The Three-Fund Portfolio

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saltycaper
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Re: The Three-Fund Portfolio

Post by saltycaper » Fri Feb 09, 2018 2:49 pm

cegibbs wrote:
Fri Feb 09, 2018 11:42 am

Also, when I used the Vanguard asset allocation link you provided it suggested I go with a 70/30 portfolio. I’m currently 65/35. Should I make that change at the same time?
Nobody can decide your asset allocation for you, including Vanguard. If you want to be 65/35, don't change just because you used Vanguard's calculator. A number of posters have found their calculator to be on the "aggressive" side compared to what they themselves decided. There is no reason to believe 70/30 is more "correct" than 65/35. A 5% difference is unlikely to be material to most investors anyway.
Quod vitae sectabor iter?

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Re: The Three-Fund Portfolio

Post by ankonaman » Sat Feb 10, 2018 12:59 pm

How would the new Global Wellington Fund Admiral Shares stack up against the 3 fund portfolio?

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Re: The Three-Fund Portfolio

Post by tj » Sat Feb 10, 2018 1:46 pm

ankonaman wrote:
Sat Feb 10, 2018 12:59 pm
How would the new Global Wellington Fund Admiral Shares stack up against the 3 fund portfolio?
Which allocation of the 3 fund? In any event, way too early to know.

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Re: The Three-Fund Portfolio

Post by CABob » Sat Feb 10, 2018 2:03 pm

tj wrote:
Sat Feb 10, 2018 1:46 pm
ankonaman wrote:
Sat Feb 10, 2018 12:59 pm
How would the new Global Wellington Fund Admiral Shares stack up against the 3 fund portfolio?
Which allocation of the 3 fund? In any event, way too early to know.
And it most likely would depend on the time frame used for comparison.
Bob

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Taylor Larimore
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Average is Better

Post by Taylor Larimore » Mon Feb 12, 2018 3:01 pm

Bogleheads:

Does it pay to be "average" by using total market index funds? Here is the answer:

In 2010 Bruce Berkowitz, manager of the Fairholme Fund (FAIRX) was named "Morningstar Fund Manager of the Decade." Investors poured into the fund.

On February 9, 2018, Morningstar compared the average annual returns of the Fairholme Fund (FAIRX still managed by Mr. Berkowitz) with Vanguard Total Stock Market Index Fund (VTSAX):

FUND................... 1-year----- 3-years--- 5-years---10-years*

VTSAX.................+14.83%------10.37%----13.52%-----9.51%

FAIRX...................-18.50%------1.35%------3.93% -----4.12%

* $10,000 invested in VTSAX became $24,660. $10,000 invested in FAIRX became $14,870

Best wishes.
Taylor
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Re: Average is Better

Post by MichaelRpdx » Mon Feb 12, 2018 6:23 pm

Taylor Larimore wrote:
Mon Feb 12, 2018 3:01 pm
Bogleheads:

Does it pay to be "average" by using total market index funds? Here is the answer:

In 2010 Bruce Berkowitz, manager of the Fairholme Fund (FAIRX) was named "Morningstar Fund Manager of the Decade." Investors poured into the fund.

On February 9, 2018, Morningstar compared the average annual returns of the Fairholme Fund (FAIRX still managed by Mr. Berkowitz) with Vanguard Total Stock Market Index Fund (VTSAX):

FUND................... 1-year----- 3-years--- 5-years---10-years*

VTSAX.................+14.83%------10.37%----13.52%-----9.51%

FAIRX...................-18.50%------1.35%------3.93% -----4.12%

* $10,000 invested in VTSAX became $24,660. $10,000 invested in FAIRX became $14,870

Best wishes.
Taylor
"But, but," some will object, "VTSAX is 100% equities. What about a balanced portfolio like a Three Fund investor would have?"

OK? What about? I present three examples:

FUND..................................... 1-year----- 3-years--- 5-years---10-years*
LifeStrategy Mod Growth......16.47% ----- 8.12% ----- 8.63% ---- 6.14%
Balanced Index Fund Adm ...15.56% ----- 8.82% --- 10.03% ---- 7.75%
Wellesley Income Fund Inv ...10.51% ----- 6.45% ---- 7.12% ---- 7.26%
Be Appropriate && Follow Your Curiosity

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Taylor Larimore
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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Mon Feb 12, 2018 7:53 pm

"VTSAX is 100% equities. What about a balanced portfolio like a Three Fund investor would have?"
Michael:

My comparison, was between the stock "Fund of the Decade" and the stock fund in The Three-Fund Portfolio which should please Three-Fund investors. Nothing more.

Best wishes.
Taylor
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Re: The Three-Fund Portfolio

Post by MichaelRpdx » Mon Feb 12, 2018 8:02 pm

Taylor Larimore wrote:
Mon Feb 12, 2018 7:53 pm
"VTSAX is 100% equities. What about a balanced portfolio like a Three Fund investor would have?"
Michael:

My comparison, was between the stock "Fund of the Decade" and the stock fund in The Three-Fund Portfolio which should please Three-Fund investors. Nothing more.

Best wishes.
Taylor
Sure, I understand, fair enough.
But someone will object. I mean, besides me. And FAIRX, at least as of today is not a "stock" fund.
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Taylor Larimore
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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Mon Feb 12, 2018 8:27 pm

And FAIRX, at least as of today is not a "stock" fund.
Michael:

Very interesting. Morningstar still puts FAIRX in its Large Value (stock fund) category:

http://portfolios.morningstar.com/fund/ ... ture=en-US

In any event, investors who invested in "The Fund of the Decade" badly trailed Vanguard Total Stock Market Index Fund in "The Three-Fund Portfolio."

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

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Re: The Three-Fund Portfolio

Post by jeroly » Tue Feb 13, 2018 8:06 am

I apologize for not finding if this has already been discussed in the 42-page thread...

Why not have a fourth fund for international bonds in the portfolio?

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Re: The Three-Fund Portfolio

Post by dbr » Tue Feb 13, 2018 9:46 am

jeroly wrote:
Tue Feb 13, 2018 8:06 am
I apologize for not finding if this has already been discussed in the 42-page thread...

Why not have a fourth fund for international bonds in the portfolio?
1. There probably needs to be more evidence that it would be particularly helpful.
2. It adds some complexity also starting a "slippery slope" process for other changes and additions.
3. Why not, indeed. 3 fund can perfectly well be 4 fund without any big deal about it.

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Tue Feb 13, 2018 12:04 pm

jeroly wrote:
Tue Feb 13, 2018 8:06 am
I apologize for not finding if this has already been discussed in the 42-page thread...

Why not have a fourth fund for international bonds in the portfolio?
jeroly:

This post on page 11 in the Three-Fund Portfolio thread answers your question:
Adding Total International Bond Index Fund?
Post by Taylor Larimore » Fri Oct 25, 2013 5:02 pm

Norske77 wrote:
What is Taylor's thinking on adding this fund and making four?
You ask a very good question and one that I carefully considered when Vanguard first offered their Total International Bond Fund (VTIBX and Admiral VTABX) on May 31, 2013, and later increased its allocation on May 26, 2015 to 30% of nominal fixed income exposure.

It is always tempting to add additional funds to The Three Fund Portfolio and overlook their additional costs, risk and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.

It is notable that a Target portfolio with a 20% bond allocation will have only 6% international bonds. This is almost meaningless. Adding a Total International Bond fund inside a single Target or Life-Strategy fund adds no complexity to the investor.

Vanguard's diversified Total Bond Market Index Fund has a proven record of providing safety in a portfolio. For example, during the 2008 bear market when Total Stock Market fell -37%, Total Bond market gained +5%.

Adding Total International Bond fund to The Three Fund Portfolio has several disadvantages: Political risk, higher expense ratios, longer duration, relatively week credit quality and more complexity.

Mr. Bogle said this in a Morningstar interview:
The other thing that's typical of an industry that's going kind of marketing-wild is think about [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.
Boglehead author and adviser, Bill Bernstein wrote this article: Don't Bother With International Bonds

During the 2015 Boglehead Conference, my expert co-author, Rick Ferri, told an interviewer: "Forget foreign bonds."

Morningstar article:Vanguard's Total International Bond exchange-traded fund is a poor investment today (8-01-14)

For the above reasons, I will not add Total International Bond Index to the very successful Three Fund Portfolio.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The Three-Fund Portfolio Book Cover

Post by Taylor Larimore » Tue Feb 13, 2018 10:12 pm

Image
Best wishes.
Taylor
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Re: The Three-Fund Portfolio Book Cover

Post by abuss368 » Tue Feb 13, 2018 10:26 pm

Taylor Larimore wrote:
Tue Feb 13, 2018 10:12 pm
Image
Best wishes.
Taylor
That is incredible! I can not wait to read this book!
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 Book Cover

Post by Calygos » Fri Feb 16, 2018 9:38 pm

abuss368 wrote:
Tue Feb 13, 2018 10:26 pm
Taylor Larimore wrote:
Tue Feb 13, 2018 10:12 pm
Image
Best wishes.
Taylor
That is incredible! I can not wait to read this book!
Agreed, thank you, Taylor! I gave my copy of the first Bogleheads' Guide to a colleague (who's now at Vanguard!) and I'm stoked about thie one!

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Re: The Three-Fund Portfolio

Post by HuckFinn » Sun Feb 18, 2018 7:50 pm

Excited to read the book too. Thanks Taylor!

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Re: The Three-Fund Portfolio

Post by kayanco » Mon Feb 19, 2018 5:35 pm

I thought of asking this question from another thread:

Those that hold the 3-fund portfolio, why is there no consideration that in the future, the USD could be weaker than, let's say the pound or euro?

- Is this not much of a risk? Or too small of a risk to worry about?
- Or, does holding the 3-fund portfolio (e.g. with Vanguard, Fidelity, etc), already protect against such a scenario? (maybe due to holding international stocks as well, e.g. Vanguard total international).
- If none of the above, what would a US investor do to protect against a scenario that the US currency would be much weaker than today?
- Does the answer depend on if you want to retire in the US, or abroad? If so, can you please explain how and what could be done in each case?

Thanks.

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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Tue Feb 20, 2018 4:37 pm

kayanco:

This Investopedia article, 3 Strategies to Mitigate Currency Risk should answer your question.

If you want more information about Currency Risk, please start a new topic on the "Investing - Theory, News & General" forum.

Thank you and best wishes.
Taylor
Last edited by Taylor Larimore on Tue Feb 20, 2018 8:33 pm, edited 1 time in total.
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Re: The Three-Fund Portfolio

Post by saltycaper » Tue Feb 20, 2018 6:14 pm

Taylor Larimore wrote:
Tue Feb 20, 2018 4:37 pm

For your information, Vanguard Total International Index Fund is hedged against currency risk.
Total Int'l Stock Index is not hedged. Maybe you are thinking of Total Int'l Bond Index. (Poster was referring to Total Int'l Stock Index.)
Quod vitae sectabor iter?

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Taylor Larimore
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Re: The Three-Fund Portfolio

Post by Taylor Larimore » Tue Feb 20, 2018 8:29 pm

saltycaper wrote:
Tue Feb 20, 2018 6:14 pm
Total Int'l Stock Index is not hedged. Maybe you are thinking of Total Int'l Bond Index. (Poster was referring to Total Int'l Stock Index.)
saltycaper:

Good catch. I will edit my post. Thank you for the correction.

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

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Re: The Three-Fund Portfolio

Post by Barry Barnitz » Wed Feb 21, 2018 3:44 pm

Hi:

We would like to thank Taylor for granting our affiliate blog an interview about his upcoming book on the three-fund portfolio.

Link: Interview with Taylor Larimore, author of The Bogleheads Guide to the Three-Fund Portfolio.

regards,
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Re: The Three-Fund Portfolio

Post by Neus » Fri Feb 23, 2018 9:12 am

I'm quite newbie here

Still confused how total return strategy with 3 fund covers spending when stock market crashes say 40% from previous high, do we still withdraw at initially decided rate (say 3% withdrawal rate) or?

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Re: The Three-Fund Portfolio

Post by longinvest » Fri Feb 23, 2018 9:17 am

Neus wrote:
Fri Feb 23, 2018 9:12 am
I'm quite newbie here

Still confused how total return strategy with 3 fund when stock market crashes say 40% from previous high, do we still withdraw at initially decided rate (say 3% withdrawal rate), or not drawing until the market bounce back
This is probably beyond the scope of this Three-Fund Portfolio discussion. I would try to learn about flexible withdrawal models such as our Wiki's Variable percentage withdrawal (VPW) which is a great companion to the Three-Fund Portfolio.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Re: The Three-Fund Portfolio

Post by dbr » Fri Feb 23, 2018 9:19 am

Neus wrote:
Fri Feb 23, 2018 9:12 am
I'm quite newbie here

Still confused how total return strategy with 3 fund when stock market crashes say 40% from previous high, do we still withdraw at initially decided rate (say 3%), or not drawing
Total return is not a strategy. Total return is how you do investment accounting correctly. All withdrawal plans have to start with correct accounting or the results are garbage. Dividend investing is an investment selection tactic the benefits or lack of benefits of which are elucidated by calculating return.

As far as withdrawal planning, there are extensive discussions in many threads that address this. Some current ones are:

viewtopic.php?f=10&t=241773

viewtopic.php?f=10&t=120430

viewtopic.php?f=10&t=241608

Neus
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Re: The Three-Fund Portfolio

Post by Neus » Fri Feb 23, 2018 9:39 am

dbr wrote:
Fri Feb 23, 2018 9:19 am
Neus wrote:
Fri Feb 23, 2018 9:12 am
I'm quite newbie here

Still confused how total return strategy with 3 fund when stock market crashes say 40% from previous high, do we still withdraw at initially decided rate (say 3%), or not drawing
Total return is not a strategy. Total return is how you do investment accounting correctly. All withdrawal plans have to start with correct accounting or the results are garbage. Dividend investing is an investment selection tactic the benefits or lack of benefits of which are elucidated by calculating return.

As far as withdrawal planning, there are extensive discussions in many threads that address this. Some current ones are:

viewtopic.php?f=10&t=241773

viewtopic.php?f=10&t=120430

viewtopic.php?f=10&t=241608
Thank you, will check it out

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Re: The Three-Fund Portfolio

Post by cfs » Fri Feb 23, 2018 12:15 pm

I have a pre-order for Mister Taylor's book on the 3-Funder, and my plan is to donate it to my local library when received. Thank you Mister Barry for the link to the interview with Mister Taylor. Gracias por leer ~cfs~
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Re: The Three-Fund Portfolio

Post by abuss368 » Thu Mar 01, 2018 10:26 pm

Barry Barnitz wrote:
Wed Feb 21, 2018 3:44 pm
Hi:

We would like to thank Taylor for granting our affiliate blog an interview about his upcoming book on the three-fund portfolio.

Link: Interview with Taylor Larimore, author of The Bogleheads Guide to the Three-Fund Portfolio.

regards,
Hi Barry -

Great interview with Taylor! I can not wait to read the book and have a hardcover copy on my bookshelf!

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: The Three-Fund Portfolio

Post by Taylor Larimore » Sat Mar 03, 2018 3:50 pm

Bogleheads:

Jonathan Clements is one of the most knowledgeable financial writers in the business. Mr. Clements spent almost 20 years at The Wall Street Journal, where he wrote over 1,000 personal finance columns. He left the Journal to join Citigroup where he became their Director of Financial Education . Mr. Clements is also the author of six highly regarded financial books. He now writes a personal finance newsletter, The Humble Dollar.

This is his first sentence in the March edition of Humble Dollar:

"TRYING TO BEAT THE MARKET isn’t just a risky endeavor that will almost certainly end in failure. It’s also unnecessary and, arguably, an astonishing waste of money and time." -- something Bogleheads have learned from our mentor, Jack Bogle!

Making A Difference

Thank you Jack and Jonathan.

Best wishes.
Taylor
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Re: The Three-Fund Portfolio

Post by fortyofforty » Thu Mar 15, 2018 9:52 pm

Thank you Taylor, and also thanks to Mel and Jack. Well done.
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Re: The Three-Fund Portfolio

Post by Barry Barnitz » Fri Mar 16, 2018 12:25 pm

Hi all:

Wiley has now listed the table of contents for The Bogleheads Guide to the Three-Fund Portfolio. I have added this table to the blog page devoted to the book: The Bogleheads’ Guide to the Three-Fund Portfolio.

regards,
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Re: The Three-Fund Portfolio

Post by Starchild » 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.

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Re: The Three-Fund Portfolio

Post by fortyofforty » Tue Mar 20, 2018 5:55 am

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 would venture to guess that very few of those on this board actually use the classic "Three Fund Portfolio", at least in the proportions posited by William Bernstein years ago. It is a solid, fundamental starting point, though, and deviation should be justified. I am interested in reading the Bogleheads' take on the subject.
"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 dbr » Tue Mar 20, 2018 8:20 am

fortyofforty wrote:
Tue Mar 20, 2018 5:55 am
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 would venture to guess that very few of those on this board actually use the classic "Three Fund Portfolio", at least in the proportions posited by William Bernstein years ago. It is a solid, fundamental starting point, though, and deviation should be justified. I am interested in reading the Bogleheads' take on the subject.
My take is to agree with you. It is a solid, fundamental starting point and deviation should be justified. "Currently getting beat up" is not the kind of language that generates justification. It is a fact that there are many variations in fixed income that don't make enough difference to worry about. The symptom that proves that is the amount of discussion about fixed income that does not resolve the issue in any particular way. Other than possibly investing in arguable factor concentrations I don't think one can establish that there is anything to gain by concentrating in sectors/indices. To "believe in" is not the kind of language that generates justification.

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Re: The Three-Fund Portfolio

Post by PhilosophyAndrew » Tue Mar 20, 2018 9:06 am

I use a three-fund portfolio and select my own asset allocation as per Taylor's conception. To me, the ideas that Taylor has worked to hard to develop and promote in this thread is the "classic," and it doesn't contain a fixed asset allocation.

I don't know how many members use this portfolio, but Taylor has done a compelling job demonstrating how it aligns with the Boglehead investing philosophy; I consider it a representation of that philosophy par excellence.

It is of course fine not to use this portfolio, or to modify it to meet your specific needs -- dogmatism isn't part of the Bogleheads philosophy! That said, I agree with dbr that a desire to chase performance in bond fonds does not constitute a rational modification of the three fund portfolio approach, but rather constitutes a different approach altogether.

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Re: The Three-Fund Portfolio

Post by john4546 » Tue Mar 20, 2018 11:34 am

Once the decision is made to use the Boglehead 3-fund portfolio, now how does one decide the percentage allocation for each fund?

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Re: The Three-Fund Portfolio

Post by TwstdSista » Tue Mar 20, 2018 11:44 am

john4546 wrote:
Tue Mar 20, 2018 11:34 am
Once the decision is made to use the Boglehead 3-fund portfolio, now how does one decide the percentage allocation for each fund?
A "simple" answer: Start with what proportion of equities and bonds you would like. Some use age in bonds, or age -10 or even age -20. Once you've decided that, decide what percentage of equities you would like to hold in international stock. Suggestions usually vary between 0% and 50%.

You can also check out what percentages are used in Target Date funds relative to the year you would like to retire and either mimic those proportions or deviate therefrom based on what you would prefer.

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Re: The Three-Fund Portfolio

Post by PhilosophyAndrew » Tue Mar 20, 2018 11:46 am

John4546, this is a much-discussed topic within this thread and across the Bogheheads site. Educating yourself by reading several of those discussions is the first thing I would do. One basic idea is that your allocation to equities is dependent on both your need for risk and your ability to assume risk; there are many rules-of-thumb based on ages and stages of life discussed here, and probably a broad consensus about what constitutes a reasonable range of options for various life stages.


The Vanguard asset allocation questionnaire at URL https://personal.vanguard.com/us/FundsInvQuestionnaire may be a useful resource, as might the Bogleheads wiki's discussion of this topic at URL https://www.bogleheads.org/wiki/Asset_allocation.

A second decision required to implement the three fund portfolio is the split between domestic and international equities. Again, this is a much-discussed topic here, although my sense is that there is less consensus about this than about asset allocation. You can read a general discussion about international investing in the wiki page at URL https://www.bogleheads.org/wiki/Domestic/International.

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Re: The Three-Fund Portfolio

Post by mhadden1 » Tue Mar 20, 2018 1:12 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.
Nothing wrong with that. Me too, regarding learning.
I also like investing in companies or emphasizing certain sectors/indexs I believe in.
I don't consider believing to be a very good basis - but neither do I have any confidence in my picking skills.
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.
For TFP you don't need the best one - just low-cost, diversified, usually intermediate duration. For people that use a 401k, it makes things easier if the 401k offers such a fund.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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

Post by saltycaper » Tue Mar 20, 2018 1:26 pm

[Split into a separate thread from: The Three-Fund Portfolio --admin LadyGeek]
PhilosophyAndrew wrote:
Tue Mar 20, 2018 9:06 am

I don't know how many members use this portfolio, but Taylor has done a compelling job demonstrating how it aligns with the Boglehead investing philosophy; I consider it a representation of that philosophy par excellence.
I think the three-fund portfolio is a failure with regard to representing Boglehead philosophy (at least "par excellence") as it allows and even encourages the investor to attempt to beat the market by tweaking the US to ex-US stock ratio. You can find ex-post justifications for the "correct" ratio based on whether US or ex-US outperformed, which is very much at odds with the general philosophy espoused. A lesser internal inconsistency would be the idea that "bonds are for safety" while then selecting a bond fund that includes bonds that have some equity-like risk. That is not so much a judgement on the portfolio, which I think is a very good portfolio, but rather on some of the rationale behind selecting the portfolio.
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PhilosophyAndrew
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Re: The Three-Fund Portfolio

Post by PhilosophyAndrew » Tue Mar 20, 2018 1:50 pm

Saltycaper, how specifically does the three fund portfolio "encourages" market-timing of the sort you describe? I'm not following your logic.

If ones does not wish to use a specific bond fund in a three fund portfolio, one may choose not to do so. Of course, not all bond funds are suitable for inclusion in the portfolio. But how does this reflect badly on the portfolio itself or constitute an inconsistency in the conception of the portfolio? Here too I'm confused by what you are saying.

Finally, your final sentence is confusing. If you believe that the portfolio design "encourages" investors to make bad choices and you believe that the portfolio design is "internally inconsistent," then, you are judging the portfolio design itself.

So, is your claim only that some investors make mistakes deciding to use this portfolio, selecting funds to use in the portfolio, or determining their asset allocation and international equities allocations? Or is your claim that the design of the portfolio is contradictory and also encourages investors to market time? Or have I missed your point and because you are claiming something else?

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Re: The Three-Fund Portfolio

Post by saltycaper » Tue Mar 20, 2018 3:07 pm

PhilosophyAndrew wrote:
Tue Mar 20, 2018 1:50 pm
Saltycaper, how specifically does the three fund portfolio "encourages" market-timing of the sort you describe? I'm not following your logic.

If ones does not wish to use a specific bond fund in a three fund portfolio, one may choose not to do so. Of course, not all bond funds are suitable for inclusion in the portfolio. But how does this reflect badly on the portfolio itself or constitute an inconsistency in the conception of the portfolio? Here too I'm confused by what you are saying.

Finally, your final sentence is confusing. If you believe that the portfolio design "encourages" investors to make bad choices and you believe that the portfolio design is "internally inconsistent," then, you are judging the portfolio design itself.

So, is your claim only that some investors make mistakes deciding to use this portfolio, selecting funds to use in the portfolio, or determining their asset allocation and international equities allocations? Or is your claim that the design of the portfolio is contradictory and also encourages investors to market time? Or have I missed your point and because you are claiming something else?
Well, I didn't say anything about market timing. I suppose you could make the case that by deviating from the market, and by judging success based on how much one outperforms the market, that might encourage market timing, but I hadn't thought of that initially.

I disagree that I am judging the portfolio. I didn't say it encourages the investor to make bad choices, only that it allows or encourages an attempt to beat the market, which is against Boglehead philosophy implicitly, and I think it's against Taylor's philosophy explicitly. I didn't say that was bad, though I can see most people making that leap. In other words, I do think it's bad if you are trying to adhere strictly to Boglehead philosophy (or Taylor's), but I don't think you have to do that.

The bond fund recommended for the portfolio is Vanguard Total Bond Market. Of course you could use something else, just like you could choose not to use the three-fund portfolio at all, but that is the recommended fund. I'm confident Taylor would not object to using a Treasury fund, but it's pretty clear he favors Total Bond. It doesn't make sense to me to say bonds should be for "safety" and then include bonds with equity-like risk. It's not that the consequences are likely to be severe (it probably matters little), but it does bring the internal consistency of the philosophy into question.

The larger problem investors seem to have with this portfolio is that it doesn't default to a market-cap weighting for equities. This is a natural consequence of claiming that one should not attempt to beat the market but then suggesting people can hold something other than what the market holds. That's contradictory and unhelpful. It seems to be a natural tendency then to think, "Which one will perform better?" Judging by the dozens of threads we see on what percentage to allocate to ex-US equities, that's exactly what happens. Lest you take this for a judgment of the portfolio itself, an alternative to changing the portfolio is to change the pillar of the philosophy that says not to try to beat the market.
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Re: The Three-Fund Portfolio

Post by PhilosophyAndrew » Tue Mar 20, 2018 4:10 pm

Saltycaper, which markets are you referring to when you conclude the three-fund portfolio encourages investors to "beat the market"? It requires investing in three separate markets, and so will gain less than 100% of the upside when one of those markets is increasing and will also gain less than 100% of the downside when prices in one of these markets is decreasing. Likewise, what market are you referring to when you say the fund "deviates from the market"? The portfolio will not simply to track any one of those three markets; the individual index funds within the portfolio do a reasonably accurate job tracking their individual benchmarks, but the aggregate results of a three-fund investment will depend on one's asset allocations.

I agree with you that individual investors should not vary these allocations (namely, of stock to bond and of domestic to international equity) to attempt to time the markets because, say, they believe one of the three constituents is irrationally valued. To do this would be an individual choice inconsistent with Boglehead values and inconsistent with the intent of the three-fund portfolio as described by Taylor and others. However, there are reasonable ways to support varying asset allocations that do not involve this kind of mistake, and I consider it a virtue of the portfolio that investors may set asset allocations to meet their long-term needs.

For example, consider the great differences of thought in how much of one's equities should be allocated internationally. I suppose it is possible to argue there should only be a single permissible international allocation, but it isn't obvious that this is so. Personally, I have decided to roughly mirror the global market cap in my equity allocation by allocating 50% to US funds and 50% to international -- but I don't think that people who make other choices are making a mistake or that the three fund portfolio is flawed because it permits more than one allocation as long as they aren't doing so to time the market.

Finally, there are no single set of recommended funds for the portfolio. The wiki lists several recommendations for funds and ETFs from several non-Vanguard brokerages, and choosing to use one of those funds (or any other equivalent index fund) is not tantamount to deciding not to use the three fund portfolio. So, to think that implementing the portfolio requires using Vanguard funds is a mistake. Replacing the bond fund with treasuries strikes me as an interesting variation -- but, again, it seems dogmatic to ding the portfolio for allowing people to choose to invest in bond funds if they don't share your concerns about those.

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Re: The Three-Fund Portfolio

Post by zengolf2011 » 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.

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Re: The Three-Fund Portfolio

Post by saltycaper » Tue Mar 20, 2018 11:11 pm

PhilosophyAndrew:

I think only one ex-US allocation is permissible if the investment philosophy is based in part on not attempting to beat the market and not trying to pull the levers of various risk factors on the equity side of the portfolio. That allocation is the global market-cap weighted allocation, however it may be defined. To recommend otherwise is to have an inconsistency that repeatedly shows up on the forum, either when others explicitly point it out like I am trying to do now, or when a newcomer wonders what their international allocation should be, and they look to the benefits and fundamental concepts behind the three-fund portfolio, and they can't find an answer. Maybe this will be better addressed in the upcoming book.

Once you open yourself up to assessing different types of equity risk, and certainly if you are trying to beat the market, there are many directions you can take to diverge from the market portfolio. While anyone is free to do as they please, if someone is forming an investment philosophy to share with others, I see it as their burden to be able to explain not only why they are advocating one direction but also why they are avoiding alternative options. If the reason for avoiding the alternatives undermines their own strategy, there is an issue with the philosophy or with the recommendations that are coming out of it.

As for the bond component, yes, non-Vanguard funds are often substituted, but the recommendations are all essentially aggregate bond index funds, which include corporate bonds. If you're using bonds to control equity-like risk--one lever that may be pulled with impunity, it seems--maybe you aren't using the best lever.

The logic behind the three-fund portfolio suggests to me a two-fund portfolio for US investors: Total World Stock plus Treasuries. That's not too far from what a lot of three-funders hold, which I find kind of funny, given the amount of discussion over the difference.
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Re: The Three-Fund Portfolio

Post by fortyofforty » Wed Mar 21, 2018 6:21 am

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.
Well said. At least your lessons weren't too costly, if at all.
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Re: The Three-Fund Portfolio

Post by UpperNwGuy » Wed Mar 21, 2018 6:58 am

saltycaper wrote:
Tue Mar 20, 2018 11:11 pm
I think only one ex-US allocation is permissible if the investment philosophy is based in part on not attempting to beat the market and not trying to pull the levers of various risk factors on the equity side of the portfolio. That allocation is the global market-cap weighted allocation, however it may be defined.
Do you consider the risks of US stocks and international stocks to be the same for a US investor? If not, how would you adjust for those risks?

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Re: The Three-Fund Portfolio

Post by saltycaper » Wed Mar 21, 2018 7:32 am

UpperNwGuy wrote:
Wed Mar 21, 2018 6:58 am

Do you consider the risks of US stocks and international stocks to be the same for a US investor? If not, how would you adjust for those risks?
I don't think the risks are the same, but that doesn't mean an adjustment is needed, just as other slices of the equity market have different risks for which adjustments are not necessarily needed. But if an adjustment is required or permitted, the way to make those adjustments should be part of the investment philosophy rather than violations of the philosophy.
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Re: The Three-Fund Portfolio

Post by dbr » Wed Mar 21, 2018 8:27 am

saltycaper wrote:
Wed Mar 21, 2018 7:32 am
UpperNwGuy wrote:
Wed Mar 21, 2018 6:58 am

Do you consider the risks of US stocks and international stocks to be the same for a US investor? If not, how would you adjust for those risks?
I don't think the risks are the same, but that doesn't mean an adjustment is needed, just as other slices of the equity market have different risks for which adjustments are not necessarily needed. But if an adjustment is required or permitted, the way to make those adjustments should be part of the investment philosophy rather than violations of the philosophy.
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.

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Re: The Three-Fund Portfolio

Post by LadyGeek » 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]


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

Post by PhilosophyAndrew » 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.

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