By Dr. James M. Dahle, WCI Founder
I was given the pleasure of reviewing my friend Taylor Larimore's excellent The Bogleheads' Guide to the Three-Fund Portfolio and will now take the opportunity to recommend it to you. I've generally stopped doing book reviews on this blog except during Continuing Financial Education week because they're a ton of work for little profit and unlike Mr. Larimore, I actually prefer reading non-financial books these days! However, this book was worth making an exception for.
A diehard, long-term Boglehead may not learn a single thing from this book, but you should buy it anyway for the sheer pleasure factor. An investing rookie will find that the book not only teaches you about one of the reasonable asset allocations (and certainly the most popular) you can use, but is a primer on basic investing, portfolio management, and most importantly, good investing behavior. The experienced Boglehead will treasure it as a letter from a grandfather passing on critical life lessons in his last years.
In our era of FIRE blogs, we have lots of people dropping out of the workforce in their 30s or 40s just as soon as they hit financial independence in order to put their feet up and chill. In contrast, we have 94-year-old Battle of Bastogne veteran Taylor Larimore who is still making valuable contributions to the world. Buy the book just to say thanks to one of the last of the Greatest Generation. Of course, the money isn't going to him, he's donating all proceeds to the John C. Bogle Financial Literacy Center (helps support the forum and annual meeting). In addition to feeling good about supporting a good cause, you also get to read 5 pages from Jack Bogle (who may not be around any longer than Taylor), and 70 pages from Taylor. In addition to their own wisdom, the words of dozens of investing experts and Bogleheads also appear in the book. Did you hear that? 75 pages (plus some short appendices). It's not quite If You Can, but it's short enough that just about anyone can get through it.
Benefits of the Total Market Index Fund
The meat of the book is an explanation of 20 reasons why investing in total market index funds is a good idea. Maybe I ought to step back briefly and explain that the Three-Fund Portfolio is a combination of three of the largest mutual funds in the world, all low-cost, broadly diversified index mutual funds:
Vanguard Total Stock Market Index Fund- Vanguard Total International Stock Market Index Fund
- Vanguard Total Bond Market Index Fund
Three-Fund Portfolio Benefits:
- No advisor risk
- No asset bloat
- No index front running
- No fund manager risk
- No individual stock risk
- No overlap
- No sector risk
- No style drift
- Low tracking error
- Above-average return
- Simplified contributions and withdrawals
- The benefit of consistency
- Low turnover
- Low costs
- Maximum diversification (lower risk)
- Portfolio efficiency (best risk/return ratio)
- Low maintenance
- Easy to rebalance
- Tax efficiency
- Simplicity (for investors, caregivers, and heirs)
Put it all together and he makes a strong case for total market investing.
The Foreword of The Bogleheads' Guide to the Three-Fund Portfolio
In addition to Chapter 4 (encompassing about half the book), there are a lot of other little pearls to enjoy. For example, I found two things interesting in the foreword by Bogle. The first was that he doesn't exactly endorse the three-fund portfolio. He says this about it:
“Index funds are designed simply to assure you that you will earn your fair share of the returns delivered in each segment of The Three-Fund Portfolio or any other indexing strategy that meets your needs.”
The second was just a hint of gloating. Bogleheads have, for years, criticized Jack's statement that international stocks aren't necessary that he made in Bogle on Mutual Funds in 1994. In the foreword, Jack says this:
“I wrote that a long-term investor need not allocate any of his or her assets to non-U.S. stocks. But if they disagreed, I argued, they should limit their holdings to 20% of their stock portion, given the significant extra risks involved (such as currency risk and sovereign risk). My opinion was based on the expectation that the American economy would continue to grow over the long term, and that the market values of U.S. corporations would grow faster than the values of non-U.S. corporations. Since 1994, as it was to happen, the U.S. S&P 500 Index was to rise by 743%, while the EAFE (Europe, Australasia, and Far East) Index of non-U.S. Stocks rose by 237%. That I was right is beside the point. It may have been luck. But now that U.S. stocks have dominated for nearly 25 years, it may well be time for reversion to the mean, with non-U.S. stocks leading the way rather than following. Who really knows? No one knows what tomorrow may bring. But I'm inclined to stick by my earlier conclusion that holdings of non-U.S. stocks should be limited to no more than 20% of equities. For U.S. investors, Taylor suggests that 20% of the equity allocation should be placed in a Total International Stock Index Fund. That suggested 20% is essentially a compromise between my suggested maximum of 20% and the minimum 20% recommended by a Vanguard study.”
The Life of Taylor Larimore
Some of the other pearls in the book are taken directly from the life of Taylor Larimore. Born in 1924, the year the first mutual fund was started, he was the grandson of an investing giant. However, that didn't spare his family from having to move away during the Great Depression when the family restaurant went under. At first, it wasn't so bad—they moved into Grandpa's waterfront mansion. But when his company went bankrupt too, they ended up in a small Miami apartment. Even those difficulties paled in comparison to what Taylor must have felt in the dark of night on Monday, June 5th, 1944 high above the French coastline aboard a C-47, much less on Christmas Day in Bastogne later that year while surrounded by Germans. But like most of his generation, he doesn't even mention that. His entire wartime service and college education are brushed aside in half a sentence in the preface. However, what he does share in the preface are the investing lessons he learned in the school of hard knocks. Like me, he must have been hardheaded, since he had to learn two of those lessons twice. Here are the lessons he learned:
- A 100% stock portfolio can be dangerous.
- Believing a broker is your friend can be dangerous.
- Avoid the lure of individual stocks.
- Past performance does not forecast future performance.
- Investment newsletters are a waste of money and market-timing doesn't work.
- Past performance does not forecast future performance.
- Avoid expensive stockbrokers and their hidden fees.
- Buying high and selling low is a losing strategy.
If you want to hear the stories behind the lessons, you'll need to buy the book.
The Boglehead Investing Philosophy
The book also contains a summary of Boglehead wisdom tucked into the nooks and crannies. If any of this is new to you, you really need to read this book.
- Develop a workable plan
- Invest early and often
- Never bear too much or too little risk
- Diversify
- Never try to time the market
- Use index funds when possible
- Keep costs low
- Minimize taxes
- Invest with simplicity
- Stay the course
Implementation of the Three-Fund Portfolio
Some investors want to be told exactly what to do. Taylor does that for you. Not only does he tell you which three mutual funds to use, but he tells you how much to put in each of them. He says hold your age in bonds, so if you're 30 years old, your portfolio should be 30% bonds. He also says put 20% of equity into international stocks. So that same 30-year-old would have the following portfolio:
- 56% Total Stock Market Index Fund
- 14% Total International Stock Market Index Fund
- 30% Total Bond Market Index Fund
and a 60-year-old would have this portfolio:
- 32% Total Stock Market Index Fund
- 8% Total International Stock Market Index Fund
- 60% Total Bond Market Index Fund
If you like to be told what to do so you can move on with more important things in your life, you can do far worse than to follow Taylor's advice. A hobbyist won't be satisfied with that, but most investors (and everybody is an investor whether they recognize it or not) are not hobbyists.
He even gives you some advice as far as how to deal with the 401(k) and other tax-advantaged retirement plans, like use a good target retirement fund, substitute the 500 index for TSM, or even build your own TSM with 5 parts 500 index and 1 part extended market index. The book ends with the obligatory chapter on Staying the Course. It is so important, but there isn't much to say about it. Taylor's version lasts a page and a half and can be summarized in two sentences:
When stocks are in a Bear Market…you will be strongly tempted to sell at least a portion of your stock funds. DON'T DO IT.
Criticisms of The Bogleheads' Guide to the Three-Fund Portfolio
Critics of the book are likely to point out that it's a bit expensive for such a short book. Funny how those “frugal” critics fail to realize just how much higher their expense ratios are than the funds advocated in the book. Talking about penny-wise and pound-foolish. Critics may also say “everybody knows the lessons this book contains.” Having helped thousands of otherwise very intelligent people with their portfolios, I assure you that is not the case. Larimore also does not even address the elephant in the room when it comes to Total Market Investing—Factor Investing. I think that was partly an effort to maximize simplicity for the intended audience of the book, but also because Taylor simply doesn't believe in factor investing. It's easy for me to see why. Look at all the fancy ways to invest that have come and gone in his 94 years! How many of the hundreds of factors being promoted out there will we even remember a decade or two from now? At any rate, if you do choose to “tilt” a portfolio, I think it is critical to first understand the base to tilt from first, and this book will teach that.
Overall, it's a book well worth your time and money. Even if you don't want to keep it on your shelf forever, I'm confident you already know the person you should give it to when you're done.
Buy The Bogleheads' Guide to the Three-Fund Portfolio today!
What do you think? Have you read the book? What did you like or dislike about it? Comment below!
This has been on my “to-do” list for a while now after Mr. Larimore sent me the book. As with many other things, when my wife started back with a full-time job, I just haven’t gotten around to it. Glad to know your thoughts on it, though!
I really do love the simplicity of the three-fund portfolio or any other kind of portfolio that we can “set and forget.” By far and away the ability to look at your portfolio once a year (or less) so that we don’t buy high and sell low outweighs any other more complicated investing theory (factor based, efficient frontier, etc). Given that importance of the behavioral finance side of investing, simple is golden in my mind.
I haven’t read the book myself, but the one big draw back of the three-fund portfolio is that many companies/hospitals, including my own, do not have these three funds available in their 401K/403B. So, the “keep it simple” index investing philosophy may look a little different for those of us in this situation, in which case the Bernstein No-Brainer portfolio seems to work quite well (25% small cap index, 25% large cap index, 25% european/internationa index, and 25% bonds). Maybe this could be adjusted to follow the 20% international allocation that Larimore and Bogle discuss.
Either way, simple is good. Thanks for the good review.
TPP
I credit you Jim and the Bogleheads as the two greatest things I stumbled upon after my divorce that got me on the right financial track and essentially responsible for where I am today.
That such a community exists like the Bogleheads is amazing. They freely give advice from experts in the field just for the reward of knowing they are truly helping someone.
I have the first 2 books (and actually next week I have scheduled my review of the original book) and found the content well written and the information contained actionable to save a lot of money in the long run. I have no doubt this book is a worthy successor.
Thanks for the review
just looked at son’s 401k most are American Funds
ONLY ONE VANGUARD FUND-mid cap index
these 401 plans are scams
Judging by the forums the elephant in the room isn’t factor investing, it’s % bonds. The idea of age = % bonds is often treated as antiquated.
Why? Does it seem to you that people are arguing for more bonds or less bonds? If less, that happens every time there hasn’t been a bear market for a while, it’s nothing new.
People are definitely arguing for less bonds. I’ve been using the age = % bonds for some time and have been happy with it, but it seems like I’m kind of a dinosaur.
I wouldn’t worry about it. Investing is a single player game. You need the AA right for you. In general, that’s as much stock as you can tolerate in a nasty bear market.
I’m 40 years old and finished residency 3 years ago. I invest to the max every paycheck in my 401k, HSA, Backdoor Roth, etc.
I still have 20 years to go and maybe 25 more. For someone like me just starting off I wouldn’t want 40% bonds to match my age correct? I’m currently 10% and will likely increase incrementally as I age and my 401k grows.
CJ
Similar boat here. I’m 52 and finished residency 6 years ago. I max out 403b, 457, TSA saver, and Roth IRA. I am 100% in stocks in the form of mostly small and mid-cap index funds, some water ETF and mutual funds, and a small, fixed basket of Crspr stocks. I guess my 403b, which is the bulk of my savings, is a “three fund” portfolio (CFWAX, VIMSX, VSGAX), but there’s no way I’m investing in bonds at this point. I also moonlight a fair bit, and am working on developing some passive income. I feel I am behind the curve here, but am doing everything I can to catch up. I probably won’t retire for 15 – 20 years, mostly because that seems super boring to me, although I hope to be doing more management or consulting rather than clinical work later in my career. Whatever happens, it’s going to be an interesting ride. 😀
What was your asset allocation in 2008-2009 and how did you react?
Jim
I am currently reading bogleheads guide to investing. I already own more than $ 10K in VTSAX in a taxable account. I am looking at doing DCA of 3K per month into that account.
On a separate note I am looking at the role of total international index fund (VTIAX) in that account, I have another 10 K to invest, so here is how I am looking at the scenario. VTIAX would expose me to international markets and create diversity but the tax efficiency is a question mark here, one the qualified dividend is 68 percent for VTIAX (compared to 95 percent for VTSAX), you do get a foreign eligible tax credit though. so if you look at morning star, since inception the tax cost ratio for VTIAX is 1.13 (wow!), which drops its return from 5.22 to 4.09. in comparison VTSAX, since inception has a tax cost ratio of .47 dropping its return from 6.69 to 6.22. I know past performance is not an indicator of future performance but its hard to argue that both are equally tax efficient funds. so is it fair to pick VTSAX because its more tax efficient?
I use both in my portfolio and both are held both in tax-protected accounts and taxable accounts. They are both very tax efficient mutual funds. I’m not sure which will be more tax-efficient going forward.
You are looking at your entire portfolio as one big account, right?
I came across this fund, its actively managed, called VINEX, the r squared at one point was 0.7 with VTSAX compared to 0.8 between VTIAX and VTSAX. despite the high turnover the after tax numbers for VINEX is 8.25 whereas VTIAX is 4.38.
My gut feeling is to stay away from the VINEX given its turnover percentage of 43 percent, just curious what you think about this fund given that its actively managed at vanguard instead of a passive index fund.
It’s considered good form online to spell out the names of funds so readers don’t have to look them up. I’ve held funds for years that I don’t have the ticker memorized for.
VTSAX = Vanguard Total Stock Market Index Fund
VTIAX = Vanguard Total International Stock Market Fund
VINEX = Vanguard International Explorer Fund
I don’t invest in actively managed mutual funds for reasons discussed here:
https://www.whitecoatinvestor.com/people-still-believe-in-active-management/
thanks for the link, as for spelling out the funds, honestly if readers are too lazy to look up the full name of a fund on google then they probably dont have much motivation to learn all the details required to fully invest in that fund, they are not required to read my post, if however you are bothered by it then its a different story.
I was just trying to be nice in the way I phrased it. Let me be more blunt:
Making me look up ticker symbols to answer your question is putting the work you should have done spelling out the fund names on me since I have to then look them up. In fact, it likely quadruples the amount of work. On many forums many people who would like to help out are put off by that and don’t bother responding. Imagine if you had listed out 20 tickers in a 401(k) kind of post. While I could scan the list in 10 seconds and identify the likely best funds, it could take a half hour to look up all the tickers and keep them straight.
In this case, it’s fine. I knew one of them, I am personally invested in one more, and it doesn’t take that long to Google two of them. But having spent more than a decade answering questions like yours, you do get a lot better answers when you take the time to organize the post and spell them out. I mean, think about how many ticker symbols you could identify from a list. I’d be surprised if it is more than 5 mutual funds and a few dozen stocks.
Jim I went back read your updated reply, it’s one ticker symbol that you had to look up. If you are at a point with the blog where you feel the need to be blunt is more important than your need to be collegial and helpful with your customer base then don’t answer the questions. I log on to your site multiple times in a week, listed to your podcast etc. you don’t need act pretentious about this, let me also be blunt, this is a financial blog ran by an ER doc not an application to Yale, please don’t teach the etiquette of writing.
Seriously, I was just trying to help. If I wasn’t, I wouldn’t have bothered.
I am happy with using the 3 fund portfolio for my kids’ 529 plans (mostly because Fidelity AZ doesn’t have any factor funds available). Coincidentally, Fido emailed me yesterday announcing a new total market index fund and a total international index fund with zero expense ratio (FZROX and FZLIX). It appears that FZROX is now available but not FZLIX. It’s obviously a marketing ploy to attract more investors to Fidelity, but it will be interesting to see how other firms respond.
Bogleheads.org is truly a great place for free, valid, unbiased personal finance information.
I am sure I am not the only Boglehead who followed you here because of all the excellent posts you did (and still do) on Bogleheads as WCI…….Gordon
I believe Mr. Bogle says you can count the value of your Social Security as part of the Bond portion, so the allocation would be less than your age. I plan to do that.
The best guideline may be “As much in stock as you can handle in a nasty bear market.” The problem is people looking for a rule of thumb don’t know how much that is. And for those folks, age in bonds is a reasonable place to start. You can adjust after your first bear.
I very much enjoyed this review, even though I disagree with most of the philosophy behind it. I do have great respect for Taylor who has been unbelievably generous with his time and wisdom. The book is worth the purchase alone on that basis, I agree with Jim on this point.
What I do not agree with however are a number of the points made, but I will focus on just two points for simplicity, and brevity.
1. Your age in bonds. If you believe in this, then I ask you to challenge yourself by reading Nick Murrays excellent work, Simple Wealth Inevitable Wealth. I think many investors forget the point of investing is to build wealth and maximize your total returns over the long run. Additionally, assuming you need bonds for some reason in a growth oriented portfolio, buying the total bond index, exposes investors to risks that are unnecessary within a bond investment, and even Jack Bogle has questioned the methodology. If you invest in bonds to protect you from equity bear markets, then simply buy U.S Treasury bonds which provide the needed protection in such an environment. This comes down to investors understanding the capital markets and the correlation factors between corporate debt and corporate equity. Bonds are supposed to provide a negatively correlated asset, and too often they just provide a less correlated asset, thus nullifying their purpose in the portfolio.
2. Is the dismissive notion with which the author deals with factor investing. It is important to understand that while everyone seems to be coming out with new factor etf’s every day now, few if any of them are actually backed by true science.
Dimensional Fund Advisors, on the other hand is based on academic research, which has won the Nobel Prize. It is not a fly by night ideology, but rather based on sound academic research that has looked at the premiums that come from designing investment portfolios with sound mathematical principles. To the extent that someone does not want to work with an evidence based advisory professional, one can simply construct an academically aligned portfolio using Vanguard funds (in fact Vanguard has now done the hard work for you by premiering a Multi-Factor fund).
Factor investing is also not something you “believe in” it is factual research that demonstrates the premiums that come from these factors (market, size, value, profitability, and investment). Too often, strict passive investors like the 3 fund crowd, will dismiss this as simply a “bet” that the future will look like the past, akin to active management. However, to make this argument is to not fully understand the methodology that went into the research, or the dependability of the results. These factors have been studied over long time periods and across geographies. The conclusions made were so significant, and the implications for portfolio management so great, that the Nobel Prize was given.
With all that being said, you could also do a lot worse than the three fund portfolio. I completely agree with Jims statement that this book will give you a base to understand the fundamentals of capturing the premium from the market factor, which will prove to provide the greatest jump in returns from the risk free rate. But for those looking to maximize their total return over a long period of time, it is worth it to read, and understand the academic research for why factor investing is a superior portfolio construction methodology.
While it might be scientific, the data is so limited that the low quantity and quality of the evidence puts a giant asterisk next to any conclusion developed from studying it. I mean, can you really call it “science” when there are only 3 data points? That’s basically what we have- three independent 30 years periods. Careful how much faith you put in conclusions on such limited data. Some skepticism is appropriate.
What are the three data points you are referring to? You claim the existence of only three 30 year periods, yet the research that has served as the basis for market efficiency and using mathematics to construct investment portfolios has its roots in the 1500’s.
Low quality and quantity of evidence? Please explain then why they gave the Nobel for such “low quality and quantity of evidence.”
You can certainly make a case for capturing the full market and all of its factors, I suppose, but your dismissal, of the research is what I take issue with. Skepticism is fine, and I agree any true scholar should have skepticism, but it is the outright dismissal of the research that I find rather unwarranted.
The number of independent 30 year periods in the data used for most of these studies you refer to as scientific. You’ve got data from one country since the late 1920s. Multi-country data prior to the 1970s was basically non-existent.
I’m not dismissing the evidence. In fact, I tilt my own portfolio to the small and value factors. But I wouldn’t be surprised one bit if neither small stocks nor value stocks outperform the overall market over the next 50 years. I suspect you would be because “it’s scientifically proven.”
Since 1500? Do tell about that high quality evidence we have from the 1500s.
Despite your comment, I actually would agree with you that over periods of time factors can go in and out of favor. I am not a shill for DFA, or any other factor fund provider, I follow the evidence no matter where it leads. I even conceded to you above that one could certainly make a credible argument for buying the total market and all the factors that come with it. In effect, you would be saying that beta is enough of a factor to target, and anything else is making a bet on the future looking like the past. This is certainly reasonable.
What I would simply say is that we should be asking the question about whether there is evidence that deviating from the market portfolio could lead to better long term investment returns. While this is an individual decision, there is certainly a mountain of evidence concluding that an investors deviation towards small and value, should result in higher returns over the long run. While there is no guarantee that the future will look like the past, the research puts the odds in our favor that over time, the premia from these factors will begin to materialize, little by little, from year to year. Over the long run, this means portfolio performance has meaningfully outperformed the market portfolio on a risk adjusted basis.
I agree with that statement. I might push it a little further – some factors that we thought were factors will turn out not to be factors once we have more data to look at. Knowing that, I try to stay humble about how much faith I place into them. I mean, how many decades do you wait saying “This factor is just out of favor” before you concede that maybe it wasn’t a factor in the first place?
we know AA determines 90% and more of your long term results
modern portfolio theory seems to be the gold standard but one day my portfolio will be as simple so my wife can manage it at last
The three fund portfolio has been Taylor’s schtick and it is probably as good as any, still, the fact that it mostly ignores what are probably the two largest asset classes (global real estate and global ex-US bonds) should cause one to at least pause and think about whether this was arrived at with sound principles or is just a convenient construct. It is easy to argue against these two – global real estate does not have a convenient/analogous investment vehicle (REITS are just the tiniest fraction) and global bonds really are not popular amongst many US investors for myriad reasons, but, for me, the question remains. If one is really in search of long-term simplicity with potential portability to a spouse/heir, it might be just as well to cut down even further and use one of the longer-standing asset allocations by investing solely in US stocks/bonds through a fund like Vanguard’s Balanced Index. This one fund could be held for a lifetime with no need for any rebalancing and easy transference to another party. (Note that there are any number of single funds at Vanguard or elsewhere which could serve the same purpose, but with more than just the two asset classes).
P.S. For those who might read the blog post above and become interested in the Boglehead website, please be forewarned – the Signal to Noise ratio there is VERY LOW.
Global bonds are easily added should one desire. Vanguard even has a low cost fund you can use. There isn’t any easy way to invest in global real estate outside of publicly REITs, which are included in TSM/TISM.
The three fund portfolio really isn’t for someone who cares about the issues you raise.
If you think the signal to noise ratio is low at Bogleheads, you should check out some of the other places online where people discuss investing.
“the Signal to Noise ratio there is VERY LOW.” found that out today, very defensive group!
Just so you can see there is more than one side to the coin, I have never purchased a bond fund. I have retired from medicine and been investing for many years and lived through a few bear markets. Even in retirement, I don’t have any bond funds and the formula here would suggest I should own 50%. There is more than one way to safely invest. This book speaks to one of them. I suspect my real estate investments and cash flow are a good substitute for bond funds.
Dr. Cory S. Fawcett
Prescription for Financial Success
I’m not going to argue that YOU need to own bonds. But real estate is not a bond substitute. Not even close. Very different asset classes. That’s like the goofballs that argued dividend stocks functioned as bonds. Apparently those folks have never looked at a chart comparing the two in 2008-2009. REITs, a reasonable proxy (and the most easily measured) for real estate dropped 78% in 2008. Vanguard’s TBM fund was up 5%.
Both good things. Not the same good thing.
The reason I compared real estate to bonds is the cash flow. (I know they dont equate) It doesn’t matter if the property drops in value 78% since it is not for sale. The cash flow keeps going independent of the property value changes. That’s what I’ve experienced. Cash flow and market value have different effects on my finances.
Saying real estate is like a bond because they both provide cash flow is like saying stocks are like bonds because they both have cash flows or rental farmland is like a job because they both provide cash flow. Sure, that’s one reason people buy bonds, but it’s only one aspect of the investment. Other reasons people buy bonds that real estate does not necessarily provide include:
Liquidity
Often rise in value during market downturns
Can be used to rebalance
Decrease portfolio volatility etc.
Like I said, I don’t care if you don’t own bonds. But don’t pretend real estate (or stocks) are bonds. They’re not.
And while rents are stickier than more liquid markets, they certainly do drop in a market downturn. However, it doesn’t show up as less rent, it shows up as vacancies and a slower rate of increase.
Folks who do not want to invest in fixed income instrument / bonds, even though they are in late 40’s/50’s, do not agree with “a bird in the hand is worth two in the bushes”.
You clearly haven’t spent much time hunting waterfowl or you’re a much better shot than I am. 🙂
Seriously though, like with anything, take what you find valuable from the writings of others and leave the rest.
WCI- First I want to say thank you for all the work you’ve put into this blog.
You’ve helped get me financially straight in many ways.
Now on to my question which is related to this post:
How does one distribute one’s portfolio among the various account types?
I’m a “high income earner” (Over 500K).
I max the 401K and profit sharing. (We have in-plan Roth Conversions which I’ve done for a few years, but have been backing over the last few years.
We do the Back door Roth for my wife and I.
The we split the rest of our savings by investing in a taxable account and paying down the house (which has 3 more years on it), then the rest will go into a taxable account till I reach FIRE in about 5 years at the age 47.
Asset allocation wise I’m doing a variant of the portfolio described above:
Total Stock market (VTSAX) 32%
Small Cap (NAESX) 13%
Total Intl (VTIAX) 30%
Total Bond (VBTLX) 14%
Intl Bond (VTABX) 6%
REIT (VGSLX) 5%
It has a small tilt,a little REIT exposure, and some intl bond exposure. To be honest, I can have any fund as I control the 401K options.
I read your post on taxable accounts which suggests using tax efficient index funds for stocks.
And also read in your post about the benefit of TLH. So, I checked out Wealthfront and at the beginning of the year dumped in enough (110K) to do their indexing which allows for more juiced up TLH. YTD the account has harvested over 8K which seems like it’s worth the basis points.
I also read the POF’s post on decreasing tax drag which talks about the Foreign Tax Credit- I guess that maxes out at like 600 bucks a year.
So that suggests keeping some of my taxable investments in international.
And finally I read your post about keeping bonds in a taxable account while the POF says bonds should be in the tax sheltered account.
The only thing there seems to be consensus about is that the REITs should be in the 401K or tax sheltered account.
And finally, there is the distinction between the Roths and Tax deferred account type. I don’t think I can choose which assets go where within my 401K, but I can choose which assets get assigned to my backdoor Roth accounts. I think I’ve read that it may be best to have the more appreciable type of investments in the Roth as the taxes have already been paid (as in not bonds).
Does this book shed any light on this subject? Or is there another post that helps sort this out from the 10,000 foot level? If not maybe its time to write one 🙂
Thanks
No, the books doesn’t really cover that. This post should help, however.
https://www.whitecoatinvestor.com/my-two-asset-location-pet-peeves/
I’m pretty agnostic about the bond issue, by the way. But as rates rise, bonds in tax-protected makes more and more sense. My current taxable holdings are TSM, TISM, a muni bond fund, and my real estate holdings. My current tax protected holdings are REITs, small value, the G fund (my nominal bond equivalent), my TIPS fund, and my small international fund. I still have some TSM in tax protected too, but at the rate my taxable account is growing, that’ll have to be swapped for some of the other stuff. The next thing I’ll put into taxable will probably be the small international fund. Then small value.
In your case, I’d probably put the REITs in tax protected first, then the international bonds, then TBM (if you wouldn’t rather do munis in taxable), then small cap, keeping the TSM and TISM in taxable.
Great post, I had missed that one. I like the emphasis on “it prolly doesn’t matter all that much.”
And that there’s really no difference between the Roth and Deferred- one just has the gov’t along for the ride… So that helps.
And thanks for the response.
I lost you a little bit here:
You currently have the small value and international value in the tax protected account but are adding it to the taxable?
I just ran across this post. I bought the 3 fund portfolio book. I was already using the 3 fund portfolio. I found it to clarify some basic points.
There is much criticism of the 3 fund portfolio. Many of the comments above talk about different funds and how they do something different or never purchase bonds or like real estate.
My answer is if you like real estate, buy real estate. It has it’s own unique set of risks.
If you like a real estate fund, buy it. It has it’s own unique set of risks.
The more complicated the investment gets, the more risk is comes with because the person managing it has to be willing to take the time to manage it and manage it correctly.
You have to ask yourself if the increased risk and management time of a more complicated portfolio is worth it. You have to ask yourself if you truly have the skills to manage them.
Most important, you have to ask yourself if the POTENTIAL gains are high enough that you are willing to put in the time to gain them.
As someone in here commented, 90% of the results are due to AA. That doesn’t mean you will lose 10% because you messed up you AA. It means a simple portfolio is on you side 90% of the time. Set it and forget it.
The 3 fund portfolio is for those who don’t need to ultra tune their portfolio. Very few people do because it doesn’t always translate to more returns.
I think those with 401Ks need to focus more on the fees and AA rather than exact funds and percentage into each fund. Because you are guessing just like everyone else. You can site every study but most of them are limited in scope and none of them can tell the future.
Invest often and stay consistent. Don’t panic and invest to where you are comfortable and can sleep at night. The rest is gambling.
White Coat Investor:
I want to thank you for your review of my new book, “The Bogleheads’ Guide to The Three-Fund Portfolio. It is the nicest review I received and is one of the reasons my book is currently Amazon’s “Best Seller” in its category.
You wrote: “He says hold your age in bonds.” I devoted two pages to “asset allocation” but I was not clear when I wrote, “Your age in bonds is a good starting point.”
I wish I had said: “Your asset allocation depends on 1) Your goals. 2) Your time frame. 3) Your risk-tolerance and 4) Your personal financial situation.”
Anyway, thanks again for your positive review. I tried to cut-out the voluminous finance information that is often more contradicting and confusing than helpful. It has never been mentioned but I am proud of our 8-page Index which makes it easy to go directly to any subject. For those who want more financial information, I suggest your 5-star book, “The White Coat Investor” or either one of my other co-authored Bogleheads’ books.
Best wishes.
Taylor Larimore
Good to hear from you Taylor. That reminds me I need to shoot you an email. We’re coming to Florida and might be able to finally take you up on that sailing offer.
Any thoughts on using a fixed indexed annuity for the bond portion of a portfolio? I’ve read some articles in some magazines geared towards advisors that recommend that as an alternative to the bond portion.
Not a fan of indexed annuities at all. The only “advisors” I know that recommend them make commissions from these products designed to be sold, not bought.
https://www.whitecoatinvestor.com/index-annuities-do-not-provide-a-stock-like-return/
The point of investing is to attain one’s goal; not necessarily seeking the highest absolute return
Two main problems with the Bogleheads 3 fund portfolio concept:
First, the two stock funds (VTSMX and VGTSX) are extremely top heavy due to cap weighting. They have only about ~5% in small cap companies, but small cap tends to outperform large cap over time. Even among low-cost index funds it’s not hard to find small cap examples that have outperformed the total market indexes over time. In the US look at FSSNX, VIEIX, VSMAX and for international look at NAESX.
Second, bond yields are so low that they barely keep up with inflation. Recent research shows that 100% stocks is safer than 50/50 bonds/stocks. See “Why Stocks, Not Bonds, Assure Less Risk in Retirement” by Dave S. Gilreath, ABC News dot com, May 20, 2014,
“Safer” requires a definition. If “safety against long term inflation” is your measure, then sure, stocks, at least in the past, are safer than bonds. But few use that definition when discussing the safety of stocks and bonds. They’re generally talking about likelihood of loss and volatility. But sure, change the goal posts and the rules and you’ll have a different winner.
This is my Roth IRA portfolio.
VTSAX =70%
VTIAX =20%
VBTLX =10%
I’m 40 years old. What do you think?
I think you should look at all of your retirement accounts as one big portfolio. If your overall retirement portfolio is 70% US stocks, 20% international stocks, and 10% bonds, I think that’s reasonable, although somewhat aggressive so I’d ask how you felt when you lost money in March 2020, December 2018, and Fall 2008. If you didn’t lose money in any of those time periods, I’d counsel you to take a bit less risk until you hit your first bear market.
Dear WCI,
Thanks to your blog and podcast I was inspired to read this amazing book. Due to my immigration status I was not able to start an account in Vanguard. I’m currently in residency and open a Roth IRA account for myself and my wife in Fidelity with the following indexes:
– Total stock market index 65%, FZROX
– Total international stock market 15%, FZILX
– Total Bond Market fund 20%, FTBFX.
Will this be a good approximate to three fund portfolio?
Thank you very much.
S Diaz
Yes. That’s what the three fund portfolio is.
Thank you very much!
Responding to something you wrote long ago:
“August 5, 2018 at 4:15 pm MST
It’s considered good form online to spell out the names of funds so readers don’t have to look them up. I’ve held funds for years that I don’t have the ticker memorized for.”
Many thanks for the support for this! Four years go I joined a financial forum and asked an initial set of questions. Unfortunately, I too oftentimes received answers filled with acronyms which then led to me having to ask what each of one of them meant as they otherwise had no meaning to me. Thanks for being a supporter in this forum of the basics of good communication!