The Three-Fund Portfolio

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dbr
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Re: Pros and CONS of the 3 fund portfolio

Post by dbr »

Fezzer wrote: Tue Aug 02, 2022 8:54 pm dbr: I’m glad you brought up the point about the long bonds. Is there any case to be made now for long term bonds in the higher interest environment? I’ve had a 10% portion in VWESX for some time now but now wonder if I should taper it over to VBTLX
The question of bond duration can be looked at from different points of view view but it has nothing to do with any higher interest environment. Anyway interest rates are still historically low and the yield curve is flat. When you can get a real rate of 3% on TIPS or a fixed rate on I bonds of 2% then there is a high interest rate environment. In the long term of a couple of centuries interest rates may well continue a long down trend. Short run disruptions such as world pandemic, wars, and political events are not a basis for making bond decisions in lifetime investing.

To address bond duration one can can consider diversification in stock/bond portfolios or look at concepts of liability matching for one's own situation.

For myself intermediate term bond funds are a fine middle point about any time. Do you mean by 10% in VWESX that your portfolio is 90/10 stocks/bonds, in which case it probably makes no difference what bonds you hold though by some theory long bonds is fine for that. How many more decades do you plan for your investing?
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Re: Pros and CONS of the 3 fund portfolio

Post by tvubpwcisla »

Thank you for sharing. Great read.
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Re: Pros and CONS of the 3 fund portfolio

Post by BrooklynInvest »

"All told, the three-fund portfolio is one of the most popular among beginner and intermediate investors alike, and for good reason."

It also works well for experts. The simplicity is deliberate and should not be construed as training wheels.

It would have been nice for the author to point out how spectacularly bad active equity managers are at actually generating long term alpha but c'est la vie. The cross we bear ;-)
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Re: Pros and CONS of the 3 fund portfolio

Post by dbr »

BrooklynInvest wrote: Wed Aug 03, 2022 8:47 am "All told, the three-fund portfolio is one of the most popular among beginner and intermediate investors alike, and for good reason."

It also works well for experts. The simplicity is deliberate and should not be construed as training wheels.

It would have been nice for the author to point out how spectacularly bad active equity managers are at actually generating long term alpha but c'est la vie. The cross we bear ;-)
Yes, one of the problems in investment literature is the implication that more complicated portfolios are for more "sophisticated" investors. Nothing could be more wrong. But who does not want to be sophisticated?
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Re: Pros and CONS of the 3 fund portfolio

Post by WhyNotUs »

Clickbait from a wannabe finance writer.
I own the next hot stock- VTSAX
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Re: Pros and CONS of the 3 fund portfolio

Post by DSBH »

Not sure about the CONS list in the article, but a potential CON of the 3-fund portfolio is the cost/challenge of rebalancing to maintain your desired AA, if you have a significant Taxable account balance compared to Tax-deferred [Edit ==>] and so rebalancing occurs mostly in Taxable, assuming Bogleheads' Efficient Tax Placement is followed (e.g. Tax-Deferred invested in fixed income)[<== Edit].

FWIW if the 60/40 Vanguard LifeStrategy Moderate Growth fund limits their international holdings to approx. 12% instead of 24% I might have been a 1-funder.
Last edited by DSBH on Fri Aug 05, 2022 9:41 am, edited 1 time in total.
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Re: The Three-Fund Portfolio

Post by LadyGeek »

I merged pkcrafter's thread into the ongoing discussion.
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Re: Pros and CONS of the 3 fund portfolio

Post by bertilak »

DSBH wrote: Wed Aug 03, 2022 1:52 pm Not sure about the CONS list in the article, but a potential CON of the 3-fund portfolio is the cost/challenge of rebalancing to maintain your desired AA,
I solve this "problem" by (mostly) ignoring it:
  • Whatever one's chosen AA is, it is somewhat arbitrary. For example, nobody can really say which of the following is "better:" 50/50, 55/45, 60/40, 65/35, 70/30. It all involves a lot of guesswork based on conflicting advice and mood swings. This means high precision in one's AA is NOT JUSTIFIED. Just aim somewhere near the middle of the road. That is, it is not worth fretting over.
  • As one adds new money to (in the accumulation phase) or spends money from (the decumulation phase) one's portfolio, it can be done in a way to constantly nudge ones actual AA towards the target AA. This is easy to do (not challenging), effective, and costs nothing. That is, drastic action should never be needed.
In other words, this "CON" is bogus: "cost" and "challenge" are chimeras.
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Re: Pros and CONS of the 3 fund portfolio

Post by DSBH »

bertilak wrote: Thu Aug 04, 2022 12:50 pm
DSBH wrote: Wed Aug 03, 2022 1:52 pm Not sure about the CONS list in the article, but a potential CON of the 3-fund portfolio is the cost/challenge of rebalancing to maintain your desired AA,
I solve this "problem" by (mostly) ignoring it:
  • Whatever one's chosen AA is, it is somewhat arbitrary. For example, nobody can really say which of the following is "better:" 50/50, 55/45, 60/40, 65/35, 70/30. It all involves a lot of guesswork based on conflicting advice and mood swings. This means high precision in one's AA is NOT JUSTIFIED. Just aim somewhere near the middle of the road. That is, it is not worth fretting over.
  • As one adds new money to (in the accumulation phase) or spends money from (the decumulation phase) one's portfolio, it can be done in a way to constantly nudge ones actual AA towards the target AA. This is easy to do (not challenging), effective, and costs nothing. That is, drastic action should never be needed.
In other words, this "CON" is bogus: "cost" and "challenge" are chimeras.
The key part in my original post was:
... if you have a significant Taxable account balance compared to Tax-deferred.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: Pros and CONS of the 3 fund portfolio

Post by bertilak »

DSBH wrote: Thu Aug 04, 2022 1:00 pm The key part in my original post was:
... if you have a significant Taxable account balance compared to Tax-deferred.
Tax management to reduce costs is always challenging. If you are not performing "sell to buy" that can help.
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Re: The Three-Fund Portfolio

Post by jdamo »

Ok, so we are retiree 3-funders with a 40% stock/60% bond asset allocation all in a Traditional IRA.
This continues to bug me in my investing mind.....
You gotta admit, with the current economic data and the pending, assured, 0.75% additional rise in interest rates the FED has announced, with more to come, it is tempting to sell the bond portion (VBTLX), wait for the next 2-4 months while rates increase, watch the yield rate increase in yield then filter into VBTLX yield and then buy back in VBTLX. Why not?
You gotta admit you think about it right?

BHs, what is really wrong with that if you don't stay out of VBTLX (or other total bond index equiv) for a long time while watching economic data roll in for what seems to be a pretty sure thing?
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Re: The Three-Fund Portfolio

Post by sycamore »

jdamo wrote: Sun Aug 07, 2022 2:36 pm Ok, so we are retiree 3-funders with a 40% stock/60% bond asset allocation all in a Traditional IRA.
This continues to bug me in my investing mind.....
You gotta admit, with the current economic data and the pending, assured, 0.75% additional rise in interest rates the FED has announced, with more to come, it is tempting to sell the bond portion (VBTLX), wait for the next 2-4 months while rates increase, watch the yield rate increase in yield then filter into VBTLX yield and then buy back in VBTLX. Why not?
Because by the time you buy back, maybe rates go up again unexpectedly -- oh no, another price drop :(
Your argument is one of the classic market timing arguments. I won't tell you not to do it but I will wish you good luck :)
jdamo wrote: Sun Aug 07, 2022 2:36 pm You gotta admit you think about it right?
Someone in accumulation mode / uncommitted to their asset allocation / surprised by bond market volatility might very well have lots of second thoughts about bonds.

But for someone who's happy with their portfolio size, their chosen asset allocation, and the swings of the markets (both stock and bond), it's easy to shrug at the tongue wagging over interest rates. Depends on your investing experience and your stage of life.
jdamo wrote: Sun Aug 07, 2022 2:36 pm BHs, what is really wrong with that if you don't stay out of VBTLX (or other total bond index equiv) for a long time while watching economic data roll in for what seems to be a pretty sure thing?
The market has already factored in those sure things. It's factored in unsure things as well. It factors in all the things that investors think they know are sure things. If you feel very strongly about your sure thing (though "seems to be" is wishy-washy), go for it!

Another thing is that some investors own bonds for the income. They're just not very concerned about the price swings. But that may not be your reason for owning bonds.
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Re: The Three-Fund Portfolio

Post by jdamo »

Sycamore,
Thanks for your response. I am thinking about it carefully.
It may sound like I'm focused only on price of the bond index but I am really thinking of total portfolio performance, of which 60% is bond performance which is a combo of bond price and coupon...so trying to understand the combo effect with rapid rising interest rates pending.
I do want the bonds for income for adding to the portfolio total so I can withdraw needed funds for retirement.
I guess I just want to make sure I'm managing our portfolio right for retirement.
So your comments about the market already pricing this in is a good reminder but hard to fathom that the "market" can do that & figure everything out.
I don't mean to sound like I think I am smarter. I am not and know that. But these seemed pretty sure but really they are not sure to happen.....
Hard to stand here and do nothing and let the 3-Fund portfolio work!
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Re: The Three-Fund Portfolio

Post by dbr »

jdamo wrote: Sun Aug 07, 2022 2:36 pm Ok, so we are retiree 3-funders with a 40% stock/60% bond asset allocation all in a Traditional IRA.
This continues to bug me in my investing mind.....
You gotta admit, with the current economic data and the pending, assured, 0.75% additional rise in interest rates the FED has announced, with more to come, it is tempting to sell the bond portion (VBTLX), wait for the next 2-4 months while rates increase, watch the yield rate increase in yield then filter into VBTLX yield and then buy back in VBTLX. Why not?
You gotta admit you think about it right?

BHs, what is really wrong with that if you don't stay out of VBTLX (or other total bond index equiv) for a long time while watching economic data roll in for what seems to be a pretty sure thing?
It might help to recognize that investing is a long game that is constantly subject to instant assaults of every variety. You seem to have obsessed on one and are not even thinking about many others also affecting bonds yesterday, today, and tomorrow ad infinitum. And stocks are included too.

It is a fact that you are engaged in an ever-changing difficult to predict enterprise and can only set something that runs in a desired direction with some rough estimate what will turn out and then don't waste time and energy trying to constantly maneuver. Your maneuvers will not be effective anyway because you haven't accounted for enough factors fast enough and that is impossible anyway.
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Re: The Three-Fund Portfolio

Post by jdamo »

dbr wrote: Mon Aug 08, 2022 7:48 am
jdamo wrote: Sun Aug 07, 2022 2:36 pm Ok, so we are retiree 3-funders with a 40% stock/60% bond asset allocation all in a Traditional IRA.
This continues to bug me in my investing mind.....
You gotta admit, with the current economic data and the pending, assured, 0.75% additional rise in interest rates the FED has announced, with more to come, it is tempting to sell the bond portion (VBTLX), wait for the next 2-4 months while rates increase, watch the yield rate increase in yield then filter into VBTLX yield and then buy back in VBTLX. Why not?
You gotta admit you think about it right?

BHs, what is really wrong with that if you don't stay out of VBTLX (or other total bond index equiv) for a long time while watching economic data roll in for what seems to be a pretty sure thing?
It might help to recognize that investing is a long game that is constantly subject to instant assaults of every variety. You seem to have obsessed on one and are not even thinking about many others also affecting bonds yesterday, today, and tomorrow ad infinitum. And stocks are included too.

It is a fact that you are engaged in an ever-changing difficult to predict enterprise and can only set something that runs in a desired direction with some rough estimate what will turn out and then don't waste time and energy trying to constantly maneuver. Your maneuvers will not be effective anyway because you haven't accounted for enough factors fast enough and that is impossible anyway.
DBR- Thanks...this are good points and good advice.
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Re: The Three-Fund Portfolio

Post by Lawrence of Suburbia »

Naive question --

Rather than buying three funds and have to do all that re-balancing stuff, why not just buy a Vanguard LifeStrategy fund thats close to the allocation you want? Those are just pre-mixed index funds, right? ... (I'm extremely lazy)
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Re: The Three-Fund Portfolio

Post by Taylor Larimore »

Lawrence of Suburbia wrote: Wed Aug 10, 2022 1:30 pm Naive question --

Rather than buying three funds and have to do all that re-balancing stuff, why not just buy a Vanguard LifeStrategy fund thats close to the allocation you want? Those are just pre-mixed index funds, right? ... (I'm extremely lazy)
Lawrence of Suburbia:

The appropriate Life Strategy or Target Retirement Fund (which I prefer), are simple and designed by experts, they can be a superior portfolio.

The problem with these funds is that they are more costly than their individual funds, their asset-allocation may not be the most suitable, and they are tax-inefficient and therefore should only be used in tax-advantaged accounts (IRAs, 401ks, etc.).

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three-Fund Portfolio

Post by bertilak »

Lawrence of Suburbia wrote: Wed Aug 10, 2022 1:30 pm Naive question --

Rather than buying three funds and have to do all that re-balancing stuff, why not just buy a Vanguard LifeStrategy fund thats close to the allocation you want? Those are just pre-mixed index funds, right? ... (I'm extremely lazy)
Taylor answered this, but I can add the following:

If you are regularly adding money to your account (like from a paycheck) it is easy to add money in a way to maintain your chosen AA.

Also, your target AA is somewhat arbitrary, so great precision is therefore not justified. Thus, one need not fret over fluctuations in your actual AA. My point is "all that re-balancing stuff" is really not a lot of "stuff."
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Re: The Three-Fund Portfolio

Post by Gort »

Taylor Larimore wrote: Wed Aug 10, 2022 2:01 pm
Lawrence of Suburbia wrote: Wed Aug 10, 2022 1:30 pm Naive question --

Rather than buying three funds and have to do all that re-balancing stuff, why not just buy a Vanguard LifeStrategy fund thats close to the allocation you want? Those are just pre-mixed index funds, right? ... (I'm extremely lazy)
Lawrence of Suburbia:

The appropriate Life Strategy or Target Retirement Fund (which I prefer), are simple and designed by experts, they can be a superior portfolio.

The problem with these funds is that they are more costly than their individual funds, their asset-allocation may not be the most suitable, and they are tax-inefficient and therefore should only be used in tax-advantaged accounts (IRAs, 401ks, etc.).

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
One big benefit of using a balanced fund such as a target date fund or Life Strategy fund is that it helps to reduce behavioral errors such as tinkering with the asset allocation, often at the wrong time. The target date funds ER is very low at 0.08%. Owning individual funds may be cheaper but at this low ER I don't think it matters much. Taylor is correct that they are tax-inefficient and should be used in tax-advantaged accounts.
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Re: The Three-Fund Portfolio

Post by enad »

My transformation is nearly complete. I am in the process of dumping my Paul Merriman UBH which has been flat for the last 12 years. You would expect some areas of over-weighting not to perform, but in the case, REIT, EM, SMALL, VALUE, INTERNATIONAL have all under-performed. Will they come back again in the future? Maybe but if you account for 12-years of under-performance (opportunity lost) it's just not worth it to me.

So I was thinking about Taylor and the Three-Fund Portfolio, and I have some questions for you Taylor:

(1) I used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total International Stock Market Index Fund (VGTSX) and from January 1997 to July 2022, VFINX returned 8.84% CAGR vs. 4.56% CAGR for VGTSX.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(2) I also used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total US Stock Market Fund (VTSMX) and from January 1993 to July 2022 (almost 30 years), VFINX returned 9.92% vs. VTSMX returning 9.84% (small difference).
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(3) I also used Portfolio Visualizer to compare The Total Bond Market (VBMFX) to Intermediate Term Bond Market (VBIIX) from January 1995 to July 2022, and VBIIX returned 5.49% vs. 4.37% for the Total Bond Market.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

Given the under-performance of International, Total Bond Market and Total US Stock Market, why not just stick to Bogle's original 2-Fund approach: S&P 500 Index & Total Bond Market (although I would swap it with Intermediate Term Bond Market since it's 1/3 Corporate Bonds)?

Simplicity is King right? And 2-funds is even simpler than 3 funds especially if it has better returns.

Taylor, I still can't thank-you enough after reading many of your posts. You made me think about how complicated my portfolio was and on top of all that it's been under-performing for a long time. You have enlightened me and I thank-you for that.
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Re: The Three-Fund Portfolio Video

Post by Taylor Larimore »

Bogleheads:

Rob Burger is an attorney, contributing editor for Forbes Advisor and host of the Financial Freedom Show. I accidently ran across his great video praising The Three-Fund Portfolio with words like this: simple; low-cost, sophisticated. This is the link:

"How to Create a 3 Fund Portfolio."

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "The Three-Fund Portfolio will help you to develop a sound asset allocation strategy, make smart investment selections, and guide the implementation of your plan."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three-Fund Portfolio Video

Post by abuss368 »

Taylor Larimore wrote: Fri Aug 26, 2022 10:38 am Bogleheads:

Rob Burger is an attorney, contributing editor for Forbes Advisor and host of the Financial Freedom Show. I accidently ran across his great video praising The Three-Fund Portfolio with words like this: simple; low-cost, sophisticated. This is the link:

"How to Create a 3 Fund Portfolio."

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "The Three-Fund Portfolio will help you to develop a sound asset allocation strategy, make smart investment selections, and guide the implementation of your plan."
Hi Taylor -

Thank you for sharing this excellent video that provides support for the many advantages of The Three Fund Portfolio!

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three-Fund Portfolio

Post by jdamo »

That's a good video of the 3-fund approach and advantages...
It's also great to show the use of the portfolio analyzer to check historical returns and different asset allocation %s......

Thanks again for posting it Taylor!
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Re: "Why The Three-Fund Portfolio Is King"

Post by Taylor Larimore »

Bogleheads:

It is informative to view a video praising The Three Fund Portfolio and giving specific reasons. Jarrad Morrow, the video producer,writes:
"There’s a very easy “do it yourself” method to investing that not only outperforms the vast majority of retail and professional investors, but also saves you a ton of time, energy, and money along the way. And that investing method is called The 3 Fund Investment Portfolio."

This is a link to the 18 minute video: Why The Three-Fund Portfolio Is King

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three-Fund Portfolio

Post by Taylor Larimore »

Bogleheads:

The Boglehead Forum has a long thread titled:

"What's the favorite thing or most important thing you have learned here?"

I love this part of bikechuck's Reply:
I have learned a lot from this forum but the most important thing(s) are/were from reading the "Three Fund Portfolio" thread started by Taylor Larimore."
Thank you bikechuck.

Taylor
Jack Bogle's Words of Wisdom "The Three-Fund Portfolio will help you to develop a sound asset allocation strategy, make smart investment selections, and guide the implementation of your plan."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three-Fund Portfolio

Post by tucker99 »

Can't help but bring back JDamo's post about the temptation to dump some the bond fund, VBTLX. Current cost basis value is -12.73% and it's bringing down the portfolio. With just 3-funds and heavy into bonds, it's real noticeable with a crap return of 3.6%. If I wasn't 6-months into retirement, I would agree. However, since I don't plan on selling any of my portfolio, why do I care what the price is? Especially, and strange enough, the lower VBTLX goes, the higher the dividends. I would like to hear, in 1000 words or less, how bond dividends are calculated; cause it doesn't make sense.

In my situation; when the time comes when we need to make withdraws; they'll be lower than dividend gains so the portfolio will still feed itself.

Every situation is different; but the argument about timing the market may be a stretch with the these index funds; seems big changes are gradual. If I was 5-or more years from retirement I would have a lighter bond allocation, but I think I'd still dump some bond if I saw a downward trend.
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Re: The Three-Fund Portfolio

Post by dbr »

Dividend is a payment in dollars per share of the fund. For an individual bond what is paid is a "coupon" which is the dollar payment for a given face value bond. Yield is the ratio of dividend to price, expressed as a percent and varies with price. You can express a distribution yield, an SEC yield, a yield to maturity, and so on.

https://corporatefinanceinstitute.com/r ... upon-bond/

https://www.thebalancemoney.com/what-is ... ame-357374

https://www.investopedia.com/terms/d/di ... %20vehicle.

https://www.investopedia.com/terms/s/secyield.asp

https://www.investopedia.com/terms/y/yi ... turity.asp

If you want to see what the payments from a fund have been you would go to a fund information sheet and look up the distributions which include dividends and sometimes also capital gains distributions.

An important characterization of the relationship between bond prices and interest rates is the concept of duration:

https://en.wikipedia.org/wiki/Bond_duration

I'm afraid this amounts to more than a thousand words.
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Re: The Three-Fund Portfolio

Post by Impreziv »

New Boglehead here. After a long hiatus on investing in my Roth IRA, I am back to it at age 32. Liquidity tied up in growing my business.

Previously I was in target date funds and now taking a 3-fund approach. My only hiccup here is asset allocation. Bogle recommends your age in bonds, others recommend your age less 20 years in bonds, and, even further, others recommend 110 or 120 less your age in equities. I'm quite risk tolerant, and 68/32 doesn't seem like enough equity exposure. I'm leaning towards an 85/15 or even a 90/10 being 30+ years out from my expected retirement.

I realize asset allocation is very personal, but just chiming in to make sure I'm not being foolish. Below is my 3 fund portfolio at a simple 80/20 for reference:

60% VTI
20% VXUS
20% VGIT (also considering VGLT based on time horizon)
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Re: The Three-Fund Portfolio

Post by jay22 »

enad wrote: Sat Aug 20, 2022 8:27 pm My transformation is nearly complete. I am in the process of dumping my Paul Merriman UBH which has been flat for the last 12 years. You would expect some areas of over-weighting not to perform, but in the case, REIT, EM, SMALL, VALUE, INTERNATIONAL have all under-performed. Will they come back again in the future? Maybe but if you account for 12-years of under-performance (opportunity lost) it's just not worth it to me.

So I was thinking about Taylor and the Three-Fund Portfolio, and I have some questions for you Taylor:

(1) I used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total International Stock Market Index Fund (VGTSX) and from January 1997 to July 2022, VFINX returned 8.84% CAGR vs. 4.56% CAGR for VGTSX.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(2) I also used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total US Stock Market Fund (VTSMX) and from January 1993 to July 2022 (almost 30 years), VFINX returned 9.92% vs. VTSMX returning 9.84% (small difference).
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(3) I also used Portfolio Visualizer to compare The Total Bond Market (VBMFX) to Intermediate Term Bond Market (VBIIX) from January 1995 to July 2022, and VBIIX returned 5.49% vs. 4.37% for the Total Bond Market.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

Given the under-performance of International, Total Bond Market and Total US Stock Market, why not just stick to Bogle's original 2-Fund approach: S&P 500 Index & Total Bond Market (although I would swap it with Intermediate Term Bond Market since it's 1/3 Corporate Bonds)?

Simplicity is King right? And 2-funds is even simpler than 3 funds especially if it has better returns.

Taylor, I still can't thank-you enough after reading many of your posts. You made me think about how complicated my portfolio was and on top of all that it's been under-performing for a long time. You have enlightened me and I thank-you for that.
Whether you need international equity allocation or not is a topic that has been debated a number of times here with no definitive answer. Both camps has fair points to make and it is up to the individual to decide where he/she is wrt their investing thought process and how they think of future returns.
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Re: The Three-Fund Portfolio

Post by Taylor Larimore »

jay22 wrote: Tue Sep 20, 2022 4:37 pm
enad wrote: Sat Aug 20, 2022 8:27 pm My transformation is nearly complete. I am in the process of dumping my Paul Merriman UBH which has been flat for the last 12 years. You would expect some areas of over-weighting not to perform, but in the case, REIT, EM, SMALL, VALUE, INTERNATIONAL have all under-performed. Will they come back again in the future? Maybe but if you account for 12-years of under-performance (opportunity lost) it's just not worth it to me.

So I was thinking about Taylor and the Three-Fund Portfolio, and I have some questions for you Taylor:

(1) I used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total International Stock Market Index Fund (VGTSX) and from January 1997 to July 2022, VFINX returned 8.84% CAGR vs. 4.56% CAGR for VGTSX.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(2) I also used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total US Stock Market Fund (VTSMX) and from January 1993 to July 2022 (almost 30 years), VFINX returned 9.92% vs. VTSMX returning 9.84% (small difference).
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(3) I also used Portfolio Visualizer to compare The Total Bond Market (VBMFX) to Intermediate Term Bond Market (VBIIX) from January 1995 to July 2022, and VBIIX returned 5.49% vs. 4.37% for the Total Bond Market.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

Given the under-performance of International, Total Bond Market and Total US Stock Market, why not just stick to Bogle's original 2-Fund approach: S&P 500 Index & Total Bond Market (although I would swap it with Intermediate Term Bond Market since it's 1/3 Corporate Bonds)?

Simplicity is King right? And 2-funds is even simpler than 3 funds especially if it has better returns.

Taylor, I still can't thank-you enough after reading many of your posts. You made me think about how complicated my portfolio was and on top of all that it's been under-performing for a long time. You have enlightened me and I thank-you for that.
Enad:

Whether you need international equity allocation or not is a topic that has been debated a number of times here with no definitive answer. Both camps has fair points to make and it is up to the individual to decide where he/she is wrt their investing thought process and how they think of future returns.
Enad:

Beware. Your 3 questions are based on the results of using "Portfolio Visualizer" which indicates the past performance of various stock and bond securities.

Unfortunately, using "past performance" can be so misleading that the government requires mutual fund companies to warn us it is misleading:
Past performance does not forecast future performance.
Please read Jack Bogle's The Telltale Chart speech about "Reversion to the Mean." I heard him give that speech in Chicago 20 years ago and it changed our investment life for the better.

I can't disagree with Jack Bogle that a 2-fund portfolio (eliminating foreign stocks) could be better in the future (no one knows). However, I remember 1986 when the MSCI EAFE Index gained +65.8% while the S&P Index gained +18.7%. My reasons for including 20% of equity in International stocks in The Three-Fund Portfolio can be read here.

I hope I've answered your questions.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: The Three-Fund Portfolio

Post by abuss368 »

enad wrote: Sat Aug 20, 2022 8:27 pm My transformation is nearly complete. I am in the process of dumping my Paul Merriman UBH which has been flat for the last 12 years. You would expect some areas of over-weighting not to perform, but in the case, REIT, EM, SMALL, VALUE, INTERNATIONAL have all under-performed. Will they come back again in the future? Maybe but if you account for 12-years of under-performance (opportunity lost) it's just not worth it to me.

So I was thinking about Taylor and the Three-Fund Portfolio, and I have some questions for you Taylor:

(1) I used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total International Stock Market Index Fund (VGTSX) and from January 1997 to July 2022, VFINX returned 8.84% CAGR vs. 4.56% CAGR for VGTSX.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(2) I also used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total US Stock Market Fund (VTSMX) and from January 1993 to July 2022 (almost 30 years), VFINX returned 9.92% vs. VTSMX returning 9.84% (small difference).
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(3) I also used Portfolio Visualizer to compare The Total Bond Market (VBMFX) to Intermediate Term Bond Market (VBIIX) from January 1995 to July 2022, and VBIIX returned 5.49% vs. 4.37% for the Total Bond Market.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

Given the under-performance of International, Total Bond Market and Total US Stock Market, why not just stick to Bogle's original 2-Fund approach: S&P 500 Index & Total Bond Market (although I would swap it with Intermediate Term Bond Market since it's 1/3 Corporate Bonds)?

Simplicity is King right? And 2-funds is even simpler than 3 funds especially if it has better returns.

Taylor, I still can't thank-you enough after reading many of your posts. You made me think about how complicated my portfolio was and on top of all that it's been under-performing for a long time. You have enlightened me and I thank-you for that.
Select a simple, low cost and diversified portfolio of total market index funds and stay the course.

Over time, you will be thankful for the results.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The Three-Fund Portfolio

Post by enad »

Taylor Larimore wrote: Tue Sep 20, 2022 8:49 pm
jay22 wrote: Tue Sep 20, 2022 4:37 pm
enad wrote: Sat Aug 20, 2022 8:27 pm My transformation is nearly complete. I am in the process of dumping my Paul Merriman UBH which has been flat for the last 12 years. You would expect some areas of over-weighting not to perform, but in the case, REIT, EM, SMALL, VALUE, INTERNATIONAL have all under-performed. Will they come back again in the future? Maybe but if you account for 12-years of under-performance (opportunity lost) it's just not worth it to me.

So I was thinking about Taylor and the Three-Fund Portfolio, and I have some questions for you Taylor:

(1) I used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total International Stock Market Index Fund (VGTSX) and from January 1997 to July 2022, VFINX returned 8.84% CAGR vs. 4.56% CAGR for VGTSX.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(2) I also used Portfolio Visualizer to compare the S&P 500 (VFINX) to Total US Stock Market Fund (VTSMX) and from January 1993 to July 2022 (almost 30 years), VFINX returned 9.92% vs. VTSMX returning 9.84% (small difference).
https://www.portfoliovisualizer.com/bac ... ation4_3=0

(3) I also used Portfolio Visualizer to compare The Total Bond Market (VBMFX) to Intermediate Term Bond Market (VBIIX) from January 1995 to July 2022, and VBIIX returned 5.49% vs. 4.37% for the Total Bond Market.
https://www.portfoliovisualizer.com/bac ... ation4_3=0

Given the under-performance of International, Total Bond Market and Total US Stock Market, why not just stick to Bogle's original 2-Fund approach: S&P 500 Index & Total Bond Market (although I would swap it with Intermediate Term Bond Market since it's 1/3 Corporate Bonds)?

Simplicity is King right? And 2-funds is even simpler than 3 funds especially if it has better returns.

Taylor, I still can't thank-you enough after reading many of your posts. You made me think about how complicated my portfolio was and on top of all that it's been under-performing for a long time. You have enlightened me and I thank-you for that.
Enad:

Whether you need international equity allocation or not is a topic that has been debated a number of times here with no definitive answer. Both camps has fair points to make and it is up to the individual to decide where he/she is wrt their investing thought process and how they think of future returns.
Enad:

Beware. Your 3 questions are based on the results of using "Portfolio Visualizer" which indicates the past performance of various stock and bond securities.

Unfortunately, using "past performance" can be so misleading that the government requires mutual fund companies to warn us it is misleading:
Past performance does not forecast future performance.
Please read Jack Bogle's The Telltale Chart speech about "Reversion to the Mean." I heard him give that speech in Chicago 20 years ago and it changed our investment life for the better.

I can't disagree with Jack Bogle that a 2-fund portfolio (eliminating foreign stocks) could be better in the future (no one knows). However, I remember 1986 when the MSCI EAFE Index gained +65.8% while the S&P Index gained +18.7%. My reasons for including 20% of equity in International stocks in The Three-Fund Portfolio can be read here.

I hope I've answered your questions.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Taylor,

Thank-you. Since I wrote this post I have been busy reading other posts on this forum including several on the 2-Fund thread. I enjoyed the Telltale Speech and others I found on the Bogle site. What a wealth of information. I started investing in 1982 and in 1987 bought into the S&P500 fund and have been continuously invested in the fund through today, In fact my portfolio was 100% US stock until 16 years ago when I switched a portion of it to Merriman's UBH which I think you are familiar with. I think Bogle called play money and others call it funny money but even losing funny money is not funny. Lesson learned. I tried it and the returns were not great (some were okay, others subpar), I am just glad its behind me.

I am retired and have no plans of using any of my retirement money until I have to take out those Required Minimum Distributions. I am at 60/40 for myself, 70/30 for my wife and we are 65/35 combined. I am waiting for an opportunity (buy on a dip or recession) to change my allocation to 70/30.

I enjoy reading your posts on this forum and even several on the Internet. I dusted off my book Bogle on Mutual funds and it's much much better the 2nd time around.

I think I will be okay with the 2-Fund portfolio as well, since we can easily live off of our SS benefits and my pensions. As a family we have learned (the last 7 years) to live well beneath our means but we still have money to enjoy life, but I don't think I will be taking up sailing out here in the desert.

I was reading Bogle on Mutual funds for the 2nd time and ran across this nugget the other day:

Financial history is important, and studying historical rates of returns provides useful perspectives. But beware of concluding too much from the past returns in the financial markets. Beware or past returns for periods that seem long enough but are not

Best Wishes to you.
Last edited by enad on Thu Sep 22, 2022 9:31 am, edited 1 time in total.
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Re: The Three-Fund Portfolio

Post by enad »

jay22 wrote: Tue Sep 20, 2022 4:37 pm Whether you need international equity allocation or not is a topic that has been debated a number of times here with no definitive answer. Both camps has fair points to make and it is up to the individual to decide where he/she is wrt their investing thought process and how they think of future returns.
Thank-you. I have since found a wealth of information on this forum (guess I should have looked before writing the post) including the 2-Fund page. FYI, I have no plans on tapping any retirement money until Uncle Sam forces me to and the bulk (if not all) of those monies will be re-invested in a regular after tax account. I have held S&P500 as my primary fund for 35 years.
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Re: The Three-Fund Portfolio

Post by enad »

abuss368 wrote: Wed Sep 21, 2022 8:10 pm Select a simple, low cost and diversified portfolio of total market index funds and stay the course.

Over time, you will be thankful for the results.

Best.
Tony
Tony,

I found your 2-Fund post and it answered many of my questions. I had been using 2 US stock funds for over 35 years before switching a portion of my portfolio to the UBH and finally dumped it as it just wasn't working out and am back to 1 US stock fund and 2 Bond funds which mimic the total bond market fund from Vanguard (2/3 IT HQ US Treasury, 1/3 IT HQ Corporate).

I found an interview in which Jack Bogle said he tried to get the index behind the Total Bond Market changed which didn't wok out, then he tried to get Vanguard to change the composition of the Total Bond Market to just a percentage of US Treasuries held by the US Government and more corporate bonds, but that didn't work out, and he tried to get them to create a new US Total Bond Market and that did not work out either. I think he stopped short of advocating additional IT Corp bonds because he was all about simplicity.

I did not want to dump all the shares I held of Intermediate Term US Treasury and buy the Total Bond Market so I just added additional shares of IT Corporate bonds.

The biggest mistake I made was trying out the UBH but I have learned and have moved on.

Best Wishes
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Re: The Three-Fund Portfolio

Post by enad »

Impreziv wrote: Tue Sep 20, 2022 3:32 pm New Boglehead here. After a long hiatus on investing in my Roth IRA, I am back to it at age 32. Liquidity tied up in growing my business.

Previously I was in target date funds and now taking a 3-fund approach. My only hiccup here is asset allocation. Bogle recommends your age in bonds, others recommend your age less 20 years in bonds, and, even further, others recommend 110 or 120 less your age in equities. I'm quite risk tolerant, and 68/32 doesn't seem like enough equity exposure. I'm leaning towards an 85/15 or even a 90/10 being 30+ years out from my expected retirement.

I realize asset allocation is very personal, but just chiming in to make sure I'm not being foolish. Below is my 3 fund portfolio at a simple 80/20 for reference:

60% VTI
20% VXUS
20% VGIT (also considering VGLT based on time horizon)
Welcome to the forum,

It's a great place to search and ask questions. I think 60/40 is the classic allocation, and I've read where Bogle wrote your age in bonds, even age -10. In the end it will be whatever lets you sleep at night. Besides having bonds to dampen the wild ride of your equities, they can be a source to sell in a recession to buy more equities. Perhaps you may even want to consider a small 5% allocation to cash. VGIT is good, but the Total Bond Market (BND) will give you better returns and income later. It's basically 2/3 VGIT 1/3 VCIT under the hood.
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