Three Fund Portfolio Excluding TSP?

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RamblinDoc
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Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 13, 2018 4:38 am

First, I'd like to thank everyone - I've spent many weeks reading through these forums. I've learned a lot as I embrace the BH mindset.

Currently, we have a traditional TSP (401k) and his and hers Vanguard Roth IRA accounts. We are very early into the accumulation phase. For convenience, as I learn more, I have an L-fund in the TSP and a Vanguard Lifestrategy fund in both Roths that match our desired AA. We are in our mid 30's and think 80/20 stocks/bonds are appropriate.

At some point, I'd like to transition into a three-fund portfolio utilizing:
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)

I know that we are supposed to look at all of the accounts together. However, what are people's thoughts about keeping an L-fund in the TSP (it has a super low ER and then I don't have to worry about allocating and reblancing the odd fund options)? Then, I could just look at the two Roths and a taxable account to balance the three fund portfolio. (I will be wise and keep bonds out of the taxable account.)

Also, if the Roths are large enough to fund Admiral shares of each of the three funds, is there any reason not to keep all three funds in both Roths? Rebalancing should still not be difficult and then one fund won't outgrow the other as much. Thoughts?

Thank you!

nps
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Re: Three Fund Portfolio Excluding TSP?

Post by nps » Tue Feb 13, 2018 5:45 am

RamblinDoc wrote:
Tue Feb 13, 2018 4:38 am
I know that we are supposed to look at all of the accounts together. However, what are people's thoughts about keeping an L-fund in the TSP (it has a super low ER and then I don't have to worry about allocating and reblancing the odd fund options)? Then, I could just look at the two Roths and a taxable account to balance the three fund portfolio. (I will be wise and keep bonds out of the taxable account.)
Unless I am missing something, it sounds like you're saying you'll use an L fund then set your other accounts such that your portfolio as a whole reflects your desired AA. If so you would be following the advice to look at all accounts together. Do you think it means something else?

rkhusky
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Re: Three Fund Portfolio Excluding TSP?

Post by rkhusky » Tue Feb 13, 2018 7:49 am

RamblinDoc wrote:
Tue Feb 13, 2018 4:38 am
I know that we are supposed to look at all of the accounts together. However, what are people's thoughts about keeping an L-fund in the TSP (it has a super low ER and then I don't have to worry about allocating and reblancing the odd fund options)? Then, I could just look at the two Roths and a taxable account to balance the three fund portfolio. (I will be wise and keep bonds out of the taxable account.)

Also, if the Roths are large enough to fund Admiral shares of each of the three funds, is there any reason not to keep all three funds in both Roths? Rebalancing should still not be difficult and then one fund won't outgrow the other as much. Thoughts?

Thank you!
L Fund in TSP and 3-Fund in Roth and taxable is fine. All three funds in each Roth is fine (assume you plan to keep the same AA for both).

If you don't mind some extra complexity, it may be worthwhile to keep most of your bonds in the TSP and mostly stocks in Roth, because you will eventually have to pay taxes on the Traditional TSP, while you won't for the Roth. Therefore, having investments with the best chance for growth in Roth and slower growing investments in Traditional has some advantage.

You could also use muni bond funds in taxable, if you want to replicate the AA of the TSP and IRA's there too. Although, muni bonds only make sense at a certain tax bracket level (~24% or higher).

Will you try to match the AA of the L-fund in your other accounts?

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 13, 2018 10:42 am

nps wrote:
Tue Feb 13, 2018 5:45 am
RamblinDoc wrote:
Tue Feb 13, 2018 4:38 am
I know that we are supposed to look at all of the accounts together. However, what are people's thoughts about keeping an L-fund in the TSP (it has a super low ER and then I don't have to worry about allocating and reblancing the odd fund options)? Then, I could just look at the two Roths and a taxable account to balance the three fund portfolio. (I will be wise and keep bonds out of the taxable account.)

Unless I am missing something, it sounds like you're saying you'll use an L fund then set your other accounts such that your portfolio as a whole reflects your desired AA. If so you would be following the advice to look at all accounts together. Do you think it means something else?

Yes, that is my plan. I can rebalance the three other accounts no more than annually to reflect the desired AA as the TSP changes.

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 13, 2018 10:45 am

rkhusky wrote:
Tue Feb 13, 2018 7:49 am
RamblinDoc wrote:
Tue Feb 13, 2018 4:38 am
I know that we are supposed to look at all of the accounts together. However, what are people's thoughts about keeping an L-fund in the TSP (it has a super low ER and then I don't have to worry about allocating and reblancing the odd fund options)? Then, I could just look at the two Roths and a taxable account to balance the three fund portfolio. (I will be wise and keep bonds out of the taxable account.)

Also, if the Roths are large enough to fund Admiral shares of each of the three funds, is there any reason not to keep all three funds in both Roths? Rebalancing should still not be difficult and then one fund won't outgrow the other as much. Thoughts?

Thank you!
L Fund in TSP and 3-Fund in Roth and taxable is fine. All three funds in each Roth is fine (assume you plan to keep the same AA for both).

If you don't mind some extra complexity, it may be worthwhile to keep most of your bonds in the TSP and mostly stocks in Roth, because you will eventually have to pay taxes on the Traditional TSP, while you won't for the Roth. Therefore, having investments with the best chance for growth in Roth and slower growing investments in Traditional has some advantage.

You could also use muni bond funds in taxable, if you want to replicate the AA of the TSP and IRA's there too. Although, muni bonds only make sense at a certain tax bracket level (~24% or higher).

Will you try to match the AA of the L-fund in your other accounts?
That’s a great idea. Perhaps I’ll put most of the bonds into TSP then the rest into a desired L-fund. Then domestic and international stock in the other three accounts.

I have a spreadsheet and use Personal Capital to help keep my AA straight.

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 13, 2018 10:48 am

If most or all of bonds are in the TSP, would you suggest a 50:50 of F:G? I’ve seen that in other threads.

TSR
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Re: Three Fund Portfolio Excluding TSP?

Post by TSR » Tue Feb 13, 2018 11:09 am

I have 100% of my TSP in L2040. I maintain a separate three-fund portfolio in my Fidelity Roth that roughly matches that allocation. It's super easy. I think that's the best course of action for you.

One reason I think this that is not directly responsive to your question, is that I think it's good to have some "strategy buy-in" from your spouse. If your spouse's Roth is a three-fund portfolio, he or she will have some experience looking at how the different asset classes interact and will have to take more ownership over rebalancing. That is important long-term when people start dying or divorcing or whatever (not to be morbid!). Anyway, lots of good options here, and best of luck!

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 13, 2018 11:13 am

TSR wrote:
Tue Feb 13, 2018 11:09 am
I have 100% of my TSP in L2040. I maintain a separate three-fund portfolio in my Fidelity Roth that roughly matches that allocation. It's super easy. I think that's the best course of action for you.

One reason I think this that is not directly responsive to your question, is that I think it's good to have some "strategy buy-in" from your spouse. If your spouse's Roth is a three-fund portfolio, he or she will have some experience looking at how the different asset classes interact and will have to take more ownership over rebalancing. That is important long-term when people start dying or divorcing or whatever (not to be morbid!). Anyway, lots of good options here, and best of luck!
Great insight. Thank you!

rkhusky
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Re: Three Fund Portfolio Excluding TSP?

Post by rkhusky » Tue Feb 13, 2018 4:16 pm

RamblinDoc wrote:
Tue Feb 13, 2018 10:45 am
That’s a great idea. Perhaps I’ll put most of the bonds into TSP then the rest into a desired L-fund. Then domestic and international stock in the other three accounts.

I have a spreadsheet and use Personal Capital to help keep my AA straight.
That should work if you plan to do most of your rebalancing within the TSP. Note that you are allowed two rebalancing moves per month in the TSP, which should be plenty. Plus the G Fund is a very good deal for those that have access to it.

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Wed Feb 14, 2018 11:12 am

rkhusky wrote:
Tue Feb 13, 2018 4:16 pm
RamblinDoc wrote:
Tue Feb 13, 2018 10:45 am
That’s a great idea. Perhaps I’ll put most of the bonds into TSP then the rest into a desired L-fund. Then domestic and international stock in the other three accounts.

I have a spreadsheet and use Personal Capital to help keep my AA straight.
That should work if you plan to do most of your rebalancing within the TSP. Note that you are allowed two rebalancing moves per month in the TSP, which should be plenty. Plus the G Fund is a very good deal for those that have access to it.
Thanks!

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grabiner
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Re: Three Fund Portfolio Excluding TSP?

Post by grabiner » Wed Feb 14, 2018 10:28 pm

RamblinDoc wrote:
Tue Feb 13, 2018 10:48 am
If most or all of bonds are in the TSP, would you suggest a 50:50 of F:G? I’ve seen that in other threads.
I prefer 100% G. For most investments, there is a trade-off between risk and return; higher-yielding bonds lose more money if interest rates rise or if bonds default. The G fund is an exception, as it has zero risk, but has the return of an intermediate-term bond fund.
David Grabiner

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Thu Feb 15, 2018 3:53 pm

grabiner wrote:
Wed Feb 14, 2018 10:28 pm
RamblinDoc wrote:
Tue Feb 13, 2018 10:48 am
If most or all of bonds are in the TSP, would you suggest a 50:50 of F:G? I’ve seen that in other threads.
I prefer 100% G. For most investments, there is a trade-off between risk and return; higher-yielding bonds lose more money if interest rates rise or if bonds default. The G fund is an exception, as it has zero risk, but has the return of an intermediate-term bond fund.
Thanks!

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blaugranamd
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Re: Three Fund Portfolio Excluding TSP?

Post by blaugranamd » Thu Feb 15, 2018 6:08 pm

FWIW, rebalancing in the TSP is about as easy as it gets. Takes about 2 minutes to do the math on your own once a year then you literally pull up the page, type in your desired allocation and it's done automatically.
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Mon Feb 19, 2018 12:52 am

TSR wrote:
Tue Feb 13, 2018 11:09 am
I have 100% of my TSP in L2040. I maintain a separate three-fund portfolio in my Fidelity Roth that roughly matches that allocation. It's super easy. I think that's the best course of action for you.

One reason I think this that is not directly responsive to your question, is that I think it's good to have some "strategy buy-in" from your spouse. If your spouse's Roth is a three-fund portfolio, he or she will have some experience looking at how the different asset classes interact and will have to take more ownership over rebalancing. That is important long-term when people start dying or divorcing or whatever (not to be morbid!). Anyway, lots of good options here, and best of luck!
To follow-up:
Do you worry about minimizing tax free growth by having bonds in your Roth?

Dogsbestfriend
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Re: Three Fund Portfolio Excluding TSP?

Post by Dogsbestfriend » Mon Feb 19, 2018 9:16 am

RamblinDoc,

I think your proposed approach is fine, but if you're up to it, you can probably optimize it a bit with fairly minimal effort, as others have suggested. We are in a similar situation regarding age and AA, so I'll share how I do it:

- All bond allocation (20%) is in TSP (G fund). Any remaining TSP money is in C:S at 4:1 to approximate the total stock market.
- All international allocation (30% of stocks; 24% of total portfolio) is in taxable (Vanguard total intl).
- Everything else (Roth IRAs, any remaining taxable space) is in Vanguard total stock market.

This has worked very well for me. Rebalancing is very easy, and everything is simple. Your approach may be even easier/simpler, and my guess is that it would probably perform very similarly. I've recently been re-thinking this a little bit, in that some of my TSP is Roth TSP, and unfortunately, you can't specify how your Roth vs. Traditional TSP is invested. I would like my G fund to be in the Traditional and my C/S funds to be in the Roth portion, but TSP just spreads your allocation evenly, so that's something to consider if you have any Roth TSP. Not sure what, if anything, I can do about that though.

Best,
Dogsbestfriend

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Mon Feb 19, 2018 1:16 pm

Dogsbestfriend wrote:
Mon Feb 19, 2018 9:16 am
RamblinDoc,

I think your proposed approach is fine, but if you're up to it, you can probably optimize it a bit with fairly minimal effort, as others have suggested. We are in a similar situation regarding age and AA, so I'll share how I do it:

- All bond allocation (20%) is in TSP (G fund). Any remaining TSP money is in C:S at 4:1 to approximate the total stock market.
- All international allocation (30% of stocks; 24% of total portfolio) is in taxable (Vanguard total intl).
- Everything else (Roth IRAs, any remaining taxable space) is in Vanguard total stock market.

This has worked very well for me. Rebalancing is very easy, and everything is simple. Your approach may be even easier/simpler, and my guess is that it would probably perform very similarly. I've recently been re-thinking this a little bit, in that some of my TSP is Roth TSP, and unfortunately, you can't specify how your Roth vs. Traditional TSP is invested. I would like my G fund to be in the Traditional and my C/S funds to be in the Roth portion, but TSP just spreads your allocation evenly, so that's something to consider if you have any Roth TSP. Not sure what, if anything, I can do about that though.

Best,
Dogsbestfriend
That’s a great strategy - Thanks!

TSR
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Re: Three Fund Portfolio Excluding TSP?

Post by TSR » Tue Feb 20, 2018 11:43 am

RamblinDoc wrote:
Mon Feb 19, 2018 12:52 am
TSR wrote:
Tue Feb 13, 2018 11:09 am
I have 100% of my TSP in L2040. I maintain a separate three-fund portfolio in my Fidelity Roth that roughly matches that allocation. It's super easy. I think that's the best course of action for you.

One reason I think this that is not directly responsive to your question, is that I think it's good to have some "strategy buy-in" from your spouse. If your spouse's Roth is a three-fund portfolio, he or she will have some experience looking at how the different asset classes interact and will have to take more ownership over rebalancing. That is important long-term when people start dying or divorcing or whatever (not to be morbid!). Anyway, lots of good options here, and best of luck!
To follow-up:
Do you worry about minimizing tax free growth by having bonds in your Roth?
Sorry for the delay on this. No, I don't worry too much about that. I think it's a perfectly reasonable approach, but I value simplicity above most other things, and for me this is the simplest approach. That's not just due to laziness, but because complexity can lead to tinkering for me. Overloading bonds in your TSP will also force you to confront the seemingly existential question for some TSP participants of whether the G fund is somehow fundamentally better than the F fund, thus justifying overweighting G while lacking any real evidence supporting that. Truth is, I think that the tax effects of having some 25-35% of your Roth holdings (which are themselves only going to be, say, 20% of your total holdings in the long run) in bonds will be somewhat muted, so you should probably just do what makes the most overall sense to you. Again, what the other folks are suggesting here is WELL within the bounds of what is mathematically reasonable and what is relatively easy to pull off. I'm just describing what I do and why. Both good options.

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tadamsmar
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Re: Three Fund Portfolio Excluding TSP?

Post by tadamsmar » Tue Feb 20, 2018 12:11 pm

RamblinDoc wrote:
Tue Feb 13, 2018 10:48 am
If most or all of bonds are in the TSP, would you suggest a 50:50 of F:G? I’ve seen that in other threads.
I use a higher percentage of G for my bond allocation (my overall bond allocation for my overall AA). I use something similar to the F:G allocations in the L funds. Those L fund allocations are designed to optimize risk-adjusted return.

I notice that Gabiner is recommending 100% G for your bond allocation. That's another common recommendation here.

I have seen other approaches where people pair G with more of a non-government bond allocation instead of F or a total bond fund. This is on the theory that G kind of covers the federal government bond allocation.

There are only 2 AA models that I know of that include the G fund: (1) The L funds and (2) financialengines.com. I think that government employees and Vanguard users can use a free version of financialengines.com.
Last edited by tadamsmar on Tue Feb 20, 2018 12:19 pm, edited 1 time in total.

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 20, 2018 12:18 pm

TSR wrote:
Tue Feb 20, 2018 11:43 am
RamblinDoc wrote:
Mon Feb 19, 2018 12:52 am
TSR wrote:
Tue Feb 13, 2018 11:09 am
I have 100% of my TSP in L2040. I maintain a separate three-fund portfolio in my Fidelity Roth that roughly matches that allocation. It's super easy. I think that's the best course of action for you.

One reason I think this that is not directly responsive to your question, is that I think it's good to have some "strategy buy-in" from your spouse. If your spouse's Roth is a three-fund portfolio, he or she will have some experience looking at how the different asset classes interact and will have to take more ownership over rebalancing. That is important long-term when people start dying or divorcing or whatever (not to be morbid!). Anyway, lots of good options here, and best of luck!
To follow-up:
Do you worry about minimizing tax free growth by having bonds in your Roth?
Sorry for the delay on this. No, I don't worry too much about that. I think it's a perfectly reasonable approach, but I value simplicity above most other things, and for me this is the simplest approach. That's not just due to laziness, but because complexity can lead to tinkering for me. Overloading bonds in your TSP will also force you to confront the seemingly existential question for some TSP participants of whether the G fund is somehow fundamentally better than the F fund, thus justifying overweighting G while lacking any real evidence supporting that. Truth is, I think that the tax effects of having some 25-35% of your Roth holdings (which are themselves only going to be, say, 20% of your total holdings in the long run) in bonds will be somewhat muted, so you should probably just do what makes the most overall sense to you. Again, what the other folks are suggesting here is WELL within the bounds of what is mathematically reasonable and what is relatively easy to pull off. I'm just describing what I do and why. Both good options.
Good points - thanks!

RamblinDoc
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Re: Three Fund Portfolio Excluding TSP?

Post by RamblinDoc » Tue Feb 20, 2018 12:19 pm

tadamsmar wrote:
Tue Feb 20, 2018 12:11 pm
RamblinDoc wrote:
Tue Feb 13, 2018 10:48 am
If most or all of bonds are in the TSP, would you suggest a 50:50 of F:G? I’ve seen that in other threads.
I use a higher percentage of G for my bond allocation (my overall bond allocation for my overall AA). I use something similar to the F:G allocations in the L funds. Those L fund allocations are designed to optimize risk-adjusted return.

I notice that Gabiner is recommending 100% G for your bond allocation. That's another common recommendation here.

I have seen other approaches where people pair G with more of a non-government bond allocation instead of F or a total bond fund. This is on the theory that G kind of covers the federal government bond allocation.
Thanks!

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tadamsmar
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Re: Three Fund Portfolio Excluding TSP?

Post by tadamsmar » Tue Feb 20, 2018 12:29 pm

rkhusky wrote:
Tue Feb 13, 2018 7:49 am
If you don't mind some extra complexity, it may be worthwhile to keep most of your bonds in the TSP and mostly stocks in Roth, because you will eventually have to pay taxes on the Traditional TSP, while you won't for the Roth. Therefore, having investments with the best chance for growth in Roth and slower growing investments in Traditional has some advantage.
Not sure if that makes sense.

Lets say you have $75 in a Roth and $100 in the TSP and a 25% tax bracket.

If one doubles while the other stays the same, you will have $225 in after-tax money to spend.

It does not matter whether the Roth or the TSP grows faster, you still end up with $225.

In a seeming paradox, Uncle Sam gets more money if the TSP grows faster, but you don't get less money!

It is slightly better to remove the estimated taxes for the purpose calculating your AA. Base your AA on an estimate of after tax dollars.

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