The Three-Fund Portfolio

[Tatala]

Is a 3 fund portfolio using g a 50/50 split stocks and Bonds, too aggressive for a 70 year old. I am currently taking distributions yearly. Considering we are in an increasing interest environment, bonds sank last year . This year it looks kind of the same , so I could go with the 110-age, but I cant figure which way to handle this.
TY

[Taylor Larimore]

Is a 3 fund portfolio using g a 50/50 split stocks and Bonds, too aggressive for a 70 year old. I am currently taking distributions yearly. Considering we are in an increasing interest environment, bonds sank last year . This year it looks kind of the same , so I could go with the 110-age, but I cant figure which way to handle this.
TY

Tatala:

Age is not the only criteria for determining our best stock/bond ratio. Use the link below -- then stay-the-course:

Investor Questionnaire.

Best wishes.
Taylor

Jack Bogle's Words of WIsdom: “The enemy of a good plan is the dream of a perfect plan.”

[Echard]

Interesting that 100% stocks (S&P 500) does better than all of them at 3, 5 and 10 years. And better than all but two others over the last year.

This is something that I was just looking at. I'm already in retirement and compared the 10 year performance of the S&P 500 VFIAX to the VBIAX 60/40 fund. What struck me as I looked at the charts over the last 10 years is that the "risk reduction" just didn't seem to produce much value over that time period. I assume that is because of how low bond returns were during the last ten years. I would think it would perform much better for the coming years due to higher rates. It actually caused me to question whether 60/40 is worth it, even in retirement.

Run PV Monte Carlo for 60/40 TSM/TBM and note the 95% success rate for a 30 year 4% SWR. 50th percentile case ended with twice the inflation adjusted start date amount. 10th percentile ended with 30%, 90th percentile ended with 5.7 times.

Do the same for 100% TSM and 86% success rate, 2.5 times 50th percentile, 0% 10th percentile, 12 times 90th percentile outcomes.

On average 100% TSM ended with more (2.5 vs 2 times in the 50th percentile case), but had more failures (only 86% were successful compared to 95% for 60/40).

100% was more volatile in outcome. Better in the average case, but worse for the 14% for whom it failed compared to 5% for 60/40.

A sizeable number will have done better with 100% TSM, but at the risk of potentially being one of the larger proportion for whom it didn't work out well.

Is targeting potentially leaving a larger legacy worth the additional risk of failure? On average leaving 2.5 times rather than 2 times, at the risk of being in a 14% set versus 5% set for whom things didn't work out well. If maximizing legacy is a primary objective then you could do better than 100% TSM with something like this (67/33 SCV/gold)

Yes, I had done that and the balanced portfolio obviously always wins, hence why 60/40 is such a popular strategy. From today forward, 60/40 makes so much sense given that rates are much better now. However, if we drop back down to really low rates again (probably unlikely), it does raise questions about whether it's worth leaving money in bonds for extended periods at very low rates. I know this goes against the passive investment philosophy. I just can't fathom a scenario where earning 2% on bonds is worth it.

[bertilak]

I know this goes against the passive investment philosophy. I just can't fathom a scenario where earning 2% on bonds is worth it.

How about when there is a big stock market crash? It is in these unfathomable circumstances that a mix of stocks and bonds becomes worth it. Some will try to time this and others will use the Boy Scout approach: Be Prepared. Depending on how critical your investments are to your income, you may wish to be more or less prepared. Adjust the AA of your three-funder accordingly.

[seajay]

From today forward, 60/40 makes so much sense given that rates are much better now. However, if we drop back down to really low rates again (probably unlikely), it does raise questions about whether it's worth leaving money in bonds for extended periods at very low rates. I know this goes against the passive investment philosophy. I just can't fathom a scenario where earning 2% on bonds is worth it.

Think in real (after inflation) terms and before (very low interest rates) were accompanied by very low inflation rates, treasury bonds were paying marginally negative real yields. More recently however, such as here in the UK, inflation is higher than treasury yields, so bonds are paying considerably more negative real yields.

With paired assets you might want one that reasonably consistently paces inflation, low (real) volatility, and another that zig zags more wildly around that, in such case rebalancing will tend to add more of the volatile asset when its zagged, reduce when its zigged (or is it the other way around, not sure if zag is down, zig is up ... or the other way around).

[JSPECO9]

All it took was me losing thousands of dollars from drinking the factor juice and countless hours lost playing with backtest portfolio visualizer trying to optimize my portfolio to realize how simple this is.

Hello, Three-Fund Portfolio. Looking forward to investing simplicity for the rest of my life.

Thank you Taylor and Jack for your wisdom and guidance.

[Taylor Larimore]

All it took was me losing thousands of dollars from drinking the factor juice and countless hours lost playing with backtest portfolio visualizer trying to optimize my portfolio to realize how simple this is.

Hello, Three-Fund Portfolio. Looking forward to investing simplicity for the rest of my life.

Thank you Taylor and Jack for your wisdom and guidance.

JSPEC09:

Few things make me happier than learning someone has benefited from "The Three-Fund Portfolio" and its "Simplicity."

"The Three-Fund Portfolio" has given me a worry-free and comfortable retirement for many years and I am sure it will work for you.

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."

[JohnW2]

Bogleheads:

Optimized Portfolio has produced an excellent updated review of The Three-Fund Portfolio. This is the link:

https://www.optimizedportfolio.com/bogl ... 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." -- "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

Thanks so much for the shout-out and kind words, Taylor!

The Three-Fund continues to be my default recommendation for novices, as well as the simple "VT and chill" for those wanting to go 100% stocks.

Planning to do a new updated video on the Three-Fund soon with a much more detailed segment on the merits of international diversification for U.S. investors.

Also revisiting your book for some casual reading and reaffirmations.

[Taylor Larimore]

JohnW2:

Are you associated with Optimized Portfolio?

Thank you.

Taylor

Jack Bogle's Words of Wisdom: "I favor the all-market index fund as the best choice for most investors."

[pizzy]

JohnW2:

Are you associated with Optimized Portfolio?

Thank you.

Taylor

Jack Bogle's Words of Wisdom: "I favor the all-market index fund as the best choice for most investors."

I imagine JohnW2 is John Williamson of Optimized Portfolio.

[Blue456]

I just can't fathom a scenario where earning 2% on bonds is worth it.

What if inflation is close to 0% for extended period of time? Better yet there is a deflation -1%.

[JohnW2]

JohnW2:

Are you associated with Optimized Portfolio?

Thank you.

Taylor

Jack Bogle's Words of Wisdom: "I favor the all-market index fund as the best choice for most investors."

Yes. I am it.

I imagine JohnW2 is John Williamson of Optimized Portfolio.

Correct.

[Taylor Larimore]

JohnW2:

I am delighted to learn that you are the very knowledgeable person behind the wonderful Optimized Portfolio website. Your video recommending The Three-Fund Portfolio is fair, accurate and I think--persuasive.

I recently reviewed Paul Farrell's Lazy Portfolios on MarketWatch which may be of interest. You will not be surprised to learn that The Three-Fund Portfolio leads the pack of professional investors in both bull and bear markets (Dr. Bernstein's portfolio is a one-year exception):

TOTAL RETURNS FOR 8 LAZY PORTFOLIOS:

Portfolio-------------------------------------1-yr----------3-yrs-----------5-yrs----------10-yrs
Aronson Family Taxable------------------2.62%---------6.44%----------3.96%---------5.45%
Fundadvice Ultimate Buy & Hold-------3.00%---------6.66%----------3.45%---------4.20%
Dr. Bernstein's Smart Money-------------2.39%---------7.58%----------4.19%---------5.30%
Coffeehouse--------------------------------0.85%---------6.33%----------4.03%---------5.21%
Yale U's Unconventional------------------0.36%---------5.83%----------4.75%---------5.50%
Bernstein's No Brainer--------------------6.09%---------9.26%----------5.22%---------6.63%
Margaritaville------------------------------3.92%---------8.15%----------5.00%---------5.59%
Second Grader's Starter**----------------5.47%--------10.70%----------6.60%---------8.04%

** The Three-Fund Second Grader's Starter Portfolio designed by Allen Roth contains 60% Vanguard Total Stock Market VTSMX, 30% Vanguard Total International Stock Market (VGTSX) and 10% Vanguard Total Bond Market (VBMFX).

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." "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

[JohnW2]

JohnW2:

I am delighted to learn that you are the very knowledgeable person behind the wonderful Optimized Portfolio website. Your video recommending The Three-Fund Portfolio is fair, accurate and I think--persuasive.

I recently reviewed Paul Farrell's Lazy Portfolios on MarketWatch which may be of interest. You will not be surprised to learn that The Three-Fund Portfolio leads the pack of professional investors in both bull and bear markets (Dr. Bernstein's portfolio is a one-year exception):

TOTAL RETURNS FOR 8 LAZY PORTFOLIOS:

Portfolio-------------------------------------1-yr----------3-yrs-----------5-yrs----------10-yrs
Aronson Family Taxable------------------2.62%---------6.44%----------3.96%---------5.45%
Fundadvice Ultimate Buy & Hold-------3.00%---------6.66%----------3.45%---------4.20%
Dr. Bernstein's Smart Money-------------2.39%---------7.58%----------4.19%---------5.30%
Coffeehouse--------------------------------0.85%---------6.33%----------4.03%---------5.21%
Yale U's Unconventional------------------0.36%---------5.83%----------4.75%---------5.50%
Bernstein's No Brainer--------------------6.09%---------9.26%----------5.22%---------6.63%
Margaritaville------------------------------3.92%---------8.15%----------5.00%---------5.59%
Second Grader's Starter**----------------5.47%--------10.70%----------6.60%---------8.04%

** The Three-Fund Second Grader's Starter Portfolio designed by Allen Roth contains 60% Vanguard Total Stock Market VTSMX, 30% Vanguard Total International Stock Market (VGTSX) and 10% Vanguard Total Bond Market (VBMFX).

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." "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

Thanks so much for the kind words, Taylor! Feels like just last week, but that video is almost 3 years old now so I need to do an updated one.

And yes indeed, hard to beat the simplicity of the 3-Fund over the long term.

[isaachemingway]

In terms of fees, you'd be better off with a mix of Vanguard Europe, Pacific Rim, and Emerging Markets fund rather than ISM. Europe and Pacific (which comprise most of ISM) have an ER of 0.14, whereas ISM has an ER of 0.20. There's also better rebalancing opportunities with having them separate, and taxes associated with rebalancing can be avoided by only selling shares held in tax deferred accounts. The downside though is no Canada stocks... and a little bit more complexity.

I think a Treasury Bond Fund is better than TBM, since it is less correlated with equities (e.g., since TBM holds corporate bonds). I don't think the logic of "owning the whole market" makes as much sense for bonds as it does for stocks; for example, I don't want to own junk bonds just because they are a part of the bond market -- I prefer to take most of my risk in equities.

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

[JohnW2]

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

This is not true when looking holistically at the portfolio that includes stocks. I used those funds specifically just to illustrate the concept because they have roughly the same effective maturity off the top of my head.

Viewing assets in isolation can lead to the wrong conclusions. While it sometimes can be hard to wrap your head around, diversifying within an asset class does not necessarily equal a more diversified portfolio.

Now obviously that's a perfectly valid argument to squeeze out more risk/yield/return if for some weird reason the portfolio is 100% intermediate bonds, but I'm guessing (and hoping) no one is doing that.

Moreover, there's definitely added risk; look at corporates vs. treasuries (and again, the total portfolio that includes those with stocks) in any major stock market crash.

Lastly, if we're worried about the U.S. Treasury as an issuer, we should be much more worried about U.S. corporate issuers.

[isaachemingway]

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

This is not true when looking holistically at the portfolio that includes stocks. I used those funds specifically just to illustrate the concept because they have roughly the same effective maturity off the top of my head.

Viewing assets in isolation can lead to the wrong conclusions. While it sometimes can be hard to wrap your head around, diversifying within an asset class does not necessarily equal a more diversified portfolio.

Now obviously that's a perfectly valid argument to squeeze out more risk/yield/return if for some weird reason the portfolio is 100% intermediate bonds, but I'm guessing (and hoping) no one is doing that.

Moreover, there's definitely added risk; look at corporates vs. treasuries (and again, the total portfolio that includes those with stocks) in any major stock market crash.

Lastly, if we're worried about the U.S. Treasury as an issuer, we should be much more worried about U.S. corporate issuers.

I improved your portfolio visualizer analysis by using older vanguard funds.

Also, if we’re worried about the govt as an issuer, why should we be more worried about investment grade corporate issuers?

Thanks!

[JohnW2]

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

This is not true when looking holistically at the portfolio that includes stocks. I used those funds specifically just to illustrate the concept because they have roughly the same effective maturity off the top of my head.

Viewing assets in isolation can lead to the wrong conclusions. While it sometimes can be hard to wrap your head around, diversifying within an asset class does not necessarily equal a more diversified portfolio.

Now obviously that's a perfectly valid argument to squeeze out more risk/yield/return if for some weird reason the portfolio is 100% intermediate bonds, but I'm guessing (and hoping) no one is doing that.

Moreover, there's definitely added risk; look at corporates vs. treasuries (and again, the total portfolio that includes those with stocks) in any major stock market crash.

Lastly, if we're worried about the U.S. Treasury as an issuer, we should be much more worried about U.S. corporate issuers.

I improved your portfolio visualizer analysis by using older vanguard funds.

Also, if we’re worried about the govt as an issuer, why should we be more worried about investment grade corporate issuers?

Thanks!

Those funds have different effective maturities.

PV's preloaded indexes may be more useful for this.

Here's a good study on this idea.

[isaachemingway]

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

This is not true when looking holistically at the portfolio that includes stocks. I used those funds specifically just to illustrate the concept because they have roughly the same effective maturity off the top of my head.

Viewing assets in isolation can lead to the wrong conclusions. While it sometimes can be hard to wrap your head around, diversifying within an asset class does not necessarily equal a more diversified portfolio.

Now obviously that's a perfectly valid argument to squeeze out more risk/yield/return if for some weird reason the portfolio is 100% intermediate bonds, but I'm guessing (and hoping) no one is doing that.

Moreover, there's definitely added risk; look at corporates vs. treasuries (and again, the total portfolio that includes those with stocks) in any major stock market crash.

Lastly, if we're worried about the U.S. Treasury as an issuer, we should be much more worried about U.S. corporate issuers.

I improved your portfolio visualizer analysis by using older vanguard funds.

Also, if we’re worried about the govt as an issuer, why should we be more worried about investment grade corporate issuers?

Thanks!

Those funds have different effective maturities.

PV's preloaded indexes may be more useful for this.

Here's a good study on this idea.

Thanks for the study! However, I still don't understand why, if we’re worried about the govt as an issuer, we should be more worried about investment-grade corporate issuers? Surely if the govt ever did default on principal or interest payments, there would be plenty of investment-grade corporate issuers that would still make their payments on time. Right?

[isaachemingway]

I prefer the Vanguard investment grade bond fund (VFICX) because it relies on many different issuers rather than relying on a single issuer (US Treasury). Also, it has provided superior returns with hardly any added risk. Thoughts?

This is not true when looking holistically at the portfolio that includes stocks. I used those funds specifically just to illustrate the concept because they have roughly the same effective maturity off the top of my head.

Viewing assets in isolation can lead to the wrong conclusions. While it sometimes can be hard to wrap your head around, diversifying within an asset class does not necessarily equal a more diversified portfolio.

Now obviously that's a perfectly valid argument to squeeze out more risk/yield/return if for some weird reason the portfolio is 100% intermediate bonds, but I'm guessing (and hoping) no one is doing that.

Moreover, there's definitely added risk; look at corporates vs. treasuries (and again, the total portfolio that includes those with stocks) in any major stock market crash.

Lastly, if we're worried about the U.S. Treasury as an issuer, we should be much more worried about U.S. corporate issuers.

I improved your portfolio visualizer analysis by using older vanguard funds.

Also, if we’re worried about the govt as an issuer, why should we be more worried about investment grade corporate issuers?

Thanks!

Those funds have different effective maturities.

PV's preloaded indexes may be more useful for this.

Here's a good study on this idea.

Thanks for the study! However, I still don't understand why, if we’re worried about the govt as an issuer, we should be more worried about investment-grade corporate issuers? Surely if the govt ever did default on principal or interest payments, there would be plenty of investment-grade corporate issuers that would still make their payments on time. Right?

Curious to hear your thoughts on my above comments. Thanks for the helpful input and study!