's bond book and there is also a good one by Annette Thau. It is probably a good idea not to go by "sound bite" snippets even from Mr. Bogle.
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Re: The Three Fund Portfolio

Post by Johm221122 »

gvsucavie03 wrote:
Johm221122 wrote:
gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
Have you seen the WIKI
http://www.bogleheads.org/wiki/Three-fund_portfolio

John
Didn't find it on there...
I consider t-bills cash
From WIKI
It is assumed that cash is not counted within the investment portfolio, so it is not included.



John
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LHerr
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Re: The Three Fund Portfolio

Post by LHerr »

The one addition I would add to The Three Fund Portfolio is a risk reduction model that would prevent major draw-downs.
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Re: The Three Fund Portfolio

Post by b767capt »

What's that? Please explain?
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LHerr
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Re: The Three Fund Portfolio

Post by LHerr »

b767capt wrote:What's that? Please explain?
What I do is rank the ETFs used in a portfolio. For example, a Three Fund Portfolio might include VTI, VEU, BND, and SHY (fourth ETF) as the cutoff ETF. Using a ranking system based on three metrics, one checks to see if any of the critical ETFs (VTI, VEU, or BND) are performing below SHY. If they are, they are sold out of the portfolio and the cash goes to a money market or is invested in SHY. So we really have a Four ETF Portfolio in this case.

Here is a detailed explanation of what I am talking about - but using a six ETF (plus SHY) portfolio.

http://seekingalpha.com/article/2436415 ... the-market

As with any back-tested model the question always remains - will it work in the future? I'm running tests with real portfolios to see if it works. Over the last fifteen months the results look promising. The SHY cutoff model appears to work best when there is a major bear market.

LH
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Taylor Larimore
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T-Bills and The Three Fund Portfolio

Post by Taylor Larimore »

gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
gvsucavieo3:

In Bogle on Mutual Funds, Mr. Bogle offers eight pie-chart portfolios. None contain T-Bills.

A primary advantage of The Three Fund Portfolio is its unique combination of diversification and simplicity. I doubt if T-Bills' lower risk is worth T-Bills lower return for long-term investors. The average discount rate on 3-month T-Bills is currently 0.020%.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Taylor Larimore
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Total Stock Market Index Fund Report

Post by Taylor Larimore »

Bogleheads:

Morningstar recently reported that only 8 of 1,144 funds with Analyst Ratings have beaten their category averages for at least ten straight years. Total Stock Market Index Fund is one of them!

THE LONGEST WINNING STREAKS AMONG OUR RATED FUNDS

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Total Stock Market Index Fund Report

Post by abuss368 »

Taylor Larimore wrote:Bogleheads:

Morningstar recently reported that only 8 of 1,144 funds with Analyst Ratings have beaten their category averages for at least ten straight years. Total Stock Market Index Fund is one of them!

THE LONGEST WINNING STREAKS AMONG OUR RATED FUNDS

Best wishes.
Taylor
Hi Taylor,

Thank you for the update. Great news for the Three Fund Portfolio!
John C. Bogle: “Simplicity is the master key to financial success."
gvsucavie03
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Re: T-Bills and The Three Fund Portfolio

Post by gvsucavie03 »

Taylor Larimore wrote:
gvsucavie03 wrote:I may have missed this in the 18 pages of this great thread, but where do t-bills fit into the 3-fund portfolio? Is it covered in TBM treasuries? I remember reading over and over in Bogle on Mutual Funds that they are an essential asset class.
gvsucavieo3:

In Bogle on Mutual Funds, Mr. Bogle offers eight pie-chart portfolios. None contain T-Bills.

A primary advantage of The Three Fund Portfolio is its unique combination of diversification and simplicity. I doubt if T-Bills' lower risk is worth T-Bills lower return for long-term investors. The average discount rate on 3-month T-Bills is currently 0.020%.

Best wishes.
Taylor
Thank you for clarifying!
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Re: Total Stock Market Index Fund Report

Post by gvsucavie03 »

Taylor Larimore wrote:Bogleheads:

Morningstar recently reported that only 8 of 1,144 funds with Analyst Ratings have beaten their category averages for at least ten straight years. Total Stock Market Index Fund is one of them!

THE LONGEST WINNING STREAKS AMONG OUR RATED FUNDS

Best wishes.
Taylor
As well as Fidelity and Schwab index funds. Passive indexing isn't such a bad idea!
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Re: The Three Fund Portfolio

Post by LadyGeek »

FYI - New member kkhanmd is requesting assistance for a 3-fund portfolio. I moved it into a stand-alone thread here: The Three Fund Portfolio [Portfolio help]

Taylor Larimore - the question is addressed to you.
Wiki 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

Post by Taylor Larimore »

LadyGeek:

Thank you for the alert. I answered here:

http://www.bogleheads.org/forum/viewtop ... 7#p2200647

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three Fund Portfolio

Post by BogleInvestorLondon »

Out of curiosity, what is an advantage of the Three Fund Portfolio over a LifeStrategy fund? Is it because costs may be slightly lower? I think an advantage of a LifeStrategy fund is that you do not need to rebalance (until maybe you get older or want more bonds) and it is easier to just forget about for years and years.
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The Three Fund Portfolio or a LIfe Cycle Fund?

Post by Taylor Larimore »

BogleInvestorLondon wrote:Out of curiosity, what is an advantage of the Three Fund Portfolio over a LifeStrategy fund? Is it because costs may be slightly lower? I think an advantage of a LifeStrategy fund is that you do not need to rebalance (until maybe you get older or want more bonds) and it is easier to just forget about for years and years.
BogleInvestorLondon:

The Three Fund Portfolio and a Life Cycle Fund are very similar (assuming funds contain the same stock/bond ratio). However The Three Fund Portfolio has advantages for many portfolios:

* The Three Fund Portfolio is more tax-efficient for the investor who has both taxable and tax-advantaged accounts. The Three Fund Portfolio allows the investor to place tax-inefficient Total Bond Market in a tax-advantaged account (IRA, 401k, 403b, etc.) and place tax-efficient Total Stock Market and Total International Stock Market in a taxable account. See Principles of Tax-Efficient Fund Placement.

* The Three Fund Portfolio allows any stock/bond allocation. The four Life-Cycle funds are limited to four stock/bond allocations. The stock/bond allocation is a very important investment decision because it determines our expected risk and expected return.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three Fund Portfolio

Post by BogleInvestorLondon »

Thank you for your reply Taylor.

I hope things change here in the UK and I imagine they will do eventually (although I feel very fortunate to be able to invest directly through Vanguard here).

In the UK, Vanguard does not offer tax advantaged accounts, therefore when investing with them, I would have to do so through a broker and incur extra fees.

With regards to my aa I can combine funds and invest a different amount in each one to achieve my desired allocation.

Maybe things will change here in the UK in the future.

All the best
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Re: The Three Fund Portfolio

Post by Clive »

Hi BogleInvestorLondon

Consider that the UK FTSE 100 index earns just 27% of revenue from the UK. The rest is something like 30% from Emerging Markets, 20% from US, 20% from Europe, and odd single digit percentage amounts from Japan, Canada etc. Even the US S&P500 derives around 40% of its earnings from foreign. Many companies are now much more global and the location of what stock exchange they're listed on (and which government they pay taxes to) is just a choice that each company makes.

In the 1960's the US accounted for around 75% of the total stock market, by 1990 that had declined to 25%, whilst over the same period Japan rose from a very low global market share to a large proportion (around 40% to 50%). Why would you want to invest 75% weighting to something/where that later became 25%, and start with next to nothing in something that later rose to being 50% of market share. Longer term history indicates that equal weighting countries to be the safer choice than cap weighting. The same is also apparent for stock index where broadly equal weighting outperforms cap weighting. The UK stock index is a reasonable choice given around 40% combined EM and 'other' weighting, 20% weighting to US, EU and (a little overweight) 27% UK weighting.

Another factor is withholding taxes. If you hold (or invest via a fund that holds) foreign stocks/bonds, you'll incur withholding taxes according to each country invested in. For example China imposes a 10% withholding tax on both dividends and capital gains, other countries might impose a 30% withholding tax on dividends. Funds absorb such overheads in a somewhat opaque manner - but obviously that's a drag factor. Low fund expenses of 0.1% or lower may appear attractive, however if the fund is invested in a manner that benefits from a 3% dividend, but is paying 30% withholding tax on such dividends then that's a 0.9% drag factor, such that when combined with 0.1% fund fees = 1% total drag.

Conceptually interest rate parity might see one countries bonds earn more than another, but where the benefits of the higher interest rate are lost due to FX (currency). Corporate bonds might yield more than Gilts/Treasury, but the higher yield reflects default risk. Overall that all washes.

Perhaps consider a simple UK Index tracker and UK Gilts, with Gilts in ISA/SIPP (or new NISA) and stocks outside of ISA (unless sufficient space) and utilise yearly Capital Gains Tax allowance(s). For a basic rate taxpayer there are no further tax liabilities on dividends. Then each year sell some stock to top up ISA and buy the stock inside ISA (migrate).

If you've insufficient ISA space, Index Linked Gilts are a reasonable choice as the capital appreciation (in reflection of inflation) isn't taxed (I believe in the US taxes do fall due upon inflationary uplift, as is the case for UK conventional Gilts (where the inflationary uplift is in effect via interest payments that are taxable)).

As a example of fund opaqueness - have a look at VUSA (Ireland) ETF. Note how it benchmarks to the S&P500TN - which indicates the S&P500 total return NET OF 30% US dividend withholding taxes. Ireland however (like the UK) has a 15% dividend withholding tax treaty arrangement with the US, so the fund is 15% of dividends ahead of its benchmark due to such 'savings'. Deduct the fees etc and the fund marginally betters its benchmark. And that's for one of the more efficient/inexpensive choices (Vanguard). Some funds hold other funds, such that you end up seeing multi-layers of fees/overheads.

Good luck in whatever you do opt for.

Clive.
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