The One-Fund Portfolio as a default suggestion

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

Post by Tom_T »

bigdave18629 wrote: Wed Apr 20, 2022 9:15 am
Tom_T wrote: Tue Apr 19, 2022 9:14 pm
Uncle Morris wrote: Tue Apr 19, 2022 8:43 pm And there's no way to know whether they will in fact be great for me.
With all due respect, that is not true for any I Bond purchased in April. The 12-month return is known in advance and guaranteed. There is no risk.
Couldn't agree more. My only regret is that I was not aware of them until recently, and that I can't pump more money in. Even if they don't keep the high interest for long, they are 100% safe. I would say best place for a significant portion of an emergency fund if nothin else.
I don't know about using it for an emergency fund. You can't touch it for 12 months.
bigdave18629
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Re: The One-Fund Portfolio as a default suggestion

Post by bigdave18629 »

Tom_T wrote: Wed Apr 20, 2022 9:20 am
bigdave18629 wrote: Wed Apr 20, 2022 9:15 am
Tom_T wrote: Tue Apr 19, 2022 9:14 pm
Uncle Morris wrote: Tue Apr 19, 2022 8:43 pm And there's no way to know whether they will in fact be great for me.
With all due respect, that is not true for any I Bond purchased in April. The 12-month return is known in advance and guaranteed. There is no risk.
Couldn't agree more. My only regret is that I was not aware of them until recently, and that I can't pump more money in. Even if they don't keep the high interest for long, they are 100% safe. I would say best place for a significant portion of an emergency fund if nothin else.
I don't know about using it for an emergency fund. You can't touch it for 12 months.
I understand, but with the limited ability to make contributions by the time there is significant money involved, most of the bonds should be past the 1 year mark. I am also making the assumption that we are dealing with someone further along in life with some level of accumulation. Would not make the same suggestion for a person just starting on the journey for the very point you brought up.
Uncle Morris
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Re: The One-Fund Portfolio as a default suggestion

Post by Uncle Morris »

Tom_T wrote: Tue Apr 19, 2022 9:14 pm
Uncle Morris wrote: Tue Apr 19, 2022 8:43 pm And there's no way to know whether they will in fact be great for me.
With all due respect, that is not true for any I Bond purchased in April. The 12-month return is known in advance and guaranteed. There is no risk.
That the return is known and guaranteed are both known facts. But even on the i-bonds threads there are those who question whether there might not be better investments (for them, at least, but also possibly in general), as well as some who point out that when one purchased them made a difference, and that it's hard to predict how much inflation there will be and for how long - and if I understand correctly, the current high inflation is what makes i-bonds attractive.

I may be leaving money on the table, just as I may be doing so by not buying any other specific investment. By sticking to the one-fund portfolio, I decide not to use my time to try and figure out what the best investments might be. Isn't this analogous to indexing vs. trying to pick only the sure-thing stocks (or in this case, the sure-thing bonds)?

I'm not denying that i-bonds sound great, and I'm happy for those who profit from them.
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Re: The One-Fund Portfolio as a default suggestion

Post by vineviz »

Tom_T wrote: Tue Apr 19, 2022 9:14 pm
Uncle Morris wrote: Tue Apr 19, 2022 8:43 pm And there's no way to know whether they will in fact be great for me.
With all due respect, that is not true for any I Bond purchased in April. The 12-month return is known in advance and guaranteed. There is no risk.
The fact that there is no "risk" doesn't necessarily make an investment "great", and certainly not "great" for everyone.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
000
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Re: The One-Fund Portfolio as a default suggestion

Post by 000 »

If the dogma of simplicity causes one to miss out on great deals like I bonds then I think we have taken simplicity a bit too far.

The prophecy of nedsaid's zero fund portfolio may yet come true. :mrgreen:
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Re: The One-Fund Portfolio as a default suggestion

Post by willthrill81 »

000 wrote: Wed Apr 20, 2022 4:07 pm If the dogma of simplicity causes one to miss out on great deals like I bonds then I think we have taken simplicity a bit too far.
"Make everything as simple as possible, but not simpler."
-Albert Einstein
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Re: The One-Fund Portfolio as a default suggestion

Post by 000 »

willthrill81 wrote: Wed Apr 20, 2022 4:11 pm "Make everything as simple as possible, but not simpler."
-Albert Einstein
That makes no sense. How could something be made simpler than the maximal possible simplicity?
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Re: The One-Fund Portfolio as a default suggestion

Post by willthrill81 »

000 wrote: Wed Apr 20, 2022 4:17 pm
willthrill81 wrote: Wed Apr 20, 2022 4:11 pm "Make everything as simple as possible, but not simpler."
-Albert Einstein
That makes no sense. How could something be made simpler than the maximal possible simplicity?
I believe he meant 'possible' to mean something like 'helpful'.
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Re: The One-Fund Portfolio as a default suggestion

Post by DaufuskieNate »

willthrill81 wrote: Wed Apr 20, 2022 4:11 pm
000 wrote: Wed Apr 20, 2022 4:07 pm If the dogma of simplicity causes one to miss out on great deals like I bonds then I think we have taken simplicity a bit too far.
"Make everything as simple as possible, but not simpler."
-Albert Einstein
I like this quote a lot. Another good one is:

“For the simplicity on this side of complexity, I wouldn't give you a fig. But for the simplicity on the other side of complexity, for that I would give you anything I have.”


― Oliver Wendell Holmes
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Re: The One-Fund Portfolio as a default suggestion

Post by 000 »

willthrill81 wrote: Wed Apr 20, 2022 4:19 pm
000 wrote: Wed Apr 20, 2022 4:17 pm
willthrill81 wrote: Wed Apr 20, 2022 4:11 pm "Make everything as simple as possible, but not simpler."
-Albert Einstein
That makes no sense. How could something be made simpler than the maximal possible simplicity?
I believe he meant 'possible' to mean something like 'helpful'.
I guess the quotation was not made as simple as possible then. :mrgreen:
bluesun
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Re: The One-Fund Portfolio as a default suggestion

Post by bluesun »

longinvest wrote: Mon Jul 06, 2020 7:20 am
Triple digit golfer wrote: Sun Jul 05, 2020 5:03 pm I would consider switching to a one fund portfolio in all accounts, but I have taxable gains in my taxable account. No really good way to do it that doesn't involve selling and wiping out all of my March losses that I locked in plus $30k in additional gains.

I'm assuming there's no way I can get this done besides taking the large gains.
Here's what I would probably do. I would estimate the amount of tax I'd owe on a realized $30K capital gain and calculate its ratio to my overall portfolio balance. Let's say, for example, that I'd owe 1% of my portfolio in taxes, I could more-or-less reduce this to a more palatable annual 0.1% cost by spreading the switch over a 10 year period. In the first year, 1/10 of taxable investments would be switched to the selected all-in-one fund. In the second year, 1/9 of the remaining would be switched. In the third year 1/8 would be switched, and so on.

Or, I might just wait long enough for the capital gain to be considered long-term, switch the entire taxable account in one shot, pay the taxes, and be done with it.
Thank you for this very interesting thread! 20 years ago I started with the recommended 3-fund portfolio with Total Stock and Total International Stock in a taxable account. I also followed the advice to put my bonds in tax-deferred accounts. I started with 90/10 and have eventually moved to 70/30, where I am now.

Amusingly, Vanguard tells me my personal rate of return over the last 10 years (6.6%) is a only little bit higher than the 10-year numbers for Lifestrategy Moderate Growth (6.51%). I know the numbers are not really comparable since the 6.51% number is a lump sum from the beginning, and I have been buying and selling, but it's an interesting benchmark considering all the time I've spent reading this forum, tweaking my allocations, rebalancing, and deciding where new money goes. Managing the 3-fund portfolio isn't terrible -- it requires updating a few numbers in a spreadsheet, but it's not something I actually enjoy doing and it does take up some time on the weekend that might be better spent doing things with family and friends.

As I've gotten older I realize there's not that much time to do the things you want to do, so I like this idea of putting it in a single fund.

I currently have long-term capital gains on 2.5% of my portfolio in the taxable account. I'm definitely reluctant to pay that much tax all at once, but if I were to switch (I haven't decided yet) I think I'd rather switch right away, since letting it drag out of 5 or 10 years carries with it its own costs on time and mental energy.
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Sandtrap
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Re: The One-Fund Portfolio as a default suggestion

Post by Sandtrap »

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 globally-diversified 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), Vanguard LifeStrategy fund (VASGX 80/20 stocks/bonds, VSMGX 60/40 stocks/bonds, VSCGX 40/60 stocks/bonds, or VASIX 20/80 stocks/bonds), or iShares Core Allocation ETF (AOA 80/20 stocks/bonds, AOR 60/40 stocks/bonds, AOM 40/60 stocks/bonds, or AOK 30/70 stocks/bonds)
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%.
Question:

Why did you not include the Vanguard Balanced Index Fund (VBIAX) in the above references and suggestions?
VBIAX
https://investor.vanguard.com/investmen ... file/vbiax

lack of international allocation?
etc?

Thoughts on the possible role of this fund in the above missive from others?

thanks,
j :D
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longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

Sandtrap wrote: Fri Sep 23, 2022 9:55 pm Question:

Why did you not include the Vanguard Balanced Index Fund (VBIAX) in the above references and suggestions?
VBIAX
https://investor.vanguard.com/investmen ... file/vbiax

lack of international allocation?
etc?

Thoughts on the possible role of this fund in the above missive from others?

thanks,
j :D
Sandtrap, here's the answer I provided earlier in this thread:
longinvest wrote: Tue Jul 21, 2020 12:47 am
1789 wrote: Mon Jul 20, 2020 11:54 pm I know it is not a market portfolio but would like to hear your thoughts on balanced index fund VBIAX , 60/40 (only US). Thou i should mention i consider this fund when i am 60 years old and not now (currently 36 yrs old)
1789, as clearly explained in the first post, this thread is about building a portfolio using a single identical globally-diversified all-in-one index fund or ETF in all accounts, like a Vanguard LifeStrategy or Target Retirement fund, or an iShares Core Allocation ETF. A domestic-only balanced fund doesn't qualify. You could create a new thread to discuss it.
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Sandtrap
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Re: The One-Fund Portfolio as a default suggestion

Post by Sandtrap »

longinvest wrote: Fri Sep 23, 2022 10:19 pm
Sandtrap wrote: Fri Sep 23, 2022 9:55 pm Question:

Why did you not include the Vanguard Balanced Index Fund (VBIAX) in the above references and suggestions?
VBIAX
https://investor.vanguard.com/investmen ... file/vbiax

lack of international allocation?
etc?

Thoughts on the possible role of this fund in the above missive from others?

thanks,
j :D
Sandtrap, here's the answer I provided earlier in this thread:
longinvest wrote: Tue Jul 21, 2020 12:47 am
1789 wrote: Mon Jul 20, 2020 11:54 pm I know it is not a market portfolio but would like to hear your thoughts on balanced index fund VBIAX , 60/40 (only US). Thou i should mention i consider this fund when i am 60 years old and not now (currently 36 yrs old)
1789, as clearly explained in the first post, this thread is about building a portfolio using a single identical globally-diversified all-in-one index fund or ETF in all accounts, like a Vanguard LifeStrategy or Target Retirement fund, or an iShares Core Allocation ETF. A domestic-only balanced fund doesn't qualify. You could create a new thread to discuss it.
thanks

j :D
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Lawrence of Suburbia
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Re: The One-Fund Portfolio as a default suggestion

Post by Lawrence of Suburbia »

I don't get why Vanguard (or Schwab, or Fidelity, or ...) doesn't introduce a single fund emulating the 3-Fund Portfolio, in a 60/40 A.A. and maybe a 40/60 one for retirees.
I know that you believe you understand what you think I said; but I am not sure you realise that what you heard is not what I meant.
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Re: The One-Fund Portfolio as a default suggestion

Post by zie »

Lawrence of Suburbia wrote: Sat Sep 24, 2022 2:37 am I don't get why Vanguard (or Schwab, or Fidelity, or ...) doesn't introduce a single fund emulating the 3-Fund Portfolio, in a 60/40 A.A. and maybe a 40/60 one for retirees.
Vanguard & Blackrock did. Vanguards are Mutual Funds and Blackrock's are ETF's. Fidelity and Schwab have some funds at fixed AA's(though most are arguably not worth buying).

Specifically in the 60/40 camp, there are 2 of consequence, VSMGX, mentioned in the first post and AOR, the Blackrock ETF.

At the lower equity spectrum(40/60) doesn't exist, but 50/50 does in ETF format: AOM and 30/70 does: AOK, then it's 20/80 with FIKFX and VASIX.

At the higher equity camp, 80/20 is popular: AOA/FFNOX/VASGX all fit the bill.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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Re: The One-Fund Portfolio as a default suggestion

Post by Lastrun »

zie wrote: Sat Sep 24, 2022 7:54 am At the lower equity spectrum(40/60) doesn't exist,
Oddly, one does exist, https://fundresearch.fidelity.com/mutua ... /316069319 but, alas it is only available for HSAs?

But it is a true one-fund (three fund) 40/60.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

The first post of this thread lists several fixed-allocation globally-diversified all-in-one index funds and ETFs (in addition to gliding asset allocation globally-diversified all-in-one index fund series):
longinvest wrote: Mon Aug 12, 2019 8:10 am Portfolio 2: A carefully-chosen all-in-one globally-diversified 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), Vanguard LifeStrategy fund (VASGX 80/20 stocks/bonds, VSMGX 60/40 stocks/bonds, VSCGX 40/60 stocks/bonds, or VASIX 20/80 stocks/bonds), or iShares Core Allocation ETF (AOA 80/20 stocks/bonds, AOR 60/40 stocks/bonds, AOM 40/60 stocks/bonds, or AOK 30/70 stocks/bonds)
Here are the eight fixed-allocation globally-diversified all-in-one index funds and ETFs mentioned in the above quote, listed by asset allocation:
  • 80/20 stocks/bonds: Vanguard LifeStrategy Growth Fund (VASGX), iShares Core Aggressive Allocation ETF (AOA)
  • 60/40 stocks/bonds: Vanguard LifeStrategy Moderate Growth Fund (VSMGX), iShares Core Growth Allocation ETF (AOR)
  • 40/60 stocks/bonds: Vanguard LifeStrategy Conservative Growth Fund (VSCGX), iShares Core Moderate Allocation ETF (AOM)
  • 30/70 stocks/bonds: iShares Core Conservative Allocation ETF (AOK)
  • 20/80 stocks/bonds: Vanguard LifeStrategy Income Fund (VASIX)
The target asset allocation of the four iShare Core Allocation ETFs is stated in page 2 of this document.
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Lawrence of Suburbia
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Re: The One-Fund Portfolio as a default suggestion

Post by Lawrence of Suburbia »

zie wrote: Sat Sep 24, 2022 7:54 am
Lawrence of Suburbia wrote: Sat Sep 24, 2022 2:37 am I don't get why Vanguard (or Schwab, or Fidelity, or ...) doesn't introduce a single fund emulating the 3-Fund Portfolio, in a 60/40 A.A. and maybe a 40/60 one for retirees.
Vanguard & Blackrock did. Vanguards are Mutual Funds and Blackrock's are ETF's. Fidelity and Schwab have some funds at fixed AA's(though most are arguably not worth buying).

Specifically in the 60/40 camp, there are 2 of consequence, VSMGX, mentioned in the first post and AOR, the Blackrock ETF.

At the lower equity spectrum(40/60) doesn't exist, but 50/50 does in ETF format: AOM and 30/70 does: AOK, then it's 20/80 with FIKFX and VASIX.

At the higher equity camp, 80/20 is popular: AOA/FFNOX/VASGX all fit the bill.
Thanks for that, I hadn't heard of the Blackrock ones.

Aren't the Vanguard offerings a little too high in international to really be Bogleheads, though?
I know that you believe you understand what you think I said; but I am not sure you realise that what you heard is not what I meant.
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Re: The One-Fund Portfolio as a default suggestion

Post by zie »

Lawrence of Suburbia wrote: Sat Sep 24, 2022 5:00 pm
Thanks for that, I hadn't heard of the Blackrock ones.

Aren't the Vanguard offerings a little too high in international to really be Bogleheads, though?
I'm not sure why you think that?

But the entire point of this thread is: it's "close enough" to William Sharpe's Market Portfolio with basically zero work and a low-ish ER.

The very first message in this thread and longinvest's post has more details.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

I am fascinated by what you have posted Longinvest and I really appreciate all of your analysis and links. I have only gotten through the first page of this thread, but am very intrigued.

Even being in my late 40s, I am looking to simplify my portfolio (even though it is already very simple) but the problem being that 61% of it is taxable (7 figs).

I’ve got large unrealized gains on that 61%. I really don’t want to give the IRS more taxes to get my taxable portion even simpler (one fund) so that it is easier for my wife in the event something happened to me.

Being in CA, the Vanguard tax managed balanced looks very appealing. If I don’t switch to that, I have thought about writing instructions for her to put all taxable in that if I pass, then tax-advantaged accounts in a Lifesrategy fund.

I like the idea of the mirrored approach. I didn’t know that the difference was a gain of 0.2-0.3% for optimal location. Knowing that now, I can say I wish I knew that at the beginning when I was shooting for a bullseye.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Mon Oct 03, 2022 1:32 pm I am fascinated by what you have posted Longinvest and I really appreciate all of your analysis and links. I have only gotten through the first page of this thread, but am very intrigued.

Even being in my late 40s, I am looking to simplify my portfolio (even though it is already very simple) but the problem being that 61% of it is taxable (7 figs).

I’ve got large unrealized gains on that 61%. I really don’t want to give the IRS more taxes to get my taxable portion even simpler (one fund) so that it is easier for my wife in the event something happened to me.

Being in CA, the Vanguard tax managed balanced looks very appealing. If I don’t switch to that, I have thought about writing instructions for her to put all taxable in that if I pass, then tax-advantaged accounts in a Lifesrategy fund.

I like the idea of the mirrored approach. I didn’t know that the difference was a gain of 0.2-0.3% for optimal location. Knowing that now, I can say I wish I knew that at the beginning when I was shooting for a bullseye.
Bbrock, thanks for the nice comments.

I see that you're referring to forum member Dude2's post. Note that the cost estimate is extracted from an analysis done in a Canadian context, not a U.S. context. Unfortunately, I'm not aware of a similar cost analysis done in a U.S. context.

This last January I took a different approach to compare a mirror allocation strategy and a "tax-efficient" asset location strategy in this post. Here are some of the highlights:
longinvest wrote: Sat Jan 29, 2022 9:05 pm [...]
It's best focus on the big numbers that matter, like total net income available to spend after taxes, instead of focusing on ratios between small numbers with little impact on the retiree's wellness, like ratios of between tax amounts.
[...]
It's a mistake to only consider good scenarios and ignore risk, when evaluating the after-tax impact of asset location strategies. A complex strategy delivering better outcomes when things go well and worse outcomes when they don't, when compared to a simpler strategy, unnecessarily complicates the life of its investor. A slightly-higher stock allocation with the simpler strategy is likely to deliver similar outcomes.
[...]
An identical asset allocation in all portfolio accounts (a mirrored asset allocation) doesn't affect the effective riskiness of the portfolio, even after taxes. In contrast, so called "tax-efficient" asset location strategies often promise better "expected" outcomes without disclosing that they do so by increasing the effective after-tax risk of the portfolio. In other words, a mirrored asset allocation is not only good enough, it also delivers more consistent outcomes.
In a follow-up post I checked that, effectively, a slightly-different stock allocation with a mirror allocation delivers similar outcomes to a "tax-efficient" asset location.

Enjoy!
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

It would be awesome to implement this one fund idea in all my accounts, but in taxable I have VTI, VXUS. In VTI alone I’m looking at over $100,000 of LTCG. So that would be the cost to move to the Vanguard tax managed balance. I’m questionable if simplicity is worth this cost. but then again now I’m letting the tax tail wag the dog versus the other way around. But no one wants to pay the government more than they need to though
Last edited by bbrock on Thu Oct 06, 2022 11:36 pm, edited 1 time in total.
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Re: The One-Fund Portfolio as a default suggestion

Post by zie »

bbrock wrote: Thu Oct 06, 2022 10:58 am It would be awesome to implement this one fund idea in all my accounts, but in taxable I have VTI, VXUS. In VTI alone I’m looking at over $100,000 of LTCG. So that would be the cost to move to the Vanguard text manage balance. I’m questionable if simplicity is worth this cost. but then again now I’m letting the tax tail wag the dog versus the other way around. But no one wants to pay the government more than they need to though
If you are reasonably certain you are going to spend the taxable balance in retirement, then you might be incentivized to pay it before 2026, since taxes are currently scheduled to go up then. Unless you expect your tax rates to go ridiculously down at some point(say in retirement), allowing you to pay even less somewhere down the road.

Obviously, if you probably won't use this money in your lifetime, then it would behoove you to not transition and let your heir(s) get the free step-up in basis, avoiding the 100k of LTCG.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

I didn’t know Zie that the cap gains taxes are on the chopping block potentially.

Whatever the case these taxable assets will have to be touched for retirement. The extent of it, I can’t say for sure yet, but these assets will be touched
Last edited by bbrock on Thu Oct 06, 2022 11:34 pm, edited 1 time in total.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

I know a lot of info says that tax free space should be prioritized for equity.

longinvest, if one uses a mirrored allocation in every account, one gives up some of his/her Roth space for stocks and bonds, instead of equity only. Well I read some of your post that all equity in a Roth comes at a greater risk because one has more to lose (if I’m summarizng it correctly). don’t we want to achieve maximum growth in our Roths over simplicity? What’s your take on this?
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Thu Oct 06, 2022 9:35 pm I know a lot of info says that tax free space should be prioritized for equity.

longinvest, if one uses a mirrored allocation in every account, one gives up some of his/her Roth space for stocks and bonds, instead of equity only. Well I read some of your post that all equity in a Roth comes at a greater risk because one has more to lose (if I’m summarizng it correctly). don’t we want to achieve maximum growth in our Roths over simplicity? What’s your take on this?
Bbrock, to aim for maximum potential returns, it's probably best to invest the entire portfolio into a 100% stocks allocation or possibly into a 140% stocks allocation (that's a leveraged portfolio), if I remember correctly, based on the Kelly criterion (and many assumptions which could hold or not in real life). But the superior outcome isn't guaranteed; there's a risk of inferior outcome that comes with it.

Many investors add bonds to their portfolio to manage risk (to dampen the severity of potential losses at the cost of decreasing potential gains).

My post explains that by prioritizing the placement of stocks into Roth accounts, so-called "tax-efficient" asset location strategies often increase the portfolio's effective after-tax risk in order to increase potential after-tax returns; that a similar increase in after-tax returns and risk could be achieved more easily, and more consistently, by simply increasing the portfolio's allocation to stocks while using a mirrored asset allocation.

In other words, tax-efficient asset location is mostly a mirage (as long as investing into tax-sheltered accounts is prioritized, see this wiki page). It promises higher potential after-tax returns, but often fails to disclose an increase in after-tax risk. Unfortunately, how much additional risk is involved is very difficult to determine, because it depends on accurately calculating the effective tax-adjusted asset allocation of the portfolio which depends on predicting future asset returns, future tax law changes, and future investor tax circumstance changes (and many other things). In contrast, a mirrored asset allocation has the same before-tax and effective tax-adjusted asset allocation and, as a consequence, delivers outcomes consistent with the chosen asset allocation regardless of future asset returns, future tax law changes, and future investor tax circumstance changes. Said differently, a mirrored asset allocation is not only good enough, it also delivers more consistent outcomes.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Got it Longinvest. Thanks for that thorough explanation.

But you say that a mirrored allocation would have to have an increase in equity in the Roth to have the same return. how does one know how much more they would have to put into the Roth then for that increase stock exposure?
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Fri Oct 07, 2022 1:24 pm Got it Longinvest. Thanks for that thorough explanation.

But you say that a mirrored allocation would have to have an increase in equity in the Roth to have the same return. how does one know how much more they would have to put into the Roth then for that increase stock exposure?
Bbrock, my previous post explained that the answer to this question is unknown (it requires predicting the future).

Here's an actionable conclusion of my explanations. If an investor wishes to get 60/40 stocks/bonds outcomes before and after tax, the investor can simply mirror this allocation in every account (Roth, traditional, taxable). This will reliably work regardless of future asset returns, future tax laws, future investor circumstances, and many other unknown-in-advance future things.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Thanks Long invest.

I was just thrown off because in the post you linked, 2 post up, you stated back in January that one would have to put in 56% in the Roth, and 44% in the bond to replicate results. Maybe I didn’t get that or fully grasp it.

Were you saying that Investor A if following the asset location perspective then he/she must put more equity in their Roth (56% in your example) less in bond (44%) in order to duplicate what a mirrored location approach would return?

I hear you that there are too many unknown variables and that a mirrored location is a safe bet consequently.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

I have been running rough numbers/scenarios about how I could make this work (I even read your thread viewtopic.php?t=280855) based on the analysis that alohajoe provided in this other thread, but unfortunately, I don't think it is worth it since >62% of our AA is taxable. I'd be looking at a tax bill (at the 15% LTCG rate) of >$120k+. For simplicity, I don't believe that tax drag is worth it.

However, OTOH, my other consideration for my wife is to call upon Vanguard PAS at my demise, or I hand over the reigns to them before it's too late and cog. decline sets in. Using approx. figs again (but it's hard to do since I have no idea when they'd take over things), if they managed a 7 fig portfolio (using $2.5m) x30 yrs, at 0.3%, we'd be looking at $225k in total fees over those 30 yr.

So one way we are paying more in management at Vanguard, the other way we are paying to the IRS to simplify things. Vanguard more expensive but I think my wife would get more out of it. Even with a 1 fund mirrored portfolio in as many accounts as possible, detailed instructions I would leave her on how to take RMDs, the account withdrawal sequencing, etc., I still think there are just certain people that could benefit more from the assistance and guidance of a CFP.

While it is a great idea longinvest, I think in this case it's not going to work. But, I definitely will be teaching my kids about the true merits of simplicity when they start their investing career. However, perhaps I'd tell them to just keep a single fund such as VTI/VTSAX, or VT/VTWAX in their taxable, but use a single fund in their retirement accounts (one of the posters in this thread made that point).
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Wed Oct 19, 2022 5:52 pm I have been running rough numbers/scenarios about how I could make this work (I even read your thread viewtopic.php?t=280855) based on the analysis that alohajoe provided in this other thread, but unfortunately, I don't think it is worth it since >62% of our AA is taxable. I'd be looking at a tax bill (at the 15% LTCG rate) of >$120k+. For simplicity, I don't believe that tax drag is worth it.

However, OTOH, my other consideration for my wife is to call upon Vanguard PAS at my demise, or I hand over the reigns to them before it's too late and cog. decline sets in. Using approx. figs again (but it's hard to do since I have no idea when they'd take over things), if they managed a 7 fig portfolio (using $2.5m) x30 yrs, at 0.3%, we'd be looking at $225k in total fees over those 30 yr.

So one way we are paying more in management at Vanguard, the other way we are paying to the IRS to simplify things. Vanguard more expensive but I think my wife would get more out of it. Even with a 1 fund mirrored portfolio in as many accounts as possible, detailed instructions I would leave her on how to take RMDs, the account withdrawal sequencing, etc., I still think there are just certain people that could benefit more from the assistance and guidance of a CFP.

While it is a great idea longinvest, I think in this case it's not going to work. But, I definitely will be teaching my kids about the true merits of simplicity when they start their investing career. However, perhaps I'd tell them to just keep a single fund such as VTI/VTSAX, or VT/VTWAX in their taxable, but use a single fund in their retirement accounts (one of the posters in this thread made that point).
Bbrock, have you considered spreading the conversion of the taxable part of the portfolio over multiple years such as the annual tax cost of partial conversion is 0.20% of the overall portfolio (taxable and tax-advantaged) per year? This would be no more expensive than paying Vanguard's PAS 0.30% annual cost because (0.20% partial conversion tax cost + 0.15% (or lower) all-in-one fund or ETF expense ratio - 0.05% (or higher) weighted average expense ratio of all-in-one investment components) = 0.30% (or lower). Once the conversion is completed, the overall carrying cost will be significantly lower than Vanguard's PAS cost.

The carrying cost is the additional cost in terms of expense ratio due to holding an all-in-one fund or ETF instead of directly holding its components, not considering any benefit of rebalancing with the cash flows of other investors. This later benefit could potentially eliminate any significant difference in overall costs (expense ratio plus taxes due to dividends and rebalancing) between holding separate components or holding an all-in-one investment.

On February 26, 2015 (see our wiki), the target allocation of Vanguard's LifeStrategy Moderate Growth (VSMGX) was changed to 36/24/28/12 VTI/VXUS/BND/BNDX. That's a 60/40 stocks/bonds allocation where 60% of stocks are domestic and 70% of bonds are domestic. Portfolio Visualizer informs us that VSMGX underperformed a similar separate ETF portfolio by -0.05% (annualized) between February 28, 2015 and September 30, 2022. That's a cumulative ($13,415 - $13,365) = $50 per invested $10,000 over 7 years and a half. This represents the cumulative carrying cost over that period.

Source: Portfolio Visualizer (link)

Image

Image

Image
Last edited by longinvest on Sat Oct 22, 2022 8:13 pm, edited 1 time in total.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

longinvest wrote: Sat Oct 22, 2022 9:43 am
bbrock wrote: Wed Oct 19, 2022 5:52 pm I have been running rough numbers/scenarios about how I could make this work (I even read your thread viewtopic.php?t=280855) based on the analysis that alohajoe provided in this other thread, but unfortunately, I don't think it is worth it since >62% of our AA is taxable. I'd be looking at a tax bill (at the 15% LTCG rate) of >$120k+. For simplicity, I don't believe that tax drag is worth it.

However, OTOH, my other consideration for my wife is to call upon Vanguard PAS at my demise, or I hand over the reigns to them before it's too late and cog. decline sets in. Using approx. figs again (but it's hard to do since I have no idea when they'd take over things), if they managed a 7 fig portfolio (using $2.5m) x30 yrs, at 0.3%, we'd be looking at $225k in total fees over those 30 yr.

So one way we are paying more in management at Vanguard, the other way we are paying to the IRS to simplify things. Vanguard more expensive but I think my wife would get more out of it. Even with a 1 fund mirrored portfolio in as many accounts as possible, detailed instructions I would leave her on how to take RMDs, the account withdrawal sequencing, etc., I still think there are just certain people that could benefit more from the assistance and guidance of a CFP.

While it is a great idea longinvest, I think in this case it's not going to work. But, I definitely will be teaching my kids about the true merits of simplicity when they start their investing career. However, perhaps I'd tell them to just keep a single fund such as VTI/VTSAX, or VT/VTWAX in their taxable, but use a single fund in their retirement accounts (one of the posters in this thread made that point).
Bbrock, have you considered spreading the conversion of the taxable part of the portfolio over multiple years such as the annual tax cost of partial conversion is 0.20% of the overall portfolio (taxable and tax-advantaged) per year? This would be no more expensive than paying Vanguard's PAS 0.30% annual cost because (0.20% partial conversion tax cost + 0.15% (or lower) all-in-one fund or ETF expense ratio - 0.5% (or higher) weighted average expense ratio of all-in-one investment components) = 0.30% (or lower). Once the conversion is completed, the overall carrying cost will be significantly lower than Vanguard's PAS cost.

The carrying cost is the additional cost in terms of expense ratio due to holding an all-in-one fund or ETF instead of directly holding its components, not considering any benefit of rebalancing with the cash flows of other investors. This later benefit could potentially eliminate any significant difference in overall costs (expense ratio plus taxes due to dividends and rebalancing) between holding separate components or holding an all-in-one investment.

On February 26, 2015 (see our wiki), the target allocation of Vanguard's LifeStrategy Moderate Growth (VSMGX) was changed to 36/24/28/12 VTI/VXUS/BND/BNDX. That's a 60/40 stocks/bonds allocation where 60% of stocks are domestic and 70% of bonds are domestic. Portfolio Visualizer informs us that VSMGX underperformed a similar separate ETF portfolio by -0.05% (annualized) between February 28, 2015 and September 30, 2022. That's a cumulative ($13,415 - $13,365) = $50 per invested $10,000 over 7 years and a half. This represents the cumulative carrying cost over that period.

Source: Portfolio Visualizer (link)

Image

Image

Image
Thanks for responding long invest.

But without a doubt, the carrying cost will be excessively more to have a one fund in a taxable brokerage account versus separate funds. Let’s use a hypothetical 1.5 million in a taxable brokerage only invested in VTI/VXUS compare it against an all in one such as the lifestrategy 60/40 or the iShares 60/40. The investor would be paying a good amount of taxes (let’s use a hypothetical 24% IRS, 9.3% CA) due to the 40% now exposed to dividends.

But yeah sure if you compare that then again say at 0.3% cost at Vanguard PAS, that would be hefty too. Not to mention is a PAS advisor going to truly follow asset location and consider something just as using VTI/VXUS in taxable, or would it also recommends bonds as well in taxable. I could actually answer that because I had an inquiry call recently with a PAS advisor just to discuss their services, and what would be a typical recommended portfolio. Lo and behold, I did have a recent phone call with a PAS advisor and he did recommend putting some bonds in my taxable. Although he had recommended if I recall municipals and/or California intermediate term tax exempt (need to dbl check).

Whatever it is though I am just speculating that the cost with PAS even before taxes will be more vs One of the aforementioned all in one funds a stated with self management.

However with PAS, my wife would get input hopefully on withdrawal account sequences (whether to use taxable, text deferred, then tax free), RMD help, some consideration for legacy planning, assistance with gift giving. So there are some benefits with having an advisor with PAS, albeit expensive over long term, which will be a drag on performance especially if it’s self managed one fund portfolio is not going to perform significantly different than a preferred location portfolio.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Sat Oct 22, 2022 7:31 pm Thanks for responding long invest.

But without a doubt, the carrying cost will be excessively more to have a one fund in a taxable brokerage account versus separate funds. Let’s use a hypothetical 1.5 million in a taxable brokerage only invested in VTI/VXUS compare it against an all in one such as the lifestrategy 60/40 or the iShares 60/40. The investor would be paying a good amount of taxes (let’s use a hypothetical 24% IRS, 9.3% CA) due to the 40% now exposed to dividends.

But yeah sure if you compare that then again say at 0.3% cost at Vanguard PAS, that would be hefty too. Not to mention is a PAS advisor going to truly follow asset location and consider something just as using VTI/VXUS in taxable, or would it also recommends bonds as well in taxable. I could actually answer that because I had an inquiry call recently with a PAS advisor just to discuss their services, and what would be a typical recommended portfolio. Lo and behold, I did have a recent phone call with a PAS advisor and he did recommend putting some bonds in my taxable. Although he had recommended if I recall municipals and/or California intermediate term tax exempt (need to dbl check).

Whatever it is though I am just speculating that the cost with PAS even before taxes will be more vs One of the aforementioned all in one funds a stated with self management.

However with PAS, my wife would get input hopefully on withdrawal account sequences (whether to use taxable, text deferred, then tax free), RMD help, some consideration for legacy planning, assistance with gift giving. So there are some benefits with having an advisor with PAS, albeit expensive over long term, which will be a drag on performance especially if it’s self managed one fund portfolio is not going to perform significantly different than a preferred location portfolio.
Bbrock, I see.

Yet, I am quite surprised to read the following statement:
bbrock wrote: Sat Oct 22, 2022 7:31 pm But without a doubt, the carrying cost will be excessively more to have a one fund in a taxable brokerage account versus separate funds.
I won't further try to convince you otherwise. But, I think that it's important to remind readers of this thread that there's actually quite a big doubt about the lifelong after-tax outcome! I've recently written three replies to you about it. Here are the links to my posts for interested readers: this post, this post, and this post. The third post provides an actionable conclusion.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Perhaps I used the wrong word longinvest and led to confusion. Instead of saying "carrying cost will be excessively more," I meant to say that with a 7 fig. taxable account, the "tax cost" with a one-fund portfolio (Lifestrategy 60/40 or iShares 60/40) will be significantly more vs. having separate funds such as VTI and VXUS.

You appear to be very mathematically inclined (by far way above my pay grade) and have demonstrated your points well. Trust me, I would love to move to a one fund portfolio such as one of the 60/40 either now, or tell my wife to do this in my instructions from the grave. Its just that if I do it now, pay those those cap gains, even if spread out over many years, and then someday my wife still doesn't intend or want to manage things (whether I am alive or in the grave, but of course she would get a step up after I am gone), then this was an exercise in futility.

I have however taken to heart what you have posted as it has really made me re-think the portfolios I am going to teach my kids about and steer them to. Before I found this thread, my thinking was teaching them to get familiar with M1 which can be used to manage a separate 2 or 3 fund portfolio as M1 would be the manager and it would function much like a one-fund portfolio after it is setup.


In cost of the LTCG to convert to a one-fund portfolio vs. the potential very long term cost of PAS, I would expect that PAS would be more. One thing Longinvest, you did state "This later benefit could potentially eliminate any significant difference in overall costs (expense ratio plus taxes due to dividends and rebalancing) between holding separate components or holding an all-in-one investment." Would you explain that more? I am confused on what you mean by "this later benefit." Did you mean later benefit of a one fund portfolio vs. separate funds? Or, did you mean rebalancing with the cash flows of other investors?
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Re: The One-Fund Portfolio as a default suggestion

Post by iamblessed »

bbrock wrote: Sat Oct 22, 2022 11:44 pm Perhaps I used the wrong word longinvest and led to confusion. Instead of saying "carrying cost will be excessively more," I meant to say that with a 7 fig. taxable account, the "tax cost" with a one-fund portfolio (Lifestrategy 60/40 or iShares 60/40) will be significantly more vs. having separate funds such as VTI and VXUS.

You appear to be very mathematically inclined (by far way above my pay grade) and have demonstrated your points well. Trust me, I would love to move to a one fund portfolio such as one of the 60/40 either now, or tell my wife to do this in my instructions from the grave. Its just that if I do it now, pay those those cap gains, even if spread out over many years, and then someday my wife still doesn't intend or want to manage things (whether I am alive or in the grave, but of course she would get a step up after I am gone), then this was an exercise in futility.

I have however taken to heart what you have posted as it has really made me re-think the portfolios I am going to teach my kids about and steer them to. Before I found this thread, my thinking was teaching them to get familiar with M1 which can be used to manage a separate 2 or 3 fund portfolio as M1 would be the manager and it would function much like a one-fund portfolio after it is setup.


In cost of the LTCG to convert to a one-fund portfolio vs. the potential very long term cost of PAS, I would expect that PAS would be more. One thing Longinvest, you did state "This later benefit could potentially eliminate any significant difference in overall costs (expense ratio plus taxes due to dividends and rebalancing) between holding separate components or holding an all-in-one investment." Would you explain that more? I am confused on what you mean by "this later benefit." Did you mean later benefit of a one fund portfolio vs. separate funds? Or, did you mean rebalancing with the cash flows of other investors?
Sound like it would be best to do it while you are alive rather than have the wife do it later. The nice thing about the One-Fund Portfolio is that the dividends and capital gains are about 4% so it is automictic for the survivor.
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Never had a balanced fund. Using Lifestrategy 60/40 as example, are the semi-annual divided distributions taxed at the lower qualified dividend and cap gain rate, or as ordinary income?
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Re: The One-Fund Portfolio as a default suggestion

Post by Blue456 »

bbrock wrote: Sun Oct 23, 2022 5:53 pm Never had a balanced fund. Using Lifestrategy 60/40 as example, are the semi-annual divided distributions taxed at the lower qualified dividend and cap gain rate, or as ordinary income?
Some will be taxed as ordinary income at your ordinary tax rate and some will be qualified at lower tax rate. Accordingly to this
https://advisors.vanguard.com/tax-cente ... end-income website for 2022 you get 54% qualified dividends which will be taxed at either 0%, 15% or 20% taxes. Reminder of the dividends will be taxed at ordinary rate. Also it is estimated that for 2022 year there will be no capital gains.

You can also look at this website:
You will get average amount of qualified and ordinary dividends this fund has distributed in the past.
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Re: The One-Fund Portfolio as a default suggestion

Post by sycamore »

Blue456 wrote: Sun Oct 23, 2022 6:09 pm
bbrock wrote: Sun Oct 23, 2022 5:53 pm Never had a balanced fund. Using Lifestrategy 60/40 as example, are the semi-annual divided distributions taxed at the lower qualified dividend and cap gain rate, or as ordinary income?
Some will be taxed as ordinary income at your ordinary tax rate and some will be qualified at lower tax rate. Accordingly to this
https://advisors.vanguard.com/tax-cente ... end-income website for 2022 you get 54% qualified dividends which will be taxed at either 0%, 15% or 20% taxes. Reminder of the dividends will be taxed at ordinary rate. Also it is estimated that for 2022 year there will be no capital gains.

You can also look at this website:
You will get average amount of qualified and ordinary dividends this fund has distributed in the past.
If you want to see actual 2021 info, see https://advisors.vanguard.com/iwe/pdf/t ... 122021.pdf.

LifeStrategy Moderate Growth (60/40) had QDI was 51% with cap gains distributions of about 1.9%

While you're reading that PDF, scroll down to the Target Retirement funds, where you can relive the fiasco of 2021 high cap gains :( 15.5% for TR 2040, 14.3% for TR 2020, a mere 5.6% for TR Income. Such high cap gain rates aren't expected again as much of the gains were due to a one-time event with Vanguard combining various share classes of the TR funds. But it's a good reminder that by using a balanced fund in taxable you do give up some control of tax-efficiency.

In my opinion, that's not a reason to never use a One-Fund in taxable. Just a reminder to know what the pros and cons are. FWIW, I own a LifeStrategy fund in taxable but my tax rates are relatively low and I don't own so much in the fund to make the tax-inefficiency a problem. My spouse & I agree it's worth the simplicity of owning the LS fund.
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

If one is worried about capital gains in a taxable account, when investing into a globally-diversified 60/40 stocks/bonds portfolio, one can use an all-in-one ETF, like the iShares Core Growth Allocation ETF (AOR) which made no capital gains distributions in 2021. It didn't distribute capital gains in 2020, either, despite continuous rebalancing. Actually, since inception in 2008, 14 years ago, it only made a single capital gains distribution in 2017 due to a major internal restructuring. See here for details.

As for Vanguard's 2021 mistake, here's what I wrote earlier in this thread:

-----
The "Target date funds ... so much for "set and forget" [and WSJ article]" thread reports about a mistake Vanguard made in 2021 with undesirable consequences for Target Date Fund investors in taxable accounts. Here's the opinion I expressed in reaction to claims against holding these funds in taxable accounts:
longinvest wrote: Fri Jan 21, 2022 7:20 pm I'm surprised to see Vanguard's mistake used as a reason to argue against using target date funds in taxable accounts. The tax consequences wouldn't have been different if Vanguard had made the same mistake with a single-asset index fund.

What I'm saying is that the tax cost is due to Vanguard's mistake; the cost isn't due to the all-in-one nature of the affected funds.

We've seen other mistakes in the past. In 2002, Vanguard's Total Bond Market Index Fund (then VBMFX fund, now VBTLX fund and BND ETF) failed to track its index by a significant -2% error. It was a due to a management mistake (sampling strategy). Vanguard has since then improved its sampling strategy to (hopefully) avoid such big tracking errors in the future.

Claiming that target date funds should be avoided in taxable accounts because Vanguard made a mistake in 2021 is similar to claiming that one shouldn't invest into bond index funds because of potential tracking errors; that one should, instead, build one's own bond index portfolio using individual securities bought in proportion of market weights. (Just imagine buying and tracking over 10,000 individual bonds! It would be more than a full-time job.)

Let's be clear. The only way to avoid the tax consequences of manager mistakes in a taxable account is to avoid owning any mutual fund or ETF in it, regardless of whether the fund or ETF is indexed or actively managed. This would be impractical and, more importantly, it's based on the flawed idea that individual investors would make fewer mistakes than Vanguard's fund managers. The managers of other fund providers make mistakes, too. Such is life: mistakes happen.

What happened in 2021 is unfortunate. In all likelyhood, all-in-one target date ETFs (instead of target date mutual funds) would have lessened (or possibly avoided) the undesirable tax consequence of Vanguard's mistake. Maybe U.S. investors could pressure Vanguard to start offering ETF versions of its all-in-one Target Date Funds and LifeStrategy Funds? Vanguard already provides such LifeStrategy ETFs in the UK and Asset Allocation ETFs in Canada.

This mistake doesn't change my opinion. I think that low-cost globally-diversified all-in-one index funds and ETFs significantly simplify investing. They help sidestep a long series of behavioral pitfalls and are good enough to be held in taxable accounts once tax-advantaged accounts are full.
-----

Here are follow-up posts:
  • Mistakes happen, investor mistakes are likely to be costlier: link
  • The superiority of an all-in-one ETF over holding a collection of individual ETFs in a taxable account: link
  • Comparison of dividends and capital gains (realized or not) between Target Retirement 2020 Fund (VTWNX) and holding a collection of individual ETFs in a taxable account: link
  • Insisting that VTWNX had a lower dividend ratio than its underlying 5 separate ETFs: link

The bias against all-in-one funds and ETFs is strong in the forum and wiki. Yet, as explained in the very first post of this thread, it's based on flawed analyses. Proper analyses which take risk into account lead to the conclusion that a mirrored asset allocation is good enough and more resilient to an unknown future than prioritizing the placement of specific assets into specific accounts. When using a mirrored allocation, all-in-one funds and ETFs are generally more tax-efficient, in a taxable account, than holding their individual components. All-in-one ETFs, in particular, use the continuous creation and redemption of shares by authorized participants to tax-efficiently gradually rebalance their holdings towards their target allocation while avoiding the distribution of capital gains (in most cases).
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
bbrock
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Location: CA

Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Using that link you gave Blue456 https://advisors.vanguard.com/tax-cente ... end-income I ran some numbers. I looked at VSMGX b/c the info was readily available. I was merely researching the tax cost of VSMGX, VTI/VXUS, and the cost of using Vanguard's PAS. These are rough numbers, but serve the purpose.

portfolio size of $1.5mil
QDI tax rate 15%
One fund
VSMGX share price from Friday 10/21/22 - $26.60
shares 56,390.977
Total dividends $36,931 (used 6/22/22 info, and 12/21/22 for 12/2022)
2022 QDI 54.77% $20,228
x15% QDI tax = $3034
45.23% Ordinary income $16,704
x33.3% (24% Fed, 9.3% CA) = $5563
Total tax = $8598
x30 yrs (an estimate for amount of time it would be invested in this if I passed away; I know it's a simple calculation) = $257,940

Separate funds
For VTI/VXUS, I used my current allocations in taxable, YTD dividends, and projected 4th qtr by averaging the 1st 3 qtrs
VTI 95.47% QDI
$2592 total tax (QDI and ordinary income tax)
x30 yrs = $88,560
VXUS 72.77% QDI, 27.33% ordinary
Total $1106 (combined QDI and ordinary)
x30 yrs = $33,180
TOTAl VTI/VXUS x30 yr = $121,740

$1.5mil x0.3% (PAS fee) x30 yr = $135,000

Total separate funds and PAS = $256,740

In this hypothetical example, what did I learn? That given my ~60% taxable portfolio, and account size, my wife would be better served to use PAS since the tax cost would be less than then one-fund, and she'd also get portfolio mgmt and advice. Again, I know my calculations are using simple figures, but it demonstrates that given certain account sizes, one may be better served with separate funds vs. one fund in taxable. Therefore, realizing capital gains to transition to a one fund approach is not worth it for me.

I do love the idea of the one fund, and in fact, I am setting something of a long term experiment and teaching method for my boys using M1. The following may be confusing if you're not familiar with M1. M1 seems to serve my purposes best for teaching my boys about finance/investing. The account will be in my name, but will have 3 sub-pies. 1 sub-pie for son 1, 1 sub-pie for son 2, and 1 sub-pie for me. Both sons will have 2 slices in their sub-pies: 60% VTI, 40% VGIT. My sub-pie will have 1 slice: 100% iShares Core Growth Allocation ETF. Yes, I know their sub-pies exclude international stock and international bond, but it is meant to be as simple as possible if more than one fund is to be used. For all sakes and purposes, 2 funds are good enough (even Buffet thinks so for how he intends for his wife's assets to be invested). My sub-pie serves as the comparison of ultimate simplicity, and a global portfolio. I'll fund each sub-pie with $1000, and it will be invested as such until they are independent. So, they have many years of growth.

I used Portfolio Visualizer and compared the 60/40 against both AOR, AOA, and Vanguard Balanced. Both my VTI/VGIT 60/40, and AOR are good enough.

Results 1/10 - 9/22
Used VTSAX for VTI
Portfolio Returns
Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio Market Correlation
VTI/VGIT 60/40 $1,000 $2,645 7.93% 8.82% 20.96% -19.51% -19.51% 0.85 1.32 0.98
AOR 60/40 $1,000 $2,071 5.88% 9.28% 18.91% -20.75% -20.75% 0.60 0.89 0.97
AOA 80/20 $1,000 $2,481 7.39% 12.58% 22.60% -23.01% -23.01% 0.59 0.88 0.97
VBINX $1,000 $2,612 7.82% 9.39% 21.67% -20.85% -20.85% 0.79 1.22 0.99
bbrock
Topic Author
longinvest
Posts: 5140
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Wed Oct 26, 2022 3:46 pm Using that link you gave Blue456 https://advisors.vanguard.com/tax-cente ... end-income I ran some numbers. I looked at VSMGX b/c the info was readily available. I was merely researching the tax cost of VSMGX, VTI/VXUS, and the cost of using Vanguard's PAS. These are rough numbers, but serve the purpose.

portfolio size of $1.5mil
QDI tax rate 15%
One fund
VSMGX share price from Friday 10/21/22 - $26.60
shares 56,390.977
Total dividends $36,931 (used 6/22/22 info, and 12/21/22 for 12/2022)
2022 QDI 54.77% $20,228
x15% QDI tax = $3034
45.23% Ordinary income $16,704
x33.3% (24% Fed, 9.3% CA) = $5563
Total tax = $8598
x30 yrs (an estimate for amount of time it would be invested in this if I passed away; I know it's a simple calculation) = $257,940

Separate funds
For VTI/VXUS, I used my current allocations in taxable, YTD dividends, and projected 4th qtr by averaging the 1st 3 qtrs
VTI 95.47% QDI
$2592 total tax (QDI and ordinary income tax)
x30 yrs = $88,560
VXUS 72.77% QDI, 27.33% ordinary
Total $1106 (combined QDI and ordinary)
x30 yrs = $33,180
TOTAl VTI/VXUS x30 yr = $121,740

$1.5mil x0.3% (PAS fee) x30 yr = $135,000

Total separate funds and PAS = $256,740

In this hypothetical example, what did I learn? That given my ~60% taxable portfolio, and account size, my wife would be better served to use PAS since the tax cost would be less than then one-fund, and she'd also get portfolio mgmt and advice. Again, I know my calculations are using simple figures, but it demonstrates that given certain account sizes, one may be better served with separate funds vs. one fund in taxable. Therefore, realizing capital gains to transition to a one fund approach is not worth it for me.
Earlier, in 2009:
bbrock wrote: Mon Nov 23, 2009 9:11 pm Age: 34 (wife 33)
Bbrock, this analysis is flawed in so many ways: looking at a single portfolio account and ignoring other accounts, comparing outcomes of different asset allocations (within a single account, ignoring the asset allocation in other accounts), comparing tax costs instead of comparing lifelong after-tax money available to spend, using simple multiplication by 30 to project long-term impacts, ignoring portfolio contributions and withdrawals, ignoring the potential impact of risk, and many other flaws (including an assumption that the 47 years old investor will die at age 77)!

This thread is of a general nature (it's in the theory forum). It's an inappropriate place for long discussions about an investor's personal situation. I suggest starting a new thread in the Personal Investments forum to discuss your personal situation and related calculations.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
Topic Author
longinvest
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Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

bbrock wrote: Wed Oct 26, 2022 3:46 pm I do love the idea of the one fund, and in fact, I am setting something of a long term experiment and teaching method for my boys using M1. The following may be confusing if you're not familiar with M1. M1 seems to serve my purposes best for teaching my boys about finance/investing. The account will be in my name, but will have 3 sub-pies. 1 sub-pie for son 1, 1 sub-pie for son 2, and 1 sub-pie for me. Both sons will have 2 slices in their sub-pies: 60% VTI, 40% VGIT. My sub-pie will have 1 slice: 100% iShares Core Growth Allocation ETF. Yes, I know their sub-pies exclude international stock and international bond, but it is meant to be as simple as possible if more than one fund is to be used. For all sakes and purposes, 2 funds are good enough (even Buffet thinks so for how he intends for his wife's assets to be invested). My sub-pie serves as the comparison of ultimate simplicity, and a global portfolio. I'll fund each sub-pie with $1000, and it will be invested as such until they are independent. So, they have many years of growth.
Bbrock, I don't think that it's a good idea to teach young investors about comparing portfolios with fundamentally different asset allocations: U.S. only (2 ETFs) versus globally diversified (1 ETF). They could attribute the win or loss to the fact that the portfolio was made of one versus two ETFs, instead of appropriately attributing it to the relative performance of domestic and international markets. Maybe suggesting to hold and rebalance a 7-ETF portfolio identical to the internal composition of AOR would be better for teaching the advantages of simplicity?

Anyway, the suggested 60/40 VTI/VGIT portfolio is off-topic for this thread. I suggest to keep such side discussions on a personal thread in the Personal Investments forum (or in a new theory thread, if the objective is to discuss how to best teach investing to young investors).
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
Topic Author
longinvest
Posts: 5140
Joined: Sat Aug 11, 2012 8:44 am

Re: The One-Fund Portfolio as a default suggestion

Post by longinvest »

As I've just made twice the suggestion to start a new thread in the Personal Investments forum to discuss personal situations, I'll add a warning.

When discussing one's personal situation in the Personal Investments forum, it's important to keep in mind that almost every post which asks about using an all-in-one fund or ETF in a taxable account gets an immediate reply that "such funds are tax-inefficient". The bias against all-in-one funds and ETFs is strong in the forum and wiki. Yet, as explained in the very first post of this thread, it's based on flawed analyses. Proper analyses which take risk into account lead to the conclusion that a mirrored asset allocation is good enough and more resilient to an unknown future than prioritizing the placement of specific assets into specific accounts. When using a mirrored allocation, all-in-one funds and ETFs are generally more tax-efficient, in a taxable account, than holding their individual components. All-in-one ETFs, in particular, use the continuous creation and redemption of shares by authorized participants to tax-efficiently gradually rebalance their holdings towards their target allocation while avoiding the distribution of capital gains (in most cases).
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
Blue456
Posts: 1842
Joined: Tue Jun 04, 2019 5:46 am

Re: The One-Fund Portfolio as a default suggestion

Post by Blue456 »

longinvest wrote: Wed Oct 26, 2022 6:55 pm As I've just made twice the suggestion to start a new thread in the Personal Investments forum to discuss personal situations, I'll add a warning.

When discussing one's personal situation in the Personal Investments forum, it's important to keep in mind that almost every post which asks about using an all-in-one fund or ETF in a taxable account gets an immediate reply that "such funds are tax-inefficient". The bias against all-in-one funds and ETFs is strong in the forum and wiki. Yet, as explained in the very first post of this thread, it's based on flawed analyses. Proper analyses which take risk into account lead to the conclusion that a mirrored asset allocation is good enough and more resilient to an unknown future than prioritizing the placement of specific assets into specific accounts. When using a mirrored allocation, all-in-one funds and ETFs are generally more tax-efficient, in a taxable account, than holding their individual components. All-in-one ETFs, in particular, use the continuous creation and redemption of shares by authorized participants to tax-efficiently gradually rebalance their holdings towards their target allocation while avoiding the distribution of capital gains (in most cases).
I think it would help to breakdown the cost of all in one fund and compare it to 3 fund portfolio. I would not only compare actual tax cost of funds but also provide actual data on money lost due to tinkering. The latter is less tangible and will very with each investor. There will be automatons out there with discipline of a Spock and there will be those who chase the most recent trends. Nevertheless a clean breakdown of tax cost on opening post would really make a difference.

A good place to start is here:
https://www.bogleheads.org/wiki/Vanguar ... tributions
I compared cost to each individual funds:
https://www.bogleheads.org/wiki/Vanguar ... tributions
https://www.bogleheads.org/wiki/Vanguar ... tributions

When I calculated equivalent 3 fund portfolio of VTIAX, VTSAX + VWITX vs VSMGX, I came to conclusion that the latter would cost me 0.4% in taxes per year. When I compared to 2 fund portfolio that I would hold, VSMGX actually came ahead. A lot of has to be taken into account when comparing costs of each including behavioral aspects of what are you actually going to hold and stick with and are you going to stick with it? I can also make a clear case for the Spocks in here. The 3 or 4 fund portfolio will be much cheaper than VSMGX if you truly stick with it and never sell or tinker.
Last edited by Blue456 on Thu Oct 27, 2022 5:20 am, edited 2 times in total.
bbrock
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Location: CA

Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

Bbrock, this analysis is flawed in so many ways: looking at a single portfolio account and ignoring other accounts, comparing outcomes of different asset allocations (within a single account, ignoring the asset allocation in other accounts), comparing tax costs instead of comparing lifelong after-tax money available to spend, using simple multiplication by 30 to project long-term impacts, ignoring portfolio contributions and withdrawals, ignoring the potential impact of risk, and many other flaws (including an assumption that the 47 years old investor will die at age 77)!
I already stated these are rough figures, and use simple calculations. Were they flawed, yes of course. Did it serve a purpose, of course again. I did not need to make it more complicated than necessary to show my point. Did it ignore a total portfolio, yes again. I was only looking at taxable. Intent was only to look at tax costs, which do matter. Simple math, yes I had already stated it was simple. I did not intend to forecast withdrawals/contributions. Risk was shown in the Portfolio Visualizer. 30 yr investment lifespan was a number I plugged in that fit the job (and someone 47 yr old could die, just as much as someone 77, given health issues). It was a number I plugged.
Bbrock, I don't think that it's a good idea to teach young investors about comparing portfolios with fundamentally different asset allocations: U.S. only (2 ETFs) versus globally diversified (1 ETF). They could attribute the win or loss to the fact that the portfolio was made of one versus two ETFs, instead of appropriately attributing it to the relative performance of domestic and international markets. Maybe suggesting to hold and rebalance a 7-ETF portfolio identical to the internal composition of AOR would be better for teaching the advantages of simplicity?
No, I disagree. The M1 portfolio I have designed will serve to teach them just fine. Teach about the merits of simplicity either way using a one-fund portfolio vs. a simple two-fund portfolio. Is it an apples-to-apples comparison, no by all means. Does it serve its intended purpose... very much so. They will be learning to keep it simple (KISS). Both serve there purposes equally well. This lesson is intended to be very simple as it will be a lesson geared to keeping it as simple as possible in a taxable acct, be it one fund or two. I understand one lacks international, so be it. The main lesson will be that a mirrored allocation could be good enough, but a two-fund, or even three-fund could be as well in taxable as eventually someday I could teach them that retirement accounts could hold a one-fund as well. The lesson is to teach that one fund in taxable could be good enough, but an adjustment could be as well.

The forum and investing is littered with writing saying that investing should hold this type of investment, or tilted this way or that, or international exposure be it in bonds or equities needs to be this %, or slice/dice/mince/quince. Heck, I was going to include VXUS, but I didn't b/c personally I don't think the merits of keeping a 10% slice for diversification purposes is even worth it; nor is using VT. I've accepted that if I want to teach them simplicity with one-fund, then 40% will be international equity; just as much as if one uses PAS then international will be included as well. But for all sakes and purposes, be it one fund, or two in taxable, good enough is just that.
Anyway, the suggested 60/40 VTI/VGIT portfolio is off-topic for this thread. I suggest to keep such side discussions on a personal thread in the Personal Investments forum (or in a new theory thread, if the objective is to discuss how to best teach investing to young investors).
Noted.
bbrock
DillPickleAvalanche
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Re: The One-Fund Portfolio as a default suggestion

Post by DillPickleAvalanche »

Here is Jack Bogle, in 2019, speaking about the portfolio he used as he invested for his grandchildren. He put everything into a balanced fund with a 60:40 ratio of stocks to bonds.

BOGLE: "I always put it in a balanced index fund. 60% total stock market and 40% total bond market."

MOTLEY FOOL CEO TOM GARDNER: "You said last time we talked that anyone could put all of their money into that one fund and make it their sole investment throughout life."

BOGLE: "Sure! Now, it's conservative, and it protects you against your emotions because when the stock market goes way down, the bond market actually usually goes up a bit under that circumstance. Investors have behavioral problems and they panic if their account goes down 50%. An account like this [one balanced index fund] probably goes down 32 or 33% so you don't get exposed to the worst of it."

It's worth watching the whole discussion!

https://youtu.be/MLgn_kVKjCE?t=1282

Start around 51 mins into the video.
Last edited by DillPickleAvalanche on Wed Nov 23, 2022 9:22 pm, edited 1 time in total.
bbrock
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Re: The One-Fund Portfolio as a default suggestion

Post by bbrock »

DillPickleAvalanche wrote: Wed Nov 23, 2022 8:47 pm Here is Jack Bogle, in 2019, speaking about the portfolio he used as he invested for his grandchildren. He put everything into a balanced fund with a 60:40 ratio of stocks to bonds.

BOGLE: "I always put it in a balanced index fund. 60% total stock market and 40% total bond market.

MOTLEY FOOL CEO TOM GARDNER "You said last time we talked that anyone could put all of their money into that one fund and make it their sole investment throughout life."

BOGLE: "Sure! Now, it's conservative, and it protects you against your emotions because when the stock market goes way down, the bond market actually usually goes up a bit under that circumstance. Investors have behavioral problems and they panic if their account goes down 50%. An account like this [one balanced index fund] probably goes down 32 or 33% so you don't get exposed to the worst of it."

It's worth watching the whole discussion!

https://youtu.be/MLgn_kVKjCE?t=1282

Start around 51 mins into the video.
+1 dill pickle avalanche. I don’t think missing out on international stocks or bonds is going to make it or break it. Performance wise, even portfolio visualizer demonstrates that.
bbrock
FellsGuy
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Re: The One-Fund Portfolio as a default suggestion

Post by FellsGuy »

SimpleGift wrote: Mon Aug 12, 2019 9:03 am As a couple who in the early 1990s (after selling our business) invested a lump sum in a balanced, all-taxable portfolio of Vanguard stock and bond funds — then added tilts to small caps, REITs and emerging markets over the years — I sometimes wish now that we had just gone the one-fund portfolio route.

It's not that managing a collection of diverse mutual funds in retirement is particularly onerous, but with all the embedded capital gains from several decades of investing, we don't now have the option of simplifying our portfolio (without massive tax consequences). Looking back, I believe investing everything in Vanguard's LifeStrategy Moderate Growth Fund at its inception in 1994 would have been a fine move.
Very interesting point thank you for the post, classic unintended consequences, or what if you had put it in Wellesley VWINX instead of lifestrategy
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness. | Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”
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Charles Joseph
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Re: The One-Fund Portfolio as a default suggestion

Post by Charles Joseph »

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:
longinvest -

I've always been intrigued by the idea of a one-fund solution and keep coming back to exploring it. Two questions if I may:

1. Where would cash fit in to a one-fund portfolio solution, in your opinion?

2. For the one-fund solution, what are you thoughts of using a low-cost active fund such as Wellesley Income Fund or Wellington Fund?

Thank you!
"What, me worry?"
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