The One-Fund Portfolio as a default suggestion

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

Post by S_Track »

longinvest wrote: Sun Sep 13, 2020 12:45 pm I'm confident that global (free-float) stock and bond weightings will remain balanced (e.g. closer to 50% than to 100% for both assets) and, as a consequence, that a 60/40 stock/bond target allocation will remain close enough*. As for Vanguard, it has historically improved its LifeStrategy funds (getting rid of an active component, adding international bonds, and reducing the home bias). I'm confident that Vanguard will remain a good manager and keep its dedication to global index investing within its LifeStrategy Moderate Growth Fund (VSMGX).
Excellent information here. Considering a One-Fund in a taxable account such as LifeStrategy Moderate Growth. I am not so much worried about VG drifting the style, but I am worried about the tax consequences should they decide to change funds. A possible scenario would be for VG to drop Total Stock and Total international in favor of Total World. If that were to happen, could it bring a large unexpected tax consequences for investors? Thinking the fund would need to do large amount of internal selling. Thanks
Ferdinand2014
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Re: The One-Fund Portfolio as a default suggestion

Post by Ferdinand2014 »

I can appreciate the simplicity of having 1 all-in-one fund in all accounts across the tax spectrum and calling it good enough. I currently have a fairly simple portfolio of cash in the form of FDLXX ( treasury only money market fund) in taxable along with FXAIX (Fidelity 500 index fund)/VTSAX (Vanguard total stock index fund) across our IRA/SEP/403b/taxable accounts. I have been very happy with its progress in meeting our goals and my ability to stick with it. I consider the cash as a catchall- emergency fund/lumpy large expenses/de-risk sleep well to stay invested in stocks pile. Having said all that, my DW has zero interest in investing and in case of cognitive decline/death (I am 10 years older and the only one that deals with the finances), I have wondered about a one fund across all accounts solution but have some questions:

If my taxable accounts which have mostly FDLXX (which equals about 3-4 years expenses depending on situation- about 8-9% of our portfolio currently and our only fixed income) gets converted (along with our IRA/SEP/403b) to an all-in-one fund such as FFNOX (Fidelity four in one index fund - a static 60/25/15) which has about 15% in investment grade total bond fund FXNAX (Fidelity total bond fund). How would I approach an emergency or a potential short term expense given the duration of the bond fund imbedded is about 6 years along with the 80-85% proportion of stocks? Wouldn’t it be less than optimal to sell a static portion of bonds with a duration of about 6 years and riskier stocks to fund a shorter term need? I assume the answer is if you have a large enough portfolio and as your potential emergency or expenses become a smaller portion of the total, it may not matter especially given the upside of not having a lot of cash sitting around getting eaten by inflation? I know there have been other threads showing being fully invested in say a 60/40 balanced portfolio does better than having a portion of cash on the side for emergencies instead of just selling the 60/40.
Last edited by Ferdinand2014 on Sun Sep 20, 2020 2:17 pm, edited 2 times in total.
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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

S_Track wrote: Sun Sep 20, 2020 9:37 am A possible scenario would be for VG to drop Total Stock and Total international in favor of Total World.
I don't think that Vanguard is likely to drop home bias down to zero. But...
S_Track wrote: Sun Sep 20, 2020 9:37 am If that were to happen, could it bring a large unexpected tax consequences for investors? Thinking the fund would need to do large amount of internal selling.
Vanguard could do it gradually, buying into the new fund with new money, and selling from old funds for redemptions. Vanguard could also take advantage of future downturns to switch funds with reduced tax consequences. But this is just a guess. It's probably best to directly ask the question to Vanguard.
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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

Ferdinand2014 wrote: Sun Sep 20, 2020 1:42 pm I currently have a fairly simple portfolio of cash in the form of FDLXX [...] I consider the cash as a catchall- emergency fund/lumpy large expenses/de-risk sleep well to stay invested in stocks pile. Having said all that, my DW has zero interest in investing and in case of cognitive decline/death (I am 10 years older and the only one that deals with the finances), I have wondered about a one fund across all accounts solution but have some questions
[...]
Ferdinand2014,

For the theoretical part, some investors consider cash as "savings" and don't count it as part of their "investment" portfolio. For them, whether cash is located into a savings account or into a money-market fund within an investment account doesn't change this principle. Other investors define their portfolio as a specific set of investment accounts (Trad. IRA, Roth IRA, taxable, ...). For them, anything within these accounts is part of their "investment" portfolio (not counted as "savings"). Both approaches are perfectly acceptable.

You're mostly asking a personal investment and money management question which would be best addressed by starting a new Personal Investments thread. The current thread is more of a theoretical nature. If you provide the information suggested in this post in your new personal thread, knowledgeable forum members will be able to understand the role of cash in your overall financial landscape and make specific recommendations about whether your FDLXX holdings should be considered as part of your investment portfolio (and possibly merged into your One-Fund Portfolio) or kept separately.
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1210sda
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Re: The One-Fund Portfolio as a default suggestion

Post by 1210sda »

Ferdinand2014 wrote: Sun Sep 20, 2020 1:42 pm my DW has zero interest in investing and in case of cognitive decline/death (I am 10 years older and the only one that deals with the finances)
For me, this is the key. Unfortunately, no one knows the timing of either death or cognitive decline. If I were in these shoes, I'd simplify as soon as possible. (Unless capital gains in doing so were prohibitive.)
Last edited by 1210sda on Sun Sep 20, 2020 8:02 pm, edited 1 time in total.
S_Track
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Re: The One-Fund Portfolio as a default suggestion

Post by S_Track »

longinvest wrote: Sun Sep 20, 2020 2:04 pm
S_Track wrote: Sun Sep 20, 2020 9:37 am A possible scenario would be for VG to drop Total Stock and Total international in favor of Total World.
I don't think that Vanguard is likely to drop home bias down to zero. But...
S_Track wrote: Sun Sep 20, 2020 9:37 am If that were to happen, could it bring a large unexpected tax consequences for investors? Thinking the fund would need to do large amount of internal selling.
Vanguard could do it gradually, buying into the new fund with new money, and selling from old funds for redemptions. Vanguard could also take advantage of future downturns to switch funds with reduced tax consequences. But this is just a guess. It's probably best to directly ask the question to Vanguard.
I believe VG made a change in the Life Strategy funds a few years back now removing some active piece. It would be curious to see the data on the distributions. I will try to find some history on VG site but perhaps someone remembers.
sycamore
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Re: The One-Fund Portfolio as a default suggestion

Post by sycamore »

S_Track wrote: Sun Sep 20, 2020 5:41 pm
longinvest wrote: Sun Sep 20, 2020 2:04 pm
S_Track wrote: Sun Sep 20, 2020 9:37 am A possible scenario would be for VG to drop Total Stock and Total international in favor of Total World.
I don't think that Vanguard is likely to drop home bias down to zero. But...
S_Track wrote: Sun Sep 20, 2020 9:37 am If that were to happen, could it bring a large unexpected tax consequences for investors? Thinking the fund would need to do large amount of internal selling.
Vanguard could do it gradually, buying into the new fund with new money, and selling from old funds for redemptions. Vanguard could also take advantage of future downturns to switch funds with reduced tax consequences. But this is just a guess. It's probably best to directly ask the question to Vanguard.
I believe VG made a change in the Life Strategy funds a few years back now removing some active piece. It would be curious to see the data on the distributions. I will try to find some history on VG site but perhaps someone remembers.
See this BH wiki article for a history of LifeStrategy fund AA changes. Not sure about the corresponding distribution history...
lanceteer
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Re: The One-Fund Portfolio as a default suggestion

Post by lanceteer »

Longinvest, thanks for all the work you have done to promote the simple investing with a one-fund portfolio.

I live in Australia and we do not have a prominent Australian presence on these boards. I think the largest Australian online presence for discussions of Boglehead-esque index investing happens on the AusFinance subreddit. I am posting here because I want to share that we have independently gravitated towards the one fund portfolio since Vanguard Australia released diversified ETFs in 2017. The gravitation is so stark that the one fund portfolio is the default suggestion now when new people ask about how they should invest. This happened rather organically, without a crusader like yourself spearheading the cause.

In Australia, Vanguard has offered fixed asset allocation diversified funds (akin to LifeStrategy) as traditional index funds since the 1990s, but it was only in 2017 that the ETF versions were created. There are as yet no Vanguard target date funds in Australia, presumably because the demand is inadequate from the relatively small market. Prior to 2017, Australian investors with more than a few thousand dollars to invest typically used single-asset class ETFs to create a domestic/developed international equity and bond portfolio, with some throwing in emerging markets. The Vanguard traditional index funds were not as popular because they had a relatively high MER (0.9% p.a.) for investors with less than $100,000 to invest.

Come 2017 and the diversified ETFs were released to a lukewarm reception, but their popularity has really snowballed since. The standout ETF in particular is VDHG (Vanguard diversified high growth), which has a fixed 90/10 allocation to equities/fixed income. There are three other diversified ETFs available with allocation ratios of 70/30, 50/50, and 30/70 respectively. VDHG is so recommended for its diversification, auto-rebalancing, and simplicity of investing. I hypothesize that the significant skew towards the higher equity allocation is because reddit users are of a younger demographic and hence are further away from retirement. The recommended plan for most of these high equity one-fund investors is to add a bond ETF at a stage closer to retirement in order to increase their allocation to fixed income, but they would have one-to-two decades of single fund investing before that happens.

Just thought I'd share some Antipodean happenings.
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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

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

Post by longinvest »

Paying less taxes is an illogical objective to aim for. The logical objective it to aim for having more money left to spend after taxes and savings over an entire lifetime, not just in the current year. This can involve paying more taxes in the short-term.

I'd like to highlight some criticism of the fund placement approach advocated in the main body our wiki's page on tax-efficient fund placement. This criticism is found on the page itself and its related discussion page. (Additional criticism, like the fact that tax-adjusted asset allocation isn't taken into account by this wiki page, is expressed in the first post of this thread).

First, to put things into perspective, the most important decision is asset allocation, not fund placement:
wiki:Tax-efficient fund placement wrote:
:!: Determination of your asset allocation (% stocks / % bonds), which sets your portfolio's level of acceptable risk, is the single most influential decision you can make on your portfolio's performance. Only consider taxes after you have configured your total portfolio.
Second, optimizing based on a projection of the investor's current situation could very well backfire due to unanticipated changes in tax laws or investor circumstances. Our wiki warns about this (but doesn't put sufficient emphasis on it, in my opinion):
wiki:Tax-efficient fund placement wrote:
:!: Tax regulations can be complex and contain subtle details that may escape inexperienced investors. If this article seems overly complicated, then just remember a few key points:
  • Set your asset allocation first, taxes come second. If you don't have any funds which can be put in a location to reduce your tax bill, then stop here. You've done the best you can.
  • 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.
The wiki page also contains a Criticism section which explicitly says that the proposed approach might be the opposite of what the investor should actually do:
wiki:Tax-efficient fund placement wrote:
Criticisms of this tax placement strategy

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on despite higher tax bills in the present. This is particularly true at the presently low bond yields, when the tax penalty from bonds in taxable is not as high as it has been in the past.

The situation may change in retirement, when the funds are withdrawn for income (decumulation phase). It is possible under some combinations of lifetime investment results and lifetime individual tax situations to be better off doing the opposite of the strategy recommended here.
...
The above highlights an important contradiction: the wiki page advocates a specific fund placement strategy because it's supposed to be optimal, yet the criticism section reveals that it could actually end up being the worst strategy!

It's tough to make predictions, especially about the future.” ― Yogi Berra

The discussion tab of the wiki page also contains a criticism and improvement suggestions:

Illogical objective: less taxes (instead of higher lifelong after-tax available income)
Illogical objective: less taxes (instead of higher lifelong after-tax available income)

I've explained in Bogleheads® forum post: Time to update asset location rules of thumb? [1 of 2] and Bogleheads® forum post: Time to update asset location rules of thumb? [2 of 2] that aiming for lower taxes using single-year calculations is illogical. In a few words, poorer people pay less taxes. I argue that the objective should be to aim for higher lifelong after-tax available income (or cash flows, after savings). I've also explained that there's a lot of uncertainty about future outcomes and suggested that a mirror asset location strategy might be good enough, especially when using an all-in-one investment such a LifeStrategy or Target Retirement fund. I definitely suggest to make the page less biased towards bonds in tax-advantaged accounts and to put a lot more emphasis on the significant uncertainty of future outcomes.

--longinvest 13:54, 5 July 2020 (UTC)

I think that using a globally-diversified all-in-one index fund or ETF in all accounts, including a taxable account when tax-advantaged accounts are full, is good enough. It will reliably deliver average returns which, by definition, are guaranteed to never be the worst returns. Using a One-Fund Portfolio greatly simplifies investing, especially for care takers or a surviving spouse. It eliminates the need to rebalance the portfolio and it sidesteps a long list of potential behavioral pitfalls.

Note: This post is based on a reply I wrote in the Personal Investments forum.
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Rajsx
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Re: The One-Fund Portfolio as a default suggestion

Post by Rajsx »

Thanks for a informative thread, I am following
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