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Portfolio of 3 balanced funds vs 3 index funds
Old 12-07-2015, 12:29 PM   #1
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Portfolio of 3 balanced funds vs 3 index funds

Looking for others' thoughts on using three balanced funds vs rolling your own with three index funds.

I'm planning to retire in the spring and will be rolling over my 401k to my Vanguard tIRA. I have planned to move everything into the simple 3 fund portfolio like that advocated by Boglehead Taylor Larimore. (my AA: 35% US stock, 10% Int'l stock, 55% bonds). This is simple but still requires rebalancing. The idea of using a balanced fund to eliminate the need to rebalance is attractive. The thought that came to mind is using three balanced funds in equal proportions to achieve a similar AA. The three funds would be Balanced Index Adm VBIAX, Wellesley Adm VWIAX, and Target Retirement Income VTINX. This would add some diversity of managed vs index and still rebalance automatically. When withdrawals need to be made for living expenses, one would sell funds to reestablish equal value among the three, thus keeping the AA balanced. The historical performances of both approaches appear very similar, when calculated for my desired AA, so it's not a matter of trying to pick a winning fund. Is this worth considering further, or is it a foolish exercise?
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Old 12-07-2015, 02:28 PM   #2
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Not sure how well that would match your original AA, but it is OK to set up an AA of three balanced funds.

Ideally your three funds would behave as differently as possible, in order to maximize rebalancing benefits. Three balanced funds are unlikely to behave very differently. So you might miss a little extra boost there, but you also might save yourself some work.
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Old 12-07-2015, 02:30 PM   #3
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Six of one... one-half dozen of the other except my guess is that the ER of the simple 3 fund portfolio is probably lower.

Another alternative would be to just use the Target Retirement fund that most closely correlates with a 45/55 AA and shift later if you don't like the glidepath AA. If all is tax-deferred this would be simplest as there is no need to rebalance and withdrawals don't affect the AA.
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Old 12-07-2015, 03:21 PM   #4
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Quote:

This would add some diversity of managed vs index and still rebalance
automatically
Perhaps it's more diversified in a way, but rebalancing with 3 funds is pretty darn simple.
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Old 12-07-2015, 08:53 PM   #5
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If these are in taxable accounts, you might be slightly better off with funds you re-balance yourself (or just don't bother - the data suggests there doesn't really seem to be much difference long term).

So rather than take whatever cap gains distributions the balanced funds kick off, you have a bit more control. If stocks are up, and you need to sell above/beyond divs/distributions, just sell a little of the stocks, which brings you more in balance. Or vice-versa as needed.

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Old 12-07-2015, 10:20 PM   #6
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Thanks for the comments. I think I have an affliction where I try to make things more complicated than necessary - the Rube Goldberg method of investing.
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Old 12-07-2015, 11:53 PM   #7
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Quote:
Originally Posted by pb4uski View Post
Six of one... one-half dozen of the other except my guess is that the ER of the simple 3 fund portfolio is probably lower.

Another alternative would be to just use the Target Retirement fund that most closely correlates with a 45/55 AA and shift later if you don't like the glidepath AA. If all is tax-deferred this would be simplest as there is no need to rebalance and withdrawals don't affect the AA.

Exactly. And I do something very similar in my tax deferred at Vanguard where my core is a mix of Wellesley and Target Retirement Income (no glideslope) for a blend of managed vs. indexed with just enough Total Stock index added to achieve my desired AA. Yet in my Roth, at Fido, I elect to use their Spartan index funds for their low ER's so I'm really using both of the OP's considered approaches. In either case, a simple spreadsheet makes it easy to rebalance or to know what one's AA is across multiple balanced funds. So I'm not sure ease of rebalancing need be much of a determining factor. One advantage to the multiple balanced funds, however, is that you're somewhat spared from "seeing" the volatility of the underlying funds. A handy feature if one is prone to "messing with things".
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