The Three-Fund Portfolio

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abuss368
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Re: International Bonds?

Post by abuss368 »

Taylor Larimore wrote: Thu Aug 19, 2021 6:17 pm Bogleheads:

I am often asked why I did not include "International Bonds" in my Three-Fund Portfolio. I recently came across this interview with Dr. Bill Bernstein who answers the question better than I can:

Don't Bother With International Bonds

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “(How much) are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either one."
Taylor -

I invested in Vanguard International Bond Fund for a short time period. I also felt that multiple bond funds added complexity to our portfolio. Now I simply use Total Bond and it works. Less funds and complexity.

I also did not like the very low yield and dividends of Total International Bond.

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

Post by abuss368 »

We have invested in Total Bond for a long time and it has served us well.

Stay the course!
🚀
Tony
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Re: The Three-Fund Portfolio

Post by GaryA505 »

Is anyone bugged by comments like:

"We have invested in XXX for a long time and it has served us well."
or
"I have owned YYY for many years and I am very happy with it."

Asking for a friend.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: The Three-Fund Portfolio

Post by Da5id »

GaryA505 wrote: Sun Aug 22, 2021 11:24 am Is anyone bugged by comments like:

"We have invested in XXX for a long time and it has served us well."
or
"I have owned YYY for many years and I am very happy with it."

Asking for a friend.
Not bugged, no. I don't find them useful and wouldn't write such. However I'd guess some people find them comforting at some level. Perhaps in an "other people investing like me validates/reinforces my choices" kind of way.
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Re: The Three-Fund Portfolio

Post by GaryA505 »

Da5id wrote: Sun Aug 22, 2021 11:30 am
GaryA505 wrote: Sun Aug 22, 2021 11:24 am Is anyone bugged by comments like:

"We have invested in XXX for a long time and it has served us well."
or
"I have owned YYY for many years and I am very happy with it."

Asking for a friend.
Not bugged, no. I don't find them useful and wouldn't write such. However I'd guess some people find them comforting at some level. Perhaps in an "other people investing like me validates/reinforces my choices" kind of way.
Good point, the validation/reinforcement thing.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: The Three-Fund Portfolio

Post by Triple digit golfer »

Da5id wrote: Sun Aug 22, 2021 11:30 am
GaryA505 wrote: Sun Aug 22, 2021 11:24 am Is anyone bugged by comments like:

"We have invested in XXX for a long time and it has served us well."
or
"I have owned YYY for many years and I am very happy with it."

Asking for a friend.
Not bugged, no. I don't find them useful and wouldn't write such. However I'd guess some people find them comforting at some level. Perhaps in an "other people investing like me validates/reinforces my choices" kind of way.
Exactly.
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Re: The Three-Fund Portfolio

Post by CFM300 »

Destiple wrote: Tue Jul 13, 2021 1:45 pm
Taylor Larimore wrote: Tue Jul 13, 2021 12:46 pm
Destiple wrote: Tue Jul 13, 2021 12:34 pm given there are so many variations of this
can one just do this
33.3 VTI
33.3 BND
33.3 VXUS
to keep it simple ?
...
Use this Vanguard Investor Questionnaire to help you decide the best stock/bond allocation for you.

After deciding your stock/bond allocation, I suggest your international stock fund (VXUS) should be 20% of your stock allocation.

Best wishes.
Taylor
I took the test and my results came back at forty bonds and sixty stocks
so i will do
40 BND
38 VTI
22 VXUS
(I don't see where anyone replied to this post, so even though it's more than a month old, I will.)

If you want a three-fund with a 60/40 split with 20% of stocks allocated to international, it would be:

40% - Total Bond (BND)
48% - Total US Stock (VTI)
12% - Totat International Stock (VXUS)
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Re: The Three-Fund Portfolio

Post by V.T »

Hello Taylor and all participants of the forum!
I read this topic to the end. My view of investment has become simpler and clearer. Definitely decided to become a follower of a portfolio of three funds! I am from the increase in sectors (sold it sector, small cup, China).
At the moment I have four funds in my portfolio:
VOO (Vanguard S&P 500 ETF) - 70 %
VEA (Vanguard FTSE Developed Markets ETF) - 15 %
VWO (Vanguard FTSE Emerging Markets Index Fund ETF) - 5 %
BND (Vanguard Total Bond Market ETF) - 10 %
I did not change VEA/VWO to VXUS due to sales tax. It's not a big complication for me (Or do you think it is worth changing to one VXUS?).
The main correspondence of 20% of international stocks and 10% share of bonds is based on my risk tolerance.
I will increase the proportion of bnd with age.
TAYLOR Thank you so much for this very valuable information!!!!
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Re: The Three-Fund Portfolio

Post by ruralavalon »

V.T wrote: Mon Aug 23, 2021 5:54 amVEA (Vanguard FTSE Developed Markets ETF) - 15 %
VWO (Vanguard FTSE Emerging Markets Index Fund ETF) - 5 %
. . . . . .
I did not change VEA/VWO to VXUS due to sales tax. It's not a big complication for me (Or do you think it is worth changing to one VXUS?)
I would not make that switch if any significant tax liability would be created.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: The Three-Fund Portfolio

Post by Triple digit golfer »

ruralavalon wrote: Mon Aug 23, 2021 9:48 am
V.T wrote: Mon Aug 23, 2021 5:54 amVEA (Vanguard FTSE Developed Markets ETF) - 15 %
VWO (Vanguard FTSE Emerging Markets Index Fund ETF) - 5 %
. . . . . .
I did not change VEA/VWO to VXUS due to sales tax. It's not a big complication for me (Or do you think it is worth changing to one VXUS?)
I would not make that switch if any significant tax liability would be created.
Me neither. It's basically the same. I wouldn't think twice about leaving it be.

https://www.portfoliovisualizer.com/bac ... tion3_2=25
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V.T
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Re: The Three-Fund Portfolio

Post by V.T »

ruralavalon wrote: Mon Aug 23, 2021 9:48 am
V.T wrote: Mon Aug 23, 2021 5:54 amVEA (Vanguard FTSE Developed Markets ETF) - 15 %
VWO (Vanguard FTSE Emerging Markets Index Fund ETF) - 5 %
. . . . . .
I did not change VEA/VWO to VXUS due to sales tax. It's not a big complication for me (Or do you think it is worth changing to one VXUS?)
I would not make that switch if any significant tax liability would be created.
The tax is certainly not huge, but if there is a drawdown and loss, I can change. Although VEA/VWO includes Chinese A class companies and has a commission less than VXUS.
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Re: The Three-Fund Portfolio

Post by V.T »

Triple digit golfer wrote: Mon Aug 23, 2021 10:01 am
ruralavalon wrote: Mon Aug 23, 2021 9:48 am
V.T wrote: Mon Aug 23, 2021 5:54 amVEA (Vanguard FTSE Developed Markets ETF) - 15 %
VWO (Vanguard FTSE Emerging Markets Index Fund ETF) - 5 %
. . . . . .
I did not change VEA/VWO to VXUS due to sales tax. It's not a big complication for me (Or do you think it is worth changing to one VXUS?)
I would not make that switch if any significant tax liability would be created.
Me neither. It's basically the same. I wouldn't think twice about leaving it be.

https://www.portfoliovisualizer.com/bac ... tion3_2=25
They're really very similar. If there is a loss, I will change to VXUS for the sake of simplicity of the portfolio. And I won't do that with taxes.
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Re: The Three-Fund Portfolio

Post by LadyGeek »

etfan has a discussion which I've moved into a new thread. See: [Three-Fund Portfolio Variations]
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Re: The Three-Fund Portfolio

Post by Jbendew »

CFM300 wrote: Sun Aug 22, 2021 2:14 pm
Destiple wrote: Tue Jul 13, 2021 1:45 pm
Taylor Larimore wrote: Tue Jul 13, 2021 12:46 pm
Destiple wrote: Tue Jul 13, 2021 12:34 pm given there are so many variations of this
can one just do this
33.3 VTI
33.3 BND
33.3 VXUS
to keep it simple ?
...
Use this Vanguard Investor Questionnaire to help you decide the best stock/bond allocation for you.

After deciding your stock/bond allocation, I suggest your international stock fund (VXUS) should be 20% of your stock allocation.

Best wishes.
Taylor
I took the test and my results came back at forty bonds and sixty stocks
so i will do
40 BND
38 VTI
22 VXUS
(I don't see where anyone replied to this post, so even though it's more than a month old, I will.)

If you want a three-fund with a 60/40 split with 20% of stocks allocated to international, it would be:

40% - Total Bond (BND)
48% - Total US Stock (VTI)
12% - Totat International Stock (VXUS)
I agree with the math, a 20% international exposure to a portfolio with a 60% allocation in stocks is only is 12% (.6 x .2) but thought some may need to see how you got to 12%. On a semi related note most of the S&P 500 firms have global sales so to some extent we are all investing internationally.
etfan
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Re: The Three-Fund Portfolio

Post by etfan »

Jbendew wrote: Tue Aug 31, 2021 8:28 pm ... most of the S&P 500 firms have global sales so to some extent we are all investing internationally.
Isn't this like saying AAPL has US sales, therefore we all have US market exposure simply by buying AAPL?
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Re: The Three-Fund Portfolio

Post by Da5id »

etfan wrote: Wed Sep 01, 2021 8:17 am
Jbendew wrote: Tue Aug 31, 2021 8:28 pm ... most of the S&P 500 firms have global sales so to some extent we are all investing internationally.
Isn't this like saying AAPL has US sales, therefore we all have US market exposure simply by buying AAPL?
Or likewise pre market crash Japan had tons of international exposure...
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Re: The Three-Fund Portfolio

Post by Fishing2retire »

I’m thinking of moving my Roth from a vanguard TDF into the 3 fund portfolio. I’m not to sure about the international bonds in the TDF. Would the performance of the 3 fund be much better if I emulate the TDD?
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Re: The Three-Fund Portfolio

Post by ruralavalon »

Fishing2retire wrote: Tue Sep 21, 2021 9:18 am I’m thinking of moving my Roth from a vanguard TDF into the 3 fund portfolio. I’m not to sure about the international bonds in the TDF. Would the performance of the 3 fund be much better if I emulate the TDD?
I don't like international bonds. I think that they are not very useful, and that they just add unnecessary complexity and expense.

Bernstein: Don’t Bother With Int'l Bonds | ETF.com.

Should You Include International Bonds In Your Portfolio? - Part II

But I don't think a little in international bonds can either hurt very much or help very much.

In my opinion more important factors in deciding on target date versus three-fund are: (1) do you want the all-in-one simplicity of a target date fund; and (2) do you like the asset allocation in the date fund more than you like a your own self-selected asset allocation in a three-fund portfolio.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: The Three-Fund Portfolio

Post by Leesbro63 »

ruralavalon wrote: Tue Sep 21, 2021 9:33 am
Fishing2retire wrote: Tue Sep 21, 2021 9:18 am I’m thinking of moving my Roth from a vanguard TDF into the 3 fund portfolio. I’m not to sure about the international bonds in the TDF. Would the performance of the 3 fund be much better if I emulate the TDD?
I don't like international bonds. I think that they are not very useful, and that they just add unnecessary complexity and expense.

Bernstein: Don’t Bother With Int'l Bonds | ETF.com.

Should You Include International Bonds In Your Portfolio? - Part II

But I don't think a little in international bonds can either hurt very much or help very much.

In my opinion more important factors in deciding on target date versus three-fund are: (1) do you want the all-in-one simplicity of a target date fund; and (2) do you like the asset allocation in the date fund more than you like a your own self-selected asset allocation in a three-fund portfolio.
Since you referenced Dr. Bernstein, I wonder what he's been up to lately and saying in regards to investing in the current era. Anyone have any recent stuff from him?
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Re: The Three-Fund Portfolio

Post by LadyGeek »

^^^ We need to keep this discussion focused on the 3-fund portfolio. Feel free to search this forum or start a new thread on Bill Bernstein's latest and greatest.
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Re: The Three-Fund Portfolio

Post by sizzlefuzz »

This may be a dumb question but would it be reasonable to treat the three-fund (or two-fund) portfolio as "across all accounts". My thought would be to only hold bond funds in tax advantaged accounts to reduce tax liability but consider the "total" asset allocation as once instead. To further illustrate the point if you have a Roth IRA, 401k, HSA, and taxable, my thought is to not bother with any bonds in the taxable and then slightly adjusting the AAs on the tax advantaged accounts.
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Re: The Three-Fund Portfolio

Post by pizzy »

sizzlefuzz wrote: Thu Sep 23, 2021 2:17 pm This may be a dumb question but would it be reasonable to treat the three-fund (or two-fund) portfolio as "across all accounts". My thought would be to only hold bond funds in tax advantaged accounts to reduce tax liability but consider the "total" asset allocation as once instead. To further illustrate the point if you have a Roth IRA, 401k, HSA, and taxable, my thought is to not bother with any bonds in the taxable and then slightly adjusting the AAs on the tax advantaged accounts.
This is a common strategy.

See: https://www.bogleheads.org/wiki/Tax-eff ... _placement
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Re: The Three-Fund Portfolio

Post by ALinLI »

Hi sizzlefuzz, Yes you are thinking about it correctly. It's all 1 account . You allocate the fixed income/equity portions among your taxable or qualified accounts in order to minime the tax consequences. Wiki has this info also about estimating the after tax yield in taxable vs. qualified. So at a high level you want to place your higher yielding assets like bonds that pay interest taxed at higher rates vs. qualified dividends in a qualified account.
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Re: The Three-Fund Portfolio

Post by Ferdinand2014 »

pizzy wrote: Thu Sep 23, 2021 2:24 pm
sizzlefuzz wrote: Thu Sep 23, 2021 2:17 pm This may be a dumb question but would it be reasonable to treat the three-fund (or two-fund) portfolio as "across all accounts". My thought would be to only hold bond funds in tax advantaged accounts to reduce tax liability but consider the "total" asset allocation as once instead. To further illustrate the point if you have a Roth IRA, 401k, HSA, and taxable, my thought is to not bother with any bonds in the taxable and then slightly adjusting the AAs on the tax advantaged accounts.
This is a common strategy.

See: https://www.bogleheads.org/wiki/Tax-eff ... _placement
This certainly makes sense to treat the portfolio as one across all account types. Taxes of course a big consideration in the placement. I also treat all accounts as one portfolio. However, I actually keep my fixed income in taxable almost exclusively as I need accessibility and liquidity as my fixed income represents savings for short term expenses I cannot cash flow and my emergency plan. I use treasury bills and short term treasury bonds as my only fixed income holdings. The yield is so low and the tax is state deductible so tax consequences are small.
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Re: The Three-Fund Portfolio

Post by GaryA505 »

Treating the portfolio as one across all account types works fine during accumulation, but not so good when RMDs start.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: The Three-Fund Portfolio

Post by ruralavalon »

GaryA505 wrote: Tue Oct 05, 2021 4:06 pm Treating the portfolio as one across all account types works fine during accumulation, but not so good when RMDs start.
It works fine for us. About 80% of our portfolio is in my rollover IRA, which contains both stock and bond funds. Do not take any regular withdrawals from our joint taxable account or any withdrawals our Roth IRAs.

We use Vanguard's automated RMD service. We take RMDs proportionally every month from each Vanguard fund in my rollover IRA, and almost never hit a rebalancing band and need to rebalance.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: The Three-Fund Portfolio

Post by GaryA505 »

ruralavalon wrote: Tue Oct 05, 2021 4:38 pm
GaryA505 wrote: Tue Oct 05, 2021 4:06 pm Treating the portfolio as one across all account types works fine during accumulation, but not so good when RMDs start.
It works fine for us. About 80% of our portfolio is in my rollover IRA, which contains both stock and bond funds. Do not take any regular withdrawals from our joint taxable account or any withdrawals our Roth IRAs.

We use Vanguard's automated RMD service. We take RMDs proportionally every month from each Vanguard fund in my rollover IRA, and almost never hit a rebalancing band and need to rebalance.
It will work for some, but not all. It would probably work just fine if the tax-deferred account is considerably larger than taxable. Then you can hold bonds and stocks in tax-deferred and all stock in taxable. Balancing, if needed, can be done in tax-deferred.

Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred, and 50% of their assets are mostly stock in taxable. RMDs will all come out of bonds, whether they want to sell bonds or not. That may be fine is they are also withdrawing from taxable, but what if they're not? Maybe they don't need to withdraw anything from taxable. Since you can't really move money between tax-deferred and taxable account, balancing could get complicated, and could result in some taxable events. This is why some people (such as myself) like to "mirror" their allocations across accounts.

My only point is that allocating across all accounts is not a "one-size-fits-all" solution, as some people here seem to think it is.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: The Three-Fund Portfolio

Post by ruralavalon »

GaryA505 wrote: Tue Oct 05, 2021 5:08 pm
ruralavalon wrote: Tue Oct 05, 2021 4:38 pm
GaryA505 wrote: Tue Oct 05, 2021 4:06 pm Treating the portfolio as one across all account types works fine during accumulation, but not so good when RMDs start.
It works fine for us. About 80% of our portfolio is in my rollover IRA, which contains both stock and bond funds. Do not take any regular withdrawals from our joint taxable account or any withdrawals our Roth IRAs.

We use Vanguard's automated RMD service. We take RMDs proportionally every month from each Vanguard fund in my rollover IRA, and almost never hit a rebalancing band and need to rebalance.
It will work for some, but not all. It would probably work just fine if the tax-deferred account is considerably larger than taxable. Then you can hold bonds and stocks in tax-deferred and all stock in taxable. Balancing, if needed, can be done in tax-deferred.

Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred, and 50% of their assets are mostly stock in taxable. RMDs will all come out of bonds, whether they want to sell bonds or not. That may be fine is they are also withdrawing from taxable, but what if they're not? Maybe they don't need to withdraw anything from taxable. Since you can't really move money between tax-deferred and taxable account, balancing could get complicated, and could result in some taxable events. This is why some people (such as myself) like to "mirror" their allocations across accounts.

My only point is that allocating across all accounts is not a "one-size-fits-all" solution, as some people here seem to think it is.
I don't have to "Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred". Our asset allocation is 50/50, our entire fixed income allocation is in Vanguard Intermediate-term Bond Index Fund (VBILX) held in my rollover IRA.

As mentioned before we take Required Minimum Distributions (RMDs) every month proportionally from each Vanguard fund in my rollover IRA.

However taking RMDs proportionally from each fund is not the only automatic RMD set-up possible.

Vanguard wrote:You can tap any of the Vanguard mutual funds in your retirement account. Generally, you have three options. You can withdraw a specific amount from each fund, withdraw a certain percentage of your RMD from each of several funds, or withdraw from each fund according to its share of the IRA assets.
Vanguard Retirement FAQs—RMDs "Which funds can I take my RMD from?"

I don't know what automatic RMD set-ups are possible at other fund firms like Fidelity or Schwab.

Automatic set-up of RMDs would become difficult or perhaps impossible if there were very little in stock funds in tax-deferred accounts subject to RMDs, plus a huge taxable brokerage account, or huge Roth IRAs, or both, all with large stock positions.

However having a huge portfolio like that is a wonderful problem to have.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
GaryA505
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Re: The Three-Fund Portfolio

Post by GaryA505 »

ruralavalon wrote: Wed Oct 06, 2021 6:54 am
GaryA505 wrote: Tue Oct 05, 2021 5:08 pm
ruralavalon wrote: Tue Oct 05, 2021 4:38 pm
GaryA505 wrote: Tue Oct 05, 2021 4:06 pm Treating the portfolio as one across all account types works fine during accumulation, but not so good when RMDs start.
It works fine for us. About 80% of our portfolio is in my rollover IRA, which contains both stock and bond funds. Do not take any regular withdrawals from our joint taxable account or any withdrawals our Roth IRAs.

We use Vanguard's automated RMD service. We take RMDs proportionally every month from each Vanguard fund in my rollover IRA, and almost never hit a rebalancing band and need to rebalance.
It will work for some, but not all. It would probably work just fine if the tax-deferred account is considerably larger than taxable. Then you can hold bonds and stocks in tax-deferred and all stock in taxable. Balancing, if needed, can be done in tax-deferred.

Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred, and 50% of their assets are mostly stock in taxable. RMDs will all come out of bonds, whether they want to sell bonds or not. That may be fine is they are also withdrawing from taxable, but what if they're not? Maybe they don't need to withdraw anything from taxable. Since you can't really move money between tax-deferred and taxable account, balancing could get complicated, and could result in some taxable events. This is why some people (such as myself) like to "mirror" their allocations across accounts.

My only point is that allocating across all accounts is not a "one-size-fits-all" solution, as some people here seem to think it is.
I don't have to "Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred". Our asset allocation is 50/50, our entire fixed income allocation is in Vanguard Intermediate-term Bond Index Fund (VBILX) held in my rollover IRA.

As mentioned before we take Required Minimum Distributions (RMDs) every month proportionally from each Vanguard fund in my rollover IRA.

However taking RMDs proportionally from each fund is not the only automatic RMD set-up possible.

Vanguard wrote:You can tap any of the Vanguard mutual funds in your retirement account. Generally, you have three options. You can withdraw a specific amount from each fund, withdraw a certain percentage of your RMD from each of several funds, or withdraw from each fund according to its share of the IRA assets.
Vanguard Retirement FAQs—RMDs "Which funds can I take my RMD from?"

I don't know what automatic RMD set-ups are possible at other fund firms like Fidelity or Schwab.

Automatic set-up of RMDs would become difficult or perhaps impossible if there were very little in stock funds in tax-deferred accounts subject to RMDs, plus a huge taxable brokerage account, or huge Roth IRAs, or both, all with large stock positions.

However having a huge portfolio like that is a wonderful problem to have.
You changed my
"Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred, and 50% of their assets are mostly stock in taxable." to
"Imagine someone with a 50/50 portfolio, 50% of their assets are mostly bonds in tax-deferred"
in your particular situation of a large tax-deferred account containing both stocks and bonds, which is not the scenario I presented.

This makes a big difference when considering allocation across accounts.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: The Three-Fund Portfolio

Post by manlymatt83 »

I have been reading recently that 3 fund holders should add a small REIT fund due to the fact that most REITs are private and therefore not thoroughly represented in TSM index funds (market cap weighted).

I know that Taylor has mentioned that many corporations own real estate which makes up for this; however, it seems that many corporations are selling their real estate and then doing lease-backs.

Is there a world where the 3 fund portfolio is actually under-representing real estate and should therefore be adjusted with a small REIT allocation? More so to “even things out” vs. tilt.
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Re: The Three-Fund Portfolio

Post by whereskyle »

manlymatt83 wrote: Sun Oct 10, 2021 3:18 pm I have been reading recently that 3 fund holders should add a small REIT fund due to the fact that most REITs are private and therefore not thoroughly represented in TSM index funds (market cap weighted).

I know that Taylor has mentioned that many corporations own real estate which makes up for this; however, it seems that many corporations are selling their real estate and then doing lease-backs.

Is there a world where the 3 fund portfolio is actually under-representing real estate and should therefore be adjusted with a small REIT allocation? More so to “even things out” vs. tilt.
Rick Ferri has also recommended either reits or small value to add a "real economy" fund to the three-fund portfolio in his model core-4 portfolios.

The real question you should ask is whether an additional fund will add anything to make such a portfolio meaningfully improve upon the three-fund portfolio. The answer to that question is almost certainly not. Such a strategy has not done anything to improve upon the three-fund since Taylor and the rest of the original Bogleheads introduced it decades ago.

Here's why there seems to be no need to add a fourth fund:

https://www.portfoliovisualizer.com/bac ... tion5_2=20
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Taylor Larimore
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Re: The Three-Fund Portfolio

Post by Taylor Larimore »

manlymatt83 wrote: Sun Oct 10, 2021 3:18 pm I have been reading recently that 3 fund holders should add a small REIT fund due to the fact that most REITs are private and therefore not thoroughly represented in TSM index funds (market cap weighted).

I know that Taylor has mentioned that many corporations own real estate which makes up for this; however, it seems that many corporations are selling their real estate and then doing lease-backs.

Is there a world where the 3 fund portfolio is actually under-representing real estate and should therefore be adjusted with a small REIT allocation? More so to “even things out” vs. tilt.
manlymatt83:

For the five primary reasons below, I feel there is no need to add an additional REIT fund to the Three-Fund Portfolio:

* Total Stock Market Index Funds ALREADY own the market weight in REIT stocks.
* As you wrote: "Many corporations ALREADY own real estate.
* Most investors ALREADY own real estate in their home.
* REITS are very tax-inefficient and take-up room in tax advantage account.
* Strive for simplicity--not complexity.

Read my Simplicity link below.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "People should invest in total market stock and bond funds for the long term. Total market indexing is the gold standard. Anything else, like sector investing, is a dilution of that standard."
Last edited by Taylor Larimore on Mon Oct 11, 2021 5:14 am, edited 1 time in total.
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Re: The Three-Fund Portfolio

Post by etfan »

whereskyle wrote: Sun Oct 10, 2021 6:07 pm Rick Ferri has also recommended either reits or small value to add a "real economy" fund to the three-fund portfolio in his model core-4 portfolios.
What's a "real economy" and why does it matter, according to that view?
The real question you should ask is whether an additional fund will add anything to make such a portfolio meaningfully improve upon the three-fund portfolio. [...]

Here's why there seems to be no need to add a fourth fund:

https://www.portfoliovisualizer.com/bac ... tion5_2=20
Thanks for that. It does seem like there's no good way to improve on the 3-fund portfolio and I can't find anything that makes a difference significant enough to justify the risk or the complexity.
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Re: The Three-Fund Portfolio

Post by sycamore »

etfan wrote: Sun Oct 10, 2021 10:02 pm
whereskyle wrote: Sun Oct 10, 2021 6:07 pm Rick Ferri has also recommended either reits or small value to add a "real economy" fund to the three-fund portfolio in his model core-4 portfolios.
What's a "real economy" and why does it matter, according to that view?
Sometimes the term "total economy" is used. Whatever it's called, the idea is the public stock market doesn't reflect the economy in its entirety. Think of private equity or real estate. Supposedly if one is able to participate and invest in those other parts of the economy, your investment returns would be better. That's the idea in a nutshell, as I understand it.

https://core-4.com/total-economy-core-4-portfolio/ is a recent article from Rick Ferri on portfolio construction. Some of his older articles are:
https://www.forbes.com/forbes/2012/0625 ... folio.html
https://www.forbes.com/sites/rickferri/ ... portfolio/
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Re: The Three-Fund Portfolio

Post by ruralavalon »

A REIT fund is about the only sector fund that could be reasonably considered.

For many years we used Vanguard Real Estate Index Fund (VGSLX) ER 0.12%, but have dropped it just to simplify.

We used it because our fee-only advisor felt that, based on the value of our home, we did not have enough real estate exposure. (We had no desire for a bigger more expensive home.) Also one of Dr. Bernstein's books suggested a REIT fund for diversification.
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Re: The Three-Fund Portfolio

Post by Investor1986 »

Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
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Re: The Three-Fund Portfolio

Post by willthrill81 »

Investor1986 wrote: Mon Oct 11, 2021 3:21 pm Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
I-bonds are perfectly fine. There is no compelling reason for owning TBM over I-bonds.
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Re: The Three-Fund Portfolio

Post by manlymatt83 »

It seems like, for the foreseeable future, most of my three fund contributions will be in taxable. This is because most of my income is coming from “owners draws” on a business I own. There is a small contribution going into a SEP IRA but unfortunately I can’t increase that unreasonably/it doesn’t make sense to increase it.

Other than buying VTI/VXUS instead of VT in taxable, anything else I should be worrying about it most of my retirement contributions will end up in a taxable? I guess I’ll be paying more in taxes now on the dividends but it’s otherwise similar to a traditional IRA?
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Re: The Three-Fund Portfolio

Post by Investor1986 »

willthrill81 wrote: Tue Oct 12, 2021 11:19 am
Investor1986 wrote: Mon Oct 11, 2021 3:21 pm Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
I-bonds are perfectly fine. There is no compelling reason for owning TBM over I-bonds.
The only downside I can think of is that with I-Bonds you don't take advantage of tax deferred accounts. To a certain degree as we can only invest $6,000 per year in our IRA compared to $10K annual I-Bonds
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Re: The Three-Fund Portfolio

Post by willthrill81 »

Investor1986 wrote: Tue Oct 12, 2021 4:32 pm
willthrill81 wrote: Tue Oct 12, 2021 11:19 am
Investor1986 wrote: Mon Oct 11, 2021 3:21 pm Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
I-bonds are perfectly fine. There is no compelling reason for owning TBM over I-bonds.
The only downside I can think of is that with I-Bonds you don't take advantage of tax deferred accounts. To a certain degree as we can only invest $6,000 per year in our IRA compared to $10K annual I-Bonds
That's true, but those are tax and contribution issues and are not related to the role of fixed income in something like the 3-fund portfolio.

Further, there are many here who don't use TBM at all and choose to use other fixed income investments, such as long-term Treasuries, short-term Treasuries, stable value funds, TIPS, I-bonds, CDs, etc.
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Re: The Three-Fund Portfolio

Post by dbr »

willthrill81 wrote: Tue Oct 12, 2021 4:34 pm
Investor1986 wrote: Tue Oct 12, 2021 4:32 pm
willthrill81 wrote: Tue Oct 12, 2021 11:19 am
Investor1986 wrote: Mon Oct 11, 2021 3:21 pm Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
I-bonds are perfectly fine. There is no compelling reason for owning TBM over I-bonds.
The only downside I can think of is that with I-Bonds you don't take advantage of tax deferred accounts. To a certain degree as we can only invest $6,000 per year in our IRA compared to $10K annual I-Bonds
That's true, but those are tax and contribution issues and are not related to the role of fixed income in something like the 3-fund portfolio.

Further, there are many here who don't use TBM at all and choose to use other fixed income investments, such as long-term Treasuries, short-term Treasuries, stable value funds, TIPS, I-bonds, CDs, etc.
I think TBM is listed specifically to avoid having to deal with a debate about what bonds. In reality it is an example which can be replaced with many other choices. It think drifting away from total stock funds would be more problematic, but there is still lots of discussion about how much in international stocks and some discussion about why not international bonds.
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Re: The Three-Fund Portfolio

Post by willthrill81 »

dbr wrote: Tue Oct 12, 2021 4:48 pm
willthrill81 wrote: Tue Oct 12, 2021 4:34 pm
Investor1986 wrote: Tue Oct 12, 2021 4:32 pm
willthrill81 wrote: Tue Oct 12, 2021 11:19 am
Investor1986 wrote: Mon Oct 11, 2021 3:21 pm Hi all!
I have a question in regards of bonds that need to be held in the 3 funds portfolio.
My 401K plan does not offer any good bond choices (no Vanguard or any cheap fund options), neither any good International total stock. Thus my entire 401K is 100% S&P500 (VOO) for the time being.
If I want to add 20% bonds and manually build a three fund portfolio with no Vanguard options, is it fine to buy I-Bonds since they don't have a purchase cost or it has to be a Total bond market for reasons I am not aware as a new investor?
Thank you!
I-bonds are perfectly fine. There is no compelling reason for owning TBM over I-bonds.
The only downside I can think of is that with I-Bonds you don't take advantage of tax deferred accounts. To a certain degree as we can only invest $6,000 per year in our IRA compared to $10K annual I-Bonds
That's true, but those are tax and contribution issues and are not related to the role of fixed income in something like the 3-fund portfolio.

Further, there are many here who don't use TBM at all and choose to use other fixed income investments, such as long-term Treasuries, short-term Treasuries, stable value funds, TIPS, I-bonds, CDs, etc.
I think TBM is listed specifically to avoid having to deal with a debate about what bonds. In reality it is an example which can be replaced with many other choices. It think drifting away from total stock funds would be more problematic, but there is still lots of discussion about how much in international stocks and some discussion about why not international bonds.
I think that more of the sort of questions that led to this direct interchange would be avoided if TBM were substituted for 'fixed income instruments', with examples of the most common forms used by BHs.

While I understand the 'KISS' and 'one-size-fits-all' appeal of the 3-fund approach to many, one-to-one implementation is not always easy. I'm not sure that it's even typical. None of the funds available in my 401(k) or 457 have any labels similar to TSM or TBM, for instance.
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Re: The Three-Fund Portfolio

Post by AndrewXnn »

I am wondering how one could go about establishing a proper amount for international?

First message says to go thru the Vanguard Questioner to determine the amount in Bonds
and a suggestion of 20% in international equity.

However, what is the basis for that international suggestion?
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Re: The Three-Fund Portfolio

Post by Da5id »

AndrewXnn wrote: Sat Oct 30, 2021 2:12 pm I am wondering how one could go about establishing a proper amount for international?

First message says to go thru the Vanguard Questioner to determine the amount in Bonds
and a suggestion of 20% in international equity.

However, what is the basis for that international suggestion?
Bogle was a "0% international is best, but if you must 20% is OK" believer. You have to figure out what your beliefs are. I have 40%, a number in the forums vehemently argue for 0%. Most target date funds seem to be in the 30-40% range. I suggest you do some reading and pick something you can stick with for the long haul. Few reference below to get you started.

https://www.bogleheads.org/blog/2020/03 ... ld-part-1/
https://www.bogleheads.org/wiki/Domestic/international
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Re: The Three-Fund Portfolio

Post by sycamore »

AndrewXnn wrote: Sat Oct 30, 2021 2:12 pm I am wondering how one could go about establishing a proper amount for international?

First message says to go thru the Vanguard Questioner to determine the amount in Bonds
and a suggestion of 20% in international equity.

However, what is the basis for that international suggestion?
Why and how much does Vanguard recommend international equity?

Before answering that question, you should know that Vanguard has changed its answer over time, which is reflected in the composition of their LifeStrategy and Target Date funds. Basically, Vanguard has been increasing the recommended amount of international stocks and bonds. For their funds, they had to pick a specific amount but in general I've seen them recommend anywhere from 30% to market weight. They don't seem to keep their web site content updated -- one example is the questionnaire you found where it recommends 20%.

In April 2021, they published Global equity investing: The benefits of diversification and sizing your allocation. Note this was written for a global audience, not just US investors.

One of the main conclusions they drew:
This paper concludes that although no one answer fits all investors, global market capitalization weight serves as a helpful starting point in determining the appropriate allocation between domestic and international equities. In practice, many investors will consider an allocation to international equities well below global market-capitalization weight based on their sensitivity to a number of considerations, including volatility reduction, expected returns, implementation costs, taxes, regulation, and their own preferences.
Reducing portfolio volatility seems to be a key rationale for Vanguard. Which raises a key question: how much does volatility reduction matter to me? A.k.a, do I lose sleep when stocks fall by 5% in a day/rise 3% the next day, or 15% in a month, or 35% in a few months?


Putting aside Vanguard's recommendation, here's an interesting Boglehead post that offers a different reason:
https://www.bogleheads.org/forum/viewtopic.php?p=5786233#p5786233 wrote:But the primary benefit of diversification isn't boosting returns or reducing volatility or improving Sharpe ratios: it's reducing the dispersion of outcomes.
Take a look and check out the chart... food for thought.

As for me, I have around 10% of stocks in international. I'd be okay with 10%-25%. No great basis for that, it's just where I ended up after many years of investing & finding myway.
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Re: The Three-Fund Portfolio

Post by One More Thing »

Proud to say that that I helped my mother reallocate her 401k into 35% S&P 500, 25% Global ex-US, 40% TBM. All Blackrock. She formerly had a slice-and-dice TDF with a higher expense ratio that underperformed the TFP over any period of time down to YTD. She relies on her union pension, SocSec, and a rental property for income so here's to superior, simple returns going forward while she leaves it be as much as she can.

Now if I could just get the old man to do the same...
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Re: The Three-Fund Portfolio

Post by AndrewXnn »

Da5id wrote: Sat Oct 30, 2021 2:35 pm
Bogle was a "0% international is best, but if you must 20% is OK" believer. You have to figure out what your beliefs are.
Wow!

Thank-you all for so much information.

Will study this for a while, but it is rather surprising to see that Bogle was 0% international is best. :confused
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Re: The Three-Fund Portfolio

Post by whereskyle »

AndrewXnn wrote: Sat Oct 30, 2021 4:25 pm
Da5id wrote: Sat Oct 30, 2021 2:35 pm
Bogle was a "0% international is best, but if you must 20% is OK" believer. You have to figure out what your beliefs are.
Wow!

Thank-you all for so much information.

Will study this for a while, but it is rather surprising to see that Bogle was 0% international is best. :confused
Costs of investing internationally were much higher, and Jack was very much concerned about investor misbehavior. As soon as you add more than one fund to a portfolio, the risk of misbehavior increases dramatically.
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Re: The Three-Fund Portfolio

Post by abuss368 »

whereskyle wrote: Sat Oct 30, 2021 6:14 pm
AndrewXnn wrote: Sat Oct 30, 2021 4:25 pm
Da5id wrote: Sat Oct 30, 2021 2:35 pm
Bogle was a "0% international is best, but if you must 20% is OK" believer. You have to figure out what your beliefs are.
Wow!

Thank-you all for so much information.

Will study this for a while, but it is rather surprising to see that Bogle was 0% international is best. :confused
Costs of investing internationally were much higher, and Jack was very much concerned about investor misbehavior. As soon as you add more than one fund to a portfolio, the risk of misbehavior increases dramatically.
Ferdinand2014, a poster who I have learned much from has always discussed this. For good reason he simply uses an S&P 500 fund with Treasuries as Warren Buffett has recommended. Ferdinand2014 has said he was his own worse enemy!

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

Post by Da5id »

whereskyle wrote: Sat Oct 30, 2021 6:14 pm
AndrewXnn wrote: Sat Oct 30, 2021 4:25 pm
Da5id wrote: Sat Oct 30, 2021 2:35 pm
Bogle was a "0% international is best, but if you must 20% is OK" believer. You have to figure out what your beliefs are.
Wow!

Thank-you all for so much information.

Will study this for a while, but it is rather surprising to see that Bogle was 0% international is best. :confused
Costs of investing internationally were much higher, and Jack was very much concerned about investor misbehavior. As soon as you add more than one fund to a portfolio, the risk of misbehavior increases dramatically.
Mind you that is as much an argument for VT (total world) or one of the LifeStrategy funds as it is for being 100% US in ones stocks.
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