The Three-Fund Portfolio

[Taylor Larimore]

The Bogleheads' Guide to The Three-Fund Portfolio is now available in hardcover book, audio book and kindle. All royalties are donated directly to The John C. Bogle Center For Financial Literacy.

Bogleheads:

After a lifetime of investing since 1950 trying to "beat the market," I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated, is an ideal portfolio for most investors. The advantages are many (read blue links):

* Avoids wasted time, confusion and the possibility of mistakes trying to pick the best of thousands of mutual funds and ETFs.
* Very diversified with over 15,000 worldwide securities (lower risk).
* Very low expense ratios.
* Very low (hidden) turnover costs.
* Very tax-efficient.
* The many Advantages of Simplicity.
* Fewer but larger funds results in earlier eligibility for low-cost Admiral shares.
* No adviser risk.
* No fund manager risk.
* No style drift.
* No asset bloat.
* No tracking error to cause abandonment of the strategy.
* No fund overlap.
* No front-running that reduces sub-index returns.
* Automatic rebalancing within each fund.
* Less worry. Never under-performs the market.
* Easy to maintain for the owner, spouse, caregivers and heirs.
* More free time.
* Mathematically certain to outperform most investors. This was Morningstar's 15-Year Category performance for each stock fund (return) and bond fund (risk) updated on January 01, 2021:

TOP 12% = Vanguard Total Stock Market (VTSAX)

TOP 35% = Vanguard Total International (VGTSX)

TOP 9% = Vanguard Total Bond Market (VBTLX) in 2008 bear market (bonds are primarily for safety).

GOLD Analyst Rating: Total Stock Market and Total International
SILVER Analyst Rating: Total Bond Market

Asset Allocation: Use this Asset-Allocation Calculator to help you decide your very important stock/bond allocation. I suggest International stocks = 20% of equity.

Fund Placement For Maximum Tax-Efficiency: Place Total Bond Market in tax-advantaged account(s). If full, use a tax-exempt bond fund in a taxable account. Place Total Stock Market and Total International Stock Market in either a tax-advantaged account (best) or a taxable account.

______________________________________________________________________________________

What Nobel Laureate's say:

Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Daniel Kahneman: "Investors shouldn't delude themselves about beating the market. They're just not going to do it. It's just not going to happen."

Harry Markowitz: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Merton Miller: "Most people might just as well buy a share of the whole market, which pools all the information, than delude themselves into thinking they know something the market doesn't"

Paul Samuelson: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

William Sharpe: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

Robert Shiller: "A portfolio approximating the market may be the most important portfolio."
----------------------------------------------------------------------------------------------------------------------

What Other Experts Say:

American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."

Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."

Christine Benz, Morningstar Director of Personal Finance: "By buying total-market index funds--one for U.S. stocks, one for foreign stocks, and one for bonds--investors can gain exposure to a huge swath of securities in three highly economical packages."

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

Jack Bogle, Vanguard founder: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

Warren Buffett, famed investor: “I’d rather be certain of a good return than hopeful of a great one. -- Most investors are better off putting their money in low-cost index funds."

Scott Burns, financial columnist: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

Jonathan Burton, MarketWatch: "There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won't have to think about too much."

Andrew Clarke, co-author of Wealth of Experience: "If your stock portfolio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

Jonathan Clements, author and Wall Street Journal columnist: "Using broad-based index funds to match the market is, I believe, brilliant in its simplicity.

John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

Consumer Reports Money Book: "Simply buy the market as a whole."

Laura Dugu, Ambassador and co-author of The Bogleheads' Guide to Retirement Planning: "With only these three funds in your investment portfolio you can benefit from low costs and broad diversification and still have a portfolio that is easy to manage."

Charles D. Ellis, author of The Index Revolution: "'Beating the market' is much harder than it used to be, and investors who continue to approach the market with that mindset populate the rolls of market losers time and time again."

Paul Farrell, author of The Lazy Person's Guide to Investing: "Where does Fama invest his retirement money? 'In index funds. Mostly the Wilshire 5000.' "

Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."

Graham/Zweig, authors of The Intelligent Investor: "The single best choice for a lifelong holding is a total stock-market index fund."

Alan Greenspan, former Chairman of the Federal Reserve: "Prices in the marketplace are by definition the right price."

Mark Hebner, author of Index Funds: “A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors.”

Hulbert Financial Digest: "Buying and holding a broad-market index fund remains the best course of action for most investors."

Sheldon Jacobs, author of No-Load Fund Investing: "The best index fund for almost everyone is the Total Stock Market Index Fund.--The fund can only go wrong if the market goes down and never comes back again, which is not going to happen."

Kiplinger's Retirement Report: "You'll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index."

Lawrence Kudlow, Director of the U.S. Economic Council: "I like the concept of the Wilshire 5000, which essentially gives you a piece of the rock of all actively traded companies."

Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-market index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."

Bill Miller, famed fund manager: "With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me."

E.F.Moody, author of No Nonsense Finance: "I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks comprising the market portfolio."

Motley Fools: "Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index."

John Norstad, Northwestern College academic: "For total-market investors, the three disciplines of history, arithmetic, and reason all say that they will succeed in the end."

Anna Pryor Wall Street Journal writer: "A simple portfolio of 3 funds. It may sound counter-intuitive, but for the average individual investor, less is actually more."

Jane Bryant Quinn, syndicated columnist and author of Making the Most of Your Money: "The dependable great investment returns come from index funds which invest in the stock market as a whole."

Pat Regnier, former Morningstar analyst: "We should just forget about choosing fund managers and settle for index funds to mimic the market."

Ron Ross, author of The Unbeatable Market: "Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind."

Gus Sauter, former Vanguard chief investment officer: "I think a very good way to gain exposure to the stock market is through the Total Stock Market Portfolio on the domestic side."

Bill Schultheis, author of The Coffee House Investor: The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market."

Charles Schwab: "Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing."

Chandan Sengupta, author of The Only Proven Road to Investment Success: "Use a low-cost, broad-based index fund to passively invest in a little bit of a large number of stocks."

Prof. Jeremy Siegel, author of Stocks For The Long Run: "For most of us, trying to beat the market leads to disastrous results."

Dan Solin, author of The Smartest Portfolio You'll Ever Own: "You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."

William Spitz, author of Get Rich Slowly: "Few are able to beat a simple strategy of buying and holding the securities that comprise the market."

Prof. Meir Statman, author of What Investors Really Want: "It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner."

Stein & DeMuth, authors of The Affluent Investor: "Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios."

"Robert Stovall, investment manager: It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group."

Peter D. Teresa, Morningstar Sr. Analyst: My recommendation: "A fund that indexes the entire market, such as Vanguard Total Stock Market Index."

Wilshire Research: "The market portfolio offers the best ratio of return to risk."

John Woerth, Vanguard director of public relations: "We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost."

Jason Zweig, Wall Street Journal columnist and author of Your Money and Your Brain: "I think a total stock market index fund is not only the simplest, but the very best core investment for most people."

Warren Buffett, famed investor: "There seems to be some perverse human characteristic that likes to make easy things difficult."

What investment writers say:

"The Best Investment Strategy Is Simple But Hard to Do" by Allan Roth in AARP

"The BigLaw Investor Portfolio" by Joshua Hunt

"A Boglehead Explains the Simplest Way to Manage Your Money"--MarketWatch

"The Bogleheads' Guide to The Three-Fund Portfolio" by Four Pillar Freedom

"The Bogleheads' Guide to the Three-Fund Portfolio" by Rick Van Ness

"Bogleheads Three-Fund Portfolio Review" by Optimized Portfolio

"Efficient Investing with the Three Fund Portfolio" by Mr. Crazy Kicks

"From 28 Funds to 3: Simplifying to a Three-Fund Portfolio" by Physician On Fire

"He Has Read 250 Investing Books and Recommends the Three Fund Portfolio" by Physician on Fire

"How the Bogle (3-fund) Model Beats the Yale Model" by Ben Carlson

"How To Create A Three-Fund Portfolio" by Camilo Maldonado, Forbes

"How to Build a Three-Fund Portfolio" by Estorica

"How To Diversify With Just Three Mutual Funds" by Ambassador Laura Dogu, Forbes

"How To Simplify Your Investing Using Only Three Funds" by Debt Free Doctor

"If You Can. How Millennials Can Get Rich Slowly" -- Free book by Wm. Bernstein

"Investing Should Be Simple. A Three-Fund Portfolio Is All You Need." by Allan Roth, AARP

"The Lazy Portfolio -- Why A Simple 3 Fund Portfolio Might Be Best" by WealthFam

"Most Investors Probably Won’t Outperform This Simple (three-fund) Portfolio" by Morningstar

"Next to Nothing" by Jonathan Clements

"The Only Three Vanguard Funds You Need to Build a Portfolio" by Kent Thune

"Review of Bogleheads Guide to the Three Fund Portfolio" by The White Coat Investor

"The Simple Magic of Investing In A Three-Fund Portfolio by BestWalletHacks

"Simplify Your Investments With The 3-Fund Portfolio" by Alicia Adamczyk

"Taylor Larimore: Three-Fund Portfolio" by blbarnitz Financial Page

"The Three Fund Portfolio: The Lazy Investing Strategy that Crushes the Pros" by The Money Wizard

"The Three-Fund Investment Portfolio: The Beauty of Simplicity" by Mama Fish Saves

"Three-Fund Portfolio" by Portfolio Charts

"Three Fund Portfolio: Did Awesomeness Find Trinity?" by Portfolio Einstein

"Three Fund Portfolio – Investing Made Easy" by The Finance Twins

"The Three-Fund Portfolio. Living the Simple Life" by Morningstar

"Three-Fund Portfolios Can Cut Risk, Taxes, and Costs for Investors. Here’s How to Build One" by Barron's

"3 Fund Portfolio Investment Strategy: The Only Time Lazy is Cool" by Dr Breathe Easy Investing

"3 Fund Portfolio: The Lazy Way To Invest" by Just Start Investing

"The Three-Fund Portfolio" -- Boglehead wiki

"The Three Fund Portfolio: A Simple Diversified Investing Strategy" by Bible Matters

"The 3 Fund Portfolio: Simple Investing That Works" by Clevergirl Finance

"Why (3) Index Portfolios Win" by M.P. Dunleavey

Best wishes.

Taylor Larimore

[livesoft]

While I respect your view, have you thought that it might be tainted by recency bias?

First, the Total Int'l Index fund has existed in its current format for about 12 months.
Second, the past year was a poor year for small-caps and value equities, so the broad index funds look great in comparison.
And Third, what about TIPS?

... just trying to keep the Permanent Portfolio folks at bay.

[ClaireTN]

I'm also curious about the exclusion of TIPS. I'm using a four-fund portfolio: TSM, TISM, TBM, and TIPS.

[Nathan Drake]

While I respect your view, have you thought that it might be tainted by recency bias?

There's really no 'recency bias' to the three fund portfolio. Any recency bias would depend on how much you have allocated to any of the three funds listed (per your asset allocation) since bonds have beat stocks this past decade:

Total International Stock Market has done relatively well in the past decade.

Total Bond Market has done very well in the past decade.

Total US Stock Market has done so-so, but still positive over the past decade.

[Cash]

Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?

[no_name]

Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?

Not Taylor, Total STK markt and Total Int'l Markt complement each other, and it's easier to tilt to value small caps./

[Noobvestor]

Taylor, might you one day simply even further to Vanguard Total World + Total Bond Market?

Not Taylor, Total STK markt and Total Int'l Markt complement each other, and it's easier to tilt to value small caps./

The bigger problem is simply expenses ... the ETF version mercifully has no load, but the fund version has a small buy-in and sell cost. Silly, but true.

[CaliJim]

There is much to be said for keeping it simple and diversifying broadly.

Slicing and dicing and tilting certainly adds effort for just a skosh higher expected return, and there is no guarantee that it will have been worth it.

If I could only hold asset classes - my three would be TSM (or Total World Stock Market-TWSM?) , TBM, and TIPS.

TSM and ISM are closely enough correlated, and I'll be spending most of it in USD,

I like a dose of TIPS as a hedge against unexpected inflation. Obviously - since TIPS have been around in the US only since 1997 - there isn't a lot of history to go on WRT how they will perform over the long haul compared to TBM, but I'm hoping they will smooth things out during the withdrawal phase.

[Cash]

Taylor, might you one day simply even further to Vanguard Total World + Total Bond Market?

Not Taylor, Total STK markt and Total Int'l Markt complement each other, and it's easier to tilt to value small caps./

The bigger problem is simply expenses ... the ETF version mercifully has no load, but the fund version has a small buy-in and sell cost. Silly, but true.

They recently eliminated the purchase fee for the mutual fund version. The early redemption fee remains but can be avoided by the ETF. VT is still more expensive than the combination of TSM and TISM, but one could argue that the simplicity and additional time spent with family and friends is worth an extra .1%, and VT's expense ratio is likely to fall further.

[Muchtolearn]

What makes certain individuals decide that TIPS, REITs and small cap value adds anything to passive indices other than recency bias or even some other type of bias?

[word]

What makes certain individuals decide that TIPS, REITs and small cap value adds anything to passive indices other than recency bias or even some other type of bias?

Additional risk means the investor expects additional return. As for TIPS, they function to reduce volatility in my overall portfolio. What makes you say that these portfolio impacts are just recency bias?

[Taylor Larimore]

Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?

Cash:

I have considered simplifying The Three Fund Portfolio to a Two Fund Portfolio (Total World + Total Bond Market). However, keeping Total U.S. Stock Market and Total International Stock Market separate has several advantages (edited 2-23-2019).

Lower (combined) Expense Ratios (Admiral Shares): Total Stock Market (VTSAX) = 0.04%; Total International (VTIAX) = 0.11%; Total World (VTWAX) = 0.10%.

Total World, because it holds less than 50% foreign stocks, does not benefit from the Foreign Tax Credit.

Lower Turnover (hidden costs): Total Stock Market = 3.4%; Total International = 3.4%; Total World Admiral 8.9%.

Better diversification (lower risk): Total U.S. Stock Market and Total International (combined) hold 9,900 stocks. Total World holds 8,125.

Flexibility: The best allocation between U.S. Total Stock Market and Total International is very controversial. Separate stock funds allow investors to choose their desired allocation.

Best wishes.
Taylor

[AgnosticInvestor]

This is my portfiolio (TSM, TISM, TBM). That's it. [My current employer was kind enough to offer the Big 3 as investment options under my 401(k) plan]. I'm constantly thinking of ways to improve it, but I'm weary of making it worse.

[joe8d]

Personally, I feel (as does Vanguard) that a U.S. investor should overweight domestic stocks primarily because many of our large corporations have significant overseas earnings and we buy and sell in domestic currency.

Agree with Taylor.

[shariron]

100% of my tax advantaged stock and bond investments are in the 4 fund portfolio- Total Stock Market, Total International, Total Bond Market, + Tips fund. Add Intermediate Tax Exempt in taxable + emergency funds and that’s it. For me, getting there was the conclusion of a multi-year journey that took me from a completely ignorant investor to a true Boglehead. Without Bogle’s courage, Vanguard, and the folks on this website, none of this would have ever occurred. It’s just that simple. Only thing left to do now is wait until my target allocation matches a TR fund (and should admiral shares for TR funds be introduced by then) to simplify even further!

[Cash]

Taylor, might you one day simplify even further to Vanguard Total World + Total Bond Market?

To Vanguard's credit, they recently announced an index change for Total World:

In order to include U.S. and international small-capitalization stocks that weren't in its previous target benchmark, the fund now seeks to track the FTSE® Global All Cap Index. This benchmark is designed to measure the performance of large-, mid-, and small-capitalization stocks worldwide, with appropriate capitalization weighting. The index is also float-adjusted, so its weighting only includes shares that are available for purchase, as opposed to all outstanding shares.

Vanguard Total World Stock Index Fund invests in a broadly diversified sampling from its benchmark, which is made up of nearly 7,400 securities in 47 different countries and captures 98% of the world's investable stock market capitalization. About 56% of the index is made up of non-U.S. stocks.

https://personal.vanguard.com/us/insigh ... t-12192011 (emphasis added)

This gives me hope that Vanguard will continue to lower costs and increase diversification. Regardless, your points regarding current cost and domestic percentages are well taken. Happy new year to you as well!

[ofcmetz]

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

[beyou]

100% of my tax advantaged stock and bond investments are in the 4 fund portfolio- Total Stock Market, Total International, Total Bond Market, + Tips fund. Add Intermediate Tax Exempt in taxable + emergency funds and that’s it. For me, getting there was the conclusion of a multi-year journey that took me from a completely ignorant investor to a true Boglehead. Without Bogle’s courage, Vanguard, and the folks on this website, none of this would have ever occurred. It’s just that simple. Only thing left to do now is wait until my target allocation matches a TR fund (and should admiral shares for TR funds be introduced by then) to simplify even further!

Not to digress, but from a tax standpoint this is not exactly the recommendation.
Why have your stocks in tax advantaged portfolio ? The typical advice
is to only buy the munis if you run out of tax advantaged space for bond allocation.

[stlutz]

My 2012 prediction. Taylor's original post will be the best post on this board for the entire year.

[Fallible]

I've had those three funds since the '90s, though I also have a few more. I loved reading the "expert" comments you provided. Great way to start the New Year!

[CABob]

The majority of my investments are the three funds, but, I have added a tilt with TIPS, REIT, SCV, and GNMA. For the past several months I have been considering dropping the tilts for simplicity, but, intertia prevails at the moment.

[jidina80]

After a lifetime of investing since 1950 trying to "beat the market," I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly balanced, is an ideal portfolio for most investors. . . . .

Further support for this 3-Fund approach comes from the fact that these same 3 funds form the core holdings in Vanguard's own Target Retirement Funds.
https://personal.vanguard.com/us/funds/ ... rementList

[Boglenaut]

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

I am not Cajun, but agree. How could anyone argue with the three fund portfolio? But of course in my eternal quest to improve on perfection, I have some TIPS, REITs, and some small/mid cap around the edges. I even put in a tiny pinch of HY Bond for seasoning. But those three funds (or their equivelents) do all the heavy lifting.

But if I only had the three funds, I'd be fine with that. This year (oops, I mean last year) I reduced my taxable funds from 6 to 2.

[tpm871]

In terms of fees, you'd be better off with a mix of Vanguard Europe, Pacific Rim, and Emerging Markets fund rather than ISM. Europe and Pacific (which comprise most of ISM) have an ER of 0.14, whereas ISM has an ER of 0.20. There's also better rebalancing opportunities with having them separate, and taxes associated with rebalancing can be avoided by only selling shares held in tax deferred accounts. The downside though is no Canada stocks... and a little bit more complexity.

I think a Treasury Bond Fund is better than TBM, since it is less correlated with equities (e.g., since TBM holds corporate bonds). I don't think the logic of "owning the whole market" makes as much sense for bonds as it does for stocks; for example, I don't want to own junk bonds just because they are a part of the bond market -- I prefer to take most of my risk in equities.

[bertilak]

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

That EXACTLY describes my portfolio.

[golfallday]

Taylor. your post inspires confidence!! The only funds I use in my 457 plan are VIIIX and VBTIX; Mr Bogle's writings and discussions have thoroughly convinced me that the SP500 has an enormous international footprint. I use VTHRX in my IRA. When $$ is leftover at the end of month it goes to VTSMX in the taxable account. Maybe I'm starting to get it after all!!

[Muchtolearn]

Taylor. your post inspires confidence!! The only funds I use in my 457 plan are VIIIX and VBTIX; Mr Bogle's writings and discussions have thoroughly convinced me that the SP500 has an enormous international footprint. I use VTHRX in my IRA. When $$ is leftover at the end of month it goes to VTSMX in the taxable account. Maybe I'm starting to get it after all!!

I like that golfallday. A 2-fund portfolio. Makes life simple although there is less "diversification" although as you say, US stocks now have half their earnings abroad and probably international stocks have half their earnings here. So it may be all a wash. At least I'm going that way.

[centrifuge41]

In terms of fees, you'd be better off with a mix of Vanguard Europe, Pacific Rim, and Emerging Markets fund rather than ISM. Europe and Pacific (which comprise most of ISM) have an ER of 0.14, whereas ISM has an ER of 0.20. There's also better rebalancing opportunities with having them separate, and taxes associated with rebalancing can be avoided by only selling shares held in tax deferred accounts. The downside though is no Canada stocks... and a little bit more complexity.

I believe that the Total Intl Stock Market Fund also holds small cap international stocks, whether they are from Europe, the Pacific, Canada, or Emerging Markets, while the 3 regionalized international funds don't have small caps.

[shariron]

Blevine- Yes, your point is well taken. Between self employment and 529’s, I’ve got a lot of tax advantaged space available and a long time frame to let it grow.

[golfallday]

I like that golfallday. A 2-fund portfolio. Makes life simple although there is less "diversification" although as you say, US stocks now have half their earnings abroad and probably international stocks have half their earnings here. So it may be all a wash. At least I'm going that way.

[/quote]

The reason I use VIIIX for my stock allocation is that my 457 plan doesn't offer a Total US Stock Index; furthermore, there is no International Index offered...if there was, I would be in it.

[englishgirl]

Taylor. your post inspires confidence!! The only funds I use in my 457 plan are VIIIX and VBTIX; Mr Bogle's writings and discussions have thoroughly convinced me that the SP500 has an enormous international footprint. I use VTHRX in my IRA. When $$ is leftover at the end of month it goes to VTSMX in the taxable account. Maybe I'm starting to get it after all!!

I like that golfallday. A 2-fund portfolio. Makes life simple although there is less "diversification" although as you say, US stocks now have half their earnings abroad and probably international stocks have half their earnings here. So it may be all a wash. At least I'm going that way.

Just to be pedantic, but somebody has to do it: golfallday has a 4-fund portfolio, not a 2-fund portfolio. [Though I had to go look up the ticker symbols to make sure.] There is a lot of overlap between VIIIX (500-index as far as I can tell), VTHRX (target retirement) and VTSMX (total stock market), but they are slightly different funds.

Personally, I think a good minimal fund portfolio would be a LifeStrategy fund + TIPs. Another option is Balanced Index + TIPs + International. Of course, these are all the same as having Total Stock + Total Bond + Total International + TIPs, but it saves doing some of the rebalancing yourself.

[rustymutt]

VTI 30%
VEU 30%
VFITX 20%
SCHP 20%

The above account above had a loss for 2011, while the account below made money. I believe it was because of the asset allocation, rather than the choice of investments.

RPV 3%
VPU 4%
VHT 4%
VNQ 4%
IWC 3%
VBR 4%
EFV 6%
EWX 6%
DLS 6%
VFIUX 30%
VAIPX 30%

[Aptenodytes]

VTI 30%
VEU 30%
VFITX 20%
SCHP 20%

The above account above had a loss for 2010, while the account below made money. I believe it was because of the asset allocation, rather than the choice of investments.

RPV 3%
VPU 4%
VHT 4%
VNQ 4%
IWC 3%
VBR 4%
EFV 6%
EWX 6%
DLS 6%
VFIUX 30%
VAIPX 30%

Last year 60% bonds beat 40% bonds. But then 100% bonds beat 60% bonds. And there was a lottery ticket that beat 100% bonds.

[FNK]

US stocks now have half their earnings abroad and probably international stocks have half their earnings here. So it may be all a wash. At least I'm going that way.

Folks, this is a fallacy. You're confusing the market of a corporation with the ownership of a corporation. Consider:

Apple (a US corporation) sells iPhones. Samsung and HTC (Asian corporations) sell Android phones.

Suppose you own only US companies. Suppose Android kills iPhone. How is it relevant to your portfolio that Apple sells iPhones in Europe?

The fact that US companies operate internationally means that the owner of US stocks is exposed to international risks. The fact that foreign companies operate in US means the same. The boglehead response to risk is to diversify. Not owning international companies means taking uncompensated risk, i.e. leaving free lunch on the table.

Note that US companies operating world-wide also expose you to currency risks, so the currency home bias is questionable.

And that's why I like 50/50 us/intl equity. A simple approximation to true market weighting (and a little bit of cowardice, I may be wrong after all). TR's 70/30 is backwards looking.

International stocks are on sale now, load up.

[Muchtolearn]

US stocks now have half their earnings abroad and probably international stocks have half their earnings here. So it may be all a wash. At least I'm going that way.

Folks, this is a fallacy. You're confusing the market of a corporation with the ownership of a corporation. Consider:

Apple (a US corporation) sells iPhones. Samsung and HTC (Asian corporations) sell Android phones.

Suppose you own only US companies. Suppose Android kills iPhone. How is it relevant to your portfolio that Apple sells iPhones in Europe?

The fact that US companies operate internationally means that the owner of US stocks is exposed to international risks. The fact that foreign companies operate in US means the same. The boglehead response to risk is to diversify. Not owning international companies means taking uncompensated risk, i.e. leaving free lunch on the table.

Note that US companies operating world-wide also expose you to currency risks, so the currency home bias is questionable.

And that's why I like 50/50 us/intl equity. A simple approximation to true market weighting (and a little bit of cowardice, I may be wrong after all). TR's 70/30 is backwards looking.

International stocks are on sale now, load up.

FNK,
Let's assume, as I think you agree, but even if you don't agree, that precisely half of US earnings are international and vice versa. Please explain why it would then matter if you were invested 50% each or 100% in US or 100% international? To go further, what if you lived in the UK? Would you be half UK and half international?

[ObliviousInvestor]

This three-fund portfolio is what my wife and I now use for our retirement savings (though we do it via one fund -- LifeStrategy Growth).

[tj]

This three-fund portfolio is what my wife and I now use for our retirement savings (though we do it via one fund -- LifeStrategy Growth).

I like this idea! I stayed away from the LifeStrategy funds because they had that Asset Allocation fund but they appeared to have gotten rid of it. Still, it makes having investments in 401K + ROTH + Taxable even more complicated...

[ObliviousInvestor]

I stayed away from the LifeStrategy funds because they had that Asset Allocation fund but they appeared to have gotten rid of it.

Yep, the Asset Allocation fund was removed sometime in the last couple months.

Still, it makes having investments in 401K + ROTH + Taxable even more complicated...

Indeed. We are lucky in that all of our retirement savings are a) tax-sheltered and b) with Vanguard.

[Taylor Larimore]

Further support for this 3-Fund approach comes from the fact that these same 3 funds form the core holdings in Vanguard's own Target Retirement Funds.

With the most recent changes in the Target and Life Strategy Funds, Vanguard experts finally saw the light.

Happy New Year!
Taylor

[FabLab]

Thanks Taylor! This has been one of my favorite threads. Why? Because the 3-4 fund, total market index portfolio is so easily maintained and sensible that I now have much more time to spend on other pursuits. Things that I once cared about (buying/selling, timing, etc.), quite remarkably, hold little or no interest to me now.

Cheers,
Ron

[Taylor Larimore]

Hi Ron:

Things that I once cared about (buying/selling, timing, etc.), quite remarkably, hold little or no interest to me now.

I feel the same. We can both thank Mr. Bogle.

Happy New Year!
Taylor

[FNK]

FNK,
Let's assume, as I think you agree, but even if you don't agree, that precisely half of US earnings are international and vice versa. Please explain why it would then matter if you were invested 50% each or 100% in US or 100% international?

Well, earnings of public companies are public, so no need to assume (and it's of course not 50/50 both ways). Regardless, say Chinese companies outcompete US companies world-wide. Then, US stock market will go down in favor of international (in this case, Chinese) stocks. It can go down maintaining the neat 50/50 domestic/international revenue stream. So it will matter a lot whether I owned US or international stocks.

It does not matter where the market is. It matters what companies you own. You want to own all of them.

To go further, what if you lived in the UK? Would you be half UK and half international?

Tough question! I have been pondering it. I'd probably gravitate towards global market-cap weighting, which would make the UK slice smaller.

[umfundi]

Taylor,

Thank you! But, I still need a little more tutorial advice.

I am somewhat more concerned about diversification and volatility than most. So, I have always had a little (3-5% each) specifically in REITS and in Natural Resources. But, that was then.

Do you think your current recommendations adequately include these less correlated components?

EDIT: And, while I'm at it, is there an easy way to see returns for comparable lazy portfolios of Vanguard funds? I am interested to see how they compare to portfolios that have the same philosophy (I think) but are more complex, like Alex Green's "Gone Fishin' Portfolio": http://www.gonefishinportfolio.com/

Thank you,

Keith

[AnotherINTP]

Further support for this 3-Fund approach comes from the fact that these same 3 funds form the core holdings in Vanguard's own Target Retirement Funds.

With the most recent changes in the Target and Life Strategy Funds, Vanguard experts finally saw the light.

Happy New Year!
Taylor

Each New Year brings the hope of progress -- or at least of new ideas to consider.

A case could be made that the new generation of Vanguard's all-in-one funds is even better than a traditional implementation of a lazy Big Three Index Fund portfolio:

• * simpler
  * much better stability of asset ratios (apparent risk), with no manual rebalancing required (unless life circumstances change)
  * during 2011 at least, slightly better returns for any of the Target Retirement funds than their underlying target ratio of 3 Index funds -- even if implemented as Admiral shares or ETFs!

The daily or fast rebalancing of the TR funds (and LifeStrategy funds very recently) adds a slightly new twist to index portfolio construction: it wasn't tracking error that gave the TR funds their slight edge in 2011, it was rebalancing strategy. Perhaps this hasn't generated much discussion on this forum because it is a fairly modest and rather random effect that will vary from year to year.

Even those who prefer to customize and tinker with a mostly Big Three Index Fund lazy portfolio might consider starting with a Target Retirement or LifeStrategy fund as the core building block (in a tax-advantaged account), in order to maintain a more constant level of market risk and perhaps take advantage of market volatility. (Constant rebalancing is just constantly buying low and selling high, right? )

[Taylor Larimore]

Hi Keith:

I will try to answer your questions one at a time:

I am somewhat more concerned about diversification and volatility than most. So, I have always had a little (3-5% each) specifically in REITS and in Natural Resources. But, that was then. Do you think your current recommendations adequately include these less correlated components?

The total market portfolios hold the market's weight in every marketable corporation--including REITS and Natural Resources. So your question involves "overweighting segments you think will outperform or reduce risk.

Many academics believe that Market Portfolios are on the "Efficient Frontier": Portfolios having the highest expected return possible for the given amount of risk. For this reason, I doubt that we can improve the risk/return trade-off by overweighting with additional securities already in the index.

If you are "Somewhat more concerned about diversification and volatility than most," in my opinion the best solution is to increase your bond allocation--not add more stock funds.

And while I'm at it, is there an easy way to see returns for comparable lazy portfolios of Vanguard funds? I am interested to see how they compare to portfolios that have the same philosophy (I think) but are more complex, like Alex Green's "Gone Fishin' Portfolio": http://www.gonefishinportfolio.com/

Total Market Index Fund performance reflects the market weight of all the asset-classes (REITS, Utilities, Precious Metal Companies, Small-Value, etc.) within it. Overweighting specific asset-classes will likely cause the Total Market Index to fall below the Efficient Frontier. For this reason I doubt if adding funds with the additional complexity is worth the trouble.

It is easy to back-test and find selected asset-classes that outperformed during certain periods and infer that these same asset-classes will outperform going forward. It seems logical but using past performance to pick winners is such a lousy idea that even the government requires mutual funds to tell you it is a lousy idea.

If anything, stocks, funds and asset-classes that outperform in one period are the ones that underperform later as they return to their mean. Mr. Bogle explains all this in this speech we heard him deliver at our Boglehead Reunion in June, 2002:

http://www.vanguard.com/bogle_site/sp20020626.html

Happy New Year!
Taylor

[CABob]

is there an easy way to see returns for comparable lazy portfolios of Vanguard funds? I am interested to see how they compare to portfolios that have the same philosophy (I think) but are more complex

Have you seen Madsinger's reports? http://www.bogleheads.org/forum/viewtop ... 10&t=86447

[reisner]

Re:

Total International? Doesn't the FTSE outperform this, as well as including otherwise-missing Canada?

Total Bond Market? Isn't the IT bond Market both safer and preferred by Jack Bogle?

And what about a safe house for money? How about the ST Bond Market?

These may be mere tweaks.

Thanks,
Rob E

[umfundi]

Taylor, and Bob:

Thank you very much!

It is incredible how much knowledge has gone into providing the simple choices that Taylor proposes.

Keith

[rohitj]

You still have institutional risk. If vanguard screws up their algorithms for buying / selling / balancing, you're pretty much screwed. Just not worth the risk to me -- I'd rather have 8 or 10 funds spread between 2 or 3 trusted institutions.

[umfundi]

Taylor,

Thank you for your thoughtful reply.

I asked about back testing simply so I could understand the past performance of various recommendations.

I put no credence into notions of "Reversion To The Mean" as you reference Jack Bogle, nor to "Momentum" as Larry Swedroe sometimes seems to want to believe in.

I am very interested in simplifying my choices, and I thank you for that.

Is there someone in particular at Vanguard that we should thank for continuing and expanding Jack Bogle's vision?

Best wishes,

Keith