The Three-Fund Portfolio

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OffGridder
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Re: The Three-Fund Portfolio

Post by OffGridder » Thu Feb 21, 2019 11:26 pm

Taylor,
For many years your fixed income allocation was split 50% TBM, 50% TIPS. You were very happy with that allocation, even after the TIPS fund took a negative dip during the 2008 financial crisis. A few years ago you sold your TIPS and consolidated into just TBM. I believe your reason was for simplicity purposes as part of your advocacy for the 3 Fund Portfolio. Do you believe the value of simplicity out weighs the value of any protection adding a TIPS fund provides against unexpected inflation, particularly for a retiree?

Thank you,
Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Fri Feb 22, 2019 7:56 am

Dave:

I am impressed with your knowledge of my TBM/TIPS experience. You are right that I consolidated our TIPS into our Total Bond Market primarily for simplicity. I've never looked back to see if it increased or decreased our subsequent return. I do know that during the 2008 bear market TBM (Total Bond Market) went up while nearly everything else (stocks and bonds) went down.

Best wishes

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

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Re: The Three-Fund Portfolio

Post by bertilak » Fri Feb 22, 2019 8:07 am

Taylor Larimore wrote:
Fri Feb 22, 2019 7:56 am
Dave:

I am impressed with your knowledge of my TBM/TIPS experience. You are right that I consolidated our TIPS into our Total Bond Market primarily for simplicity. I've never looked back to see if it increased or decreased our subsequent return. I do know that during the 2008 bear market TBM (Total Bond Market) went up while nearly everything else (stocks and bonds) went down.

Best wishes

Taylor
Taylor and Dave, It would not be a surprise if TBM out performed TIPS. TIPS is not held to increase performance but for safety ‐- a form of insurance -- and insurance always costs something.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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Another Three-Fund Portfolio article

Post by Taylor Larimore » Fri Feb 22, 2019 7:39 pm

Bogleheads:

Another article recommending The Three-Fund Portfolio:

Simplify Your Investments With The 3-Fund Portfolio

Thank you, Alicia Adamczyk

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

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Re: The Three-Fund Portfolio

Post by GaryA505 » Sat Feb 23, 2019 1:08 pm

I'd be interested to hear people's thoughts on 2 things:
1. The opinions of some that TBM (VBTLX) doesn't really represent the whole bond market.
2. If the purpose of the bond (AKA fixed income) side of the portfolio is safety and not gain, wouldn't US treasuries be better suited for this purpose? (see 2008)

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Re: The Three-Fund Portfolio

Post by dbr » Sat Feb 23, 2019 1:19 pm

GaryA505 wrote:
Sat Feb 23, 2019 1:08 pm
I'd be interested to hear people's thoughts on 2 things:
1. The opinions of some that TBM (VBTLX) doesn't really represent the whole bond market.

It doesn't represent the whole market. That also does not matter.


2. If the purpose of the bond (AKA fixed income) side of the portfolio is safety and not gain, wouldn't US treasuries be better suited for this purpose? (see 2008)

The concept of safety is relative. Actually unqualified and nuanced the word "safe" in investing is meaningless. The idea is that the two elements of a portfolio are low volatility, low returning investments (aka bonds, aka fixed income) and high volatility, high returning investments (aka stocks). The difference in volatility and return between the total bond market and varieties of Treasuries is small relative to the difference between either and stocks. In fact some Treasuries are more volatile than total bond market.


Anyway the process is to aim for the overall risk and return of the portfolio. If one invests in less volatile and lower returning bonds one might then hold more in stocks to come out the same as if one had riskier higher returning bonds.

If by safety, one is concerned that full faith and credit of the US government is a major requirement, then by all means invest in treasuries, but it won't make the portfolio much safer if the rest of it is in stocks. In any case it is certainly fine and can't be criticized to hold fixed income in Treasuries. Note one variety of Treasury that does not exist in any other fixed income instrument is TIPS (and I bonds).

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Re: The Three-Fund Portfolio

Post by abuss368 » Mon Feb 25, 2019 1:17 pm

OffGridder wrote:
Thu Feb 21, 2019 11:26 pm
Taylor,
For many years your fixed income allocation was split 50% TBM, 50% TIPS. You were very happy with that allocation, even after the TIPS fund took a negative dip during the 2008 financial crisis. A few years ago you sold your TIPS and consolidated into just TBM. I believe your reason was for simplicity purposes as part of your advocacy for the 3 Fund Portfolio. Do you believe the value of simplicity out weighs the value of any protection adding a TIPS fund provides against unexpected inflation, particularly for a retiree?

Thank you,
Dave
About 10 years ago we too sold the Vanguard Intermediate Term TIPS fund and consolidated with Total Bond. We are happy for the simplicity and in hindsight it probably did not make much difference. Take risks (for higher returns) with stocks.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: The Three-Fund Portfolio

Post by Eagle33 » Mon Feb 25, 2019 6:27 pm

An article that references Taylor's book - How to Benchmark Your Portfolio
https://www.morningstar.com/articles/91 ... folio.html

"If, over time, it turns out that you're consistently lagging, you might consider calling it a day and going all-in with total market index funds, much as Taylor Larimore suggests in his book, The Bogleheads' Guide to the Three-Fund Portfolio. "
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

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Strive for Simplicity

Post by Taylor Larimore » Mon Mar 04, 2019 2:47 pm

OffGridder wrote:
Thu Feb 21, 2019 11:26 pm
Taylor,
For many years your fixed income allocation was split 50% TBM, 50% TIPS. You were very happy with that allocation, even after the TIPS fund took a negative dip during the 2008 financial crisis. A few years ago you sold your TIPS and consolidated into just TBM. I believe your reason was for simplicity purposes as part of your advocacy for the 3 Fund Portfolio. Do you believe the value of simplicity out weighs the value of any protection adding a TIPS fund provides against unexpected inflation, particularly for a retiree?

Thank you,
Dave
Dave:

I underlined your question. The answer is "yes."

The primary reason for safe, fixed-income funds is safety. Stocks are best for bigger returns (with or without inflation).

Strive for simplicity. Read my "Simplicity" link below.

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

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Re: The Three-Fund Portfolio

Post by 2015 » Mon Mar 04, 2019 8:45 pm

I'm so grateful I never fell for the TIPS fad while it was cresting. I chose the 3 fund PF for simplicity and so I could spend my time enjoying the fruits of my prior delayed gratification. It has always seemed rather ironic to me that one would spend their life working and sacrificing during the accumulation phase only to retire and spend their time chasing yield and performance. The 3 fund PF frees me to be lethargic when it comes to my investments.

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Re: The Three-Fund Portfolio

Post by Dialectical Investor » Mon Mar 04, 2019 11:30 pm

bertilak wrote:
Fri Feb 22, 2019 8:07 am

Taylor and Dave, It would not be a surprise if TBM out performed TIPS. TIPS is not held to increase performance but for safety ‐- a form of insurance -- and insurance always costs something.
Yes. Several people seemed to have missed the point, referencing higher returns and chasing yield. That is not the point of TIPS and does not answer Dave's question. TIPS certainly are worth considering, especially for a retiree. If the point of the bond portion of the three-fund portfolio discussed in this thread is for so-called "safety," TIPS should be among the top considerations.

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Adding TIPS

Post by Taylor Larimore » Tue Mar 05, 2019 10:43 am

Dialectical Investor:

I like your thought that TIPS can be thought of as "insurance." However, it can be a mistake to buy insurance that is not needed.

The USA's worst annual inflation since the inception of the Aggregate Bond Index (benchmark for Vanguard Total Bond Market), was -13.3% in 1979. That year the Aggregate Bond Index gained +1.9%.**

I like TIPS as well as many other investments. However, Dave asked if adding TIPS was worth the sacrifice in simplicity. My answer is still "no." I bought Vanguard TIPS fund at its beginning so I have had some experience.

**Past performance does not forecast future performance.


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

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Re: Adding TIPS

Post by OffGridder » Tue Mar 05, 2019 1:12 pm

Taylor Larimore wrote:
Tue Mar 05, 2019 10:43 am
Dialectical Investor:

I like your thought that TIPS can be thought of as "insurance." However, it can be a mistake to buy insurance that is not needed.

The USA's worst annual inflation since the inception of the Aggregate Bond Index (benchmark for Vanguard Total Bond Market), was -13.3% in 1979. That year the Aggregate Bond Index gained +1.9%.**

I like TIPS as well as many other investments. However, Dave asked if adding TIPS was worth the sacrifice in simplicity. My answer is still "no." I bought Vanguard TIPS fund at its beginning so I have had some experience.

**Past performance does not forecast future performance.


Best wishes.
Taylor
Taylor,

Thank you for your reply to my question relative the value of adding TIPS to the Three Fund Portfolio.

I also want add my thanks and appreciation to "Bertilak", "Abuss368", "2015" and "Dialectical Investor" for weighing with their thoughts.

I am fully aware that the primary purpose of TIPS is insurance against the risk of "unexpected" inflation. I have never considered them a vehicle to "reach for yield" I also agree that adding TIPS to a portfolio has not made much difference since the inception of TIPS in the late 1990s or Vanguard's first TIPS fund in 2001. Of course inflation has been pretty tame since then, so the insurance aspect of TIPS has not yet been tested. I think an argument can be made that since having TIPS during periods of tame inflation has not made any difference in portfolio performance, the cost of the insurance for "unexpected" inflation has been minimal.

While one can "hope" the returns on stocks and TBM will outpace inflation in the long run, as you wisely state "past performance does not forecast future performance". Also while the Aggregate Bond Index may have been +1.9% in 1979, I believe that was a nominal return. With a 13.3% inflation, the "real" return was probably closer to a deep negative 11.4%. Correct me if I am wrong. In contrast TIPS are "contractually" locked to the CPI. Whether or not the CPI matches your personal inflation, by contract TIPS are the closest one can get to guaranteed inflation protection.

So, I think it really comes down to whether you want to accept the risk of unexpected inflation in return for a dogmatic commitment to the simplicity of the Three Fund Portfolio versus adding just one more fund in the form of TIPS. Of course if you have other forms of inflation protection in the form of Social Security, pensions with a COLA, or a SPIA, then maybe Three Fund purity does not need to be questioned.

Full Disclosure. I am a retiree in my early 60s, with a Three Fund Portfolio. I do my best to "stay the course" and not "tinker". I just have been having nagging thoughts that as a retiree, I might be exposed to a future event of unexpected inflation. I do have recollections of 1970s inflation and waiting in "gas lines" right after I got my driver's license. Purchased our first house in 1980, with an assumed 1st mortgage if 12% and a 2nd mortgage at 14% to make the deal. I kind of laugh when people get all panicky when mortgage rates rise to 4%😀

Thanks again.

Best Regards,
Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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Re: The Three-Fund Portfolio

Post by 2015 » Tue Mar 05, 2019 1:37 pm

Dialectical Investor wrote:
Mon Mar 04, 2019 11:30 pm
bertilak wrote:
Fri Feb 22, 2019 8:07 am

Taylor and Dave, It would not be a surprise if TBM out performed TIPS. TIPS is not held to increase performance but for safety ‐- a form of insurance -- and insurance always costs something.
Yes. Several people seemed to have missed the point, referencing higher returns and chasing yield. That is not the point of TIPS and does not answer Dave's question. TIPS certainly are worth considering, especially for a retiree. If the point of the bond portion of the three-fund portfolio discussed in this thread is for so-called "safety," TIPS should be among the top considerations.
TIPS is about "doing something", be it for safety or anything else. "Students of investing" are always "doing something" whether it be to chase yield, performance, or safety. Out performance lies where others are not. Since students of investing are always doing something (usually as a result of their slavish devotion to reading every new piece of information on investing) doing nothing will prevent the wise investor from inflicting self harm.

Choosing and sticking to the 3 fund portfolio should be among the top considerations for not inflicting self harm.

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Tempted to "Tinker."

Post by Taylor Larimore » Tue Mar 05, 2019 1:40 pm

I am a retiree in my early 60s, with a Three Fund Portfolio. I do my best to "stay the course" and not "tinker".
Dave:

Whenever I am tempted to "tinker" I read the "Simplicity" link below:

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

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Re: Adding TIPS

Post by Dialectical Investor » Tue Mar 05, 2019 3:40 pm

Taylor Larimore wrote:
Tue Mar 05, 2019 10:43 am

The USA's worst annual inflation since the inception of the Aggregate Bond Index (benchmark for Vanguard Total Bond Market), was -13.3% in 1979. That year the Aggregate Bond Index gained +1.9%.**
Without verifying the numbers, that means Agg lost 11.4% real. Ouch. Not very safe to me. I certainly don't think it's evidence that TIPS are not needed. If anything, it's evidence in support of TIPS.

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Re: The Three-Fund Portfolio

Post by Dialectical Investor » Tue Mar 05, 2019 3:46 pm

2015 wrote:
Tue Mar 05, 2019 1:37 pm

TIPS is about "doing something", be it for safety or anything else. "Students of investing" are always "doing something" whether it be to chase yield, performance, or safety. Out performance lies where others are not. Since students of investing are always doing something (usually as a result of their slavish devotion to reading every new piece of information on investing) doing nothing will prevent the wise investor from inflicting self harm.

Choosing and sticking to the 3 fund portfolio should be among the top considerations for not inflicting self harm.
TIPS is not about "doing something" any more than Total Bond is about "doing something." Once upon a time, it didn't exist either.

You don't have to be a student of investing to invest in TIPS.

A three-fund portfolio using TIPS as the bond fund is still a three-fund portfolio.

You are not acting with slavish devotion because you ask a question or give an answer about what bonds to include in your investment portfolio.

Wisdom is tough to define, but it's not a synonym for ignorance.

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Re: Adding TIPS

Post by Dialectical Investor » Tue Mar 05, 2019 6:15 pm

Taylor Larimore wrote:
Tue Mar 05, 2019 10:43 am

<omitted for brevity>

I like TIPS as well as many other investments.

</omitted for brevity>
Taylor,

I came to wonder, having stated the idea above without thinking about it any further, would you be "okay" if someone held only TIPS as the bond allocation in their "Larimore Three-Fund Portfolio"? You often mention something to the effect of, "any high-quality, low-cost bond fund will do," even though we know Total Bond is your preferred fund. Already asked and answered? What do you think?

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Re: The Three-Fund Portfolio

Post by 2015 » Tue Mar 05, 2019 7:36 pm

Dialectical Investor wrote:
Tue Mar 05, 2019 3:46 pm
2015 wrote:
Tue Mar 05, 2019 1:37 pm

TIPS is about "doing something", be it for safety or anything else. "Students of investing" are always "doing something" whether it be to chase yield, performance, or safety. Out performance lies where others are not. Since students of investing are always doing something (usually as a result of their slavish devotion to reading every new piece of information on investing) doing nothing will prevent the wise investor from inflicting self harm.

Choosing and sticking to the 3 fund portfolio should be among the top considerations for not inflicting self harm.
TIPS is not about "doing something" any more than Total Bond is about "doing something." Once upon a time, it didn't exist either.

You don't have to be a student of investing to invest in TIPS.

A three-fund portfolio using TIPS as the bond fund is still a three-fund portfolio.

You are not acting with slavish devotion because you ask a question or give an answer about what bonds to include in your investment portfolio.

Wisdom is tough to define, but it's not a synonym for ignorance.
Point taken and I agree with you. As long as the individual who chooses TIPS doesn't later go back to TBM (or vice versa) because either suddenly goes out of favor (for whatever reason). My point is constant action shatters compounding.

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Re: Adding TIPS

Post by Taylor Larimore » Tue Mar 05, 2019 9:04 pm

I came to wonder, having stated the idea above without thinking about it any further, would you be "okay" if someone held only TIPS as the bond allocation in their "Larimore Three-Fund Portfolio"? You often mention something to the effect of, "any high-quality, low-cost bond fund will do," even though we know Total Bond is your preferred fund. Already asked and answered? What do you think?
Dialectical Investor:

I think that almost ANY low-cost, relatively safe, fixed income investment (including TIPS) would be suitable to replace a Total Bond Market Index Fund in The Three-Fund Portfolio. I selected Total Bond Market primarily because of its simplicity, great diversification (the only free lunch in investing), and desirability (world's largest bond fund).

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

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Re: Adding TIPS

Post by Dialectical Investor » Tue Mar 05, 2019 10:07 pm

Taylor Larimore wrote:
Tue Mar 05, 2019 9:04 pm

Dialectical Investor:

I think that almost ANY low-cost, relatively safe, fixed income investment (including TIPS) would be suitable to replace a Total Bond Market Index Fund in The Three-Fund Portfolio. I selected Total Bond Market primarily because of its simplicity, great diversification (the only free lunch in investing), and desirability (world's largest bond fund).

Best wishes.
Taylor

Thank you, Taylor. I appreciate your response, and though I favor TIPS and nominal Treasuries over Total Bond, I also think Total Bond is a fine recommendation.

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Re: The Three-Fund Portfolio

Post by Randtor » Thu Mar 07, 2019 10:23 pm

Wow. I just finished reading all 49 pages of this thread over the past 5 days. I am so impressed with Taylor Larimore's patience. I couldn't count the number of times the same few questions were repeatedly asked, and yet, with very little variation, all were answered by Taylor, and others of course. But repeating oneself 'ad nauseum' without simply shouting, "hey I answered this question a thousand times already, go look it up!", says a lot about this gentleman. Continuing to offer his wisdom from investing all these years, the message remains the same. "3 Fund portfolio". "Simplify". "Stay the course". And of course "There is more than one road to Dublin"!

I came across this forum after reading of the demise of Jack Bogle, and started googling his name, Vanguard funds, and eventually bogleheads. I am in the process of divesting all Ameriprise holdings, almost 50 (!!) funds (High ER's, exorbitant front loads, deferred loads and high yearly maintenance fees) and will be going to 3 funds (caveat: the PAS Vanguard advisor recommended 8 funds: 4 equities, 4 bonds; I am going to bring that down to the recommended 3). I have a separate taxable account in Fidelity with 4 individual stocks that will create significant tax implications, so those will be slowly sold over a few years, and they will all be invested in VG Total Stock Market Fund.

I was frustrated with my Ameriprise advisor but not financially astute enough to realize the error of my ways. Having read Taylor's new book "Guide to the 3 Fund Portfolio", now reading Jack Bogle's "Mutual Funds", and next in line is "A Random Walk Down Wall Street", I continue to learn and be thankful for the incredible wealth of knowledge freely shared on this forum. My grateful thanks to all!
"Whats done is done, and can't be undone"

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Re: The Three-Fund Portfolio

Post by billyo44 » Thu Mar 07, 2019 10:36 pm

Randtor:

Every time I read a post like yours it reminds me of the Schwab commercial in which a client asks his Broker ..."Carl remind me what you invested my money in"...Carl replies "its complicated".
On the serious side...congratulations on dumping Ameriprise. 50...really? :shock:
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Re: The Three-Fund Portfolio

Post by ruralavalon » Fri Mar 08, 2019 7:32 am

Randtor wrote:I am in the process of divesting all Ameriprise holdings, almost 50 (!!) funds (High ER's, exorbitant front loads, deferred loads and high yearly maintenance fees)
Such a sad commentary about Ameriprise. It seems like they don't have investors, instead they have victims.
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Re: Adding TIPS

Post by S_Track » Sat Mar 09, 2019 8:41 pm

Taylor Larimore wrote:
Tue Mar 05, 2019 9:04 pm
I came to wonder, having stated the idea above without thinking about it any further, would you be "okay" if someone held only TIPS as the bond allocation in their "Larimore Three-Fund Portfolio"? You often mention something to the effect of, "any high-quality, low-cost bond fund will do," even though we know Total Bond is your preferred fund. Already asked and answered? What do you think?
Dialectical Investor:

I think that almost ANY low-cost, relatively safe, fixed income investment (including TIPS) would be suitable to replace a Total Bond Market Index Fund in The Three-Fund Portfolio. I selected Total Bond Market primarily because of its simplicity, great diversification (the only free lunch in investing), and desirability (world's largest bond fund).

Best wishes.
Taylor
Hi Taylor,

Curious, what would be your second choice from VG if total bond was not around?

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A "second choice" bond fund?

Post by Taylor Larimore » Sat Mar 09, 2019 9:47 pm

What would be your second choice from VG if total bond was not around?
S_Track:

When I am unsure of something about investing (which is most of the time), I listen to Jack Bogle. This is what Jack wrote in The Little Book of Common Sense Investing:
Investors who require a higher yield than the total bond market index fund (yet still seek a high-quality portfolio) might consider a portfolio consisting of 75% in the total bond market index fund and 25% in an investment-grade corporate bond index fund.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three-Fund Portfolio

Post by hornet1 » Sun Mar 10, 2019 1:31 am

SPTM for total US

SPDW for international

SPEM for emerging markets

SPAB for bonds


These are good if you want lower expense ratio ETFs the SPDR funds are like .03% expense ratio!

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Re: The Three-Fund Portfolio

Post by hornet1 » Sun Mar 10, 2019 6:58 pm

I was wondering with low interest rates and fed raising interst rates are you all still investing nin normal long bonds like BNDs or are you doing some shorter term bonds or any other strategy?

I'm asking this because when the fed raises interst rates both BONDS and STOCKS can take a big hit at hte same time. If theres some sort of rise in rates and the markets react negatively and the bond ETFs dive at same time. It could also happen during a fiat crisis and stagflation or hyper inflation...


Not saying it's likely but if it did happen people who think they're hedged and diversified with the three fund portfolio could essentially lose 50-70% of their retirement...

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Re: The Three-Fund Portfolio

Post by abuss368 » Fri Mar 15, 2019 3:26 pm

Randtor wrote:
Thu Mar 07, 2019 10:23 pm
Wow. I just finished reading all 49 pages of this thread over the past 5 days. I am so impressed with Taylor Larimore's patience. I couldn't count the number of times the same few questions were repeatedly asked, and yet, with very little variation, all were answered by Taylor, and others of course. But repeating oneself 'ad nauseum' without simply shouting, "hey I answered this question a thousand times already, go look it up!", says a lot about this gentleman. Continuing to offer his wisdom from investing all these years, the message remains the same. "3 Fund portfolio". "Simplify". "Stay the course". And of course "There is more than one road to Dublin"!

I came across this forum after reading of the demise of Jack Bogle, and started googling his name, Vanguard funds, and eventually bogleheads. I am in the process of divesting all Ameriprise holdings, almost 50 (!!) funds (High ER's, exorbitant front loads, deferred loads and high yearly maintenance fees) and will be going to 3 funds (caveat: the PAS Vanguard advisor recommended 8 funds: 4 equities, 4 bonds; I am going to bring that down to the recommended 3). I have a separate taxable account in Fidelity with 4 individual stocks that will create significant tax implications, so those will be slowly sold over a few years, and they will all be invested in VG Total Stock Market Fund.

I was frustrated with my Ameriprise advisor but not financially astute enough to realize the error of my ways. Having read Taylor's new book "Guide to the 3 Fund Portfolio", now reading Jack Bogle's "Mutual Funds", and next in line is "A Random Walk Down Wall Street", I continue to learn and be thankful for the incredible wealth of knowledge freely shared on this forum. My grateful thanks to all!
Welcome to the Bogleheads -

That an "advisor" structured your portfolio with fifty funds is simply incredible and not much of a surprise. You have started your journey of becoming better educated and prepared. Investing is not complicated. In fact, it quite easy to quote Jack Brennan (Jack Bogle's successor many years ago). I would highly recommend the Three Fund Portfolio and continue to increase your knowledge of investing. Any of Jack Bogle's books are great (I have them all) and you will learn much.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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The Three-Fund Portfolio -- More Is Less

Post by Taylor Larimore » Fri Mar 15, 2019 9:57 pm

Bogleheads:

Many of us are tempted to add more funds to the Three-Fund Portfolio in an attempt to improve returns. This is what can happen:

A prominent advisor wrote a very persuasive article on MarketWatch on February, 19, 2016 (about 3-years ago) in which he recommended adding nine stock funds to compose the "Ultimate" portfolio as an improvement over the S&P 500 and Total International Index Funds. He wrote:
The "ultimate" portfolio starts with the S&P 500 Index, then adds small and equal portions of nine other very carefully selected U.S. & International asset classes, each one being an excellent long-term vehicle for diversifying.
I did a quick comparison of 3-year returns for the S&P 500 (similar to Total Stock Market) to see if the addition of nine funds improved the portfolio. The answer is: The additional funds (4 US stock funds and 4 International funds) on average significantly underperformed Vanguard Total Stock Market and Vanguard Total International -- the two stock funds in The Three-Fund Portfolio.

More is less.

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

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Re: The Three-Fund Portfolio

Post by retire2022 » Sun Mar 24, 2019 2:45 pm

Taylor another article on your book by Christine Benz:

https://www.morningstar.com/articles/92 ... lists.html

"Before I go any further, I'll acknowledge that the idea for a minimalist portfolio isn't a new one. The Bogleheads have long enthused about a simple, three-fund portfolio composed of total market index funds, the subject of Taylor Larimore's fine recent book. Author Rick Ferri has proposed an even simpler "two-fund portfolio" that consists of a total world stock index fund and bonds. And Morningstar ETFInvestor features a series of new portfolios, including a "Basic Portfolio" that starts and ends with three total market index funds."

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Wed Mar 27, 2019 6:13 pm

Assuming all three accounts are available in tax deferred, tax free, and taxable, what is the most efficient fund placement in today's environment?

Bonds in tax deferred, for starters.

U.S. equities in taxable and international in tax free, vice versa, or flip a coin?

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Re: The Three-Fund Portfolio

Post by retire2022 » Wed Mar 27, 2019 6:14 pm

another Morningstar article on three fund portfolio ETF by Alex Bryan

https://www.morningstar.com/articles/92 ... ment-.html

Broadly diversified market-cap-weighted index funds, like Vanguard Total Stock Market ETF (VTI), Vanguard Total International Stock ETF (VXUS), and Vanguard Total Bond Market ETF (BND), are a good place to start. These funds mirror the composition of the U.S. stock, international stock, and U.S. investment-grade bond market, respec­tively. It isn’t necessary to own the entire market to have a diversified portfolio. But it’s necessary to have good industry representation, have limited exposure to individual securities, and be intentional about the active bets in the portfolio.

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Wed Mar 27, 2019 6:25 pm

Triple digit golfer wrote:
Wed Mar 27, 2019 6:13 pm
Assuming all three accounts are available in tax deferred, tax free, and taxable, what is the most efficient fund placement in today's environment?

Bonds in tax deferred, for starters.

U.S. equities in taxable and international in tax free, vice versa, or flip a coin?
Triple digit golfer:

From page 1 of this topic (short-version):
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.
From the Boglehead Wiki (long-version):

Tax-Efficient Fund Placement

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

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Wed Mar 27, 2019 6:50 pm

Taylor Larimore wrote:
Wed Mar 27, 2019 6:25 pm
Triple digit golfer wrote:
Wed Mar 27, 2019 6:13 pm
Assuming all three accounts are available in tax deferred, tax free, and taxable, what is the most efficient fund placement in today's environment?

Bonds in tax deferred, for starters.

U.S. equities in taxable and international in tax free, vice versa, or flip a coin?
Triple digit golfer:

From page 1 of this topic (short-version):
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.
From the Boglehead Wiki (long-version):

Tax-Efficient Fund Placement

Best wishes.
Taylor
Thank you, Taylor. I figured it really didn't matter much; total international and total U.S. can basically go in any account. I'll put U.S. in taxable and international in the Roth so that we can stay under $600 in foreign tax credits and avoid form 1116 as long as possible.

I am going to read through this thread again; it's one of my favorites on the forum. Investing so simply and knowing it is a wonderful strategy gives me a sense of security knowing that I'm investing well for my family's future in a strategy that will never become outdated.

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Re: The Three-Fund Portfolio

Post by Leesbro63 » Thu Mar 28, 2019 7:20 am

Triple digit golfer wrote:
Wed Mar 27, 2019 6:50 pm
Taylor Larimore wrote:
Wed Mar 27, 2019 6:25 pm
Triple digit golfer wrote:
Wed Mar 27, 2019 6:13 pm
Assuming all three accounts are available in tax deferred, tax free, and taxable, what is the most efficient fund placement in today's environment?

Bonds in tax deferred, for starters.

U.S. equities in taxable and international in tax free, vice versa, or flip a coin?
Triple digit golfer:

From page 1 of this topic (short-version):
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.
From the Boglehead Wiki (long-version):

Tax-Efficient Fund Placement

Best wishes.
Taylor
Thank you, Taylor. I figured it really didn't matter much; total international and total U.S. can basically go in any account. I'll put U.S. in taxable and international in the Roth so that we can stay under $600 in foreign tax credits and avoid form 1116 as long as possible.

I am going to read through this thread again; it's one of my favorites on the forum. Investing so simply and knowing it is a wonderful strategy gives me a sense of security knowing that I'm investing well for my family's future in a strategy that will never become outdated.
If you put international in a Roth to avoid Form 1116, aren’t you cutting your nose to spite your face? You are still paying those foreign taxes through the fund, but you will lose the credit for those taxes paid against your annual U.S. income tax due. Form 1116 is kinda like good food...expensive but worth it. TurboTax handles it fairly easily.

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Thu Mar 28, 2019 1:36 pm

Leesbro63 wrote:
Thu Mar 28, 2019 7:20 am
Triple digit golfer wrote:
Wed Mar 27, 2019 6:50 pm
Taylor Larimore wrote:
Wed Mar 27, 2019 6:25 pm
Triple digit golfer wrote:
Wed Mar 27, 2019 6:13 pm
Assuming all three accounts are available in tax deferred, tax free, and taxable, what is the most efficient fund placement in today's environment?

Bonds in tax deferred, for starters.

U.S. equities in taxable and international in tax free, vice versa, or flip a coin?
Triple digit golfer:

From page 1 of this topic (short-version):
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.
From the Boglehead Wiki (long-version):

Tax-Efficient Fund Placement

Best wishes.
Taylor
Thank you, Taylor. I figured it really didn't matter much; total international and total U.S. can basically go in any account. I'll put U.S. in taxable and international in the Roth so that we can stay under $600 in foreign tax credits and avoid form 1116 as long as possible.

I am going to read through this thread again; it's one of my favorites on the forum. Investing so simply and knowing it is a wonderful strategy gives me a sense of security knowing that I'm investing well for my family's future in a strategy that will never become outdated.
If you put international in a Roth to avoid Form 1116, aren’t you cutting your nose to spite your face? You are still paying those foreign taxes through the fund, but you will lose the credit for those taxes paid against your annual U.S. income tax due. Form 1116 is kinda like good food...expensive but worth it. TurboTax handles it fairly easily.
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.

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Re: The Three-Fund Portfolio

Post by Leesbro63 » Thu Mar 28, 2019 1:58 pm

Triple digit golfer wrote:
Thu Mar 28, 2019 1:36 pm
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.
I am not a tax expert and don't do financial advising. So take my comment for what it's worth. But I am guessing that Livesoft did not mean that he puts any significant amount of International funds/ETFS in any IRA (Roth or Traditional). Because if you do that, you will be paying foreign tax through the fund or ETF, but cannot capture that tax back, like you can do if those funds were in a taxable account, via Form 1116. In fact, I can make the case that if you really want to do that, you could just put the International fund in a taxable account and not do Form 1116 and don't take the credit. It would be foolish, but the IRS would be happy to let you pay more tax than necessary and it would avoid having to do Form 1116.

Livesoft, can you clarify?

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Thu Mar 28, 2019 2:12 pm

Leesbro63 wrote:
Thu Mar 28, 2019 1:58 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 1:36 pm
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.
I am not a tax expert and don't do financial advising. So take my comment for what it's worth. But I am guessing that Livesoft did not mean that he puts any significant amount of International funds/ETFS in any IRA (Roth or Traditional). Because if you do that, you will be paying foreign tax through the fund or ETF, but cannot capture that tax back, like you can do if those funds were in a taxable account, via Form 1116. In fact, I can make the case that if you really want to do that, you could just put the International fund in a taxable account and not do Form 1116 and don't take the credit. It would be foolish, but the IRS would be happy to let you pay more tax than necessary and it would avoid having to do Form 1116.

Livesoft, can you clarify?
I guess where I'm going with it is if the tax bill is roughly the same in these two scenarios, why use Scenario B when it requires what many Bogleheads have called a difficult form? Sure, you're giving up the foreign tax credit, but you're also sheltering the higher dividend yield in a tax-advantaged account.

Scenario A:
Total Stock in taxable
Total International in Roth

Scenario B:
Total Stock in Roth
Total International in taxable

As Grabiner has said in many threads, Total Stock and Total International in taxable are typically about equal in terms of tax efficiency because while you get the foreign tax credit with Total International, you're also paying a >1% higher dividend yield, which roughly offsets the foreign tax credit.

I would love for Livesoft and Grabiner to both chime in.

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Re: The Three-Fund Portfolio

Post by Leesbro63 » Thu Mar 28, 2019 2:47 pm

Triple digit golfer wrote:
Thu Mar 28, 2019 2:12 pm
Leesbro63 wrote:
Thu Mar 28, 2019 1:58 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 1:36 pm
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.
I am not a tax expert and don't do financial advising. So take my comment for what it's worth. But I am guessing that Livesoft did not mean that he puts any significant amount of International funds/ETFS in any IRA (Roth or Traditional). Because if you do that, you will be paying foreign tax through the fund or ETF, but cannot capture that tax back, like you can do if those funds were in a taxable account, via Form 1116. In fact, I can make the case that if you really want to do that, you could just put the International fund in a taxable account and not do Form 1116 and don't take the credit. It would be foolish, but the IRS would be happy to let you pay more tax than necessary and it would avoid having to do Form 1116.

Livesoft, can you clarify?
I guess where I'm going with it is if the tax bill is roughly the same in these two scenarios, why use Scenario B when it requires what many Bogleheads have called a difficult form? Sure, you're giving up the foreign tax credit, but you're also sheltering the higher dividend yield in a tax-advantaged account.

Scenario A:
Total Stock in taxable
Total International in Roth

Scenario B:
Total Stock in Roth
Total International in taxable

As Grabiner has said in many threads, Total Stock and Total International in taxable are typically about equal in terms of tax efficiency because while you get the foreign tax credit with Total International, you're also paying a >1% higher dividend yield, which roughly offsets the foreign tax credit.

I would love for Livesoft and Grabiner to both chime in.
But the tax bill won’t be roughly the same if you take the available credit. You’re making the tax bills the same by leaving money on the table.

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Thu Mar 28, 2019 3:23 pm

Leesbro63 wrote:
Thu Mar 28, 2019 2:47 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 2:12 pm
Leesbro63 wrote:
Thu Mar 28, 2019 1:58 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 1:36 pm
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.
I am not a tax expert and don't do financial advising. So take my comment for what it's worth. But I am guessing that Livesoft did not mean that he puts any significant amount of International funds/ETFS in any IRA (Roth or Traditional). Because if you do that, you will be paying foreign tax through the fund or ETF, but cannot capture that tax back, like you can do if those funds were in a taxable account, via Form 1116. In fact, I can make the case that if you really want to do that, you could just put the International fund in a taxable account and not do Form 1116 and don't take the credit. It would be foolish, but the IRS would be happy to let you pay more tax than necessary and it would avoid having to do Form 1116.

Livesoft, can you clarify?
I guess where I'm going with it is if the tax bill is roughly the same in these two scenarios, why use Scenario B when it requires what many Bogleheads have called a difficult form? Sure, you're giving up the foreign tax credit, but you're also sheltering the higher dividend yield in a tax-advantaged account.

Scenario A:
Total Stock in taxable
Total International in Roth

Scenario B:
Total Stock in Roth
Total International in taxable

As Grabiner has said in many threads, Total Stock and Total International in taxable are typically about equal in terms of tax efficiency because while you get the foreign tax credit with Total International, you're also paying a >1% higher dividend yield, which roughly offsets the foreign tax credit.

I would love for Livesoft and Grabiner to both chime in.
But the tax bill won’t be roughly the same if you take the available credit. You’re making the tax bills the same by leaving money on the table.
I don't agree. Everything I've seen lately says that they will be close to the same with the credit because the credit is offset by the higher dividend yield.

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Re: The Three-Fund Portfolio

Post by Leesbro63 » Thu Mar 28, 2019 3:51 pm

Triple digit golfer wrote:
Thu Mar 28, 2019 3:23 pm
I don't agree. Everything I've seen lately says that they will be close to the same with the credit because the credit is offset by the higher dividend yield.
We'll have to wait for someone else to chime in here. It's a long enough thread that probably many are following it and sooner or later someone will clarify this for us. The power of Bogleheads!

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Thu Mar 28, 2019 6:02 pm

Leesbro63 wrote:
Thu Mar 28, 2019 3:51 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 3:23 pm
I don't agree. Everything I've seen lately says that they will be close to the same with the credit because the credit is offset by the higher dividend yield.
We'll have to wait for someone else to chime in here. It's a long enough thread that probably many are following it and sooner or later someone will clarify this for us. The power of Bogleheads!
:sharebeer

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Re: The Three-Fund Portfolio

Post by LadyGeek » Fri Mar 29, 2019 1:29 pm

bennettg has a question which I've moved into a new thread. See: [Three-Fund Portfolio in a 529 account]
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Re: The Three-Fund Portfolio

Post by 4nwestsaylng » Fri Mar 29, 2019 2:50 pm

Taylor, just wondering why the SP500 performance is very close to the total stock market,does it mean that over time, performance of small caps in the TSM is more volatile, and so TSM performance ends up being about the same as SP500?

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Re: The Three-Fund Portfolio

Post by Triple digit golfer » Sat Mar 30, 2019 11:43 am

Triple digit golfer wrote:
Thu Mar 28, 2019 3:23 pm
Leesbro63 wrote:
Thu Mar 28, 2019 2:47 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 2:12 pm
Leesbro63 wrote:
Thu Mar 28, 2019 1:58 pm
Triple digit golfer wrote:
Thu Mar 28, 2019 1:36 pm
I am putting U.S. in taxable and international in the Roth. As I understand it, there's not a significant difference between U.S. in taxable/International in Roth and vice versa. Am I wrong? I figured if the two are roughly equal, might as well use the method that requires not completing the tax form. Livesoft even said that the complexity of the form alone has led him to avoid too much international in taxable.
I am not a tax expert and don't do financial advising. So take my comment for what it's worth. But I am guessing that Livesoft did not mean that he puts any significant amount of International funds/ETFS in any IRA (Roth or Traditional). Because if you do that, you will be paying foreign tax through the fund or ETF, but cannot capture that tax back, like you can do if those funds were in a taxable account, via Form 1116. In fact, I can make the case that if you really want to do that, you could just put the International fund in a taxable account and not do Form 1116 and don't take the credit. It would be foolish, but the IRS would be happy to let you pay more tax than necessary and it would avoid having to do Form 1116.

Livesoft, can you clarify?
I guess where I'm going with it is if the tax bill is roughly the same in these two scenarios, why use Scenario B when it requires what many Bogleheads have called a difficult form? Sure, you're giving up the foreign tax credit, but you're also sheltering the higher dividend yield in a tax-advantaged account.

Scenario A:
Total Stock in taxable
Total International in Roth

Scenario B:
Total Stock in Roth
Total International in taxable

As Grabiner has said in many threads, Total Stock and Total International in taxable are typically about equal in terms of tax efficiency because while you get the foreign tax credit with Total International, you're also paying a >1% higher dividend yield, which roughly offsets the foreign tax credit.

I would love for Livesoft and Grabiner to both chime in.
But the tax bill won’t be roughly the same if you take the available credit. You’re making the tax bills the same by leaving money on the table.
I don't agree. Everything I've seen lately says that they will be close to the same with the credit because the credit is offset by the higher dividend yield.
I think this got buried at the bottom of the last page. Any opinions on this issue?

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Foreign Stock Placement

Post by Taylor Larimore » Sun Mar 31, 2019 3:11 pm

Bogleheads:

The "Three-Fund Portfolio" topic has morphed into a long discussion about whether to place foreign stocks in a tax-advantaged (IRA, 401k, etc) account OR a taxable account. This is a controversial subject that could go on forever. It is best discussed in its own separate topic HERE.

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

Post by thatbrian » Mon Apr 01, 2019 6:01 pm

I'm fully onboard with the Three-Fund-Portfolio (thank you, Taylor). The only decision making left is: Allocation, Allocation, Allocation. I HATE making these types of decisions.
Better late than later.

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Mon Apr 01, 2019 6:26 pm

thatbrian wrote:
Mon Apr 01, 2019 6:01 pm
I'm fully onboard with the Three-Fund-Portfolio (thank you, Taylor). The only decision making left is: Allocation, Allocation, Allocation. I HATE making these types of decisions.
thatbrian:

Don't worry about getting the exact best allocation. No one knows except with hindsight. Close is good enough.

Use this Vanguard Asset-Allocation Questionnaire for help:

https://personal.vanguard.com/us/FundsI ... unds/tools

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 » Mon Apr 01, 2019 6:27 pm

UnLearnYourself has a question which I've moved into a new thread. See: [Want to move to a three-fund portfolio]

(Thanks to the member who reported the post.)
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