The One-Fund Portfolio as a default suggestion

[Lastrun]

Also, the "good enough" comment for LifeStrategy Moderate Growth is relative to what Nobel Laurate William Sharpe calls the most efficient portfolio, which is basically to hold all tradeable assets at market cap weights (stocks and bonds).
https://www.bogleheads.org/wiki/World_B ... _Portfolio

It is probably not good enough relative to a portfolio that we look back on as outperforming.

To further elaborate here as IMHO opinion there is a significant mismatch in the current discussion.

I believe HansT's argument to can be summed up with this:

Per an earlier post, the "total market" is not the optimal portfolio for retirees (and likely for most investors). For discussion of "one fund" we should instead examine portfolios that are recommended for retirees, and then compare performance of "one funds" against these recommendations.

But there are two fundamental premises to this thread:

First:

In theory, the "ideal" default portfolio would be William Sharpe's Market Portfolio..

Second, that:

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.

...
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).

Unless Longinvest opines otherwise, the "good enough" relates to the funds that implement the market portfolio, not whether the market portfolio is good enough. That the market portfolio is the correct portfolio is a fundamental premise of the thread.

[longinvest]

Unless Longinvest opines otherwise, the "good enough" relates to the funds that implement the market portfolio, not whether the market portfolio is good enough.

Lastrun, I disagree.

I think that the global stock-and-bond market portfolio with some home country bias and a fixed or gliding lifelong stocks/bonds allocation is good enough for investors of all ages and all wealth levels (independently of using an all-in-one or separate funds or ETFs).

If the market portfolio doesn't deliver enough returns to the average investor, most of us are necessarily doomed. I don't believe that large institutional investors will choose to only hold the worst performing securities, just to give a chance to small investors, like members of this forum, to hold the best performing ones so that we get enough, which has to be more than the market average if the market average is insufficient.

The humble rules of arithmetic, as Jack Boggle called them, are relentless against active management and so-called "better portfolios".

Financial Analysts Journal, Volume 61, 2005 - Issue 6

The Relentless Rules of Humble Arithmetic
By John C. Bogle

...

Today, the investment management profession is overwhelmingly focused on “comparative advantage”—providing superior returns to clients. We ignore the fact that in the essentially closed system in which financial markets operate, each dollar of advantage that one professional earns comes at the direct expense of another. As a group, we're average. After costs, we're all destined to fall short of the market return, victims of the relentless rules of humble arithmetic.

[Lastrun]

Fair enough, and good enough on both counts, the portfolio and implementation. Thanks for the reply.

[000]

* No law of which I'm aware prevents any fund company from changing the makeup/allocation of their all-in-one funds. Those who hold an all-in-one fund in a nonqualified account will have to pay taxes on any embedded CG's if they want to switch to another fund that more closely aligns with their desired asset allocation.

Despite their reputed power to help investors stay the course, these indexed all-in-one funds have seen a lot of asset allocation changes by providers. Vanguard's changes to their LS and TDF funds were already discussed upthread. Fidelity has also done this both to their FFNOX fund and their TDFs (adding more long term treasury bonds recently for instance). In general TDF providers are in constant competition with each other and a lot of fund selection for 401k plans is based on..... past returns.

Ironically active balanced funds like Wellington and Wellesley have done a better job staying the course, at least over the last forty years.

And, as you point out, to change allocation would require paying capital gains on the whole fund, even if the allocation is only to be changed by something small like 20%. One might instead try to alter the holdings in a qualified account, but that is also forbidden under the strategy's rules.

It would not surprise me at all to see Vanguard or any of its peers begin adding stuff like ESG, private equity, or commodities to the all-in-one funds.

[AlwaysLearningMore]

* No law of which I'm aware prevents any fund company from changing the makeup/allocation of their all-in-one funds. Those who hold an all-in-one fund in a nonqualified account will have to pay taxes on any embedded CG's if they want to switch to another fund that more closely aligns with their desired asset allocation.

Despite their reputed power to help investors stay the course, these indexed all-in-one funds have seen a lot of asset allocation changes by providers. Vanguard's changes to their LS and TDF funds were already discussed upthread. Fidelity has also done this both to their FFNOX fund and their TDFs (adding more long term treasury bonds recently for instance). In general TDF providers are in constant competition with each other and a lot of fund selection for 401k plans is based on..... past returns.

Ironically active balanced funds like Wellington and Wellesley have done a better job staying the course, at least over the last forty years.

And, as you point out, to change allocation would require paying capital gains on the whole fund, even if the allocation is only to be changed by something small like 20%. One might instead try to alter the holdings in a qualified account, but that is also forbidden under the strategy's rules.

It would not surprise me at all to see Vanguard or any of its peers begin adding stuff like ESG, private equity, or commodities to the all-in-one funds.

Bingo. Which is why this approach of having the same "all in one fund" in both tax-advantaged and nonqualified accounts has the potential to be so problematic. As you point out, fund companies like to fiddle. When 2025 rolls around this is going to be even more important. I can only imagine VG adding additional asset classes to the TDF's, or changing asset allocations yet again; the response of some might be to demur and state it's "good enough" even though the product may have been substantially altered. Rationalization is a strong force.

(Also, a muni bond fund is far superior in tax treatment vs. the taxable bond's component of a TDF at the higher tax brackets; taxable bonds are "good enough" in a nonqualified account only if you don't mind writing a bigger check to Uncle Sam every April.)

[lostdog]

Hi Longinvest. I had to look up VBAL, as noted in your signature line. Impressive ETF offered by Vanguard for Canadian investors. Speculative question, but do you think Vanguard will ever offer such an ETF for US investors?

I'd love to transition to AOR (or even AOA as we expect a large CALPERS pension at DW's retirement), but I am struggling with accepting the large imbedded cap. gains from my taxable portfolio I'd have to pay the government to make such a move.

Did you make the move?

[bbrock]

Hi Longinvest. I had to look up VBAL, as noted in your signature line. Impressive ETF offered by Vanguard for Canadian investors. Speculative question, but do you think Vanguard will ever offer such an ETF for US investors?

I'd love to transition to AOR (or even AOA as we expect a large CALPERS pension at DW's retirement), but I am struggling with accepting the large imbedded cap. gains from my taxable portfolio I'd have to pay the government to make such a move.

Did you make the move?

No, I did not make the move. I just can’t do it at least right now. I don’t want to give more to Uncle Sam. I think my workaround will just be for DW to call Vanguard PAS upon my demise.

[L84SUPR]

I haven't made it through the entire thread yet, but I would like to provide an anecdote supporting the premise behavioral errors can outweigh benefits of a more complex portfolio relative to a mirrored single fund portfolio.

I made it through the dotcom crash and the housing bust, not to mention the savings and loan crisis, in good order without any behavioral missteps. As I started to burn out at work I craved retirement and began looking for ways to move up my retirement date. I came across the concept of counting SS as bonds and used this as a justification to move from a 2035 fund to a 2065 fund. This was in mid 2021 and stocks went up for a bit but then in early fall dropped about 5 percent. At this point I was experiencing cognitive dissonance between fear of missing out on gains that could bring us up to our number and fear of further delaying retirement due to losses. I was definitely not sleeping well.

A few months later, VT recovered to above 105, which is where I had made the previous move, and I moved about 40 percent of my money into TSP G Fund, a cash equivalent, and left the rest in 2065 or VTWAX. Fear of having to delay retirement won out over FOMO and I slept much better after that.

This was a very near miss as we all know what happened in 2022. I should have stayed the course or moved from 2035 to 2025 if I really wanted to lock in an earlier retirement date. The move to G Fund turned out to be a fortuitous move but it was pure luck. Also, 40% G and 60% L2065 is not substantially different that L2025.

Now I know I am indeed human after all and capable of behavioral blunders. I'm pretty happy with our strange three fund portfolio but I am willing to admit it is actually not any better than mirroring at something like 60/40.

[thatbrian]

Just today I heard someone say, "VOO and chill"

I agree.

Large US companies are doing business globally already, and I see no value in holding bonds.

[longinvest]

I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or the iShares Core Growth Allocation ETF (AOR) are an excellent default suggestion. It's the first (and my preferred) of two alternative default suggestions in the first post of this thread. It implements a good enough approximation of the Global Stock-and-Bond Portfolio possibly with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing.

VSMGX is an automatically-rebalanced and low-cost all-ine-one 60/40 stocks/bonds fund which, as of July 31, 2023, was spread across 3,861 U.S. stocks, 7,989 international stocks, 10,591 U.S. bonds, and 6,989 international bonds for a total of 29,430 global securities. Similarly, AOR is a low-cost globally-diversified and automatically-rebalanced all-in-one 60/40 stocks/bonds index ETF.

I think that combining such a globally-diversified One-Fund Portfolio with the VPW worksheet, as illustrated in the forward test thread, is the simplest way to fully embrace this site's philosophy (I added my interpretation in blue):

1 Develop a workable plan (don't use illogical plans)
2 Invest early and often (live below your means so that there's money to invest, and invest it immediately)
3 Never bear too much or too little risk (use a balanced portfolio)
4 Diversify (use broad total-market funds or ETFs, and invest both domestically and internationally)
5 Never try to time the market (don't wait for market bottom, and don't set your asset allocation based on market valuations)
6 Use index funds when possible (use capitalization-weighted index funds or ETFs)
7 Keep costs low (use low-cost funds or ETFs, and don't give away a percent of your portfolio to a financial advisor)
8 Minimize taxes (use tax-sheltered accounts)
9 Invest with simplicity (Occam's razor: the simplest solution is most likely the right one)
10 Stay the course (once your asset allocation is chosen and your plan is set in motion, follow through with your plan and rebalance your portfolio)

The choice of a globally-diversified balanced index all-in-one fund or ETF satisfies principles 3, 4, 5, 6, 7, 9, and 10.

The VPW worksheet implements a workable plan which lets its user choose monthly, semimonthly, or biweekly contributions during accumulation and annual, quarterly, or monthly withdrawals during retirement. It's very easy to use. It needs a few simple inputs (in yellow cells) and it suggests a contribution or withdrawal amount (in green cells). Here are two screenshots: accumulation and retirement. It satisfies principles 1, 2, 5, and 10.

As for principle 8, it's achieved by fully taking advantage of workplace retirement plans and other tax-advantaged accounts. It's also achieved by using a low-turnover total-market all-in-one index fund or ETF in taxable accounts once tax-advantaged accounts are full. See this post and this post, earlier in this thread, for a discussion about tax efficiency.

I think that the use of a single identical all-in-one index fund or ETF in all accounts greatly simplifies a portfolio, especially for a caretaker or a surviving spouse. It also eliminates the need to rebalance the portfolio and sidesteps a long list of potential behavioral pitfalls. It helps staying the course.

[Uncle Morris]

Does a one-fund portfolio with automatic, constant rebalancing reduce risk in a significant way compared with a corresponding multi-fund portfolio - enough to allow for a greater equity allocation without a 1:1 increase in the level of risk?

Thanks.

[tj]

Does a one-fund portfolio with automatic, constant rebalancing reduce risk in a significant way compared with a corresponding multi-fund portfolio - enough to allow for a greater equity allocation without a 1:1 increase in the level of risk?

Thanks.

....no.

[bikeeagle1]

Man, thanks to the OP for this thread!

I've been doing some backtesting using portfoliovisualizer comparing AOR with various combinations of VTI, VXUS, and various bond funds, and the AOR combination definitely fits the "good enough" requirement. Plus, it's something my wife can manage if she outlives me.

Thanks again!

[CRC_Volunteer]

Man, thanks to the OP for this thread!

I've been doing some backtesting using portfoliovisualizer comparing AOR with various combinations of VTI, VXUS, and various bond funds, and the AOR combination definitely fits the "good enough" requirement. Plus, it's something my wife can manage if she outlives me.

Thanks again!

On PV, change the time period from "Year-to-Year" to "Month-to-Month" and rerun. The is a difference in outcomes.

[bikeeagle1]

On PV, change the time period from "Year-to-Year" to "Month-to-Month" and rerun. The is a difference in outcomes.

Thanks. Yes, I did that. As you know, doing so allows the capture of the GFC drawdown, but I find that AOR was "good enough" when compared to similar combinations of US & foreign funds.

Or did you find some other result? Thanks for the input!

Edit: I am now comparing VSMGX and it seems to have outperformed AOR over the period available. Has that been discussed already in this thread? Doing more research, but the overall "one fund" idea is what is appealing to me.

[bikeeagle1]

Does anyone know of a Vanguard ETF that is similar to VSMGX? Rumors of one coming?

[CRC_Volunteer]

On PV, change the time period from "Year-to-Year" to "Month-to-Month" and rerun. The is a difference in outcomes.

Thanks. Yes, I did that. As you know, doing so allows the capture of the GFC drawdown, but I find that AOR was "good enough" when compared to similar combinations of US & foreign funds.

Or did you find some other result? Thanks for the input!

Edit: I am now comparing VSMGX and it seems to have outperformed AOR over the period available. Has that been discussed already in this thread? Doing more research, but the overall "one fund" idea is what is appealing to me.

Here are sample runs using a 4% SWR. Even though this includes the GFC, it also includes one of the greatest bull markets. Just more information to ponder.

Month-to-Month:
https://www.portfoliovisualizer.com/bac ... ion9_3=100

Year-to-Year:
https://www.portfoliovisualizer.com/bac ... ion9_3=100

[GaryA505]

On PV, change the time period from "Year-to-Year" to "Month-to-Month" and rerun. The is a difference in outcomes.

Thanks. Yes, I did that. As you know, doing so allows the capture of the GFC drawdown, but I find that AOR was "good enough" when compared to similar combinations of US & foreign funds.

Or did you find some other result? Thanks for the input!

Edit: I am now comparing VSMGX and it seems to have outperformed AOR over the period available. Has that been discussed already in this thread? Doing more research, but the overall "one fund" idea is what is appealing to me.

Here are sample runs using a 4% SWR. Even though this includes the GFC, it also includes one of the greatest bull markets. Just more information to ponder.

Month-to-Month:
https://www.portfoliovisualizer.com/bac ... ion9_3=100

Year-to-Year:
https://www.portfoliovisualizer.com/bac ... ion9_3=100

I don't have a dog in this fight but if you want to compare 3-fund, VSMGX and AOR I believe the VTSMX/VGTSX/VBMFX allocations for the 3-fund would be 36/24/40. AOR took a bad beating in 2008.
Month-to-month:
https://www.portfoliovisualizer.com/bac ... ion7_3=100
Year-to-year:
https://www.portfoliovisualizer.com/bac ... ion7_3=100

[bikeeagle1]

I don't have a dog in this fight but if you want to compare 3-fund, VSMGX and AOR I believe the VTSMX/VGTSX/VBMFX allocations for the 3-fund would be 36/24/40. AOR took a bad beating in 2008.

I noticed that difference too. I also saw in another thread that Vanguard has changed the mix in some of their funds, so I am wondering if that could be the reason for the better performance? I'm not sure how to find the historical allocations for Vanguard funds but if it was different back then then we are comparing apples and oranges.

[GaryA505]

I don't have a dog in this fight but if you want to compare 3-fund, VSMGX and AOR I believe the VTSMX/VGTSX/VBMFX allocations for the 3-fund would be 36/24/40. AOR took a bad beating in 2008.

I noticed that difference too. I also saw in another thread that Vanguard has changed the mix in some of their funds, so I am wondering if that could be the reason for the better performance? I'm not sure how to find the historical allocations for Vanguard funds but if it was different back then then we are comparing apples and oranges.

Yes, the ex-US allocation has increased in VSMGX over time, making it more difficult to do a meaningful comparison. I believe VSMGX was even actually actively managed at some point in the past.

[sycamore]

Comparing LifeStrategy funds to a fixed allocation over time is slightly problematic -- Vanguard changed the LifeStrategy allocation on several occasions including 2011, 2013, and 2015. See https://www.bogleheads.org/wiki/Vanguar ... ds#History for some details.

Generally each fund kept its overall stock/bond ratio (subject to minor fluctuations from using the Vanguard Asset Allocation Fund). Vanguard has tweaked the US vs international ratios, and introduced international bond allocation along the way.

This could explain some of the long-term performance differences. Which are all rather minor IMO.

Here's a backtest of VSMGX against its components since March 2015, the last time Vanguard made an allocation change.

iShares also made a change to their Core Allocation funds back in 2018. I think they consolidated some of the holdings.

[GaryA505]

Comparing LifeStrategy funds to a fixed allocation over time is slightly problematic -- Vanguard changed the LifeStrategy allocation on several occasions including 2011, 2013, and 2015. See https://www.bogleheads.org/wiki/Vanguar ... ds#History for some details.

Generally each fund kept its overall stock/bond ratio (subject to minor fluctuations from using the Vanguard Asset Allocation Fund). Vanguard has tweaked the US vs international ratios, and introduced international bond allocation along the way.

This could explain some of the long-term performance differences. Which are all rather minor IMO.

Here's a backtest of VSMGX against its components since March 2015, the last time Vanguard made an allocation change.

iShares also made a change to their Core Allocation funds back in 2018. I think they consolidated some of the holdings.

Dang that backtest is close since March 2015!

[lostdog]

I'm really liking the simplicity of the ishares all in one ETF's AOA and AOR especially at the low 0.15% exp ratio.

My wife wouldn't need to contact Vanguard PAS and she could easily not worry about the portfolio.

Does anyone have AOA or AOR in their taxable account?

[zie]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

[lostdog]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

Simplicity

[bbrock]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

[zie]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

It's not that I don't care. I just care more about being simple, easy and staying true to my Asset Allocation than I do taxes. AOA will be as tax efficient as an 80/20 AA in taxable can be, that's good enough for me. Sure I could complicate my portfolio drastically(compared to 1-fund) and perhaps save a little in taxes, but I know my heir(s) are going to 100% totally not care about investments and finances(at least this next generation). I doubt I'll get to truly generational wealth, but if my heir(s) stick to AOA and only spend whatever it throws off and not sell, they almost certainly will. I mean I still have many many decades to go, I hope, but I'm probably going to retire sooner rather than later, instead of fixating on generational wealth in my lifetime.

[AlwaysLearningMore]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

It's not that I don't care. I just care more about being simple, easy and staying true to my Asset Allocation than I do taxes. AOA will be as tax efficient as an 80/20 AA in taxable can be, that's good enough for me. Sure I could complicate my portfolio drastically(compared to 1-fund) and perhaps save a little in taxes, but I know my heir(s) are going to 100% totally not care about investments and finances(at least this next generation). I doubt I'll get to truly generational wealth, but if my heir(s) stick to AOA and only spend whatever it throws off and not sell, they almost certainly will. I mean I still have many many decades to go, I hope, but I'm probably going to retire sooner rather than later, instead of fixating on generational wealth in my lifetime.

Are you sure AOA won't change its asset allocation?

[zie]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

It's not that I don't care. I just care more about being simple, easy and staying true to my Asset Allocation than I do taxes. AOA will be as tax efficient as an 80/20 AA in taxable can be, that's good enough for me. Sure I could complicate my portfolio drastically(compared to 1-fund) and perhaps save a little in taxes, but I know my heir(s) are going to 100% totally not care about investments and finances(at least this next generation). I doubt I'll get to truly generational wealth, but if my heir(s) stick to AOA and only spend whatever it throws off and not sell, they almost certainly will. I mean I still have many many decades to go, I hope, but I'm probably going to retire sooner rather than later, instead of fixating on generational wealth in my lifetime.

Are you sure AOA won't change its asset allocation?

The allocation currently shifts a little, it's not exactly 80% equities and 20% bonds. I just checked and right now they are 81% equities at the moment. If it shifts by 5-10% either direction for periods of time, I'm still happy. However, I imagine you are concerned about a material persistent shift in AA.

Obviously the chance is non-zero, but I would say it's way down on the list of things to worry about. Their overall objective is to have "a portfolio of underlying equity and fixed income funds intended to represent an aggressive target risk allocation strategy." That's also what I'm after, so our objectives are aligned. How many funds have radically altered their objectives after being around for 15 years? I would guess it's close enough to zero as to not worry about.

[AlwaysLearningMore]

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

It's not that I don't care. I just care more about being simple, easy and staying true to my Asset Allocation than I do taxes. AOA will be as tax efficient as an 80/20 AA in taxable can be, that's good enough for me. Sure I could complicate my portfolio drastically(compared to 1-fund) and perhaps save a little in taxes, but I know my heir(s) are going to 100% totally not care about investments and finances(at least this next generation). I doubt I'll get to truly generational wealth, but if my heir(s) stick to AOA and only spend whatever it throws off and not sell, they almost certainly will. I mean I still have many many decades to go, I hope, but I'm probably going to retire sooner rather than later, instead of fixating on generational wealth in my lifetime.

Are you sure AOA won't change its asset allocation?

The allocation currently shifts a little, it's not exactly 80% equities and 20% bonds. I just checked and right now they are 81% equities at the moment. If it shifts by 5-10% either direction for periods of time, I'm still happy. However, I imagine you are concerned about a material persistent shift in AA.

Obviously the chance is non-zero, but I would say it's way down on the list of things to worry about. Their overall objective is to have "a portfolio of underlying equity and fixed income funds intended to represent an aggressive target risk allocation strategy." That's also what I'm after, so our objectives are aligned. How many funds have radically altered their objectives after being around for 15 years? I would guess it's close enough to zero as to not worry about.

How familiar are you with the history of Vanguard TDF's? And others?

https://supplements.pionline.com/upload ... bility.pdf

[AlwaysLearningMore]

Duplicate

[zie]

Are you sure AOA won't change its asset allocation?

The allocation currently shifts a little, it's not exactly 80% equities and 20% bonds. I just checked and right now they are 81% equities at the moment. If it shifts by 5-10% either direction for periods of time, I'm still happy. However, I imagine you are concerned about a material persistent shift in AA.

Obviously the chance is non-zero, but I would say it's way down on the list of things to worry about. Their overall objective is to have "a portfolio of underlying equity and fixed income funds intended to represent an aggressive target risk allocation strategy." That's also what I'm after, so our objectives are aligned. How many funds have radically altered their objectives after being around for 15 years? I would guess it's close enough to zero as to not worry about.

How familiar are you with the history of Vanguard TDF's?

https://supplements.pionline.com/upload ... bility.pdf

I'm not at all familiar as I don't invest in any TDF's and don't have a Vanguard account. TDF's are quite different from fixed allocation funds like AOA. I might be misunderstanding, but it seems they did shift their glide path, but not with the existing TDF's, so if you bought in 2005, you get glide path A and if you bought in 2006 you got glide path B, but they didn't shift 2005's glide path to B. Also: "To Vanguard’s credit, when they changed their glide path they informed investors of the change, as well as the rationale behind the regime switch." So they were very up-front about it to anyone remotely paying attention. If anything that paper seems to mostly be annoyed at T-Rowe Price and Fidelity for being so bad at keeping their glide path stable.

Assuming my understanding(which taken solely from your source and only skimmed) it seems like this is completely different and not remotely the same as an existing fund drastically altering their fund objective. AOA has been around for almost 15 years now, and while they have changed the holdings(once early on in it's history), they have not altered the overall 80/20 AA. So I'm still guessing it's close enough to zero as to not be a concern.

[AlwaysLearningMore]

Are you sure AOA won't change its asset allocation?

The allocation currently shifts a little, it's not exactly 80% equities and 20% bonds. I just checked and right now they are 81% equities at the moment. If it shifts by 5-10% either direction for periods of time, I'm still happy. However, I imagine you are concerned about a material persistent shift in AA.

Obviously the chance is non-zero, but I would say it's way down on the list of things to worry about. Their overall objective is to have "a portfolio of underlying equity and fixed income funds intended to represent an aggressive target risk allocation strategy." That's also what I'm after, so our objectives are aligned. How many funds have radically altered their objectives after being around for 15 years? I would guess it's close enough to zero as to not worry about.

How familiar are you with the history of Vanguard TDF's?

https://supplements.pionline.com/upload ... bility.pdf

I'm not at all familiar as I don't invest in any TDF's and don't have a Vanguard account. TDF's are quite different from fixed allocation funds like AOA. I might be misunderstanding, but it seems they did shift their glide path, but not with the existing TDF's, so if you bought in 2005, you get glide path A and if you bought in 2006 you got glide path B, but they didn't shift 2005's glide path to B. Also: "To Vanguard’s credit, when they changed their glide path they informed investors of the change, as well as the rationale behind the regime switch." So they were very up-front about it to anyone remotely paying attention. If anything that paper seems to mostly be annoyed at T-Rowe Price and Fidelity for being so bad at keeping their glide path stable.

Assuming my understanding(which taken solely from your source and only skimmed) it seems like this is completely different and not remotely the same as an existing fund drastically altering their fund objective. AOA has been around for almost 15 years now, and while they have changed the holdings(once early on in it's history), they have not altered the overall 80/20 AA. So I'm still guessing it's close enough to zero as to not be a concern.

The point is simply that "fixed" allocation funds are not immutable, and the potential tax implications for non-qualified accounts grows as does the balance.

[lostdog]

I went with VT (Vanguard Total World ETF) in taxable and AOR (iShares 60/40 ETF) in the IRA's. It comes out to our desired asset allocation and the beautiful thing about these iShares asset allocation ETF's is the equity allocation floats with world market cap allocation between U.S and international equity.

I showed my wife how to buy and sell VT in the taxable account and the same with AOR in the IRA's.

She doesn't ever have to worry about re balancing or tax loss harvesting etc... My goal here is pure simplicity for her, no tinkering and staying the course.

[bikeeagle1]

Thanks to this thread, I’ve been spending a lot of time considering how my wife and/or heirs will manage my accounts in the event of my "graduation." I’m also considering how I will manage them in the event of cognitive decline. Neither of these considerations had really entered my thinking very much until I found this thread, so I’m (yet again) grateful to this forum for expanding my awareness.

With all that in mind, I decided to consolidate all of my accounts to Vanguard, and then to simplify the fund holdings as much as possible. I’m not sure I will use VSMGX for everything, since I’m a believer in Wellington and Wellesley, but I could easily imagine a setup with that combination in one account and everything else in VSMGX or similar. Maybe something like this:

Taxable account: VTMFX
Traditional IRA: VWENX & VWIAX (50/50)
Roth IRA: VSMGX

Still researching and open to suggestions, but in general I’m liking the idea of simplification from this thread.

[lostdog]

I also noticed that AOR (ishares 60/40 ETF) trades at high volume. So far the bid/ask spread has been .01% consistently like Vanguard ETF's.

The cost is in line with Vanguard Life Strategy Funds at .15% expense ratio.

[lostdog]

Thanks to this thread, I’ve been spending a lot of time considering how my wife and/or heirs will manage my accounts in the event of my "graduation." I’m also considering how I will manage them in the event of cognitive decline. Neither of these considerations had really entered my thinking very much until I found this thread, so I’m (yet again) grateful to this forum for expanding my awareness.

With all that in mind, I decided to consolidate all of my accounts to Vanguard, and then to simplify the fund holdings as much as possible. I’m not sure I will use VSMGX for everything, since I’m a believer in Wellington and Wellesley, but I could easily imagine a setup with that combination in one account and everything else in VSMGX or similar. Maybe something like this:

Taxable account: VTMFX
Traditional IRA: VWENX & VWIAX (50/50)
Roth IRA: VSMGX

Still researching and open to suggestions, but in general I’m liking the idea of simplification from this thread.

This looks perfectly fine to me. Very simple setup. If simplicity is your goal, this setup fulfills it.

[zie]

Everyone keeps saying AOA is miserable because of dividends, so I decided to compare VT vs AOA.

According to nasdaq.com[0], the difference in dividend yield between AOA and VT is .36%

For every $10k of AOA in taxable, it's an extra $13.32 in taxes at the 37% tax bracket.

So for a 1M portfolio of AOA vs VT, AOA will cost you an additional $3,600 of income in taxable. At the 37% tax bracket that's an additional $1,332 in tax.

I don't know what magic AOA does to have such a small difference between VT, or if my math is just wrong(totally possible), but based on this, I'm definitely not losing sleep over having AOA in taxable vs VT and complicating my portfolio.

Yes, convenience(laziness) has a cost, but it doesn't seem to be much of one.

0: AOA https://www.nasdaq.com/market-activity/ ... nd-history
VT: https://www.nasdaq.com/market-activity/ ... nd-history

[bikeeagle1]

For those concerned about tax ramifications if using VSMGX in a taxable account, here is a backtest comparing VSMGX to VTMFX:

https://bit.ly/3sSuStj

Similar returns, so if VTMFX results in lower tax bills, then perhaps that would be a better option for taxable accounts?

[lostdog]

Everyone keeps saying AOA is miserable because of dividends, so I decided to compare VT vs AOA.

According to nasdaq.com[0], the difference in dividend yield between AOA and VT is .36%

For every $10k of AOA in taxable, it's an extra $13.32 in taxes at the 37% tax bracket.

So for a 1M portfolio of AOA vs VT, AOA will cost you an additional $3,600 of income in taxable. At the 37% tax bracket that's an additional $1,332 in tax.

I don't know what magic AOA does to have such a small difference between VT, or if my math is just wrong(totally possible), but based on this, I'm definitely not losing sleep over having AOA in taxable vs VT and complicating my portfolio.

Yes, convenience(laziness) has a cost, but it doesn't seem to be much of one.

0: AOA https://www.nasdaq.com/market-activity/ ... nd-history
VT: https://www.nasdaq.com/market-activity/ ... nd-history

Even better in lower tax brackets. I wish I could switch from VT to AOA but I have large unrealized capital gains. If I didn't, I would definitely have AOA in taxable and IRA's.

[GaryA505]

For those concerned about tax ramifications if using VSMGX in a taxable account, here is a backtest comparing VSMGX to VTMFX:

https://bit.ly/3sSuStj

Similar returns, so if VTMFX results in lower tax bills, then perhaps that would be a better option for taxable accounts?

I would not hold VSMGX in a taxable account myself. It is not designed to be tax managed. As we have seen in the past, Vanguard cannot be trusted not to make changes in the holdings that cause large cap gains. Just look at what they did with the target date funds.

[bbrock]

Does anyone have AOA or AOR in their taxable account?

I hold 6 figures of AOA in taxable. I have nothing to complain about so far.

I’d be interested in doing that to make things simple for my wife someday, but I just can’t get over the CG taxes due. Are you in a low tax bracket Zie? Or, do you just not care?

At some point I see it as It’s going to be either my spouse giving the government extra due to a less favorable investment in taxable (e.g. AOA, AOR), or Vanguard PAS to manage her portfolio.

It's not that I don't care. I just care more about being simple, easy and staying true to my Asset Allocation than I do taxes. AOA will be as tax efficient as an 80/20 AA in taxable can be, that's good enough for me. Sure I could complicate my portfolio drastically(compared to 1-fund) and perhaps save a little in taxes, but I know my heir(s) are going to 100% totally not care about investments and finances(at least this next generation). I doubt I'll get to truly generational wealth, but if my heir(s) stick to AOA and only spend whatever it throws off and not sell, they almost certainly will. I mean I still have many many decades to go, I hope, but I'm probably going to retire sooner rather than later, instead of fixating on generational wealth in my lifetime.

Right on zie, thx for replying.

I do really like the simplicity, diversification, and convenience of AOA. It was good reading your viewpoint.

[bbrock]

Everyone keeps saying AOA is miserable because of dividends, so I decided to compare VT vs AOA.

According to nasdaq.com[0], the difference in dividend yield between AOA and VT is .36%

For every $10k of AOA in taxable, it's an extra $13.32 in taxes at the 37% tax bracket.

So for a 1M portfolio of AOA vs VT, AOA will cost you an additional $3,600 of income in taxable. At the 37% tax bracket that's an additional $1,332 in tax.

I don't know what magic AOA does to have such a small difference between VT, or if my math is just wrong(totally possible), but based on this, I'm definitely not losing sleep over having AOA in taxable vs VT and complicating my portfolio.

Yes, convenience(laziness) has a cost, but it doesn't seem to be much of one.

0: AOA https://www.nasdaq.com/market-activity/ ... nd-history
VT: https://www.nasdaq.com/market-activity/ ... nd-history

Even better in lower tax brackets. I wish I could switch from VT to AOA but I have large unrealized capital gains. If I didn't, I would definitely have AOA in taxable and IRA's.

I agree with you lostdog. I’d be looking at a >$100k CG tax bill to make that switch in taxable.

And like zie, if I had AOA in taxable, I’d accept it may be less than favorable for taxable. Just the price to pay for simplicity.

[GP813]

If I was starting from scratch today as a young person I would buy VTWAX/VT or AVGE and concentrate solely on investing as much as I could, instead of worrying about allocations and individual stocks.

[GaryA505]

In a taxable account, I think anything other than an index fund that uses a long standing, well established index runs the risk of unexpected cap gains due to changes in the composition of the fund. Vanguard even changed the index of VTSMX/VTSAX at least once that I know of. Multi-asset funds like VSMGX, AOA and AOR have an even greater chance of this happening. Just look at the cap gains fiasco caused by Vanguard changing the composition of it's target date funds. The best way to avoid this is to use an S&P 500 index fund like VFINX/VFIAX/VOO.

EDIT: Oh yeah, I forgot the Vanguard tax-managed funds like VTMFX and VTCLX.

[zie]

In a taxable account, I think anything other than an index fund that uses a long standing, well established index runs the risk of unexpected cap gains due to changes in the composition of the fund. Vanguard even changed the index of VTSMX/VTSAX at least once that I know of. Multi-asset funds like VSMGX, AOA and AOR have an even greater chance of this happening. Just look at the cap gains fiasco caused by Vanguard changing the composition of it's target date funds. The best way to avoid this is to use an S&P 500 index fund like VFINX/VFIAX/VOO.

EDIT: Oh yeah, I forgot the Vanguard tax-managed funds like VTMFX and VTCLX.

For the record, even the S&P 500 has changed its method over time, it's not immune to this problem. AOA(and friends) did change their allocation once, early in its existence. FFNOX(Fidelity's 85/15 fund) just recently changed its allocation. Change is inevitable, regardless of what you select.

[GaryA505]

In a taxable account, I think anything other than an index fund that uses a long standing, well established index runs the risk of unexpected cap gains due to changes in the composition of the fund. Vanguard even changed the index of VTSMX/VTSAX at least once that I know of. Multi-asset funds like VSMGX, AOA and AOR have an even greater chance of this happening. Just look at the cap gains fiasco caused by Vanguard changing the composition of it's target date funds. The best way to avoid this is to use an S&P 500 index fund like VFINX/VFIAX/VOO.

EDIT: Oh yeah, I forgot the Vanguard tax-managed funds like VTMFX and VTCLX.

For the record, even the S&P 500 has changed its method over time, it's not immune to this problem. AOA(and friends) did change their allocation once, early in its existence. FFNOX(Fidelity's 85/15 fund) just recently changed its allocation. Change is inevitable, regardless of what you select.

Thanks, I didn't know about the change in AOA. I guess the question would be what is the potential magnitude and effect of the change.

[zie]

In a taxable account, I think anything other than an index fund that uses a long standing, well established index runs the risk of unexpected cap gains due to changes in the composition of the fund. Vanguard even changed the index of VTSMX/VTSAX at least once that I know of. Multi-asset funds like VSMGX, AOA and AOR have an even greater chance of this happening. Just look at the cap gains fiasco caused by Vanguard changing the composition of it's target date funds. The best way to avoid this is to use an S&P 500 index fund like VFINX/VFIAX/VOO.

EDIT: Oh yeah, I forgot the Vanguard tax-managed funds like VTMFX and VTCLX.

For the record, even the S&P 500 has changed its method over time, it's not immune to this problem. AOA(and friends) did change their allocation once, early in its existence. FFNOX(Fidelity's 85/15 fund) just recently changed its allocation. Change is inevitable, regardless of what you select.

Thanks, I didn't know about the change in AOA. I guess the question would be what is the potential magnitude and effect of the change.

It was before I owned AOA, so I don't know. I'm sure an energetic person could dig it up, but I'm not that energetic. I seem to remember it was just shifting a fund or two and wasn't that bad, but obviously not it's overall allocation of 80% equities.

As I recall, FFNOX's change was a bit more dramatic, there was even a thread here about it, and some people were quite upset. I don't own FFNOX in taxable, so it wasn't a concern for me. But I don't think I'd have been concerned even if it happened in taxable, the changes overall made sense to me.

[longinvest]

At the bottom of the first post of this thread, it's written that so-called "tax-efficient" asset location strategies are a mirage. In another thread, forum member Exchme wrote a very insightful post explaining why, mathematically, it's necessarily so (see the bolded part of the quoted post):

If we stick to stocks and taxable bonds/cash, any location preference can be emulated by a mirrored portfolio (same stock bond allocation in all accounts), though generally the allocation is different between the “tax efficient” portfolio and the equivalent mirrored portfolio.

It must be so by simple continuity - we know that with only stocks and bonds/cash, the maximum average return would be when we hold 100% of the higher yielding asset and at that point there is no difference between “tax efficient” and “mirrored”, so the same maximum is in reach either way. Similarly, holding 100% bonds/cash gives the lowest returns and that too is equal in both “tax efficient” and “mirrored”. Both mirrored and "tax efficient" must be able to hit all points in between. Except at those end points, it will require different allocations to hit any particular intermediate point, but it must be possible, we just need to find the alternate allocation.

I say the mirrored portfolio is more fundamental, so I would reframe and say that when you hold a “tax efficient” portfolio, you are really holding a different asset allocation than the simple sum of your pre-tax stocks and bonds. The “tax efficient” approach loads up your tax deferred with bonds, forcing the government to hold more of those and loads up Roth/taxable with stocks, keeping more of those for yourself. The extra return can be thought of as coming from this shift to less bonds and more stocks.

[...]

So my conclusion is that the topic is just another way to fool ourselves into thinking there is a free lunch. My answer is that the extra return of a “tax efficient” asset location is simply due to more risk.

[Exchme]

At the bottom of the first post of this thread, it's written that so-called "tax-efficient" asset location strategies are a mirage. In another thread, forum member Exchme wrote a very insightful post explaining why, mathematically, it's necessarily so (see the bolded part of the quoted post):

If we stick to stocks and taxable bonds/cash, any location preference can be emulated by a mirrored portfolio (same stock bond allocation in all accounts), though generally the allocation is different between the “tax efficient” portfolio and the equivalent mirrored portfolio.

It must be so by simple continuity - we know that with only stocks and bonds/cash, the maximum average return would be when we hold 100% of the higher yielding asset and at that point there is no difference between “tax efficient” and “mirrored”, so the same maximum is in reach either way. Similarly, holding 100% bonds/cash gives the lowest returns and that too is equal in both “tax efficient” and “mirrored”. Both mirrored and "tax efficient" must be able to hit all points in between. Except at those end points, it will require different allocations to hit any particular intermediate point, but it must be possible, we just need to find the alternate allocation.

I say the mirrored portfolio is more fundamental, so I would reframe and say that when you hold a “tax efficient” portfolio, you are really holding a different asset allocation than the simple sum of your pre-tax stocks and bonds. The “tax efficient” approach loads up your tax deferred with bonds, forcing the government to hold more of those and loads up Roth/taxable with stocks, keeping more of those for yourself. The extra return can be thought of as coming from this shift to less bonds and more stocks.

[...]

So my conclusion is that the topic is just another way to fool ourselves into thinking there is a free lunch. My answer is that the extra return of a “tax efficient” asset location is simply due to more risk.

But a lot of people don't remember their math, so they don't get how fundamental the continuity theorem is! It's especially interesting in that with RPM or Pralana Gold, people can actually test this for their own portfolio and determine what "mirrored" allocation matches the results of the "tax efficient" one. Maybe if they actually modeled it out, that would aid their understanding.