Bogleheads' three fund portfolio

[Scallywag]

I recently heard about the three fund portfolio promoted by the Bogleheads. The portfolio comprises mutual funds for Total Stock Market, Total International Stock Market and Total Bond Market. Does anyone have any feedback about this investment strategy? The Bogleheads claim that this 3-fund portfolio has beaten the market since 1950!

Thanks!

[Jluke]

Like everything on bogleheads (BH), they can make this simple approach extremely complicated.

With this approach:
you need to rebalance on your own if you want to maintain a specific asset allocation.

debate holding international

is total bond appropriate nowadays.

tax efficient placement of these investments.

Total US: I am invested in VTI ( ETF equivalent of VTSAX) in a taxable account. Also hold Fidelity version mutual fund in my 401k

Total International: small investment of Fidelity version in 401k.

Total Bond: I don’t understand bonds so I am invested in Wellesley (401k & Roth) and Wellington (Taxable: not tax efficient but oh well).

I also hold some individual stocks and other index funds (anti-bh)


3-fund: Taylor Larimore wrote the book and you can checkout the wiki on BH.

[rennigade]

Boglehead philosophy is to keep it simple, which is why the recommend the 3 fund portfolio. Many members there have low to mid 8 figure net worth...and even they follow that method.

I have a 2 fund portfolio throughout all of my accounts...bonds and total US...I dont have international.

[Jluke]

The Bogleheads claim that this 3-fund portfolio has beaten the market since 1950!

Do you have a source for this claim?

if anything the philosophy is that the 3-fund will give you what the market returns.

I don’t think they claim it will outperform.

[Scallywag]

Do you have a source for this claim?

if anything the philosophy is that the 3-fund will give you what the market returns.

I don’t think they claim it will outperform.

I thought this was claimed in their book - did I misread? I also had a conversation with a Boglehead (low 7-figure worth) where she claimed her portfolio had beaten the market since 2005 when she switcted over to the 3 fund portfolio + a real estate fund. She claimed that she would done even better had she started in the mid/late 90s (when she first began to invest).

I am tempted because I expect a period of deep recession & because my nest egg is nowhere close to a million. If the market returns 5% over the next 15 years then my portfolio would double in that time. However, I am hoping to "beat the market" because I would only meet my retirement goals if I made a 7% return & managed to pay off a house in that time frame as we're about 20 to 25 years away from retirement & I am scared to death about going into retirement with less than that.

With just a 2% increased return per year, I calculated that we'd retire with a million more! So I am tempted. Very tempted!

Also, our current portfolio has too many funds, ETFs and single stocks. I honestly cannot even name all of my holdings so looking to simplify

[Scallywag]

Boglehead philosophy is to keep it simple, which is why the recommend the 3 fund portfolio. Many members there have low to mid 8 figure net worth...and even they follow that method.

I have a 2 fund portfolio throughout all of my accounts...bonds and total US...I dont have international.

Any reason you don't have international? Also, any thoughts on adding a real estayr fund to the mix?

The other thing about Bogleheads is that they seem to be against "market timing". But if you expect a recession does it not make sense to move *temporarily* to cash as you wait to see how things pay out?

[kork13]

The other thing about Bogleheads is that they seem to be against "market timing". But if you expect a recession does it not make sense to move *temporarily* to cash as you wait to see how things pay out?

Yes, as a group Bogleheads are a bit violently opposed to market timing. However, you never really know how the market is actually going to do, in spite of what you may or may not think it's on the horizon. Bogleheads take the long view, and will tell you not to worry about watching past investments fall in a down-market. It's a buying opportunity, so focus on the opportunity of buying more shares at a discount. Doing so allows you to continually DCA into the market in the way down, through the bottom, and on the way back up.

[rennigade]

Any reason you don't have international? Also, any thoughts on adding a real estayr fund to the mix?

A while ago I did have the international fund. It lost money for a couple years in a row...while total US and bonds had gains. I was basically sick of it and sold it all off. Never went back. Not a great reason, but its a reason.

[disneysteve]

if you expect a recession does it not make sense to move *temporarily* to cash as you wait to see how things pay out?

There's an old joke that economists correctly predicted 9 of the last 5 recessions.

The point is that nobody knows what's going to happen in the future. Nobody knows when things will go up or go down. The key to long term investing is to invest on a consistent, regular basis whether that's every paycheck or every month or every quarter or whatever schedule works for you.

As for expecting a recession, we're already in one. First quarter growth was negative and unless something really drastic happens, second quarter growth will be as well. But it isn't officially a recession until you are at least 6 months into it and we're only 5 months in, so it won't get the formal label until July.

Don't base your investing on whether you think we're heading for or already in a recession. Market timing doesn't work.

[disneysteve]

A while ago I did have the international fund. It lost money for a couple years in a row...while total US and bonds had gains.

You've just given the exact reason why an international fund should be part of your portfolio. It doesn't perform the same as a US fund. That's the entire point of owning it. Just as you saw it go down when the US fund went up, the opposite is also true and it can go up when your US fund goes down. It reduces the overall volatility and smooths the returns of your portfolio.

[Scallywag]

The only thing worrying me is FOMO. What if I could earn more invested in a more aggressive fund? This happens when you start late and then have to play catch up in your mid / late 40s because you panic over lost time and fear the future!

[kork13]

The only thing worrying me is FOMO. What if I could earn more invested in a more aggressive fund? This happens when you start late and then have to play catch up in your mid / late 40s because you panic over lost time and fear the future!

What are your goals, and ability to save? You can pretty reliably build up $500k-$1M in 20 years. Honestly, it depends more on what you can contribute/save than what it earns for you. Sure, you can tilt more aggressive by having more stocks & less bonds, and it may net you an extra 0.5%-1% average return over time. But the biggest thing is to save as much as possible, as consistently as possible, for as long as possible. It's a tried-and-true recipe for success.

If you can save $12k/yr ($1k/mo -- just maxing 2x Roth IRAs for yourself and a spouse), you'll have $400k-$600k in 20 years (6-8% returns -- reasonable inflation-adjusted average returns with a typical 3-fund mix, say 80/20 or 70/30). Similarly, if you can save $24k/yr ($2k/mo), you'll have $900k-$1.1M after 20 years.

[kork13]

The only thing worrying me is FOMO. What if I could earn more invested in a more aggressive fund? This happens when you start late and then have to play catch up in your mid / late 40s because you panic over lost time and fear the future!

One other factor that is generally less stated both here & among the Bogleheads... The 3-fund portfolio isn't about being the best possible option to earn the highest possible return on your money in any given year or time period. What's important is that the 3-fund portfolio (and the long-term mindset that goes with it) is good enough as a highly reliable way to provide sufficient returns on your money over the long term.

Using broad-market index funds virtually guarantees that your returns will largely mimic the overall market. But by using DCA to even out the highs & lows for you, over the long term your returns will actually likely be better than average, and even better than the highly aggressive, highly volatile funds that might seem enticing to you. Because while an ultra-aggressive hedge fund or whatever else might beat the market by 5% one year, the next 5 years it might lose by 5%. Something like 90% of mutual funds under-perform the market in any given year. Over time, it's more like 98%. If you think that you can sift through the 10,000+ mutual funds available to find that 1-2% fund that regularly bests the market, more power to you. Otherwise, for the vast majority of folks, it's a wise choice to simply follow the market with indexes. Let time & patience work for you.

[corn18]

I'm a boglehead (BH). It's simplicity makes it hard for me to mess with it, which is why it appeals to me. I like to fiddle with things that aren't broken and usually end up breaking them. That's ok if we're talking about a toaster, but could be disastrous when talking about our retirement savings.

BH's don't strive for anything but average. Buy the haystack, not the needle. What we are very proud of is that there is NO ETF or fund that has beaten the average over a 15 year period. None, zip, notta. Many beat the average over one year. About half make it to 3 years. Only about 5% make it to 5 years. There are myriad studies as to why this is, but I don't pay much attention to why. I'll take average over a 30 year period and know that I am doing better than all of the active managers out there over that time frame.

The other big ideal of a BH is stay the course. Like my sig says, Don't do something, just stand there! The market goes up and down, BH's just sit there and watch it all with mild interest. If it gets too whacky, like the 10 year bull market, your AA gets out of whack so you rebalance. If you get a bear market, you rebalance. Other than that, you do nothing.

[Scallywag]

One other factor that is generally less stated both here & among the Bogleheads... The 3-fund portfolio isn't about being the best possible option to earn the highest possible return on your money in any given year or time period. What's important is that the 3-fund portfolio (and the long-term mindset that goes with it) is good enough as a highly reliable way to provide sufficient returns on your money over the long term.

Using broad-market index funds virtually guarantees that your returns will largely mimic the overall market. But by using DCA to even out the highs & lows for you, over the long term your returns will actually likely be better than average, and even better than the highly aggressive, highly volatile funds that might seem enticing to you. Because while an ultra-aggressive hedge fund or whatever else might beat the market by 5% one year, the next 5 years it might lose by 5%. Something like 90% of mutual funds under-perform the market in any given year. Over time, it's more like 98%. If you think that you can sift through the 10,000+ mutual funds available to find that 1-2% fund that regularly bests the market, more power to you. Otherwise, for the vast majority of folks, it's a wise choice to simply follow the market with indexes. Let time & patience work for you.

Saving isn't the issue here, as we have finished funding our emergency fund and now have a % of our income shaved automatically off the top of our income by direct deposit to our downpayment account (inaccessible as it is a small credit union a county away and does not have ATMs in our county AND we do not have check books or shred up the debit card that was sent to us).

Problem is, we need 3 million + a paid for home at retirement because of our son with special needs who might live with us for the rest of our lives. I can't see us getting to 3 million because of how late we started and it is starting to worry me. We can push around $700 a month into his 401K on top of the downpayment savings but I just don't know if 3 million is doable (especially as we currently have only 500K invested - this does not include a college fund for our daughter, emergency fund and downpayment fund).