Vanguard Balanced Index from Cradle to Grave

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stemikger
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Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

This was inspired by a comment left on another thread and the more I thought about it, it didn't really sound so crazy.

The advice given to the regular small retail investor is to have more in stocks when you are young and put more into bonds when you are older.

There is also a new theory I believe by Wade Pfau is to actually become more aggressive in the later years in retirement. I don't know all the details but I believe the first few years in retirement you hold a conservative asset allocation and down the road you hold more in stocks.

Having said that, what would be wrong if someone just buys the balanced index when they first start investing and hold it for their entire natural life. Yes, they are too conservative when they are younger, but as they get older they are not, and finally when they are older they may be too aggressive, but it should all balance out and keep up with inflation. Just a thought on the ultimate in simplicity and it just might work. In the end they will end up with a portfolio that may look like Wade Pfau suggests.

P.S. I know there is no international in the Balanced Index, but I don't own it and never have. 20 years without it tells me I'm not missing anything.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by DSInvestor »

The fund may not be available in 401k and other employer plans. Those with employer plans may sometimes be forced to use less than optimal choices there and use IRA space fill in the gaps in the portfolio. If the fund is available in an employer plan it would be a good choice for lots of folks.

Balanced Index good choice for IRA but not taxable accounts if investor is in high tax bracket. For those looking for a tax efficient option in taxable accounts, Tax Managed Balanced in taxable can be paired with Balanced Index in IRA.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Levett »

Mr. Bogle has often praised the Balanced Index fund.

Lev
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Re: Vanguard Balanced Index from Cradle to Grave

Post by dharrythomas »

LifeStrategy Moderate Growth with the broader diversification might be a better choice, but the lack of international is the only thing wrong with Balanced Index. Tax-Managed Balanced is a reasonable choice also though less diversified than Balanced Index.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Louis Winthorpe III »

stemikger wrote: P.S. I know there is no international in the Balanced Index, but I don't own it and never have. 20 years without it tells me I'm not missing anything.
I think it's a pretty decent plan. The problem with high stocks early in life is that it assumes that young people with a long time horizon will stay the course during and after a severe bear market. That's questionable.

As for avoiding international, I've seen good arguments for and against, but the quote above isn't one of them.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

Louis Winthorpe III wrote:
stemikger wrote: P.S. I know there is no international in the Balanced Index, but I don't own it and never have. 20 years without it tells me I'm not missing anything.
As for avoiding international, I've seen good arguments for and against, but the quote above isn't one of them.
I agree with you there. For my personal reasoning, I will direct you to Common Sense on Mutual Funds by John Bogle. He devotes an entire chapter to the subject. I can honestly say I agree with everything he says on the subject and more importantly it makes the most sense to me.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by nisiprius »

The thing that's hard for people to accept is that there is a fairly big zoo of portfolios of which it can be said that they are all sane, that there is no way to prove which is best, and even thirty years from now no way to prove whether the highest-returning one was smart or just lucky.

Note that although John C. Bogle has suggested just holding Vanguard Balanced Index Fund, it's also true that in 2001, in The Twelve Pillars of Wisdom he wrote:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
Vanguard Balanced Index Fund was launched in 1992 and he's sometimes expressed enough pride in Balanced Index that we can be sure he was well aware of it.

So, how come he's saying 60/40 in a balanced fund one place, and 50/50 in separate funds somewhere else?

But there's more. He has also said that he holds a lot of Wellington Fund, because "One, that was the fund I was brought up with. Two, its founder, Walter Morgan, gave me my job at Wellington. I owe it to him.... This is less than traitorous of me (regarding his advocacy of index investing) [because] basically, it's close to a balanced index fund.[/quote]So, there you have it. 50% each to a stock index and a bond index fund. Or, Balanced Index (60/40). Or, Wellington which is "close to a balanced index fund."

Either he's making inconsistent recommendations... or, he doesn't think the differences matter all that much and he thinks he these are three consistent recommendations.

A corollary to this is that it doesn't matter much whether you simply buy and hold Balanced Index, or whether you hold its two components (Total Stock and Total Bond) as separate funds in a 60/40 proportion and occasionally rebalance as needed. Or 50/50. Because the difference between 60/40 and 50/50 doesn't matter much, either.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

Thanks Nisprius, I always enjoy your knowledge and insight.
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Re: Vanguard Balanced Index from Cradle to Grave

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Re: Vanguard Balanced Index from Cradle to Grave

Post by BogleBoogie »

stemikger wrote:Thanks Nisprius, I always enjoy your knowledge and insight.

DITTO!!!
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Re: Vanguard Balanced Index from Cradle to Grave

Post by IronHorse1928 »

stemikger wrote:Thanks Nisprius, I always enjoy your knowledge and insight.
+1, I appreciate the body of work and content posted by Nisprius.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Sibelius »

"A corollary to this is that it doesn't matter much whether you simply buy and hold Balanced Index, or whether you hold its two components (Total Stock and Total Bond) as separate funds in a 60/40 proportion and occasionally rebalance as needed. Or 50/50. Because the difference between 60/40 and 50/50 doesn't matter much, either."

As the wise men of Delta House proclaimed, "It just doesn't matter!"
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Re: Vanguard Balanced Index from Cradle to Grave

Post by fortyofforty »

The more I've been contemplating this idea, the more I like it. One fund. Essence of simplicity. Automatically rebalanced for you. Start small and convert to Admiral shares when the time comes. I like it.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Waba »

VBINX should be starting point for any portfolio, and if it stays with that you will have done better than many before you.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Rodc »

http://home.comcast.net/~rodec/finance/ ... nBonds.pdf

See the third graph in this little write up I did some years ago.

Indeed 60/40 birth to death is not a crazy idea.

Over the long haul the issue largely comes down to what your average allocation is.

That said, there is also some wisdom in at least considering cutting back a little on risk once you have enough.

When young one can arguably take more risk. On the other hand lots of folks lack the life and investing experience to handle more risk. So 60/40 is not at all crazy for many young people.

Personally though it has not made much difference historically I would suggest holding a decent slug of international as opposed to a pure US balanced fund.

FWIW I was 70/30 more or less for many years (due to not rebalancing I got out of whack due to the late 1990s run up, but the early 2000s fixed that. :) ), I am now 60/40 as I near retirement.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by selftalk »

I think I read not so very long ago that John Bogle gave as a gift some shares of the Vanguard Balanced Index Fund to his grand children. As he`s said before "that`s conservative but then again I`m conservative." It all grows and compounds. At least that`s what it has done in the past. The biggest problem we may have as investors in our retirement accounts and taxable accounts is wanting to increase our returns by taking on more risk by tilting to more volatile asset classes than what the Total Stock Market Index fund offers. If we weren`t so greedy we would experience less stress in investing and most probably earn more.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Kevin M »

I think the main thing an approach like this misses is the large change in the ratio of human capital to financial capital as one ages. Granted, a young person may not have the required willingness to take risk to incorporate their human capital into their asset allocation reasoning, but I think it's important to at least understand it.

Here's an interesting Ibbotson Associates research paper on lifetime asset allocations as it relates to the design of target date funds:

Lifetime Asset Allocations: Methodologies for Target Maturity Funds

Lots of interesting discussion of incorporating human capital into the asset allocation decision.

Of course Vanguard also incorporates this kind of analysis into the design of their Target Retirement funds: Vanguard’s approach to target-date funds

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Re: Vanguard Balanced Index from Cradle to Grave

Post by Index Fan »

I think the Balanced Fund from cradle to grave is a good thing. I'd prefer LifeStrategy Moderate Growth for the greater diversification, but both would be a good 60/40 portfolio. Once upon a time a 60/40 portfolio was seen as a standard asset allocation for investors (Peter Bernstein was a champion of this approach).
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Re: Vanguard Balanced Index from Cradle to Grave

Post by chessmannextmove »

nisiprius wrote:The thing that's hard for people to accept is that there is a fairly big zoo of portfolios of which it can be said that they are all sane, that there is no way to prove which is best, and even thirty years from now no way to prove whether the highest-returning one was smart or just lucky.

Note that although John C. Bogle has suggested just holding Vanguard Balanced Index Fund, it's also true that in 2001, in The Twelve Pillars of Wisdom he wrote:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
I wonder if JB would be of the same opinion on world stocks index funds if he were born and raised in Germany.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by htdrag11 »

nisiprius wrote:
A corollary to this is that it doesn't matter much whether you simply buy and hold Balanced Index, or whether you hold its two components (Total Stock and Total Bond) as separate funds in a 60/40 proportion and occasionally rebalance as needed. Or 50/50. Because the difference between 60/40 and 50/50 doesn't matter much, either.
Yep, it does not matter much, see Fine Tuning Your Asset Allocations 2014 (article by Paul Merriman):

http://paulmerriman.com/2014-new-site/f ... tion-2014/

[OT comment removed by admin LadyGeek]
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Dandy »

I recently made a large commitment to Balanced Index in lieu of Target Date/Life Strategy in my TIRA. I like the idea of young people starting off less aggressive than the late dated Target Date Funds -- at least until their risk tolerance has be tested successfully. There is a point of portfolio review near or in retirement to make sure the effects of loss of human capital, withdrawals that are necessary etc. So, Balanced Index may not be the only answer in retirement - but it could be. 60/40 is a bit aggressive for my TIRA so I have some Wellesley and some fixed income to bring my overall allocation in line. But that is the beauty - too aggressive - add a bond fund/CD ladder, to conservative add a stock fund. Still simple and cheap.

I recently looked at the performance of the much praised Wellington Fund and compared it to Balanced Index - both are good funds but the lower cost, passive Balanced Index fund was slightly better for the periods displayed.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

selftalk wrote:I think I read not so very long ago that John Bogle gave as a gift some shares of the Vanguard Balanced Index Fund to his grand children. As he`s said before "that`s conservative but then again I`m conservative." It all grows and compounds. At least that`s what it has done in the past. The biggest problem we may have as investors in our retirement accounts and taxable accounts is wanting to increase our returns by taking on more risk by tilting to more volatile asset classes than what the Total Stock Market Index fund offers. If we weren`t so greedy we would experience less stress in investing and most probably earn more.
You are right about that and he also has quite a bit of money in it himself. :beer
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

Index Fan wrote:I think the Balanced Fund from cradle to grave is a good thing. I'd prefer LifeStrategy Moderate Growth for the greater diversification, but both would be a good 60/40 portfolio. Once upon a time a 60/40 portfolio was seen as a standard asset allocation for investors (Peter Bernstein was a champion of this approach).
Unfortunately Peter L. Bernstein changed his tune a few years later. However, his article the 60/40 solution is still my favorite article on why to choose 60/40. Here it is below:

http://web.archive.org/web/200612140619 ... in6040.pdf

I also like what Harry Markowitz said about a simple 50/50 two fund portfolio.

“I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Here is another good article about 60/40.

http://www.marketwatch.com/story/get-th ... 2014-06-06
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Re: Vanguard Balanced Index from Cradle to Grave

Post by dbr »

So is the forum changing its flavor from the enthusiasts for all stock portfolios when young and providing for everything in bond ladders when old to thinking you just invest everything 50/50 (or 60/40 or 40/60) for a lifetime and also don't peek?
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

dbr wrote:So is the forum changing its flavor from the enthusiasts for all stock portfolios when young and providing for everything in bond ladders when old to thinking you just invest everything 50/50 (or 60/40 or 40/60) for a lifetime and also don't peek?
Good question. I for one have always held a two fund with AA anywhere from 50/50, 60/40 and 70/30. However, in 2013 I lost my mind a bit when one of the men I admire the most said in his Berkshire Hathaway annual letter that the average person should just hold enough in cash and put the rest in an index fund that buys America and all his reasoning made sense. I did it for a short period and I could not sleep very well. Even though Mr. Buffett gave an even more detailed explanation in his 2014 letter, the 60/40 solution should get me there and the best is I can sleep at night and needless to say I love the simplicity. Mr. Bogle and Mr. Buffett are almost on the same page and I look up to both of these great men equally. We would have to look long and hard to find the likes of these two giants, so for now, I'm standing on their shoulders but fine tuning my nuances as Mr. Bogle has often said.

So for me, I'm back to doing things the way I always have until those two hiccups pertaining to AA. In the end holding more equities like Mr. Buffett suggest may yield a larger portfolio, but until I get there, I need to get my beauty rest.

I would love to see what others have to say.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by staythecourse »

nisiprius wrote:The thing that's hard for people to accept is that there is a fairly big zoo of portfolios of which it can be said that they are all sane, that there is no way to prove which is best, and even thirty years from now no way to prove whether the highest-returning one was smart or just lucky.
I think anyone reading needs to take a minute and think and digest this insightful comment. It is NOT the asset allocation that matters, but the ability to STAY THE COURSE that matters. There are many asset allocations that are fine and "close enough" to get one to the end goal of most investors, i.e. money for retirement. When folks fail it is NOT because they didn't include International or short duration corporate bonds, but because they did not stay the course.

Pick one of MANY numerous reasonable plans and stick to it.

p.s. For stemikger... Would the Vanguard balanced fund been as highly thought of Vanguard was a Japanese Company and the constitutes were of Japaese markets? Just something to think about. :D
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Re: Vanguard Balanced Index from Cradle to Grave

Post by linenfort »

staythecourse wrote: I think anyone reading needs to take a minute and think and digest this insightful comment. It is NOT the asset allocation that matters, but the ability to STAY THE COURSE that matters.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by stemikger »

staythecourse wrote:p.s. For stemikger... Would the Vanguard balanced fund been as highly thought of Vanguard was a Japanese Company and the constitutes were of Japaese markets? Just something to think about. :D
Short answer is no. For the long answer I will ask that you read the entire chapter on international investing of Common Sense on Mutual Funds by John Bogle. And I apologize in advance for being a broken record when it comes to international and balanced index, as another poster called me. lol. For the record, as far as being a broken record, my wife agrees and if I had to answer the question while looking in the mirror I would have to also. :beer
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Re: Vanguard Balanced Index from Cradle to Grave

Post by garlandwhizzer »

nisiprius wrote:
The thing that's hard for people to accept is that there is a fairly big zoo of portfolios of which it can be said that they are all sane, that there is no way to prove which is best, and even thirty years from now no way to prove whether the highest-returning one was smart or just lucky.
1+

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Re: Vanguard Balanced Index from Cradle to Grave

Post by CyberBob »

stemikger wrote:
Index Fan wrote:I think the Balanced Fund from cradle to grave is a good thing. I'd prefer LifeStrategy Moderate Growth for the greater diversification, but both would be a good 60/40 portfolio. Once upon a time a 60/40 portfolio was seen as a standard asset allocation for investors (Peter Bernstein was a champion of this approach).
Unfortunately Peter L. Bernstein changed his tune a few years later. However, his article the 60/40 solution is still my favorite article on why to choose 60/40. Here it is below:

http://web.archive.org/web/200612140619 ... in6040.pdf

I also like what Harry Markowitz said about a simple 50/50 two fund portfolio.

“I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Here is another good article about 60/40.

http://www.marketwatch.com/story/get-th ... 2014-06-06
It looks like Markowitz may have changed his tune too.

From a 2013 interview:
  • "HM: A lot has happened. We have a lot of data now. In 1952, we hired a student to collect data on securities. But between the top down view, knowledge of data, and our experience, we are better now. When I was at Rand in 1950, I just did 50/50. That’s all I knew then, it’s not what I would do now and it’s not what I would recommend to a 25 year old. My profession and I have learned a lot."
http://cuffelinks.com.au/the-harry-mark ... selection/
  • "HM: The problem with 60/40, it’s a little chicken for people early on, it’s not right for everybody. 90/10 might be best for a young person. The problem with lifecycle is I’m 85 and I have more in equities than I’ve ever had, but I have a wealth level that means I am many standard deviations away from not being able to eat."
http://cuffelinks.com.au/the-harry-mark ... al-advice/
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Chan_va »

nisiprius wrote:
The thing that's hard for people to accept is that there is a fairly big zoo of portfolios of which it can be said that they are all sane, that there is no way to prove which is best, and even thirty years from now no way to prove whether the highest-returning one was smart or just lucky.
Great point. Taking this logic further, there is a fairly big zoo of strategies of switching between these fairly big zoo of portfolio's of which it can be said that they are all sane.

Stay the course is one of them, but so is random switching every week, age in bonds, PE 10 based, switching based on superbowl winners etc. etc. There is no way to prove which is best, even in hindsight.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by toto238 »

The enemy of a good plan is the pursuit of a perfect plan.

Balanced Index from cradle to grave is an absolutely fine plan. You have low expenses. You have good diversification. You have an asset allocation of stocks/bonds that is not completely unreasonable at any age.

Balanced Index Fund makes a great option for any investor. Yes you can tilt one way or another. You can add international, or not. You can gain little efficiencies here and there, maybe. Or maybe not.

A one-fund portfolio for your entire life like Balanced Index, LifeStrategy Moderate, or a Target Retirement fund, is absolutely fine. If you end up in a high income tax bracket and have run out of tax-advantaged space, then it might be time to start talking about munis, and/or allocating your assets across accounts in a way to minimize taxes. But most Americans are never going to be in an income high enough that it will really start to make a difference.

Us folks here on Bogleheads like to slice and dice sometimes, trying to squeeze every dollar out of our investments if we can. The return we get on the amount of time and work we put into our investments is very low. We would get a much higher return spending the same time investing in our human capital. But we still do it anyway, because we enjoy it.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by marklearnsbogle »

stemikger wrote:Thanks Nisprius, I always enjoy your knowledge and insight.
+ 1 for both stemikger and nisprius. This forum - and the many contributors participating - continues to change and improve my investing life. Great thread all around reminding us that simplicity and staying the course are truly a solid foundation on which to build! Thank you! :sharebeer
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Re: Vanguard Balanced Index from Cradle to Grave

Post by rattlenap »

Great Post!
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Re: Vanguard Balanced Index from Cradle to Grave

Post by Lax67 »

nisiprius wrote: So, how come he's saying 60/40 in a balanced fund one place, and 50/50 in separate funds somewhere else?
In addition to those two, here are a couple of excerpts from Bogle's Enough:

"In recent years, there have been other investor-friendly innovations, including target retirement funds and life strategy funds. Properly used (and properly costed!), these funds can easily serve as an investor's complete investment program for the long run.


"If it sounds like I'm reaffirming my belief in the index fund - in both its stock form and bond form - and in ideas like tax-managed funds, defined-maturity bond funds, and target-date funds (all of which, at their best, have index funds at their core), well, you read me loud and clear"

With all that he says, I just focus on the advice of keeping it simple and staying the course.
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Re: Vanguard Balanced Index from Cradle to Grave

Post by willthrill81 »

The White Coat Investor recommends Life Strategy Moderate Growth for those only interested in knowing the 'bare minimum' needed to get them where they need to go. Coupled with a 20% gross savings rate, people following this will very likely be in good shape come normal retirement age.
https://www.whitecoatinvestor.com/the-bare-minimum/
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