The Three-Fund Portfolio

[SWBoarder]

Thank you.

[CyclingDuo]

I was disappointed it did not have a comprehensive historic return grid for a Vanguard 3 fund portfolio at 10%, 20%, & 30% stock/bond split for Vanguard shares.

SWBoarder:

I do not like using past returns because past performance does not forecast future performance. Nevertheless, you can see past returns of The Three-Fund Portfolio, using different stock/bond splits, HERE.

The Three Fund Portfolio on page 61 was 40% Total Stock Market; 20% Total International and 40% Total Bond Market.

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Best wishes.
Taylor

Looks like quite a few more pension funds could have done better with a simple 60/40 mix of the Three Fund Portfolio the past decade:

https://finance.yahoo.com/news/wall-str ... 58282.html

[Taylor Larimore]

Bogleheads:

Mel Lindauer started a topic conversation about my new book, The Bogleheads' Guide to The Three-Fund Portfolio. I wrote the book, in part, because of the popularity of this Conversation. The book contains many of your endorsements for which I am very grateful.

Please make your posts about the book here:

Taylor's New Book: The Bogleheads' Guide to The Three-Fund Portfolio

Thank you and best wishes.
Taylor

[Carol88888]

in the 2015 update it shows that the 60/40 stock to bond allocation had a higher CAGR than the 80/20 allocation. This was quite a surprise to me.

[TM90]

Question, what would happen to a three fund portfolio if inflation picked up? It has no tips, Commodities nor does it have a lot of real estate.

Anyone?

[abuss368]

Question, what would happen to a three fund portfolio if inflation picked up? It has no tips, Commodities nor does it have a lot of real estate.

Anyone?

In my opinion the Three Fund Portfolio would be fine over time. In terms of Total Bond, older bonds would mature and exit with new bonds at higher rates entering the fund. Stocks generally should stay ahead of the inflation curve. Total Stock and Total International would include all REITs.

[Banjoman]

I became acquainted with Vanguard Funds a few years ago after getting my earlier financial education reading the Fools in the 90s. I read several of Mr. Bogle's books and some of Paul Merriman's books as well and managed to construct a portfolio close to what the Vanguard Portfolio Watch recommended. After lurking around here for about a year I finally signed up. Since then I have soaked up all the information in this thread and decided my carefully constructed was not simple enough and have now a Three Fund Portfolio in both my Taxable and non-taxable portions of my IRA and my 401K at my present employer. I bought Mr. Larrimore's book and quoted several portions to my wife and to my surprise today she asked me to set her up a Vanguard account and help her transfer her TSA/ 403B plan to a Three Fund Portfolio. Thank you Taylor and Mel... and Mr. Bogle. Fair Winds and Following Seas.

[gasdoc]

Sorry if I have missed this info earlier in the thread, and I am not certain this is the place to post this question. I have been invested in essentially a three fund portfolio for many years, but I still have some straggling emerging markets and developed markets from the "old days" in my taxable account. Any advice on switching these over in a "less taxing" way. I am 57, and hope to retire in 4.5 years. I am in the top tax bracket now, and probably will not be in retirement. Should I just wait? Are the savings in the 3 fund portfolio worth just taking the tax pain now?

gasdoc

[Taylor Larimore]

Bogleheads:

The many benefits of total market index funds have forced Fidelity (and Schwab) to offer similar funds. The Wall Street Physician has written this article for Fidelity customers:

Three-Fund Portfolios Using Fidelity Index Funds

Best wishes.
Taylor

[Leesbro63]

Sorry if I have missed this info earlier in the thread, and I am not certain this is the place to post this question. I have been invested in essentially a three fund portfolio for many years, but I still have some straggling emerging markets and developed markets from the "old days" in my taxable account. Any advice on switching these over in a "less taxing" way. I am 57, and hope to retire in 4.5 years. I am in the top tax bracket now, and probably will not be in retirement. Should I just wait? Are the savings in the 3 fund portfolio worth just taking the tax pain now?

gasdoc

I wouldn't sell. I have a similar situation..."legacy" investments from before I learned how to really do it. If you had single stocks, I might be inclined to suggest you sell. But since you are diversified in index funds, emerging and developed markets will PROBABLY mimic your equities in the 3-Fund portfolio, over time. And perhaps even provide some extra diversification. I think the bottom line is that the guaranteed loss from taking the tax hit is probably greater than any temporary future loss from not having everything neatly in your 3 core funds.

[gasdoc]

Sorry if I have missed this info earlier in the thread, and I am not certain this is the place to post this question. I have been invested in essentially a three fund portfolio for many years, but I still have some straggling emerging markets and developed markets from the "old days" in my taxable account. Any advice on switching these over in a "less taxing" way. I am 57, and hope to retire in 4.5 years. I am in the top tax bracket now, and probably will not be in retirement. Should I just wait? Are the savings in the 3 fund portfolio worth just taking the tax pain now?

gasdoc

I wouldn't sell. I have a similar situation..."legacy" investments from before I learned how to really do it. If you had single stocks, I might be inclined to suggest you sell. But since you are diversified in index funds, emerging and developed markets will PROBABLY mimic your equities in the 3-Fund portfolio, over time. And perhaps even provide some extra diversification. I think the bottom line is that the guaranteed loss from taking the tax hit is probably greater than any temporary future loss from not having everything neatly in your 3 core funds.

Thanks, Leesbro66. I suspect you are right. (That is why I still have them.)

gasdoc

[Java11]

I'm confused regarding the difference in tax implications for ETF's vs. mutual funds in a taxable account. In the above linked article that Taylor referenced by The Wall Street Physician he states, "Remember that you should use ETFs instead of index funds in a Fidelity taxable account because of the more favorable tax treatment of ETFs. In tax-deferred accounts, you can use either index funds or ETFs, and my preference is to use index funds."

In Taylor Latimores Three Fund Potfolio book he states, "Vanguard ETF's are simply another share class of their mutual funds. They hold the same securities as their corresponding mutual funds and are equally tax efficient. "

I know that one is referencing Fidelity and the other Vanguard, but is there a difference in tax implications?

[Taylor Larimore]

I'm confused regarding the difference in tax implications for ETF's vs. mutual funds in a taxable account. In the above linked article that Taylor referenced by The Wall Street Physician he states, "Remember that you should use ETFs instead of index funds in a Fidelity taxable account because of the more favorable tax treatment of ETFs. In tax-deferred accounts, you can use either index funds or ETFs, and my preference is to use index funds."

In Taylor Larimores Three Fund Portfolio book he states, "Vanguard ETF's are simply another share class of their mutual funds. They hold the same securities as their corresponding mutual funds and are equally tax efficient. "

I know that one is referencing Fidelity and the other Vanguard, but is there a difference in tax implications?

Java11:

Yes, there is a difference. In most companies ETFs are slightly more tax-efficient than mutual funds. However, Vanguard has a patent which makes their ETFs and mutual funds equally tax-efficient.

Side note: Vanguard investors can exchange their mutual funds for ETFs without fees or tax. However, they cannot exchange from Vanguard ETFs to mutual funds.

Best wishes.
Taylor

[Java11]

Thank you Taylor for your quick an informative response.

[jhernan271]

I have done some searching on the Wikis but to no success. What would the split between US Stock to Int'l stock look like on a 70/30 portfolio?

Could it be:

50% US Stock/20% Int'l ?

thx

[LadyGeek]

That's a good question. It's in the wiki, but you need to search for something different: Approximating Vanguard target date funds - the experts have already done the hard work and figured out the ratios to use.

My post here provides some background: Re: I’m still not a fan of international bond funds

Find the Vanguard target date fund that matches a 70/30 asset allocation. Then, match your US / Int'l ratio to match the ratio in that fund.

If you have any questions, just ask.

[jhernan271]

Ok that seems easy enough to match for a 70/30. Thanks for the tips.

Still unclear though is how would you count a single balanced fund's AA%(70/30AA or 80/20AA) against a portfolio's total AA? Ex:If you were to choose either a target date fund or Life Strategy fund for individual accounts, would it's %'s count against the total US Stock % or slightly for a weighted average?

For example here are the actual #'s that I have worked out(%'s are messy due to a rollover that can not be mixed with individual accounts):

Account 1: 457b(76.7% total portfolio)
Total Market US-18.4%
Total Int'l-27.6%
Total Bond Mkt-30.7%

Account 2:Roth IRA(17.8%)

Account 3: Solo 401k(5.5%)
Vanguard Life Strategy Growth Fund (80/20AA) or Target 2030 Fund(70/30AA).
(This is what is still unclear to me as everything else besides the solo 401k is 70/30AA so how would a 80/20AA in the Life Strategy determine overall AA? ) The only reason why I am considering the growth fund over 2030 fund is the allocations don't change over time.

-thx !

[LadyGeek]

You would have to weight the percentage of each account against the total portfolio. It can be done, but it gets messy.

Rule of thumb: To the nearest 5% is fine. Anything more precise will take too much work for little added benefit.

If you have further questions, bump your thread: Solo 401k w/457 and Roth IRA-How to balance and allocate and we can help you directly.

[balbrec2]

I was disappointed it did not have a comprehensive historic return grid for a Vanguard 3 fund portfolio at 10%, 20%, & 30% stock/bond split for Vanguard shares.

SWBoarder:

I do not like using past returns because past performance does not forecast future performance. Nevertheless, you can see past returns of The Three-Fund Portfolio, using different stock/bond splits, HERE.

The Three Fund Portfolio on page 61 was 40% Total Stock Market; 20% Total International and 40% Total Bond Market.

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Best wishes.
Taylor

Looks like quite a few more pension funds could have done better with a simple 60/40 mix of the Three Fund Portfolio the past decade:

https://finance.yahoo.com/news/wall-str ... 58282.html

I know that the Johnson and Johnson Pension fund allocates as follows,
55% domestic equity
20% international equity
25% US bonds
They do not however use index funds but rather have a diverse group
of fund managers

[CyclingDuo]

I was disappointed it did not have a comprehensive historic return grid for a Vanguard 3 fund portfolio at 10%, 20%, & 30% stock/bond split for Vanguard shares.

SWBoarder:

I do not like using past returns because past performance does not forecast future performance. Nevertheless, you can see past returns of The Three-Fund Portfolio, using different stock/bond splits, HERE.

The Three Fund Portfolio on page 61 was 40% Total Stock Market; 20% Total International and 40% Total Bond Market.

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Best wishes.
Taylor

Looks like quite a few more pension funds could have done better with a simple 60/40 mix of the Three Fund Portfolio the past decade:

https://finance.yahoo.com/news/wall-str ... 58282.html

I know that the Johnson and Johnson Pension fund allocates as follows,
55% domestic equity
20% international equity
25% US bonds
They do not however use index funds but rather have a diverse group
of fund managers

Tough business job to run a pension fund, for sure!

http://www.philly.com/philly/blogs/inq- ... 80307.html

Ben Carlson did an article last year on various college endowment fund returns vs. The Three Fund Portfolio.

http://awealthofcommonsense.com/2017/02 ... ale-model/

[Psychopasta]

Hi Taylor,

Thank you for your excellent book! I have question on Chapter 5, where you say:

If your current securities are in a taxable account, and if they’re profitable...Here are five steps to minimize taxes... Stop reinvesting distributions. Larimore, Taylor. The Bogleheads' Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk (Kindle Locations 1428-1432). Wiley. Kindle Edition.

Can I ask you for a bit more detail on this advice? I've been brought up to think that reinvesting distributions was the tax-efficient as well as auto-pilot thing to do (subject to periodic rebalancing). Just curious on this one piece of advice,

- Pasta

[Taylor Larimore]

Hi Taylor,

Thank you for your excellent book! I have question on Chapter 5, where you say:

If your current securities are in a taxable account, and if they’re profitable...Here are five steps to minimize taxes... Stop reinvesting distributions. Larimore, Taylor. The Bogleheads' Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk (Kindle Locations 1428-1432). Wiley. Kindle Edition.

Can I ask you for a bit more detail on this advice? I've been brought up to think that reinvesting distributions was the tax-efficient as well as auto-pilot thing to do (subject to periodic rebalancing). Just curious on this one piece of advice,

Pasta:

Dividends are taxed whether reinvested or not. Our Boglehead wiki has a good article about reinvesting dividends in a taxable account:

https://www.bogleheads.org/wiki/Reinves ... le_account

Best wishes.
Taylor

[Psychopasta]

Thank you!
- Pasta

[LadyGeek]

tomd37 has a question which I've moved into a stand-alone thread: [Thinking about a two-fund portfolio]

[LXEX55]

In an interview with AARP magazine, August/September 2017 issue, Mr Bogle said he, at the present time, does not include international stock funds in his portfolio ("I don't do it myself"). I too am somewhat reluctant to include them in my portfolio. May I ask Taylor what he thinks of this three fund portfolio when I retire next year at age 63:
50% Total Stock Market, 25% Total Bond Market, 25% Vanguard Inflation Protected Securities. Or should I just keep it simple at 50% Total Stock Market and 50% Total Bond Market. Ben Stein recommends the Inflation Protected Securities fund in his book YES, YOU CAN STILL RETIRE COMFORTABLY. Any advice, comments, suggestion are appreciated. Thank you.

[LadyGeek]

In order to give the best advice, it's important to keep all the information in one spot. I recommend you post this question in your original thread: Retirement Investing With Healthcare $ Concerns

I suggest you bump the thread and post your portfolio using the Asking Portfolio Questions format. It will make you think about the "big picture" while giving us the information we need to point you in the right direction. (Your first post is missing some info.)

That being said, TIPS were recommended a few years ago, but seem to have fallen out of favor.

[Taylor Larimore]

May I ask Taylor what he thinks of this three fund portfolio when I retire next year at age 63:
50% Total Stock Market, 25% Total Bond Market, 25% Vanguard Inflation Protected Securities. Or should I just keep it simple at 50% Total Stock Market and 50% Total Bond Market.

LXEX55:

In my opinion, only one low-cost, good quality, diversified bond fund is all you need to reduce portfolio risk. A total bond market index fund is what I use.

Without knowing more, and based solely on your age, a 50% stock/bond allocation should be about right.

Read my "Simplicity" link below.

If you have more questions about your personal portfolio, please read Lady Geek's post, above.

Thank you and best wishes.
Taylor

[LXEX55]

May I ask Taylor what he thinks of this three fund portfolio when I retire next year at age 63:
50% Total Stock Market, 25% Total Bond Market, 25% Vanguard Inflation Protected Securities. Or should I just keep it simple at 50% Total Stock Market and 50% Total Bond Market.

LXEX55:

In my opinion, only one low-cost, good quality, diversified bond fund is all you need to reduce portfolio risk. A total bond market index fund is what I use.

Without knowing more, and based solely on your age, a 50% stock/bond allocation should be about right.

Read my "Simplicity" link below.

If you have more questions about your personal portfolio, please read Lady Geek's post, above.

Thank you and best wishes.
Taylor

Thank you, sir. I will follow your advice. Your book just arrived today and I look forward to reading it.

[Taylor Larimore]

Thank you, sir. I will follow your advice. Your book just arrived today and I look forward to reading it.

LXEX55:

Let me know if you like (or don't like) the book and if it answers your questions.

Thank you and best wishes.
Taylor

[Kcr8n]

WOW ! Lots of info here. I'm sold ! I'm retiring in March of 2019 at age 60 ! I will be rolling 401K into IRA with 3 funds !! I'm grateful I found Bogleheads !!

[LadyGeek]

Welcome! Celebrate your milestone in: Roll Call for the Retirement Class of 2019!

[Kcr8n]

Prior to finding Bogleheads, I was interviewing potential Financial Advisors. One of them provided me with their recommended Portfolio........a 56 page document !!!! 56 pages !!!! Might just have well been in a foreign language !!!
And they wanted 1% to manage. Yes, I'm grateful I found you folks.

[MichaelRpdx]

Prior to finding Bogleheads, I was interviewing potential Financial Advisors. One of them provided me with their recommended Portfolio........a 56 page document !!!! 56 pages !!!! Might just have well been in a foreign language !!!
And they wanted 1% to manage. Yes, I'm grateful I found you folks.

The Bogleheads' Guide to the Three-Fund Portfolio is 112 pages. How did you make it through?

[Kcr8n]

Easy !! It's in English !!

[Taylor Larimore]

The Bogleheads' Guide to the Three-Fund Portfolio is 112 pages.

Bogleheads:

It is unusual to have a full 8 Page Index in a short book. This allows the reader to quickly locate any investment subject in the book.

Best wishes.
Taylor

[abuss368]

Prior to finding Bogleheads, I was interviewing potential Financial Advisors. One of them provided me with their recommended Portfolio........a 56 page document !!!! 56 pages !!!! Might just have well been in a foreign language !!!
And they wanted 1% to manage. Yes, I'm grateful I found you folks.

The Bogleheads' Guide to the Three-Fund Portfolio is 112 pages. How did you make it through?

I actually do not understand the question! I have learned much.

Thank you Taylor.

[MichaelRpdx]

Prior to finding Bogleheads, I was interviewing potential Financial Advisors. One of them provided me with their recommended Portfolio........a 56 page document !!!! 56 pages !!!! Might just have well been in a foreign language !!!
And they wanted 1% to manage. Yes, I'm grateful I found you folks.

The Bogleheads' Guide to the Three-Fund Portfolio is 112 pages. How did you make it through?

I actually do not understand the question! I have learned much.

While the Advisor's recommended Portfolio may (??) have had many issues, its 56 page length probably was not one of them. After all, the book is twice as long to explain something very simple. I was poking fun at the prior poster. If he couldn't get through a 56 page portfolio how did he ...

[ruralavalon]

WOW ! Lots of info here. I'm sold ! I'm retiring in March of 2019 at age 60 ! I will be rolling 401K into IRA with 3 funds !! I'm grateful I found Bogleheads !!

Welcome to the forum .

[LXEX55]

Hello Mr. Larimore, I originally posted this question on Mr. Bogle's Q&A, but, my wife (who knows all, you understand) told me that since it pertains to the three fund portfolio, I should have posted on your thread. Perhaps you would be kind enough to answer. As always, I appreciate your time and expertise.

With the stock market so high, would this be a bad time for me to switch over to a two fund retirement portfolio (50% bond fund; 50% US stock fund). Would it be smarter for me to leave my 401k money in the stable value fund until I need to start drawing down on the money a year or more from now? Aren't I buying very high if I switched into it now (or when I retire at year's end)? I am 63 and planning on retiring at the end of this year. Am employed now, and Wells Fargo manages my 401k money. Upon retirement, I can either leave the money where it is with Wells Fargo or roll it over to Vanguard, which was my original plan after reading your book.

[Taylor Larimore]

LXEX55:

Please post your question on the Help With Personal Investments forum: This is the link: viewforum.php?f=1

Use this format which will give us the information needed to give you informed replies:

ASKING PORTFOLIO QUESTIONS

Thank you and best wishes.
Ta;ylor

[Calico]

I am so eager to do this with my retirement investments. I just read the book this weekend. I am actually part way there with a three fund portfolio. At least, I have three of the funds: SWTSX, SWSIX, and SWAGX as part of my portfolio. I have an S&P index fund that I might change over to SWTSX. I am already asset allocated the way I would like to be 80 stocks/20 bonds. So I think it would be a simple matter of just changing that one fund.

But I have a question before I do that. What do those of you who do this three fund approach do when you have some money that can't go into any kind of total stock or bond anything? There are two accounts like that in my portfolio. One is an annuity that I've slowly been siphoning money out of (10% every year) into those Schawb funds. It makes up 19% of my portfolio and I think of it as bonds for allocation purposes. Then there is my 401k. There are no great funds for my 401k so I picked a good looking fund with the lowest ER. That's 28% of my portfolio. According to the book I should just get matching and put the rest in an IRA or Roth IRA. But I am already maxed out on my Roth IRA, so that 401k is what I keep adding to now (matching is 6% and I put 15% in it).

So what should one do about those kinds of investments? How do you count them three fund? Can you consider them or should one just look at the money one can control and actively invest?

[Taylor Larimore]

Calico:

In order to keep this thread manageable, it is important that questions about personal investments should be posted on the "Help With Personal Investments Forum." Please read the post above yours.

Thank you and best wishes
Taylor

[Calico]

Calico:

In order to keep this thread manageable, it is important that questions about personal investments should be posted on the "Help With Personal Investments Forum." Please read the post above yours.

Thank you and best wishes
Taylor

Sorry about that. I wasn't thinking of it as a personal question when I wrote it, but now that you point it out, I can see that is. I posted a new thread in the other forum.

Loved the book by the way! Thank you for writing it.

[47Percent]

Taking human psychology into account, the three-fund portfolio should be tweaked to a "three-fund plus" strategy.
i.e. take 95% of your portfolio and do the BH thing of three-fund portfolio.
The other 5%, invest in whatever fancies your mind. TIPS, commodities, REITS, Individual stocks, IPO's. etc. to get your jollies.

Caveats:
1) Making sure the 5% from constantly gnawing away from the nest egg come rebalancing time.
So, that 5% should be walled off from rebalancing except for shoveling windfall profits into the sensible portion of the portfolio.

2) No options or any other leveraged plays

3) Still keep an eye out for tax consequences.

[abuss368]

Taking human psychology into account, the three-fund portfolio should be tweaked to a "three-fund plus" strategy.
i.e. take 95% of your portfolio and do the BH thing of three-fund portfolio.
The other 5%, invest in whatever fancies your mind. TIPS, commodities, REITS, Individual stocks, IPO's. etc. to get your jollies.

Caveats:
1) Making sure the 5% from constantly gnawing away from the nest egg come rebalancing time.
So, that 5% should be walled off from rebalancing except for shoveling windfall profits into the sensible portion of the portfolio.

2) No options or any other leveraged plays

3) Still keep an eye out for tax consequences.

Hi 47Percent -

The beauty of the Three Fund Portfolio is that an investor does not need any additional funds.

Keep investing simple.

[PuddlesTheDuck]

Something that I haven't seen mentioned much on here (though I visit bogleheads fairly infrequently now) is that you can now get full world stock and bond exposure in just 2 funds!

If you want a certain stock:bond ratio and want roughly global weights inside each of those categories, Vanguard has come out with a total world bond fund to go with the total world stock fund (structured as a fund of funds). I know the subject of international bonds has been contentious in this thread before (I've definitely participated in that debate), but for those looking for international bonds this is a great option.

I just merged my total international and total US bond funds into one, as they were already close to 50:50, making my new "3 Fund" portfolio in my IRA now encompasses the globe in just 2 funds:

75% Vanguard Total World Stock (VT or VTWSX)
25% Vanguard Total World Bond (BNDW)

Personally I'll eat the 1-2 basis points to reduce my rebalancing complexity though I know some people don't feel the same way.

- Puddles

[Taylor Larimore]

Bogleheads:

Today, CBS MarketWatch published my interview with them discussing The Three-Fund Portfolio. This is the link:

Opinion: A Boglehead explains the simplest way to manage your money

Best wishes.
Taylor

[LadyGeek]

Bogleheads:

Today, CBS MarketWatch published my interview with them discussing The Three-Fund Portfolio. This is the link:

Opinion: A Boglehead explains the simplest way to manage your money

Best wishes.
Taylor

The discussion thread is here: A Boglehead explains the simplest way to manage your money

[abuss368]

Bogleheads:

Today, CBS MarketWatch published my interview with them discussing The Three-Fund Portfolio. This is the link:

Opinion: A Boglehead explains the simplest way to manage your money

Best wishes.
Taylor

Hi Taylor -

A good interview and it will help continue to spread the word regarding the many benefits of the Three Fund Portfolio.

Best.

[kayanco]

If you have i-bonds, should that be counted as part of the bond fund in the 3-fund portfolio (for asset allocation)?

Thanks.

[corrected typo]