The Three-Fund Portfolio

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lostdog
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Re: [US vs. International allocation in a Three-fund portfolio]

Post by lostdog » Wed Mar 21, 2018 9:26 am

Are you saying Vanguard Total World and Vanguard Total Bond would adhere more to the boglehead philosophy because there is no speculation on domestic vs international equities?
Vanguard Total World Equity Index - The rational portfolio

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triceratop
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Re: [US vs. International allocation in a Three-fund portfolio]

Post by triceratop » Wed Mar 21, 2018 9:33 am

lostdog wrote:
Wed Mar 21, 2018 9:26 am
Are you saying Vanguard Total World and Vanguard Total Bond would adhere more to the boglehead philosophy because there is no speculation on domestic vs international equities?
I think the claim is that Vanguard Total World and a Treasury bond fund of some duration represent the ideals better. I realize this isn't precisely your question but it's another one of saltycaper's points.

An easy way to check this is to search for the number of times Taylor has said "Bonds are (primarily) for safety". Then go look at the relative returns of Intermediate investment-grade (good quality -- an important term because Taylor says any short or intermediate-term bond fund of good quality will do) corporates to intermediate treasuries in the 2008 market crisis. The difference in returns exceeds 20% (see Appendix A). This is a bear market for stocks, but instead it's within the parameters of what is acceptable for 3-fund bond portfolio choices.

Appendix A: A recent post of mine:
triceratop wrote:
Wed Mar 21, 2018 8:51 am
It's not unreasonable to own corporate bonds; be aware that there is at least some component of equity-like risk present. Have you looked at drawdowns in a crisis like 2008? Or looked at their behavior in late 2015/early 2016 when equities also declined?

VTI: Total Stock Market
VCSH / VFSUX: Short corporate bonds
VCIT / VFIDX: Int. corporate bonds
VGSH / VFIRX: Short government bonds
VGIT / VFIUX: Int. government bonds

12/01/2015 - 02/12/2016 total returns:
VTI: -11.4%
VCIT: -0.3%
VCSH: -0.2%
VGIT: +2.9%
VGSH: +0.6%

10/09/2007 - 03/09/2009 total returns:
VTI: -55%
VFIDX: -5.1%
VFSUX: -1.9%
VFIUX: +16.6%
VFIRX: +10.1%

Think about these numbers when you think about the "safety" of various types of bonds. There is risk there! The drawdown for intermediate corporate bonds versus treasuries in 2008 exceeded 20% which would be considered bear market territory for stocks.
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Re: [US vs. International allocation in a Three-fund portfolio]

Post by bgf » Wed Mar 21, 2018 9:35 am

lostdog wrote:
Wed Mar 21, 2018 9:26 am
Are you saying Vanguard Total World and Vanguard Total Bond would adhere more to the boglehead philosophy because there is no speculation on domestic vs international equities?
im not sure if that is what saltycaper is saying, but i think given the fundamental principles of bogleheading, yes, VT + BND, in an allocation appropriate for your time horizon and behavioral risk tolerance, is the bar.

one can of course come up with legitimate reasons for doing otherwise, e.g., splitting VT into VTI and VXUS for tax loss harvesting.

still, its hard to beat VT + BND (Vanguard Total World and Vanguard Total Bond) for convenience and simplicity and compliance with the principles as i understand them.
Last edited by bgf on Wed Mar 21, 2018 9:37 am, edited 1 time in total.
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Re: The Three-Fund Portfolio

Post by UpperNwGuy » Wed Mar 21, 2018 9:36 am

dbr wrote:
Wed Mar 21, 2018 8:27 am

The question is a little undefined. In investment theory we would say risk is just the variability or uncertainty of return. I think US and OUS stocks are about equally risky and offer about equal return on that count. What is different is all the dynamics behind changes in stock prices between the two. The timing, relationship to underlying causes, etc. would be different. I would understand that the only actual difference in risk between residents of different countries would be exchange rates for pricing the buying and selling of shares in local currency.

If by risks one wants to assess some kind of personal consequences of the variability of returns, then I really don't know.
Some would say that currency exchange is an important risk to consider. Another risk not yet mentioned is the difference in volatility between US and OUS. Does VT adequately address these risks?

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Re: The Three-Fund Portfolio

Post by saltycaper » Wed Mar 21, 2018 11:11 am

LadyGeek wrote:
Wed Mar 21, 2018 9:13 am
FYI - I split a discussion started by saltycaper into a stand-alone thread. There were enough posts to merit a separate discussion.

See: [US vs. International allocation in a Three-fund portfolio]
I did not start a discussion on US vs. International. The discussion is about whether the Three-Fund Portfolio is an internally consistent investment philosophy that provides answers to commonly asked investor questions, including how to allocate the bond portion of the portfolio in addition to how to allocate the equity portion. The comments are entirely relevant to this thread.
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Re: The Three-Fund Portfolio

Post by LadyGeek » Wed Mar 21, 2018 11:40 am

saltycaper wrote:
Wed Mar 21, 2018 11:11 am
LadyGeek wrote:
Wed Mar 21, 2018 9:13 am
FYI - I split a discussion started by saltycaper into a stand-alone thread. There were enough posts to merit a separate discussion.

See: [US vs. International allocation in a Three-fund portfolio]
I did not start a discussion on US vs. International. The discussion is about whether the Three-Fund Portfolio is an internally consistent investment philosophy that provides answers to commonly asked investor questions, including how to allocate the bond portion of the portfolio in addition to how to allocate the equity portion. The comments are entirely relevant to this thread.
Thank you for the correction. My mistake. The posts have been moved back into this thread.
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Re: The Three-Fund Portfolio

Post by Starchild » Wed Mar 21, 2018 3:15 pm

zengolf2011 wrote:
Tue Mar 20, 2018 9:49 pm
Starchild wrote:
Mon Mar 19, 2018 10:06 pm
While I'm certainly not an expert, and I respect people's thoughts on the 3-fund approach, but it really isn't for me. I enjoy spending time investing, researching, and learning about economics. I also like investing in companies or emphasizing certain sectors/indexs I believe in. I'm also not sold on VBTLX. It just doesn't perform as well as other fixed income funds, and and on top of that, is currently getting beat up.
I can only relate my personal experiences. I am an amateur, defensive (Benjamin Graham) investor with 30+ years of history. I have generally invested in the 3-fund portfolio. When I veered slightly, some other investments were winners, some losers. In retrospect, I believe I would have been better off, or at least no worse off, sticking with the 3-fund portfolio. That's my plan for the rest of my life.

Starchild, you enjoy the challenge of research and entrepreneural investing, and that's certainly legal. But my humble advice is this: deviate from the 3-fund portfolio, and Graham's defensive investing, if you wish. But not too far.
I hear ya. Good advice. At some point, I'd like to add vtsax as a core holding. I just like the extra diversity of having different indexs at different weights, along with some individual stocks that have historically performed well (at least for me).

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Re: The Three-Fund Portfolio

Post by dbr » Wed Mar 21, 2018 3:54 pm

UpperNwGuy wrote:
Wed Mar 21, 2018 9:36 am
dbr wrote:
Wed Mar 21, 2018 8:27 am

The question is a little undefined. In investment theory we would say risk is just the variability or uncertainty of return. I think US and OUS stocks are about equally risky and offer about equal return on that count. What is different is all the dynamics behind changes in stock prices between the two. The timing, relationship to underlying causes, etc. would be different. I would understand that the only actual difference in risk between residents of different countries would be exchange rates for pricing the buying and selling of shares in local currency.

If by risks one wants to assess some kind of personal consequences of the variability of returns, then I really don't know.
Some would say that currency exchange is an important risk to consider. Another risk not yet mentioned is the difference in volatility between US and OUS. Does VT adequately address these risks?
My mention of risk above means volatility and I would expect US and developed international markets to be of similar volatility. Emerging markets are more volatile.

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Re: The Three-Fund Portfolio

Post by fortyofforty » Wed Mar 21, 2018 6:58 pm

My understanding is that, like capitalization-weighted stock indexes, Total Bond Market weights its holdings based on what "the market" dictates. It's what Vanguard uses for its LifeStrategy fund grouping, along with Total International Bond Market.
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"It’s very hard to ‘beat the market'. 95% of professional's can't do it.

Post by Taylor Larimore » Wed Mar 21, 2018 8:58 pm

Bogleheads:

This is a recent article supporting "The Three-Fund Portfolio." It is written by Mark J. Perry, a professor of economics and finance at the University of Michigan (the financial industry will hate it). This is the link:

More evidence that it's very hard to 'beat the market'. 95% of professionals can't do it.

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

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Re: The Three-Fund Portfolio

Post by papahurls1 » Wed Mar 21, 2018 10:23 pm

Taylor and all,
I have a quick question of you.
Despite the obvious fee difference, what is your opinion of using the Vanguard ETF's as opposed to the TIF's?
I guess that I am confused when Jack says that he doesn't like ETF's. Does he mean ones other than the Vanguard ones?
Sorry, for what might be a stupid question.


VBFMX vs. BND
VTSMX vs. VTI
VGTSX vs. VXUS
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Re: The Three-Fund Portfolio

Post by dbr » Thu Mar 22, 2018 8:04 am

papahurls1 wrote:
Wed Mar 21, 2018 10:23 pm
Taylor and all,
I have a quick question of you.
Despite the obvious fee difference, what is your opinion of using the Vanguard ETF's as opposed to the TIF's?
I guess that I am confused when Jack says that he doesn't like ETF's. Does he mean ones other than the Vanguard ones?
Sorry, for what might be a stupid question.


VBFMX vs. BND
VTSMX vs. VTI
VGTSX vs. VXUS
Jack doesn't like ETFs, especially he doesn't like Vanguard ETFs because he thinks Vanguard of all companies should not be providing products that encourage people to trade holdings rather than stay the course, as he sees it. It is probably near unanimous on this board that Vanguard ETFs are perfectly fine investment holdings that make sense in almost any situation.

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Thu Mar 22, 2018 10:19 pm

papahurls1 wrote:
Wed Mar 21, 2018 10:23 pm
Taylor and all,
I have a quick question of you.
Despite the obvious fee difference, what is your opinion of using the Vanguard ETF's as opposed to the TIF's?
I guess that I am confused when Jack says that he doesn't like ETF's. Does he mean ones other than the Vanguard ones?
Sorry, for what might be a stupid question.


VBFMX vs. BND
VTSMX vs. VTI
VGTSX vs. VXUS
papahurls1:

Welcome to the Bogleheads Forum!

Whether to use Traditional Mutual Funds or ETFs is not a "stupid" question. There is usually little difference which makes it hard to reach a decision. Fortunately, it is way down on the list of what's important.

I agree with Mr. Bogle who wrote in "The Little Book of Common Sense Investing": "There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don't trade them."

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

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Re: The Three-Fund Portfolio

Post by dbr » Fri Mar 23, 2018 8:30 am

Taylor Larimore wrote:
Thu Mar 22, 2018 10:19 pm
papahurls1 wrote:
Wed Mar 21, 2018 10:23 pm
Taylor and all,
I have a quick question of you.
Despite the obvious fee difference, what is your opinion of using the Vanguard ETF's as opposed to the TIF's?
I guess that I am confused when Jack says that he doesn't like ETF's. Does he mean ones other than the Vanguard ones?
Sorry, for what might be a stupid question.


VBFMX vs. BND
VTSMX vs. VTI
VGTSX vs. VXUS
papahurls1:

Welcome to the Bogleheads Forum!

Whether to use Traditional Mutual Funds or ETFs is not a "stupid" question. There is usually little difference which makes it hard to reach a decision. Fortunately, it is way down on the list of what's important.

I agree with Mr. Bogle who wrote in "The Little Book of Common Sense Investing": "There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don't trade them."

Best wishes.
Taylor
I would add, by the way, that I don't really understand why having an ETF leads the investor to become a trader any more than he might be with a mutual fund. I thought the trading issue had to do with speculators trading by the minute all day long or even intraday. Jack doesn't want that happening on the market but it has nothing at all to do with what an investor here would do. The objection simply does not apply. I do understand that Jack might be concerned that a person not get caught up in some sort of distorted market moves in thinly traded concentrated ETFs, but that also should not apply to ETF share classes of diversified index funds as we hold here. It is a case of taking soundbites and ending up with distorted ideas of what the advice is.

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Re: The Three-Fund Portfolio

Post by bgf » Fri Mar 23, 2018 8:35 am

dbr wrote:
Fri Mar 23, 2018 8:30 am
Taylor Larimore wrote:
Thu Mar 22, 2018 10:19 pm
papahurls1 wrote:
Wed Mar 21, 2018 10:23 pm
Taylor and all,
I have a quick question of you.
Despite the obvious fee difference, what is your opinion of using the Vanguard ETF's as opposed to the TIF's?
I guess that I am confused when Jack says that he doesn't like ETF's. Does he mean ones other than the Vanguard ones?
Sorry, for what might be a stupid question.


VBFMX vs. BND
VTSMX vs. VTI
VGTSX vs. VXUS
papahurls1:

Welcome to the Bogleheads Forum!

Whether to use Traditional Mutual Funds or ETFs is not a "stupid" question. There is usually little difference which makes it hard to reach a decision. Fortunately, it is way down on the list of what's important.

I agree with Mr. Bogle who wrote in "The Little Book of Common Sense Investing": "There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don't trade them."

Best wishes.
Taylor
I would add, by the way, that I don't really understand why having an ETF leads the investor to become a trader any more than he might be with a mutual fund. I thought the trading issue had to do with speculators trading by the minute all day long or even intraday. Jack doesn't want that happening on the market but it has nothing at all to do with what an investor here would do. The objection simply does not apply. I do understand that Jack might be concerned that a person not get caught up in some sort of distorted market moves in thinly traded concentrated ETFs, but that also should not apply to ETF share classes of diversified index funds as we hold here. It is a case of taking soundbites and ending up with distorted ideas of what the advice is.
completely agree. all of my investments are in ETFs and none are in mutual funds. ETFs are slightly cheaper as all my trades are no commission. the ability to trade ETFs throughout the day does not equal the encouragement to do so.

i only use 10% of my credit card limit. my car can go well over 100mph, but i never do. we can go on and on.
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Re: The Three-Fund Portfolio

Post by papahurls1 » Fri Mar 23, 2018 11:19 am

Thanks Taylor and dbr,
I retired on January 31st and rolled over my Vanguard 401K account into my traditional IRA. My cash out had perfect timing with this recent dip.
I will purchase my replacement Vanguard ETF's this afternoon.
Now the real fun begins, as I try to determine the proper percentages.
The low bond yields have me somewhat reluctant to put too much into BND.
I guess I have been a Boglehead for a couple of years now, but just officially registered on the site the other night!
Thanks again!
Pat
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Re: [US vs. International allocation in a Three-fund portfolio]

Post by saltycaper » Fri Mar 23, 2018 2:41 pm

PhilosophyAndrew wrote:
Wed Mar 21, 2018 9:24 am
Saltycaper, on your interpretation, the strategy is inconsistent because it doesn’t define a single “perfect” set of allocations, bond funds cannot serve to moderate equity risk unless they contain zero corporate bonds, the strategy fails because it is possible for investors to implement it poorly.

This is a heterodox perspective -- you have an eccentric viewpoint that rejects the common understanding of the purpose and value of the components of the three fund portfolio.

Are you interested in helping to develop the three-fund portfolio? If so, I think a useful constructive step would be for you to constructing persuasive rational arguments supporting your claims. Perhaps you have good ideas for improving this strategy, but we won’t know that without digging into the arguments for your position.
I think there are a few things you think I'm saying that I do not intend to convey.

Just because I favor consistency does not mean there is a single perfect allocation. The plainest way I can put it is that the principles should be consistent with one another, and the recommendations that follow should adhere to the principles. That should not be a controversial or eccentric viewpoint.

Generally, the above does not require followers are pointed to a single "perfect" allocation; however, it is possible that they are. For instance, if one of the principles is, "do not try to beat the market", then you must hold the market portfolio. That is a unique characteristic of the strategy--there is only one choice. If that outcome is not what is desired, then the strategy simply needs to be re-worked. If the strategy isn't meant to be so limiting, then such limiting phrases should be avoided or qualified.

Bond funds of course can serve to moderate equity risk even if they contain corporate bonds. But, it would be in more perfect accordance with the idea that "bonds are for safety" when equities tank if bonds that have equity-like risk are not included. Again, if the outcome of using only Treasuries is not what is intended, that's fine, but then the strategy needs work.

A note on the word "perfect." I take the word to mean the portfolio is constructed in accordance with the strategy, adhering to the principles as closely as possible. It would not matter to me how the portfolio performed compared to some other portfolio that was based on a different strategy. It's possible for multiple allocations to be "perfect", provided the strategy allows for that. An example of this which I think we can agree on is the allowance for a different stock/bond ratio for different investors. (Even Bill Sharpe, perhaps the greatest advocate for the market portfolio, allows for this adjustment, I believe, although it might come with certain strings attached.)

I do not see the strategy as failing just because it is possible for investors to implement it poorly. The strategy fails because it provides conflicting messages about what the investor is supposed to do. In that case it's actually rather difficult for the investor to implement it poorly since almost any implementation could be claimed to be following the strategy. But, if flexibility is a virtue (and it seems, to Taylor, it is), I think it's possible to achieve that while maintaining consistency as well.

Re: whether I'm interested in improving the three-fund portfolio, I think I will hold off on offering much more commentary until I have the opportunity to read Taylor's book. My understanding of the principles behind it comes not only from this thread but also from Taylor's other many thousands of posts written over many years. I've been wrong about plenty, changed my mind about things, etc., and I'm sure he has too. It will be much easier to digest what the current strategy actually is by reading it in book form.

I've offered my take so far on what I see as a more perfect three-fund portfolio: An allocation resembling Total World Stock, which may be approximated with a Total US and Total ex-US fund if necessary, plus a safe bond portion consisting of US Treasuries, which could be adjusted for duration as well as different nominal versus TIPS allocations depending on individual circumstances, including different stock/bond ratios.
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Re: The Three-Fund Portfolio

Post by 220volt » Tue Mar 27, 2018 12:48 pm

I was looking at the most common index funds used to comprise three-fund portfolio (SP500, Total Stock, Large-Cap and Total World), and I was stunned to see how much of a weight only hand full of companies now have. In Total Market Index Fund, top 10 companies comprise almost 19% of total assets!
Big techs like Apple, Microsoft, Google, Facebook, and Amazon alone have over 3 trillion market cap. Even in the VG's Total World index, those companies have a huge sway. It almost doesn't matter which big index you pick, same companies are always there.

If you lay those companies on the graph alongside the whole market, they almost move in unison. Almost like those big tech stocks are the market! I don't know, it just doesn't seem that having a single big equity fund will provide adequate diversification.

Maybe some slice and dice or at least sprinkle with mid and small caps is in order? Perhaps for the US equity portion of the three-fund portfolio instead of owning a single fund, use:
SP500 50%
Mid-cap 30%
Small-cap 20%

But then again, the reason why those big techs have gotten so huge is because they are the best performers, so do we really want to tilt away from them?
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

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Re: [US vs. International allocation in a Three-fund portfolio]

Post by PhilosophyAndrew » Tue Mar 27, 2018 1:08 pm

saltycaper wrote:
Fri Mar 23, 2018 2:41 pm
I've offered my take so far on what I see as a more perfect three-fund portfolio: An allocation resembling Total World Stock, which may be approximated with a Total US and Total ex-US fund if necessary, plus a safe bond portion consisting of US Treasuries, which could be adjusted for duration as well as different nominal versus TIPS allocations depending on individual circumstances, including different stock/bond ratios.
Thanks, Saltycaper -- your most recent posts helps me to understand your perspective much more clearly.

I'm also looking forward to reading Taylor's book.

Andy.

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"Boosting Returns With Rebalancing"

Post by Taylor Larimore » Wed Apr 04, 2018 10:10 am

Bogleheads:

Allan Roth, CPA, CFP, has completed an 18-year study about the effects of rebalancing The Three-Fund Portfolio. He found that rebalancing, not only maintained the desired portfolio asset-allocation, but also increased return.

Boosting Returns With Rebalancing

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

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Re: The Three-Fund Portfolio

Post by C4NT » Wed Apr 04, 2018 10:23 am

Hello Taylor,

Thanks for posting this. I'm glad to see there is a "rebalancing bonus" for the three-fund portfolio.

C4NT
Taylor Larimore wrote:
Wed Apr 04, 2018 10:10 am
Bogleheads:

Allan Roth, CPA, CFP, has completed a 17-year study about the effects of rebalancing The Three-Fund Portfolio. He found that rebalancing, not only maintained the desired portfolio asset-allocation, but also increased return.

Boosting Returns With Rebalancing

Best wishes
Taylor

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Re: The Three-Fund Portfolio

Post by Allan Roth » Thu Apr 05, 2018 6:08 pm

Thanks Taylor. I can't predict markets but it's pretty easy to predict human behavior. Markets surge; people buy. Market plunge; people sell. As Dan Ariely puts it, people are "Predictably Irrational."

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Re: The Three-Fund Portfolio

Post by LadyGeek » Thu Apr 05, 2018 6:12 pm

The wiki has some background info: Rebalancing

Also: Allan Roth
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Re: The Three-Fund Portfolio

Post by pkcrafter » Sat Apr 07, 2018 12:30 pm

Thank you, Taylor. Thank you Allan. Good stuff.

Paul
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Re: The Three-Fund Portfolio

Post by Starchild » Sat Apr 14, 2018 5:55 pm

220volt wrote:
Tue Mar 27, 2018 12:48 pm
I was looking at the most common index funds used to comprise three-fund portfolio (SP500, Total Stock, Large-Cap and Total World), and I was stunned to see how much of a weight only hand full of companies now have. In Total Market Index Fund, top 10 companies comprise almost 19% of total assets!
Big techs like Apple, Microsoft, Google, Facebook, and Amazon alone have over 3 trillion market cap. Even in the VG's Total World index, those companies have a huge sway. It almost doesn't matter which big index you pick, same companies are always there.

If you lay those companies on the graph alongside the whole market, they almost move in unison. Almost like those big tech stocks are the market! I don't know, it just doesn't seem that having a single big equity fund will provide adequate diversification.

Maybe some slice and dice or at least sprinkle with mid and small caps is in order? Perhaps for the US equity portion of the three-fund portfolio instead of owning a single fund, use:
SP500 50%
Mid-cap 30%
Small-cap 20%

But then again, the reason why those big techs have gotten so huge is because they are the best performers, so do we really want to tilt away from them?
I’ve been contemplating the tech weight myself. However, like you said, they’re driving the profits. Realistically, they only make up about 10% of SP500. You can do something like VYM dividend etf that eliminates goog fb and amzn, but has underperformed in comparison.

The thing is, if one of those companies fell off a cliff it wouldn’t matter, for the whole market would panic and fall off with it imo.

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Re: The Three-Fund Portfolio

Post by cegibbs » Sun Apr 15, 2018 11:12 am

Hi Taylor and Alan,

Thanks for you to help investors.

I’m trying to understand more about using the international index within the 3-Fund Portfolio. My question is that the international index hasn’t performed as well within its category relative to other international funds when compared to how the US Total Market has performed with its domestic peers. That seems to be the case for almost any time period. Does this mean that international markets are less efficient as compared with US markets and therefore it may make some reasonable sense to use low cost active management for international?

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Re: The Three-Fund Portfolio

Post by fortyofforty » Sun Apr 15, 2018 1:17 pm

cegibbs wrote:
Sun Apr 15, 2018 11:12 am
Hi Taylor and Alan,

Thanks for you to help investors.

I’m trying to understand more about using the international index within the 3-Fund Portfolio. My question is that the international index hasn’t performed as well within its category relative to other international funds when compared to how the US Total Market has performed with its domestic peers. That seems to be the case for almost any time period. Does this mean that international markets are less efficient as compared with US markets and therefore it may make some reasonable sense to use low cost active management for international?
That has been the perennial argument by active managers and their proponents. They always find some "inefficient" slice of the equity market of which they can take advantage. However, each time you dig deeper, you find they underperform. We've heard it about international investing, emerging market investing, small capitalization investing, microcap investing... The list is long, and always fluid. I tend to believe that equity markets everywhere are efficient or at least as efficient as necessary to prevent active stock pickers to exploit supposed mispricing or inefficiencies.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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International: Index or Managed

Post by Taylor Larimore » Sun Apr 15, 2018 4:43 pm

cegibbs wrote:
Sun Apr 15, 2018 11:12 am
Hi Taylor and Alan,

Thanks for you to help investors.

I’m trying to understand more about using the international index within the 3-Fund Portfolio. My question is that the international index hasn’t performed as well within its category relative to other international funds when compared to how the US Total Market has performed with its domestic peers. That seems to be the case for almost any time period. Does this mean that international markets are less efficient as compared with US markets and therefore it may make some reasonable sense to use low cost active management for international?
cegibbs:

According to Morningstar, Vanguard Total International Index Fund (VTIAX) returned 27.55% in 2017. It is in the top 26% of all funds in its category (index and managed) for quarterly trailing 15 year returns.


The Dow Jones SPIVA report for the 2017 year-end reported: "Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed."

Stick with total market index funds and you will do just fine.

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

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"A successful index fund investor goes through four phases"

Post by Taylor Larimore » Sun Apr 22, 2018 11:25 am

Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three-Fund Portfolio

Post by tsturbo » Sun Apr 22, 2018 12:39 pm

Yes, that pretty much sums it up! Thanks for sharing this Taylor :moneybag

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Re: "A successful index fund investor goes through four phases"

Post by dbr » Sun Apr 22, 2018 2:17 pm

Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
That's good. This board is firmly lodged at 3) with a cameo role for 4).

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Re: "A successful index fund investor goes through four phases"

Post by fortyofforty » Sun Apr 22, 2018 2:22 pm

dbr wrote:
Sun Apr 22, 2018 2:17 pm
Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
That's good. This board is firmly lodged at 3) with a cameo role for 4).
If the board goes full-on 4), there won't be much need for the board. Or most investment books, either. :beer A simple pamphlet would suffice, such as that generously provided by William Bernstein, If You Can.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: "A successful index fund investor goes through four phases"

Post by abuss368 » Sun Apr 22, 2018 7:13 pm

Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
I did recently read this post by Rick and my experience is it is very true indeed. Simplicity is the master key to financial success!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: The Three-Fund Portfolio

Post by zengolf2011 » Sun Apr 22, 2018 9:42 pm

Rick described my personal investing journey perfectly.

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Re: "A successful index fund investor goes through four phases"

Post by Rick Ferri » Mon Apr 23, 2018 8:28 am

Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
Thank you, Taylor!

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The Education of an Index Investor: flounders in darkness, finds enlightenment, overcomplicates strategy, embraces simplicity.

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Re: "A successful index fund investor goes through four phases"

Post by 2015 » Mon Apr 23, 2018 11:34 am

dbr wrote:
Sun Apr 22, 2018 2:17 pm
Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor
That's good. This board is firmly lodged at 3) with a cameo role for 4).
Yes! You hit a home run with that one. :beer

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Re: The Three-Fund Portfolio

Post by wwhan » Mon Apr 23, 2018 5:44 pm

Yes, so true about four phases and in the end simple is good.

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Re: The Three-Fund Portfolio vs VBIAX

Post by Jackson12 » Tue Apr 24, 2018 12:32 pm

Taylor Larimore wrote:
Mon Jan 22, 2018 10:06 pm
Roger:

This is not the place to have a lengthy discussion about a single balanced index fund (VBIAX) for retirees vs. The Three-Fund Portfolio. There are many variables including the one you mentioned: "The inability to re-balance asset allocations if your goals change from the 60/40 solution." There is also the fact that, if you have both a taxable and tax-advantaged account, one fund will be in the wrong type account. Also VBIAX has no international stocks.

Mr. Bogle has written a long Introduction for my upcoming book, "The Bogleheads' Three-Fund Portfolio," so we can assume he endorses it also.

I believe that in most cases The Three-Fund Portfolio is the better choice.

Best wishes.
Taylor

I've got that book on pre- order. When I have the urge to check my portfolio too often, I simply slide over to my book's order status instead and wait for the urge to pass. So, in its own way, the book is already helping me stay the course, even before its release. :happy

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Re: The Three-Fund Portfolio

Post by A440 » Sat Apr 28, 2018 3:02 pm

One of the things I planned to do when I turned 50 was simplify my portfolio. So,yesterday I moved all our tax advantaged accounts to the Three-Fund Portfolio model. I have also begun to move some of my taxable accounts to VTSAX from less tax-efficient funds. Many thanks to Taylor for his help and recommendations!

Now let's see about the other things on the list to do when I turn 50:
-Increase Roth IRA...check!
-Get a colonoscopy... :shock:

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Endorsements for The Three-Fund Portfolio

Post by Taylor Larimore » Sat May 05, 2018 12:16 pm

Bogleheads:

The Bogleheads' Three-Fund Portfolio book is scheduled for release next month. My publisher (Wiley) sent an early draft to four well-known and very knowledgeable mutual fund authorities asking for their endorsement. These are their replies:
"The vast majority of investment products and services are overwrought and cost too much, but the Bogleheads are here to say that it doesn't have to be that way. In this single, easy-to-digest volume, lead Boglehead Taylor Larimore shares how three low-cost mutual funds are all you really need for a successful investing life, whether you're just starting out or have been a serious investor for years. 'The majesty of simplicity' have long been Taylor's watchwords; this book is the embodiment of those virtues." -- Christine Benz, Senior columnist, Morningstar Inc. and author of 30-Minute Money Solutions: A step-by-Step Guide to Managing Your Finances.
"Simple, Powerful and Unbeatable. Read it, execute it, then retire in comfort and sleep like a baby." -- Wm. T. Bernstein, best selling author of The Investor's Manifesto."
Forget picking individual stocks. Stop hunting for star money managers. Don't bother guessing the market's direction. All this is nonsense that'll enrich Wall Street at your expense. Instead, listen to Taylor Larimore, buy three total market index funds--and put yourself on the far surer road to financial success" -- Jonathan Clements, founder of HumbleDollar.com and author of From Here to Financial Happiness.
Usually if it's too good to be true, it is. Taylor's investment strategy is an exception to the rule. Most investors will be far better off if they follow Taylor's simple, yet sophisticated strategy. It will have a profound impact on people's lives. -- Gus Sauter, Former Chief Investment Officer of the Vanguard Group.
Best wishes.
Taylor
Last edited by Taylor Larimore on Tue May 29, 2018 7:51 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Endorsements for The Three-Fund Portfolio

Post by ClaycordJCA » Sun May 06, 2018 3:33 am

Taylor Larimore wrote:
Sat May 05, 2018 12:16 pm
Bogleheads:

The Bogleheads' Three-Fund Portfolio book is scheduled for release next month. My publisher (Wiley) sent an early draft to three well-known and very knowledgeable mutual fund authorities asking for their endorsement. These are their replies:
"The vast majority of investment products and services are overwrought and cost too much, but the Bogleheads are here to say that it doesn't have to be that way. In this single, easy-to-digest volume, lead Boglehead Taylor Larimore shares how three low-cost mutual funds are all you really need for a successful investing life, whether you're just starting out or have been a serious investor for years. 'The majesty of simplicity' have long been Taylor's watchwords; this book is the embodiment of those virtues." -- Christine Benz, Senior columnist, Morningstar Inc. and author of 30-Minute Money Solutions: A step-by-Step Guide to Managing Your Finances.
"Simple, Powerful and Unbeatable. Read it, execute it, then retire in comfort and sleep like a baby." -- Wm. T. Bernstein, best selling author of The Investor's Manifesto."
Forget picking individual stocks. Stop hunting for star money managers. Don't bother guessing the market's direction. All this is nonsense that'll enrich Wall Street at your expense. Instead, listen to Taylor Larimore, buy three total market index funds--and put yourself on the far surer road to financial success" -- Jonathan Clements, founder of HumbleDollar.com and author of From Here to Financial Happiness.
Best wishes.
Taylor
Borrowing from Facebook: Like!!! :D

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Re: Endorsements for The Three-Fund Portfolio

Post by abuss368 » Sun May 06, 2018 12:25 pm

Taylor Larimore wrote:
Sat May 05, 2018 12:16 pm
Bogleheads:

The Bogleheads' Three-Fund Portfolio book is scheduled for release next month. My publisher (Wiley) sent an early draft to three well-known and very knowledgeable mutual fund authorities asking for their endorsement. These are their replies:
"The vast majority of investment products and services are overwrought and cost too much, but the Bogleheads are here to say that it doesn't have to be that way. In this single, easy-to-digest volume, lead Boglehead Taylor Larimore shares how three low-cost mutual funds are all you really need for a successful investing life, whether you're just starting out or have been a serious investor for years. 'The majesty of simplicity' have long been Taylor's watchwords; this book is the embodiment of those virtues." -- Christine Benz, Senior columnist, Morningstar Inc. and author of 30-Minute Money Solutions: A step-by-Step Guide to Managing Your Finances.
"Simple, Powerful and Unbeatable. Read it, execute it, then retire in comfort and sleep like a baby." -- Wm. T. Bernstein, best selling author of The Investor's Manifesto."
Forget picking individual stocks. Stop hunting for star money managers. Don't bother guessing the market's direction. All this is nonsense that'll enrich Wall Street at your expense. Instead, listen to Taylor Larimore, buy three total market index funds--and put yourself on the far surer road to financial success" -- Jonathan Clements, founder of HumbleDollar.com and author of From Here to Financial Happiness.
Best wishes.
Taylor
Hi Taylor -

That is excellent news and you should be very proud. I can not wait to read the book! It will be a great piece and addition to my bookshelf right next to Jack's books.

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

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Re: "Boosting Returns With Rebalancing"

Post by epicahab » Mon May 07, 2018 8:25 pm

Taylor Larimore wrote:
Wed Apr 04, 2018 10:10 am
Bogleheads:

Allan Roth, CPA, CFP, has completed an 18-year study about the effects of rebalancing The Three-Fund Portfolio. He found that rebalancing, not only maintained the desired portfolio asset-allocation, but also increased return.

Boosting Returns With Rebalancing

Best wishes
Taylor
Great stuff, thank you. Do you think this would also be the case with an 80/20 allocation of Total Stock and Total Bond? I have never done automatic rebalancing.

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Rebalancing?

Post by Taylor Larimore » Mon May 07, 2018 9:08 pm

Great stuff, thank you. Do you think this would also be the case with an 80/20 allocation of Total Stock and Total Bond? I have never done automatic rebalancing.
epicahab:

I don't know the answer (the period chosen in the study had similar stock/bond returns).

The primary purpose of rebalancing is to maintain the desired stock/bond ratio--not return.

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

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Re: The Three-Fund Portfolio

Post by shorekat14 » Wed May 09, 2018 7:10 am

This is probably a very rookie question (and if it's misplaced, apologies in advance) - but what is the advantage of going with a three-fund portfolio (US equity/non-US equity/fixed income) vs. a single target fund?

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Re: The Three-Fund Portfolio

Post by fortyofforty » Wed May 09, 2018 7:55 am

shorekat14 wrote:
Wed May 09, 2018 7:10 am
This is probably a very rookie question (and if it's misplaced, apologies in advance) - but what is the advantage of going with a three-fund portfolio (US equity/non-US equity/fixed income) vs. a single target fund?
Two that come to mind are tax implications and rebalancing bonus.

With a customized 3F, you can place bonds in tax sheltered accounts, while more tax efficient funds are placed in taxable accounts. You are also able to harvest losses to count against future gains. Plus, you can rebalance as you desire, potentially capturing the benefits of buying low and selling high. Just a couple of thoughts.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: The Three-Fund Portfolio

Post by oldcomputerguy » Wed May 09, 2018 8:04 am

Starchild wrote:
Mon Mar 19, 2018 10:06 pm
I'm also not sold on VBTLX. It just doesn't perform as well as other fixed income funds, and and on top of that, is currently getting beat up.
Certainly, if you feel you're better off investing in other bond funds, that's up to you.

However, with respect, the use of the word "currently" would seem to indicate a tendency to base your investing decisions on what is "currently" happening, which doesn't seem the best course to me for the long term. I believe there is no asset class in existence that at one time or another did not get "beat up" over the short term.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: The Three-Fund Portfolio

Post by oldcomputerguy » Wed May 09, 2018 8:08 am

A440 wrote:
Sat Apr 28, 2018 3:02 pm
-Get a colonoscopy... :shock:
Oh, don't remind me ..................... :wink:
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: The Three-Fund Portfolio or a Target Fund?

Post by Taylor Larimore » Wed May 09, 2018 8:19 am

This is probably a very rookie question (and if it's misplaced, apologies in advance) - but what is the advantage of going with a three-fund portfolio (US equity/non-US equity/fixed income) vs. a single target fund?
shorekat14:

It is not a "rookie" question because the Three-Fund and a low-cost Target Fund are both excellent portfolios.

The primary advantage of The Three-Fund Portfolio is that it is a more tax-efficient portfolio if the investor has both tax-advantaged accounts (IRA, 401k, etc.) and taxable accounts. The Three-Fund Portfolio allows the investor to place the two tax-efficient funds (Total Stock Market and Total International) in the taxable account (or tax-advantaged account) and place the tax inefficient fund (Total Bond Market) in a tax-advantaged account.

The primary advantage of the Target Fund is its one-fund simplicity and its increased diversification. If all accounts are tax-advantaged, I recommend a simple low-cost target fund designed by company experts.

There is more than one road to Dublin.


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

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Re: "A successful index fund investor goes through four phases"

Post by bltn » Wed May 09, 2018 2:03 pm

Taylor Larimore wrote:
Sun Apr 22, 2018 11:25 am
Bogleheads:

Rick Ferri recently made a post which Three-Fund Portfolio investors will appreciate:
A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds
Best wishes.
Taylor


Accurately and simply summarized.

I trying to help my children and a nephew avoid steps one and two and thereby get an earlier start on their best accumulation strategy.
I hope they don t have to learn the hard way like I did. All of my early educators were working on commission!!!

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