The One-Fund Portfolio as a default suggestion

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Wed Oct 16, 2019 8:34 pm

Jeff Albertson wrote:
Tue Oct 15, 2019 9:31 pm
Mike Piper (https://www.bogleheads.org/wiki/Mike_Piper) has written a few articles on changing to a single LifeStrategy fund.

https://obliviousinvestor.com/my-portfolio-updated/
https://obliviousinvestor.com/more-on-s ... owth-fund/
Thanks for the links.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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305pelusa
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Re: The One-Fund Portfolio as a default suggestion

Post by 305pelusa » Wed Oct 16, 2019 8:47 pm

longinvest wrote:
Tue Oct 15, 2019 4:03 pm
305pelusa, unfortunately your simple analysis only considers the immediate tax on distributions in the taxable account while ignoring the overall long-term impact of putting the possibly-slower growing asset into the tax shelter.
It wasn't an analysis; it was just showing the tax inefficiency on the balanced fund vs a stock fund. There are other factors of course, like how using an actual 3-Fund portfolio will allow TLH, producing further tax advantages.

Depending on whether the tax shelter is deferred or free, one can make an argument as to whether you'd prefer it was a fast or slow-growing asset. But in general, bonds go great even in Roths.
longinvest wrote:
Tue Oct 15, 2019 4:03 pm
The asset location problem is a complex one. Fortunately, a mirrored asset allocation is a simple and good enough solution to deal with the uncertainty.
Complex is certainly subjective. I find asset location to be a straightforward but I can understand that you'd find it complex. I think it's worthwhile to think through however because, as you saw above, the tax savings are significant. It's like buying the exact same index funds, but with +0.5% expense ratio. That's a lot of mula.

There's good information online about tax efficiency. Our wiki is a great place to start:
https://www.bogleheads.org/wiki/Vanguar ... tributions

First sentence is right on the money: "The Vanguard Balanced Index Fund is a questionable candidate for placement in taxable accounts."

I also recommend you read The Bogleheads Guide to Investing. It should answer questions you have about taxable location. I know it sounds overwhelmingly complex at first but it really isn't. And well worth the costs! As we say "Costs Matter!".

Hope that helps :wink: :sharebeer

marcwd
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Re: The One-Fund Portfolio as a default suggestion

Post by marcwd » Wed Oct 16, 2019 11:03 pm

longinvest wrote:
Wed Oct 16, 2019 8:01 pm
marcwd wrote:
Tue Oct 15, 2019 9:25 pm
longinvest wrote:
Mon Oct 14, 2019 11:21 am
I really enjoy the simplicity of having a globally-diversified balanced portfolio using a single exchange-traded fund.

What about you?
Simple, yes. But have you acknowledged that using a single all-in-one fund precludes any possibility of tax loss harvesting?
An all-in-one fund (or ETF) doesn't distribute losses; it uses them to offset future gains. It's really nice to let the fund manager deal with all the complexity. :wink:
The management of all-in-one funds typically doesn’t involve or utilize the conventional techniques of tax loss harvesting. And, again, putting the issue of complexity aside for a moment, the holders of such funds lose the opportunity themselves to tax loss harvest.

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Wed Oct 16, 2019 11:04 pm

Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 8:47 pm
longinvest wrote:
Tue Oct 15, 2019 4:03 pm
The asset location problem is a complex one. Fortunately, a mirrored asset allocation is a simple and good enough solution to deal with the uncertainty.
Complex is certainly subjective. I find asset location to be a straightforward but I can understand that you'd find it complex.
"Complex" has a different meaning than "complicated". Here's an explanation:
What is the difference between “complicated” and “complex”?

Complex is used to refer to the level of components in a system. If a problem is complex, it means that it has many components. Complexity does not evoke difficulty.

On the other hand, complicated refers to a high level of difficulty. If a problem is complicated, there might be or might not be many parts but it will certainly take a lot of hard work to solve.


-- English Language & Usage Stack Exchange
Here's a post by Rick Ferri. I've added some emphasis on points pertinent to this thread.
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
When using the same asset allocation in all accounts*, the proper comparison to make in a taxable account is between holding Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) and holding four separate funds for domestic stocks (36%), international stocks (24%), domestic bonds (28%), and international bonds (12%). I think that the difference in tax efficiency and expense ratio, between these two taxable portfolios, is small enough.

* Our wiki calls this a mirrored asset allocation.

Best regards,

longinvest
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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305pelusa
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Re: The One-Fund Portfolio as a default suggestion

Post by 305pelusa » Wed Oct 16, 2019 11:34 pm

longinvest wrote:
Wed Oct 16, 2019 11:04 pm
Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 8:47 pm
longinvest wrote:
Tue Oct 15, 2019 4:03 pm
The asset location problem is a complex one. Fortunately, a mirrored asset allocation is a simple and good enough solution to deal with the uncertainty.
Complex is certainly subjective. I find asset location to be a straightforward but I can understand that you'd find it complex.
I wrote "complex"; I didn't write "complicated".

Here's a post by Rick Ferri. I've added some emphasis on points pertinent to this thread.
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
When using the same asset allocation in all accounts*, the proper comparison to make in a taxable account is between holding Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) and holding four separate funds for domestic stocks (36%), international stocks (24%), domestic bonds (28%), and international bonds (12%). I think that the difference in tax efficiency and expense ratio, between these two taxable portfolios, is small enough.

* Our wiki calls this a mirrored asset allocation.

Best regards,

longinvest
Evidently if you'll use a mirrored asset allocation, then it will be more funds and will not be more tax efficient. The point is not to mirror the allocation but segregate the allocation based on tax efficiency.

You don't need the same AA, in every account. What matters is your entire portolio, like Rick says.

Hence you could have BND in tax deferred, and VT in taxable. This will behave very similar to Lifestrategy Growth, is the same number of funds (one in each account), and will save significantly in taxes. If tax-sheltered space is larger than you want in bonds, just add more VT in there. Otherwise, more BND in taxable. So for a total of 3 funds, you can essentially mimic the performance of a mirrored balanced allocation of 2 funds, with serious tax savings.

Each individual will have to decide if they're willing to improve their returns by 0.5% a year by taking on the "complexity" of one more fund (3 funds total). Since the 3-Fund portolio is already the most popular BH go-to, I suspect most BHs would GLADLY make that trade to keep the costs much lower.

Cheers mate,
305

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Thu Oct 17, 2019 12:28 am

Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 11:34 pm
longinvest wrote:
Wed Oct 16, 2019 11:04 pm
Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 8:47 pm
longinvest wrote:
Tue Oct 15, 2019 4:03 pm
The asset location problem is a complex one. Fortunately, a mirrored asset allocation is a simple and good enough solution to deal with the uncertainty.
Complex is certainly subjective. I find asset location to be a straightforward but I can understand that you'd find it complex.
"Complex" has a different meaning than "complicated". Here's an explanation:
What is the difference between “complicated” and “complex”?

Complex is used to refer to the level of components in a system. If a problem is complex, it means that it has many components. Complexity does not evoke difficulty.

On the other hand, complicated refers to a high level of difficulty. If a problem is complicated, there might be or might not be many parts but it will certainly take a lot of hard work to solve.


-- English Language & Usage Stack Exchange
Here's a post by Rick Ferri. I've added some emphasis on points pertinent to this thread.
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
When using the same asset allocation in all accounts*, the proper comparison to make in a taxable account is between holding Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) and holding four separate funds for domestic stocks (36%), international stocks (24%), domestic bonds (28%), and international bonds (12%). I think that the difference in tax efficiency and expense ratio, between these two taxable portfolios, is small enough.

* Our wiki calls this a mirrored asset allocation.

Best regards,

longinvest

Evidently if you'll use a mirrored asset allocation, then it will be more funds and will not be more tax efficient. The point is not to mirror the allocation but segregate the allocation based on tax efficiency.

You don't need the same AA, in every account. What matters is your entire portolio, like Rick says.

Hence you could have BND in tax deferred, and VT in taxable. This will behave very similar to Lifestrategy Growth, is the same number of funds (one in each account), and will save significantly in taxes. If tax-sheltered space is larger than you want in bonds, just add more VT in there. Otherwise, more BND in taxable. So for a total of 3 funds, you can essentially mimic the performance of a mirrored balanced allocation of 2 funds, with serious tax savings.

Each individual will have to decide if they're willing to improve their returns by 0.5% a year by taking on the "complexity" of one more fund (3 funds total). Since the 3-Fund portolio is already the most popular BH go-to, I suspect most BHs would GLADLY make that trade to keep the costs much lower.

Cheers mate,
305
Here's a contrarian view: Asset Location - Bonds Go In Taxable! -- The White Coat Investor.

As I said, it's a complex problem. Filling tax-advantaged space with a possibly slower-growing asset (bonds) and letting a possibly faster-growing asset (stocks) spill into a taxable account, like you're suggesting, could lead to lower overall after-tax income over a lifetime, an undesirable outcome. Not always. It's uncertain.

There are two schools of thought: one that claims that in tax-advantaged accounts bonds should be prioritized, and another that claims that in tax-advantaged accounts stocks should be prioritized. (Luckily, everybody agrees that all investments should go into tax-advantaged accounts if there's enough space, which is the case for many investors).

Which approach is best, for a specific future time frame, depends on asset returns and tax law changes over that specific time frame.

Here's the thing. If prioritizing bonds in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized stocks in tax-advantaged accounts. If prioritizing stocks in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized bonds in tax-advantaged accounts. A mirrored allocation is thus mathematically guaranteed not to turn out to have been the worst location strategy among these three strategies, even if tax laws change in unexpected ways.

In other words, a mirrored asset allocation might not be optimal, but it is safer (or more resilient in face of an unknown future, if your prefer) than prioritizing the placement of a specific asset in tax-advantaged accounts.

Best regards,

longinvest
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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305pelusa
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Re: The One-Fund Portfolio as a default suggestion

Post by 305pelusa » Thu Oct 17, 2019 6:22 am

longinvest wrote:
Thu Oct 17, 2019 12:28 am
Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 11:34 pm
longinvest wrote:
Wed Oct 16, 2019 11:04 pm
Dear 305pelusa,
305pelusa wrote:
Wed Oct 16, 2019 8:47 pm
longinvest wrote:
Tue Oct 15, 2019 4:03 pm
The asset location problem is a complex one. Fortunately, a mirrored asset allocation is a simple and good enough solution to deal with the uncertainty.
Complex is certainly subjective. I find asset location to be a straightforward but I can understand that you'd find it complex.
"Complex" has a different meaning than "complicated". Here's an explanation:
What is the difference between “complicated” and “complex”?

Complex is used to refer to the level of components in a system. If a problem is complex, it means that it has many components. Complexity does not evoke difficulty.

On the other hand, complicated refers to a high level of difficulty. If a problem is complicated, there might be or might not be many parts but it will certainly take a lot of hard work to solve.


-- English Language & Usage Stack Exchange
Here's a post by Rick Ferri. I've added some emphasis on points pertinent to this thread.
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
When using the same asset allocation in all accounts*, the proper comparison to make in a taxable account is between holding Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) and holding four separate funds for domestic stocks (36%), international stocks (24%), domestic bonds (28%), and international bonds (12%). I think that the difference in tax efficiency and expense ratio, between these two taxable portfolios, is small enough.

* Our wiki calls this a mirrored asset allocation.

Best regards,

longinvest

Evidently if you'll use a mirrored asset allocation, then it will be more funds and will not be more tax efficient. The point is not to mirror the allocation but segregate the allocation based on tax efficiency.

You don't need the same AA, in every account. What matters is your entire portolio, like Rick says.

Hence you could have BND in tax deferred, and VT in taxable. This will behave very similar to Lifestrategy Growth, is the same number of funds (one in each account), and will save significantly in taxes. If tax-sheltered space is larger than you want in bonds, just add more VT in there. Otherwise, more BND in taxable. So for a total of 3 funds, you can essentially mimic the performance of a mirrored balanced allocation of 2 funds, with serious tax savings.

Each individual will have to decide if they're willing to improve their returns by 0.5% a year by taking on the "complexity" of one more fund (3 funds total). Since the 3-Fund portolio is already the most popular BH go-to, I suspect most BHs would GLADLY make that trade to keep the costs much lower.

Cheers mate,
305
Here's a contrarian view: Asset Location - Bonds Go In Taxable! -- The White Coat Investor.

As I said, it's a complex problem. Filling tax-advantaged space with a possibly slower-growing asset (bonds) and letting a possibly faster-growing asset (stocks) spill into a taxable account, like you're suggesting, could lead to lower overall after-tax income over a lifetime, an undesirable outcome. Not always. It's uncertain.

There are two schools of thought: one that claims that in tax-advantaged accounts bonds should be prioritized, and another that claims that in tax-advantaged accounts stocks should be prioritized. (Luckily, everybody agrees that all investments should go into tax-advantaged accounts if there's enough space, which is the case for many investors).

Which approach is best, for a specific future time frame, depends on asset returns and tax law changes over that specific time frame.

Here's the thing. If prioritizing bonds in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized stocks in tax-advantaged accounts. If prioritizing stocks in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized bonds in tax-advantaged accounts. A mirrored allocation is thus mathematically guaranteed not to turn out to have been the worst location strategy among these three strategies, even if tax laws change in unexpected ways.

In other words, a mirrored asset allocation might not be optimal, but it is safer (or more resilient in face of an unknown future, if your prefer) than prioritizing the placement of a specific asset in tax-advantaged accounts.

Best regards,

longinvest
Like I said two posts ago, it depends on whether the space is tax deferred or tax free. With the latter, one can make an argument for a faster growing asset in it. If the former, you will almost certainly come out ahead putting bonds in taxable.

Regardless, what you should have come out with that article is that this is possible to calculate this and make an educated guess based on your particular circumstances. Look at the math the article shows; this is fifth grade stuff. What I see you came out by reading it (and Rick's quote) is "he says it's complicated. So I will do none of it and hedge my bets". Of course, you're free to do as you wish your account.

Cheers mate,
305

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Thu Oct 17, 2019 7:11 am

Dear 305pelusa,
305pelusa wrote:
Thu Oct 17, 2019 6:22 am
longinvest wrote:
Thu Oct 17, 2019 12:28 am
[...]
There are two schools of thought: one that claims that in tax-advantaged accounts bonds should be prioritized, and another that claims that in tax-advantaged accounts stocks should be prioritized. (Luckily, everybody agrees that all investments should go into tax-advantaged accounts if there's enough space, which is the case for many investors).

Which approach is best, for a specific future time frame, depends on asset returns and tax law changes over that specific time frame.

Here's the thing. If prioritizing bonds in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized stocks in tax-advantaged accounts. If prioritizing stocks in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized bonds in tax-advantaged accounts. A mirrored allocation is thus mathematically guaranteed not to turn out to have been the worst location strategy among these three strategies, even if tax laws change in unexpected ways.

In other words, a mirrored asset allocation might not be optimal, but it is safer (or more resilient in face of an unknown future, if your prefer) than prioritizing the placement of a specific asset in tax-advantaged accounts.
[...]
Like I said two posts ago, it depends on whether the space is tax deferred or tax free. With the latter, one can make an argument for a faster growing asset in it. If the former, you will almost certainly come out ahead putting bonds in taxable.
An investor's horizon often spans across multiple decades. Future tax law changes (and asset returns), during these future decades, are currently unknown. Mathematics tell us that a mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset (stocks or bonds) into specific tax-advantaged accounts. In other words, a mirrored asset allocation dampens the consequences of an undesirable outcome.

This forum is filled with similar discussions on the related subject of asset allocation where some investors seek to maximise the possibility of a higher return using a stocks-only or leveraged portfolio, while other investors prudently include bonds into their non-leveraged portfolio to dampen the impact of an undesirable outcome. There are also similar discussions about domestic-only versus globally-diversified investments.

A mirrored asset allocation is one among multiple rational asset location approaches. It's a prudent approach that has the distinct advantage of allowing for the use of a One-Fund Portfolio across all of one's investment accounts, including taxable ones, which significantly simplifies things for a less knowledgeable spouse or caretaker.

Best regards,

longinvest
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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305pelusa
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Re: The One-Fund Portfolio as a default suggestion

Post by 305pelusa » Thu Oct 17, 2019 10:14 am

longinvest wrote:
Thu Oct 17, 2019 7:11 am
Mathematics tell us that a mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset (stocks or bonds) into specific tax-advantaged accounts..
Dear longinvest,
I'd love if you could show/walk me through the math that shows that.

All the best,
305

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Thu Oct 17, 2019 3:06 pm

Dear 305pelusa,
305pelusa wrote:
Thu Oct 17, 2019 10:14 am
longinvest wrote:
Thu Oct 17, 2019 7:11 am
Mathematics tell us that a mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset (stocks or bonds) into specific tax-advantaged accounts..
Dear longinvest,
I'd love if you could show/walk me through the math that shows that.

All the best,
305
I already did in this post.

Best regards,

longinvest
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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305pelusa
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Re: The One-Fund Portfolio as a default suggestion

Post by 305pelusa » Thu Oct 17, 2019 3:18 pm

longinvest wrote:
Thu Oct 17, 2019 3:06 pm
Dear 305pelusa,
305pelusa wrote:
Thu Oct 17, 2019 10:14 am
longinvest wrote:
Thu Oct 17, 2019 7:11 am
Mathematics tell us that a mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset (stocks or bonds) into specific tax-advantaged accounts..
Dear longinvest,
I'd love if you could show/walk me through the math that shows that.

All the best,
305
I already did in this post.

Best regards,

longinvest
That math does not show that a " mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset (stocks or bonds) into specific tax-advantaged accounts."

Perhaps you linked the wrong website?

Thank you once again.

Topic Author
longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Thu Oct 17, 2019 3:25 pm

Dear 305pelusa,

Here it is:
longinvest wrote:
Thu Oct 17, 2019 12:28 am
Here's the thing. If prioritizing bonds in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized stocks in tax-advantaged accounts. If prioritizing stocks in tax-advantaged accounts turns out to be best over one's specific lifetime, a mirrored allocation will turn out to be superior to having prioritized bonds in tax-advantaged accounts. A mirrored allocation is thus mathematically guaranteed not to turn out to have been the worst location strategy among these three strategies, even if tax laws change in unexpected ways.
Best regards,

longinvest
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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fortyofforty
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Re: The One-Fund Portfolio as a default suggestion

Post by fortyofforty » Fri Oct 18, 2019 9:13 am

If the LifeStrategy funds had lower expense ratios, I'd be all in. They are extremely low compared with the rest of the industry, but a bit high compared with other Vanguard index products.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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CWRadio
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Re: The One-Fund Portfolio as a default suggestion

Post by CWRadio » Fri Oct 18, 2019 9:20 am

What one fund in retirement would you use when you are in the distribution phase of your life? Thanks Paul

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Re: The One-Fund Portfolio as a default suggestion

Post by willthrill81 » Fri Oct 18, 2019 9:24 am

CWRadio wrote:
Fri Oct 18, 2019 9:20 am
What one fund in retirement would you use when you are in the distribution phase of your life? Thanks Paul
Wellesley and Wellington would be strong contenders for me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rixer
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Re: The One-Fund Portfolio as a default suggestion

Post by rixer » Fri Oct 18, 2019 9:57 am

fortyofforty wrote:
Fri Oct 18, 2019 9:13 am
If the LifeStrategy funds had lower expense ratios, I'd be all in. They are extremely low compared with the rest of the industry, but a bit high compared with other Vanguard index products.
The fee is low enough to keep me or the wife allocated in a lifestrategy fund. We would probably do worse if we were in charge of keeping the proper allocation in the three fund portfolio where we had to keep in balance ourselves. Unfortunately, I'm not immune to emotional decisions. I sometimes would waffle keeping things balanced if it looked like one of the funds was tanking.
It isn't the portfolio, it's us. We're not to be trusted..... :(
That's one reason we use a LS fund. The other is that the wife is more comfortable with it in case she's left alone.

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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Fri Oct 18, 2019 6:01 pm

CWRadio wrote:
Fri Oct 18, 2019 9:20 am
What one fund in retirement would you use when you are in the distribution phase of your life? Thanks Paul
Paul, in the first post of this thread I suggested this:
longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
  • Portfolio 1: Vanguard LifeStrategy Moderate Growth Fund (VSMGX) -- a globally-diversified balanced index portfolio with a moderate home bias, appropriate for investors of all ages and all wealth levels, or
  • ...
...
My personal preference is for portfolio 1, representing a globally-diversified lifelong 60/40 stocks/bonds allocation because I consider that all investment assets are risky, but in different ways. I think that it's best to broadly diversify across them all lifelong***.

*** In retirement, combining variable portfolio withdrawals with Social Security (possibly delayed to age 70) and a pension (if any) often results into mild total income fluctuations. When necessary, Total Retirement Income fluctuations can be further dampened by using a small part of the portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA) instead of increasing the bond allocation above 40%.
You can find a live illustration of how to use the LifeStrategy Moderate Growth Fund (VSMGX) with the variable percentage withdrawal (VPW) method to get monthly income during retirement in the thread A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test).
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Fri Oct 18, 2019 6:28 pm

rixer wrote:
Fri Oct 18, 2019 9:57 am
The fee is low enough to keep me or the wife allocated in a lifestrategy fund. We would probably do worse if we were in charge of keeping the proper allocation in the three fund portfolio where we had to keep in balance ourselves. Unfortunately, I'm not immune to emotional decisions. I sometimes would waffle keeping things balanced if it looked like one of the funds was tanking.
It isn't the portfolio, it's us. We're not to be trusted..... :(
That's one reason we use a LS fund. The other is that the wife is more comfortable with it in case she's left alone.
Thanks.
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Re: The One-Fund Portfolio as a default suggestion

Post by smectym » Fri Oct 18, 2019 10:59 pm

longinvest wrote:
Mon Oct 14, 2019 3:02 pm
lostdog wrote:
Mon Oct 14, 2019 12:18 pm
longinvest wrote:
Mon Oct 14, 2019 11:21 am
I really enjoy the simplicity of having a globally-diversified balanced portfolio using a single exchange-traded fund.

What about you?
I do also.

I have VT in my taxable account and SPGM in our tax advantaged account. I'll add BNDW later.
Lostdog, this thread is about all-in-one globally-diversified balanced index funds which contain both stocks and bonds. VT, SPGM, and BNDW unfortunately don't qualify. Please read the first post for details.

An appropriately chosen Vanguard Target Retirement Fund would match your desire to increase bonds with age while meeting this thread's One-Fund Portfolio suggestion.

Good luck!


What about Vanguard Tax-Managed Balanced VTMBX? “Doesn’t qualify” as “not globally diversified”? Same with Wellesley VWIAX? I ask because these are the two “one fund” ideas spouse and I are gravitating toward. I’ve already liquidated several all-over-the-map funds and consolidated at VTMBX, and spouse is gradually DCA-ing into Wellesley

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Re: The One-Fund Portfolio as a default suggestion

Post by abuss368 » Sat Oct 19, 2019 10:53 am

In my opinion, and the longer I follow investing the more I am convinced, the right portfolio is the one that works for you. There are so many behavior aspects that impact investing and often are not considered or are perhaps under appreciated.
Last edited by abuss368 on Sat Oct 19, 2019 12:38 pm, edited 3 times in total.
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Re: The One-Fund Portfolio as a default suggestion

Post by vineviz » Sat Oct 19, 2019 11:05 am

smectym wrote:
Fri Oct 18, 2019 10:59 pm
longinvest wrote:
Mon Oct 14, 2019 3:02 pm
lostdog wrote:
Mon Oct 14, 2019 12:18 pm
longinvest wrote:
Mon Oct 14, 2019 11:21 am
I really enjoy the simplicity of having a globally-diversified balanced portfolio using a single exchange-traded fund.

What about you?
I do also.

I have VT in my taxable account and SPGM in our tax advantaged account. I'll add BNDW later.
Lostdog, this thread is about all-in-one globally-diversified balanced index funds which contain both stocks and bonds. VT, SPGM, and BNDW unfortunately don't qualify. Please read the first post for details.

An appropriately chosen Vanguard Target Retirement Fund would match your desire to increase bonds with age while meeting this thread's One-Fund Portfolio suggestion.

Good luck!


What about Vanguard Tax-Managed Balanced VTMBX? “Doesn’t qualify” as “not globally diversified”? Same with Wellesley VWIAX? I ask because these are the two “one fund” ideas spouse and I are gravitating toward. I’ve already liquidated several all-over-the-map funds and consolidated at VTMBX, and spouse is gradually DCA-ing into Wellesley

Neither VTMBX nor VWIAX are global funds: they own only US stocks and bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Oct 19, 2019 11:51 am

abuss368 wrote:
Sat Oct 19, 2019 10:53 am
In my opinion, and the longer I follow investing the most I am convinced, the right portfolio is the one that works for you. There is so much behavior aspects and impact to investing that often are not considered or perhaps fully appreciated.
Abuss368, I agree. Heping to sidestep behavioral mistakes is actually one of the main advantages of the One-Fund Portfolio. Here's what I wrote in the first post:
longinvest wrote:
Mon Aug 12, 2019 8:10 am
The use of a single identical all-in-one index fund or ETF in all accounts greatly simplifies a portfolio, eliminates the need to rebalance, and sidesteps a long list of potential behavioral pitfalls.
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Re: The One-Fund Portfolio as a default suggestion

Post by abuss368 » Sat Oct 19, 2019 12:38 pm

smectym wrote:
Fri Oct 18, 2019 10:59 pm
longinvest wrote:
Mon Oct 14, 2019 3:02 pm
lostdog wrote:
Mon Oct 14, 2019 12:18 pm
longinvest wrote:
Mon Oct 14, 2019 11:21 am
I really enjoy the simplicity of having a globally-diversified balanced portfolio using a single exchange-traded fund.

What about you?
I do also.

I have VT in my taxable account and SPGM in our tax advantaged account. I'll add BNDW later.
Lostdog, this thread is about all-in-one globally-diversified balanced index funds which contain both stocks and bonds. VT, SPGM, and BNDW unfortunately don't qualify. Please read the first post for details.

An appropriately chosen Vanguard Target Retirement Fund would match your desire to increase bonds with age while meeting this thread's One-Fund Portfolio suggestion.

Good luck!


What about Vanguard Tax-Managed Balanced VTMBX? “Doesn’t qualify” as “not globally diversified”? Same with Wellesley VWIAX? I ask because these are the two “one fund” ideas spouse and I are gravitating toward. I’ve already liquidated several all-over-the-map funds and consolidated at VTMBX, and spouse is gradually DCA-ing into Wellesley
I believe these funds include domestic only stocks and bonds.
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Re: The One-Fund Portfolio as a default suggestion

Post by packerguy » Sat Nov 02, 2019 12:24 pm

What do people think about AOR (iShares Core Growth Allocation ETF) as an alternative to VSMGX for those that cannot purchase VSMGX commission free (at Schwab there is a$50 fee). AOR's expense ratio is higher at 0.25% and the mix of underlying indexes (funds) is a bit different although it is still 60/40 stocks to bonds.

Are there other alternatives?

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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Nov 02, 2019 12:51 pm

packerguy wrote:
Sat Nov 02, 2019 12:24 pm
What do people think about AOR (iShares Core Growth Allocation ETF) as an alternative to VSMGX for those that cannot purchase VSMGX commission free (at Schwab there is a$50 fee). AOR's expense ratio is higher at 0.25% and the mix of underlying indexes (funds) is a bit different although it is still 60/40 stocks to bonds.

Are there other alternatives?
The iShares Core Growth Allocation ETF (AOR) is similar-enough to the Vanguard LifeStrategy Moderate Growth Fund (VSMGX). It has a 60/40 stocks/bonds allocation and it diversifies both assets across the world with a moderate US home bias. It internally invests into cap-weighted index ETFs. Its slightly higher expense ratio (0.25% versus 0.13%) won't cause an otherwise succeeding retirement plan to fail. It's not like if it had a 1% or 1.5% expense ratio.

The all-in-one ETF I use, by Vanguard Canada, happens to have a 0.25% expense ratio, too. But, in all fairness, I should say that Canadian expense ratios (for funds and ETFs) are generally higher than US ones because it's a much smaller market (smaller economies of scale). Anyway, I don't anticipate my retirement plan to fail because of it. :wink:
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Re: The One-Fund Portfolio as a default suggestion

Post by fortyofforty » Sat Nov 02, 2019 2:24 pm

longinvest wrote:
Sat Nov 02, 2019 12:51 pm
Its slightly higher expense ratio (0.25% versus 0.13%) won't cause an otherwise succeeding retirement plan to fail. It's not like if it had a 1% or 1.5% expense ratio.
Thanks for reminding us of the "bad old days" when most mutual funds had what we now consider to be outrageously high expense ratios*. There was a time, for example, when I wouldn't think twice about paying over 1% in fees for the "privilege" of investing in one fund or another. You've made me think again about those LifeStrategy funds. :beer

ETA: * front end and back end loads, and 12b-1 fees.
Last edited by fortyofforty on Sun Nov 03, 2019 9:59 am, edited 1 time in total.
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Re: The One-Fund Portfolio as a default suggestion

Post by rixer » Sun Nov 03, 2019 9:35 am

packerguy wrote:
Sat Nov 02, 2019 12:24 pm
What do people think about AOR (iShares Core Growth Allocation ETF) as an alternative to VSMGX for those that cannot purchase VSMGX commission free (at Schwab there is a$50 fee). AOR's expense ratio is higher at 0.25% and the mix of underlying indexes (funds) is a bit different although it is still 60/40 stocks to bonds.

Are there other alternatives?
What I did at Schwab when I retired and wasn't contributing to my IRA anymore, was make a one time purchase of Lifestrategy. It's just a one time fee when you purchase it. Then as you sell, there is no fee involved. It's only when you buy.

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Re: The One-Fund Portfolio as a default suggestion

Post by yogesh » Sat Nov 16, 2019 10:16 am

Reminder post for me to look at after 10 years. I choose simplicity of one fund and mirrored. Automated contributions from paycheck so zero effort for heirs.

Taxable: VTMFX Tax-Managed Balanced (50/50 fixed)
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Nov 16, 2019 11:26 am

Some recent forum posts are expressing worries about portfolio rebalancing.

In the old days, before the advent of the index fund, I'm sure investors worried about rebalancing their stock allocation among their hand-pick stocks. Thanks to Jack Bogle's index fund, Bogleheads don't worry about rebalancing among individual stocks anymore; they invest their (domestic, international) stock allocation into an index fund and let the fund manager take care of the hassles of rebalancing the fund to track changes in the composition of the market.

I think that it's time to take the next step and embrace all-in-one funds (traditional or exchange traded).

Have you considered investing your entire portfolio (tax deferred, tax free, and taxable accounts) into a globally-diversified balanced index fund like the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or the iShares Core Growth Allocation ETF (AOR), letting the fund manager take care of portfolio management hassles such as rebalancing?
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Re: The One-Fund Portfolio as a default suggestion

Post by David Jay » Sat Nov 16, 2019 11:58 am

I still have a half-dozen funds, but in my “after I am gone” letter, I have suggested to my spouse (who has no interest in portfolio theory) to put everything in LS Moderate and go live her life. These are all tax-advantaged accounts so there are no tax consequences for the move.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Nov 16, 2019 12:12 pm

David Jay wrote:
Sat Nov 16, 2019 11:58 am
I still have a half-dozen funds, but in my “after I am gone” letter, I have suggested to my spouse (who has no interest in portfolio theory) to put everything in LS Moderate and go live her life. These are all tax-advantaged accounts so there are no tax consequences for the move.
Do you really want to put the burden of such a considerable change on your surviving spouse? Your spouse will face the same tax dillemas as you do now but won't have your help to proceed with the suggested change.

It took me a lot of humility to go ahead and take the leap to an all-in-one ETF, paying the taxes* and letting go of my carefully designed portfolio. I suggest planning on starting the transition now, but incrementally over a period of a few years to spread the tax impact.

* I'm still in the accumulation phase and my taxable account was small, so the taxes were small in my case.
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Re: The One-Fund Portfolio as a default suggestion

Post by David Jay » Sat Nov 16, 2019 12:23 pm

longinvest wrote:
Sat Nov 16, 2019 12:12 pm
David Jay wrote:
Sat Nov 16, 2019 11:58 am
I still have a half-dozen funds, but in my “after I am gone” letter, I have suggested to my spouse (who has no interest in portfolio theory) to put everything in LS Moderate and go live her life. These are all tax-advantaged accounts so there are no tax consequences for the move.
Do you really want to put the burden of such a considerable change on your surviving spouse? Your spouse will face the same tax dillemas as you do now but won't have your help to proceed with the suggested change.

It took me a lot of humility to go ahead and take the leap to an all-in-one ETF, paying the taxes and letting go of my carefully designed portfolio. I suggest planning on starting the transition now, but incrementally over a period of a few years to spread the tax impact.
I face no tax dilemmas (note my final sentence), I just like to optimize. But I must say that the LS funds are my favorite recommendation to those who don’t want to “mess with” their portfolios.

After start of SS benefits (withdrawal rate goes to zero except for “capital” type outlays) I am evaluating LS Growth + 100K ST bond. ST bond would be in Roth so it could be used for any urgent need without hitting the SS “hump”.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Nov 16, 2019 12:34 pm

David Jay wrote:
Sat Nov 16, 2019 12:23 pm
I face no tax dilemmas (note my final sentence),
Somehow, my brain saw the word "tax" and failed to register that there wouldn't be a tax impact. But, the idea remains the same. If you unexpectedly passed away early, do you really want to burden your spouse with a big portfolio change?

My personal answer to this question was "no", so I made the transition and I let my wife manage her own accounts (quite simple with a One-Fund Portfolio) so that she doesn't need to hire a financial advisor once I'm gone. Now I can sleep well at night.
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Re: The One-Fund Portfolio as a default suggestion

Post by David Jay » Sat Nov 16, 2019 12:49 pm

longinvest wrote:
Sat Nov 16, 2019 12:34 pm
David Jay wrote:
Sat Nov 16, 2019 12:23 pm
I face no tax dilemmas (note my final sentence),
Somehow, my brain saw the word "tax" and failed to register that there wouldn't be a tax impact. But, the idea remains the same. If you unexpectedly passed away early, do you really want to burden your spouse with a big portfolio change?

My personal answer to this question was "no", so I made the transition and I let my wife manage her own accounts (quite simple with a One-Fund Portfolio) so that she doesn't need to hire a financial advisor once I'm gone. Now I can sleep well at night.
I admire your care...
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Re: The One-Fund Portfolio as a default suggestion

Post by 1210sda » Sat Nov 16, 2019 12:55 pm

longinvest wrote:
Sat Nov 16, 2019 12:34 pm
David Jay wrote:
Sat Nov 16, 2019 12:23 pm
I face no tax dilemmas (note my final sentence),
Somehow, my brain saw the word "tax" and failed to register that there wouldn't be a tax impact. But, the idea remains the same. If you unexpectedly passed away early, do you really want to burden your spouse with a big portfolio change?
You are wise and fortunate to be doing this now while you are in the accumulation stage and your tax burden would be low.

Unfortunately for me, I'm 18 years into retirement and our taxable account would have a tax burden into six figures. As such, I will continue with my plans for having my wife make the change after my passing.

To offset some of the negatives of having her do it on her own, I have written a detailed letter of instructions for her to send to Vanguard. We go over it periodically to help her with understanding what we are doing.

Another small positive is that we are currently using the Three Fund portfolio and have only 2 positions (Total Stock and Total International) in our taxable account.

I too sleep well at night. :)

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Re: The One-Fund Portfolio as a default suggestion

Post by Dead Man Walking » Sat Nov 16, 2019 3:20 pm

longinvest wrote:
Wed Oct 16, 2019 8:34 pm
Jeff Albertson wrote:
Tue Oct 15, 2019 9:31 pm
Mike Piper (https://www.bogleheads.org/wiki/Mike_Piper) has written a few articles on changing to a single LifeStrategy fund.

https://obliviousinvestor.com/my-portfolio-updated/
https://obliviousinvestor.com/more-on-s ... owth-fund/
Thanks for the links.
Mike Piper said that he changed to a single Life Strategy fund because he recognized that he was the greatest threat to the success of their investment portfolio. Many of us are probably the greatest threat to the success of our portfolios.

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Re: The One-Fund Portfolio as a default suggestion

Post by yogesh » Sat Nov 16, 2019 4:34 pm

Most retirement accounts have either DIY or TargetDate
Between the two default should be TargetIndex

On Morningstar forums you see big following for balanced funds; most of them are actively managed.

We need to recognize the fact that with lot of money moved into index funds; one fund balanced index would be the top recommendation for millennials.

And that’s exactly what RoboAdvisors are preaching by hiding the funds/rebalance/tlh under name of single Pie/Portfolio based on duration/risk profile.
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Re: The One-Fund Portfolio as a default suggestion

Post by tj » Mon Nov 18, 2019 9:00 pm

longinvest wrote:
Wed Oct 16, 2019 8:34 pm
Jeff Albertson wrote:
Tue Oct 15, 2019 9:31 pm
Mike Piper (https://www.bogleheads.org/wiki/Mike_Piper) has written a few articles on changing to a single LifeStrategy fund.

https://obliviousinvestor.com/my-portfolio-updated/
https://obliviousinvestor.com/more-on-s ... owth-fund/
Thanks for the links.
He only uses them in his retirement accounts though. Does he not invest in a taxable account or does he do other things?

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Re: The One-Fund Portfolio as a default suggestion

Post by tomwood » Sat Nov 30, 2019 12:12 pm

longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
Do you have any familiarity with the TSP? Would the L Funds offered in the TSP, or any funds, check most or all of the boxes for you?

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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sat Nov 30, 2019 12:18 pm

tomwood wrote:
Sat Nov 30, 2019 12:12 pm
longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
Do you have any familiarity with the TSP? Would the L Funds offered in the TSP, or any funds, check most or all of the boxes for you?
I unfamiliar with it, but other forum members might step in and answer your question.
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Re: The One-Fund Portfolio as a default suggestion

Post by tj » Sat Nov 30, 2019 12:38 pm

longinvest wrote:
Sat Nov 30, 2019 12:18 pm
tomwood wrote:
Sat Nov 30, 2019 12:12 pm
longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
Do you have any familiarity with the TSP? Would the L Funds offered in the TSP, or any funds, check most or all of the boxes for you?
I unfamiliar with it, but other forum members might step in and answer your question.
The L funds are like any other target date fund, except they do utilize the G fund which isn't available a brokerages. Some people love the G fund, some people wouldn't want to use the G fund in their younger years....

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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sun Dec 01, 2019 12:20 pm

The tax-efficiency issue was debated a little while back on another thread. Here's a post I wrote about it:

viewtopic.php?p=4839242#p4839242
longinvest wrote:
Thu Nov 14, 2019 8:03 am
l1am wrote:
Thu Nov 14, 2019 12:27 am
Can we finally stop [saying] that bonds belong in tax advantaged first? And maybe update the wiki [to] not be so biased[?]
I agree with the suggestion to modify the wiki.

I think that the default suggestion, if one is made, should be to mirror the asset allocation in all accounts, which represents a moderate and good enough suggestion. I think that forum member Stlutz said it best in an earlier post:
stlutz wrote:
Wed Oct 10, 2018 8:40 pm
The other problem is that tax laws change. It hasn't always been the case that long-term capital gains and dividends got favorable treatment. It's very possible that the same could happen in the future. The problem with optimizing is that you're optimizing for right now, which might be different from what is optimal in the future.
[...]
Because I can't predict future interest rates or tax policy I hold the same stock/bond mix in all of my accounts. I'll never have the "best" arrangement but I won't have the worst either when things change in an unexpected way.
(I added the emphasis.)

A mirrored allocation has many advantages. It enables the use of a low-cost automatically-rebalanced Bogleheads One-Fund Portfolio across all accounts including taxable ones, it's resilient to unanticipated asset returns and tax law changes, it's inherently tax-adjusted, and it can also help with behavioral risks. Here's what Rick Ferri wrote about it:

viewtopic.php?p=1426569#p1426569
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest » Sun Dec 01, 2019 12:29 pm

Let's be clear. Most people have sufficient tax-advantaged contribution room and don't need a taxable investment account. Some Bogleheads, on the other hand, get to a point where they don't have sufficient tax-advantaged space and must invest in a taxable account.

I think that over 90% of the benefits of tax-adavntaged accounts can be harvested by following the simple rules of the Prioritizing Investments wiki page, without worrying about any smart fund placement strategy (which could backfire, anyway, due to unanticipated future returns or tax law changes).

The more known (and popular) "Tax-efficient fund placement" page actually contains a statement in its preamble which invalidates most of the recommendations made in the rest of the page:
Tax rates and brackets change frequently. What was a logical tax location one year may turn out to be a poor choice a few years later. Consider if it's worth the effort (added complexity) to take this approach.
Yet, few people pay attention to it and blindly use the debatable recommendations of that page to push investors away from all-on-one funds.

I think it's quite sad that the simple and coherent Prioritizing Investments wiki page is much more difficult to locate, in the wiki, than the debatable "Tax-efficient fund placement" page.
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Re: The One-Fund Portfolio as a default suggestion

Post by dbr » Sun Dec 01, 2019 12:35 pm

I suspect that a lot of people with large taxable accounts have them due to inheritances, sale of businesses or real estate, or similar transactions.

However, I agree that tax efficient fund placement is not as cut and dried as that article suggests.

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Re: The One-Fund Portfolio as a default suggestion

Post by abuss368 » Sun Dec 01, 2019 2:45 pm

I had a poll question many years ago inquiring how many Bogleheads had a taxable account. I believe 85% of the responses said "yes" they had a taxable account.
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Re: The One-Fund Portfolio as a default suggestion

Post by bck63 » Sun Dec 01, 2019 2:59 pm

abuss368 wrote:
Sun Dec 01, 2019 2:45 pm
I had a poll question many years ago inquiring how many Bogleheads had a taxable account. I believe 85% of the responses said "yes" they had a taxable account.
I'm a small investor with a small nest egg, ten years from retirement, and I have a large (for me) taxable account. I believe in tax diversification. But also, I just don't want the government to be able to tell me what do to, when spend and when to withdraw all of my money. I know there is a cost for this, and I'm willing to pay it. I can do whatever I want with my taxable investments, and I like that.

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Re: The One-Fund Portfolio as a default suggestion

Post by abuss368 » Sun Dec 01, 2019 3:05 pm

bck63 wrote:
Sun Dec 01, 2019 2:59 pm
abuss368 wrote:
Sun Dec 01, 2019 2:45 pm
I had a poll question many years ago inquiring how many Bogleheads had a taxable account. I believe 85% of the responses said "yes" they had a taxable account.
I'm a small investor with a small nest egg, ten years from retirement, and I have a large (for me) taxable account. I believe in tax diversification. But also, I just don't want the government to be able to tell me what do to, when spend and when to withdraw all of my money. I know there is a cost for this, and I'm willing to pay it. I can do whatever I want with my taxable investments, and I like that.
Vanguard investment experts have provided research and interviews discussing tax diversification.

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

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Re: The One-Fund Portfolio as a default suggestion

Post by danielc » Sun Dec 01, 2019 9:58 pm

longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
  • Portfolio 1: Vanguard LifeStrategy Moderate Growth Fund (VSMGX) -- a globally-diversified balanced index portfolio with a moderate home bias, appropriate for investors of all ages and all wealth levels, or
  • Portfolio 2: A carefully-chosen all-in-one index fund or ETF with a gliding or fixed asset allocation based on the investor's circumstances -- low-cost Target Retirement / Target Date index fund (various providers), LifeStrategy fund (Vanguard), or Core Allocation ETF (iShares)
In theory, the "ideal" default portfolio would be William Sharpe's Market Portfolio but it has various problems: (a) calculating asset weights is challenging, (b) the actual weightings are approximate because float-adjusted market capitalisations corresponding to Vanguard's total world stocks (VT) and bonds (BNDW) aren't all available*, and (c) there are good reasons for most investors (around the world) to keep a reasonable amount of home bias in their portfolios, as explained in Vanguard's paper "The role of home bias in global asset allocation decisions".

* They aren't available for free, if they're available.

As a consequence, I think that portfolio 1 is a very good default portfolio for investors of all ages and all wealth levels. This includes experienced investors who have finally realized the importance simplicity as well as the futility of trying to engineer a better portfolio, accumulating investors who want to spend their life doing other things than worrying about their portfolio, and even new investors who don't know how to choose an asset allocation. It has a fixed 60/40 stocks/bonds allocation. It's very broadly-diversified, currently holding over 25,000 securities. It's actually a very good practical proxy for Bill Sharpe's ideal Market Portfolio adapted for a U.S. investor with a moderate home bias.

Investors who desire a specific gliding or fixed asset allocation can go with portfolio 2 and choose among the various available all-in-one index funds and ETFs. This is somewhat more complex than portfolio 1 as it requires making more assumptions about assets and about the investor's preferences.

I think that these funds and ETFs are good enough to be used as a single identical investment across all of the investor's accounts (Traditional, Roth, ..., and even taxable).

I think that most tax-efficient fund placement arguments against using such funds in a taxable account are flawed because they usually ignore tax-adjusted asset allocation which is justified by mathematics:
Bogleheads wiki wrote:Your ability to take risk is determined by the consequences of losses; losing $100K in your Roth IRA will reduce your standard of living (or require more additional savings to keep the same standard) by more than losing $100K in your traditional IRA or taxable account does.
In particular:
  • Most analyses ignore the long-term impact of asset location. For example, while bonds get most of their growth from coupons which attract immediate taxes, unlike stock capital gains which are only taxed when realized often decades later (leading simple analyses to conclude that one should prioritize bonds over stocks in tax-advantaged accounts), a long-term view can reveal that the generally faster growth of stocks might lead to more taxes when stock dividends in taxable grow to more than bond interest in tax-advantaged. Also, prioritizing the placement of a slower growing asset in tax-advantaged leads to a slower growth of tax-advantaged space relative to the size of the entire portfolio.
  • Most analyses ignore that rebalancing reduces the impact (good or bad) of prioritizing the location of specific assets into specific accounts.
  • Most analyses ignore the tax advantage of rebalancing with the cash flows of other investors when using a balanced fund or ETF in a taxable account.
  • Most analyses ignore that future tax laws could change, that future investor circumstances could change, and that the best asset location strategy can only be known after the fact.
I think that using a mirrored asset allocation in all accounts with a single identical all-in-one fund or ETF is good enough and elegantly sidesteps the need to tax-adjust the asset allocation.**

** A mirrored asset allocation is inherently tax-adjusted.

The use of a single identical all-in-one index fund or ETF in all accounts greatly simplifies a portfolio, eliminates the need to rebalance, and sidesteps a long list of potential behavioral pitfalls. Many investors are likely to lose more to behavioral pitfalls with separate funds or ETFs than to save in taxes even when they're lucky enough to select an asset location strategy that beats the mirrored one (unforeseeable) in their specific long-term investing time frame.

My personal preference is for portfolio 1, representing a globally-diversified lifelong 60/40 stocks/bonds allocation because I consider that all investment assets are risky, but in different ways. I think that it's best to broadly diversify across them all lifelong***.

*** In retirement, combining variable portfolio withdrawals with Social Security (possibly delayed to age 70) and a pension (if any) often results into mild total income fluctuations. When necessary, Total Retirement Income fluctuations can be further dampened by using a small part of the portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA) instead of increasing the bond allocation above 40%.

Thank you for that post. My DW and I just decided to change our portfolios to this. As is often the case, we have our investments scattered across several retirement accounts with different providers. So we chose a similar set of "Life Strategy" and "Target Date" portfolios from different providers that all give roughly the same stock/bond and US/Int'l allocations so we can basically forget about rebalancing between accounts or any other tinkering.

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Re: The One-Fund Portfolio as a default suggestion

Post by danielc » Tue Dec 03, 2019 12:45 am

longinvest wrote:
Sat Aug 17, 2019 12:35 pm
305pelusa wrote:
Sat Aug 17, 2019 12:25 pm
Time diversification (like asset diversification) IS a free lunch.
Here's a link with a mathematical discussion: The Fallacy of Time Diversification, from Risk and Time by John Norstad (2000).
That was VERY interesting. And in hindsight, I wonder why I didn't see it before. Here's one way to visualize the point from that article: Imagine a fixed uncertainty in the final value of an investment:

A < (1+r)^N < B

where 'r' is the rate of return. It seems obvious that as 'N' increases, the permissible range of 'r' decreases, or we can show it like this:

r_max = B^(1/N) - 1
r_min = A^(1/N) - 1

Whether you look at 'r_max / r_min' or 'r_max - r_min', it is clear that the allowed range of 'r' decreases with N.

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Re: The One-Fund Portfolio as a default suggestion

Post by danielc » Tue Dec 03, 2019 5:14 am

longinvest wrote:
Mon Oct 14, 2019 3:36 pm
Bck63, this seems complex to manage for a less knowledgeable spouse or caretaker.

I personally think that the simplicity of using a single low-cost globally-diversified balanced index investment across all of one's accounts has many advantages, like simplicity for one's spouse or future caretaker.
Earlier I said that I would implement your suggestion. Sadly, my DW's 401k doesn't have a low-cost balanced or target date fund. But I have tried to keep some of the spirit of the one-fund portfolio by ensuring by ensuring that every retirement account has an entirely equivalent portfolio (even if the individual funds are not the same) and setting up automatic rebalancing wherever possible.

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