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The Three Fund Portfolio
Old 05-26-2019, 07:44 AM   #1
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The Three Fund Portfolio

Aside from this forum, my favorite financial forum is the Bogleheads Forum. Like this one, it includes many really smart people who simply want to help and tolerate basic newbie questions that may seem stupid to those in the know. Nothing ticks me off more than when I ask a question on a forum and somebody replies with "Why not just Google it?". They don't seem to understand I DID Google it and I don't understand what I read. Anyway, that being said, one of the basic tenants of Bogle Investing is the index fund approach to investing. Similar to what Ben Stein recommended in his book. Your total portfolioi is three index funds, total domestic stock, totoal international stock, and total bond market. I think this was originally called the Couch Potato portfolio. Jack Bogle in a 2017 interview said he does not include International in his portfolio, but he can see the logic of doing so. This simple approach makes a lot of sense to me. Does anyone have any feelings yay or nay on this investing approach? I should add, I am a p poor investor, am not interested in finance or investing, am just looking for a reasonably safe way to park my IRA money in retirement that requires little or no maintenance.
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Old 05-26-2019, 07:59 AM   #2
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IMO, the three-fund portfolio, Couch Potato portfolio, Coffeehouse Investor portfolio, etc are all fine. But, for an investor who just wants to "set it and forget it, a better alternative is a well-designed and low cost Target Date Fund. It truly is set and forget (no need to periodically rebalance or adjust the asset allocation as you near retirement, etc). It removes the chance that an investor will overlook this rebalancing and (more importantly) makes it less likely that the novice investor will attempt to time the market based on emotion, an article they just read, etc. The folks running the fund will automatically sell what has gone up and buy a little more of what has gone down every day, while the investor just carries on with their life. This really works best for most people, IMO.

Note that the target date funds and/or a simple 3 fund approach do give up some small amount of return for the sake of simplicity. For example, it is not practical to do things like tax loss harvesting, and if an investor has both IRA and taxable accounts there is some tax advantage to putting the bonds and the stocks in different types of accounts. But this difference is on the margins, and the vast majority of folks would be much better off to just stick everything in the appropriate, low-cost, Target Date Fund, keep investing regularly (payroll deduction if offered), and >leave it alone< rather than trying to do anything complicated to get the last bit of return or tax efficiency.
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Old 05-26-2019, 08:26 AM   #3
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I lurk over there. I think the three fund portfolio is probably a lot better than what the vast majority of people would do. With regard to international, I have some (although not particularly pleased with it); but believe that a lot of out large corps have overseas exposure.

I also agree with samclem re the Target Date Fund. It's all baked in. You can pick that through Vanguard: EZPZ.
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Old 05-26-2019, 08:30 AM   #4
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I'll put it this way... Vanguard uses this approach for their target-date funds for customers (actually they add in an international bond fund... so make it 4 rather than 3).... close enough.

If it is good enough for Vanguard for their customers then it is good enough for the vast majority of the population... including you and me.

I have four beyond the Vanguard four index funds. Two are because DW has some VFINX/S&P 500 Index in her taxable account from long ago that is so highly appreciated that I can't convert to Total Stock because it would incur a lot of tax cost... so I balance that out by holding Extended Market Index in another account. I have some Wellesley in my IRA, principally to own some managed bonds (and the equities come along with it). And my international equities is split 50/50 between International Stock Index and International Explorer, so that adds another fund.
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Old 05-26-2019, 08:43 AM   #5
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Quote:
Originally Posted by LXEX55 View Post
Aside from this forum, my favorite financial forum is the Bogleheads Forum. Like this one, it includes many really smart people who simply want to help and tolerate basic newbie questions that may seem stupid to those in the know. Nothing ticks me off more than when I ask a question on a forum and somebody replies with "Why not just Google it?". They don't seem to understand I DID Google it and I don't understand what I read. Anyway, that being said, one of the basic tenants of Bogle Investing is the index fund approach to investing. Similar to what Ben Stein recommended in his book. Your total portfolioi is three index funds, total domestic stock, totoal international stock, and total bond market. I think this was originally called the Couch Potato portfolio. Jack Bogle in a 2017 interview said he does not include International in his portfolio, but he can see the logic of doing so. This simple approach makes a lot of sense to me. Does anyone have any feelings yay or nay on this investing approach? I should add, I am a p poor investor, am not interested in finance or investing, am just looking for a reasonably safe way to park my IRA money in retirement that requires little or no maintenance.
With no facts about your situation it would be wrong to recommend anything. How are you invested now?
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Old 05-26-2019, 08:48 AM   #6
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I agree with Samclem.

OP, even if you enjoyed investing and wanted a more complicated portfolio, it would not likely change your portfolio structure much from the 3 funds you mention. I enjoy investing and the vast majority of our funds are still in total US stock market, total international stock and short term bond funds. The tweaks I have made include additions of US small cap, US value and emerging markets and short term bonds vs. total bond market. And, I doubt my performance is any better than the funds you describe and it may be worse. IMO, investing results benefit from inactivity and simplicity. You are on the right track.
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Old 05-28-2019, 09:54 AM   #7
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For example, it is not practical to do things like tax loss harvesting, and if an investor has both IRA and taxable accounts there is some tax advantage to putting the bonds and the stocks in different types of accounts. But this difference is on the margins, and the vast majority of folks would be much better off to just stick everything in the appropriate, low-cost, Target Date Fund, keep investing regularly (payroll deduction if offered), and >leave it alone< rather than trying to do anything complicated to get the last bit of return or tax efficiency.
I disagree, there are substantial financial advantages to both TLH and to have the right mix of funds in taxable and tax-advantaged accounts. It's not just a 'last bit of return' IMO if you have any sort of balance between the two.

If almost all of the money is in tax-advantaged then sure, go Target Date. But I'm not convinced the vast majority of ER folk are in that category. Perhaps a majority sure, but the rest aren't on the fringe.
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Old 05-28-2019, 10:22 AM   #8
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I have 3 categories but bc I bought SPY over time with per share cost of 142, I have 4 holdings that comprise 90% of my investments. SPY & SCHB 78%, SCHF 5%, PWZ 7%. I find that this mix outperforms what I was doing when actively trading. Keep 10% to play with

I also have a pension with a built in COLA so my tolerance may differ substantially with others. Whatever let's you sleep well at night
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Old 05-28-2019, 11:46 AM   #9
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I disagree, there are substantial financial advantages to both TLH and to have the right mix of funds in taxable and tax-advantaged accounts. It's not just a 'last bit of return' IMO if you have any sort of balance between the two.

If almost all of the money is in tax-advantaged then sure, go Target Date. But I'm not convinced the vast majority of ER folk are in that category. Perhaps a majority sure, but the rest aren't on the fringe.
Noted. My post was in response to the OP. His post included:

Quote:
Originally Posted by LXEX55 View Post
I should add, I am a p poor investor, am not interested in finance or investing, am just looking for a reasonably safe way to park my IRA money in retirement that requires little or no maintenance.
This didn't strike me as what someone interested in TLH (or likely to actually do it), would write. And since his question was specifically about his IRA only, the issue is irrelevant.

But, yes, it is good to know that the issues of relative tax efficiency and more sophisticated techniques to reduce taxes are important in some cases. That's why I mentioned them.
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Old 05-28-2019, 11:59 AM   #10
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I think the three fund portfolio is pretty doggone cool.

But also I have always loved Wellesley VWIAX, which is not an index fund. And then there's the TSP "G Fund" which I also love because unlike other bond funds it will never decrease in share price. After all, access to the G Fund is one of my federal employee/retiree benefits and if I like it, why not. I couldn't decide; what should I do? Put my portfolio in Wellesley, the G Fund, or do the three fund approach? Decisions, decisions. I didn't know.

So, I put 30% into Wellesley, all of my TSP into the G Fund, and put the rest into the following three fund portfolio in taxable:

1.) Vanguard Total Stock Market Index (VTSAX
2.) Vanguard Total Bond Market Index (VBTLX)
3.) Vanguard FTSE All-World Ex-US Index (VFWAX).

That is what felt best to me. I think I am kind of hedging my bets.

Now, a target date fund would have been a good option also and maybe even a better option than what I actually did. Although putting my eggs all in one basket scares me, still a target date fund would probably have been better for my extreme old age because you don't have to rebalance or mess with it. I can imagine that rebalancing might become more difficult or impossible to do without help in extreme old age. However at this point I probably won't sell any huge amount of my portfolio to buy a target date fund, for tax reasons.

When I get too old to rebalance, I guess I will just let it all ride without rebalancing and continue to live off my SS, mini-pension, and dividends. So what if it's not exactly balanced when I croak.
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Old 05-28-2019, 12:42 PM   #11
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Somewhat similar to W2R, but complicated by including DWs accounts into portfolio. In our Roths we both have VBIAX VG 60/40 Balanced index fund, in her IRA is mostly Wellesley with some Star. My TSP is all G, Ithen there is a tradiing account (about 10% of portfolio) that holds all kinda of equities that I play with. At VG we have after tax accounts with Wellington and a money market fund. Currently we are 40% stock, 45% bond and 15% cash. I don't like holding so much cash but am not inclined to increase the % of stocks and bonds are no bargain. I would prefer 50/50 or 60/40 overall but I can hold the current AA forever but if the market really tanks I will look for buying opportunities.
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Old 05-28-2019, 02:53 PM   #12
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This simple approach makes a lot of sense to me. Does anyone have any feelings yay or nay on this investing approach?
If you want market average returns, this is the portfolio for you. It's not for me.

Quote:
I should add, I am a p poor investor, am not interested in finance or investing, am just looking for a reasonably safe way to park my IRA money in retirement that requires little or no maintenance.
Then the three fund portfolio would be good for you.
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Old 05-29-2019, 06:23 PM   #13
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Hitting the S&P Index average gain/loss is not bad. That is what all the active managers are trying to beat (which means they are the market) each with its own "Spin" on how to beat the index, some pulling one way....some pulling the other....some tilting oneway and some the other....according to this article they are actually terrible at beating the average.

Maybe they can do for a few years here and there but not consistently, I believe that is what the Monkey throwing darts at random stocks experiment showed (i.e. the Monkey beat most stock pickers)

"After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index."

https://www.cnbc.com/2019/03/15/acti...-indexing.html
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Old 05-29-2019, 07:31 PM   #14
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Rick Ferri is a disciple of John Bogle and an investment advisor and author of investment books. He advocates a series of 4 funds/ETFs which, in their simplest form, are essentially identical to the Three Fund Portfolio with one addition: a small slice of REITs. You can find the details on core-4.com. (They largely use Vanguard index funds and are intended for the investor to self-manage, not for him to manage for a fee.)
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Old 05-29-2019, 07:42 PM   #15
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you can go on and on about Portfolios, pick one and an asset allocation that you will stick with for the next 30 or so years that allows you to sleep well at night (SWAN).
Here are a few hundred to choose from just adjust to your desired AA.
"235 Portfolios Better Than Yours"
https://www.portfolioeinstein.com/23...er-than-yours/
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Old 05-29-2019, 09:15 PM   #16
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I went from stocks to many funds to a four fund portfolio over the course of about 20 years. I don't think my returns were noticeably better for any of them. So as I find I care less and less about trying to squeeze out a little extra performance, I'm going with simplicity.

I have four funds instead of three only because I divide the U.S. stocks into S&P 500 and all the rest. Can't stop tinkering! Also because I don't want more than 25% bonds, so I have 25% in each of my four funds. I like having the bond fund separate from the stocks, and I still have rebalancing opportunities if I want.

If you truly want to do almost nothing, a target date fund is a fine way to go.
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Old 05-30-2019, 05:02 AM   #17
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What ratio do you use for S&P 500 vs Extended Market Index?
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Old 05-30-2019, 06:57 AM   #18
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What ratio do you use for S&P 500 vs Extended Market Index?
If your goal is to emulate the total market, you'd want 80% S&P 500 and 20% extended.
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Old 05-30-2019, 07:05 AM   #19
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Hitting the S&P Index average gain/loss is not bad. That is what all the active managers are trying to beat (which means they are the market) each with its own "Spin" on how to beat the index <snip>..

Maybe they can do for a few years here and there but not consistently, I believe that is what the Monkey throwing darts at random stocks experiment showed (i.e. the Monkey beat most stock pickers)

"After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index."

https://www.cnbc.com/2019/03/15/acti...-indexing.html
Bernstein mentions a great example of this in one of his books - Oakmark Fund and Robert Sanborn (manager). Sanborn was for many years "beating" the index only to then under-perform for quite a few years..leading to his eventual resignation from Oakmark.

I unfortunately bought Oakmark "back in the day" thinking that I could "beat" the S&P 500 returns, which I did for a few years. Unfortunately, I still own it and the current one-year returns are 9.93% LESS than the S&P 500 index. The 3, 5 and 10-year averages are also all under the S&P 500..

Similar story with OAKIX (Oakmark International) which I also own..David Hero is the manager, and M* awarded him "International Fund Manager of the Year" multiple times. So, I invested pretty heavily in OAKIX - which has shown periods of outperformance..unfortunately, it's 5-year average return is 1.33% LESS than it's index and even worse - 1.22% less than the category average.

It's taken me a few decades of investing experience to finally realize that no-one can consistently "beat" the market - especially in large cap stocks. I do think there are sectors including Fixed Income (or even Small Cap Value) where it may be possible - and for that reason own some actively managed funds in those areas. But large or even mid-cap? I don't know of a single fund that has done it for 15+ years, year in and year out.
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Old 05-30-2019, 07:45 AM   #20
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Whenever we have discussions like this, I offer the reminder that the average person on this forum knows more about investing than 95% of the general population. For that 95%, a three-fund portfolio or target-date fund is the option I would recommend. The other 5% may (or may not) be able to do a tad better with tweaking that strategy with things slicing-and-dicing and TLH, but that's not for the masses.
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