Three Fund Portfolio in context of multiple accounts

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robirdayehear
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Three Fund Portfolio in context of multiple accounts

Post by robirdayehear »

My wife and I are retirees who have are long time devotees of Vanguard.

In our initial years we foolishly chased top performing mutual fund managers. Since then I have been a long time indexer whose initial reliance was on maintaining a diverse portfolio, with a minimum of overlapping but large number of index funds to reflect most all segments of the stock market. I had some success but at great cost of my time, effort and mental health. In the end we have built a substantial retirement portfolio which has put us in a comfortable financial position. A year ago to reduce our complex investment strategy I changed over to fewer funds principally based on the "Three Fund Portfolio" strategy plus a less than 10% position in REIT and green energy indexed funds. The idea was to simplify and probably improve efficiency.

My question: what are legitimate approaches to applying the 3 fund strategy in a multiple account portfolio? Both my wife and I have Traditional and Roth IRAs; the traditional IRAs of which are by far the largest of our holdings. We additionally have one non-retirement account.

1. Need we maintain all 3 funds in each of the 4 retirement accounts (for a minimum total of 12 funds)? [We only hold the Total U.S. Stock Market fund in the non-retirement account to avoid taxable events associated with International Stocks and U.S. Bonds.]
2. I have been thinking of reducing the two Roth IRAs to just comprise the Total U.S. Stock Market fund, thinking I could rely on the traditional IRA's for balancing asset allocation (getting us down to a minimum of 8 funds).
3. Since my traditional IRA is twice the size of my wifes, might I further reduce her Traditional IRA to just the Total U.S. Stock Market fund as well (getting us down to a minimum of 6 funds)?

Any insights will be appreciated.
Thanks.
dbr
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Re: Three Fund Portfolio in context of multiple accounts

Post by dbr »

The assets of a specific three fund asset allocation should be located in accounts of different tax treatment for best tax advantage. It sounds like you have already figured that out.

Here is a Wiki article on that: https://www.bogleheads.org/wiki/Tax-eff ... _placement

There are people who don't mind being less than pure about this for convenience in rebalancing, etc. On the other hand lots of people have only one fund of some kind in any given account. My 401k holds only bonds, though there are two funds to do it.
Doctor Rhythm
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Re: Three Fund Portfolio in context of multiple accounts

Post by Doctor Rhythm »

Welcome to the forum.

With multiple retirement and taxable accounts divided or shared between a married couple working for different employers, a true 3-fund portfolio is tough to achieve. Once you start tax-loss harvesting, things get even more complicated. Remember, 3-funds is a possible strategy but not the goal.

1. So, you absolutely do not need to “mirror” your accounts. Doing so simplifies the math but gives up some tax efficiency and often means owning more funds. Keep in mind that the foreign tax credit mitigates against the higher amount of non-qualified dividends in international funds.

2. It’s reasonable to put equity funds in your Roth accounts because these are expected to have the highest long term growth which would be tax free in a Roth. My Roth is all stock because I have a lot of tax-deferred space to keep my bonds.

3. Yes. If your tIRA is big enough to hold all your bonds, her tIRA can just hold stocks.
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bertilak
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Re: Three Fund Portfolio in context of multiple accounts

Post by bertilak »

I just today read an interesting article about stock and bond allocations for Roth IRAs. Unfortunately, I lost track of it. I just tried to find it but couldn't. If anyone recognizes what I am referring to, please post a link here!

A popular theory goes like this:
  • A Roth is, in the end, the best place to hold investments because you can get the money out tax free. Since stocks have a higher expected return than bonds your Roth should hold all stocks to maximize its ultimate size. Therefore, put bonds elsewhere (traditional IRA, taxable).
The article pointed out the following:
  • Stocks may have a higher expected return but they are also riskier, meaning they may underperform as well as outperform. It is therefore wise to temper that risk by including some bonds in a Roth. Bonds can be used to rebalance back into stocks to shore up a damaged Roth when the stocks have taken a hit.
Worth considering, I think.

I haven't thought much about it as my Roth was emptied out to pay off my mortgage. I am retired and not making any new IRA additions.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Adfmacro
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Re: Three Fund Portfolio in context of multiple accounts

Post by Adfmacro »

I think you have a reasonable strategy for the most part, but we do not know your ages and withdraw strategy to see how RMDs and other withdraws will play into this. Although you mention 3 fund strategy, I could not tell where you have international equities.

If there are no plans to dip into Roth accounts for withdraws any time soon, having just equities in Roth makes a lot of sense. If you are planning to withdraw RMDs soon, having bonds in traditional tax deferred is a good plan. Depending on your needs, you might not want to be too overweighted in bonds in traditional though.

If you are nearing RMDs, having fewer funds will make those withdraws and rebalancing easier.

In my case my tIRA is 60/40 equities to bonds with no bonds in Roth, so my overall is 70/30 since I was rather late getting into Roths. My plan is to not spend any Roth except as “last resort” though.

Welcome to the forum by the way.
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nisiprius
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Re: Three Fund Portfolio in context of multiple accounts

Post by nisiprius »

Imagine three investors.

Investor A has a single account containing

$100,000 in the Vanguard Total Stock Market Index Fund and
$100,000 the Vanguard Total Bond Market Index Fund.

Suppose that in one year, the return on Total Stock is 10% and the return on Total Bond is 3%. At the end of the year:

$110,000 in a stock index fund and
$103,000 in a bond index fund.

Investor B has one account with

$100,000 in the Vanguard Total Stock Market Index fund

and a second account with
$100,000 in the Fidelity US Bond Index Fund, which behaves almost identically with the Vanguard Total Bond Market Index Fund.

At the end of the year he has

$110,000 in stock index funds
$103,000 in bond index funds

Bear with me on the next one.

Investor C has one account

$80,000 in the Vanguard Total Stock Market Index Fund,
$10,000 in the Vanguard Total Bond Market Index Fund, and
$10,000 in the Vanguard Total Bond Market ETF, and

a second account with

$20,000 in the Schwab Total Stock Market Index Fund,
$30,000 in the Schwab US Aggregate Bond Index Fund,
$50,000 in the iShares Core US Aggregate Bond ETF.

If you add that up, it is a total of $100,000 in stock index funds (two funds in two accounts) and $100,000 in US bond index funds (two ETFs and two index fund in two accounts). The stock index funds all behave virtually identically. The bond funds and ETFs all behave virtually identically.

At the end of the year: the first account has
$88,000 in the Vanguard Total Stock Market Index Fund ($80,000 + 10%, etc.)
$10,300 in the Vanguard Total Bond Market Index Fund, and
$10,300 in the Vanguard Total Bond Market ETF, and

the second account has has
$22,000 in the Schwab Total Stock Market Index Fund,
$30,900 in the Schwab US Aggregate Bond Index Fund,
$51,500 in the iShares Core US Aggregate Bond ETF.

Now if you don't bother trying to get the totals for each account but jump around doing mental math based on the asset class you will see that he has

$88,000 + $22,000 = $110,000 in stock index funds
$10,300 + $10,300 + $30,900 + $51,500 = $103,000 in bond index funds

It doesn't matter how many parcels it's split into, if you have $100,000 in stock index funds and they all gain 10%, then you will have $110,000 in stock index funds.

Every of these three examples is "a two-fund portfolio with 50% each in US total stock market index funds and US bond market index funds." The point is that you're only investing in two kinds of stuff, and one kind is a total stock market index and the other is a US bond market index.

For taxes and for operational reasons (rebalancing) it may make some small difference what you do. But the central idea of the three-fund portfolio is not any magic in the number "three," or the number of funds, or the number of accounts. It is "the" portfolio as a whole, however it is split up between funds an accounts.

It is that when you take a grand total of your holdings, you are only investing in low-cost total market index funds. You us them cover three big, main, asset classes--US stocks, international stocks, US bonds. In each case you simply mirror a whole market; not only do you not try to pick and choose individual stocks, you don't try to put extra weight on this category or that category of stock.

It is like our freezers... we have a freezer in our refrigerator and a small separate freezer, and we like to have frozen mixed vegetables on hand, and sometimes we have some in one freezer and some in the other and the bags are different sizes and different brands, but as far as our cooking is concerned, the only things we care about is "do we have frozen peas?" and sometimes "how much frozen peas do we have?"

And it is not that there is some special magic in the exact combination, but just that there is a virtue in simplicity, a virtue in being a "satisficer" who focusses on "good enough" and "avoiding big mistakes," and skepticism that anything more complicated is really any better.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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bertilak
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Re: Three Fund Portfolio in context of multiple accounts

Post by bertilak »

nisiprius wrote: Sat May 08, 2021 6:01 am Imagine three investors. [etc.]
The difficulty with this, as pointed out in the article I mentioned, is that you (assuming a retiree with no earned income) can't rebalance into a Roth and if it is the Roth you want to maximize it is nice to have non-equity assets (i.e. bonds) to beef up the equity portion via a rebalance. Rebalancing outside the Roth doesn't help the Roth itself if its equity position has been reduced by market pricing. Your Roth is isolated from the rest of your portfolio so it deserves its own optimal AA.

If your stand-alone freezer is a Roth freezer you can't move frozen food into it from your refrigerator's non-Roth freezer. Yup, the analogy goes off the rails very quickly!
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
sycamore
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Re: Three Fund Portfolio in context of multiple accounts

Post by sycamore »

bertilak wrote: Sat May 08, 2021 9:45 am
nisiprius wrote: Sat May 08, 2021 6:01 am Imagine three investors. [etc.]
The difficulty with this, as pointed out in the article I mentioned, is that you (assuming a retiree with no earned income) can't rebalance into a Roth and if it is the Roth you want to maximize it is nice to have non-equity assets (i.e. bonds) to beef up the equity portion via a rebalance. Rebalancing outside the Roth doesn't help the Roth itself if its equity position has been reduced by market pricing. Your Roth is isolated from the rest of your portfolio so it deserves its own optimal AA.

If your stand-alone freezer is a Roth freezer you can't move frozen food into it from your refrigerator's non-Roth freezer. Yup, the analogy goes off the rails very quickly!
As a general statement, is it really such a big difficulty? Maybe, maybe not. It would be worth running the numbers to see just how much you could lose (or win) by not having any bonds in Roth. There certainly could be cases where no-bonds-in-Roth means a sub-optimal outcome for that one account, but I'd question (1) whether that's really the right goal, and (2) whether an investor (not you bertilak, but investors in general) will practice rebalancing in a healthy manner - I think human behavioral quirks tend to be more problematic than losing the ability to rebalance in Roth.

IMO, as long as you can rebalance the overall portfolio (say in tax-deferred accounts), you can reach the more important goal of maintaining the target AA on your overall portfolio.
sycamore
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Re: Three Fund Portfolio in context of multiple accounts

Post by sycamore »

robirdayehear wrote: Fri May 07, 2021 7:51 pm My wife and I are retirees who have are long time devotees of Vanguard.

In our initial years we foolishly chased top performing mutual fund managers. Since then I have been a long time indexer whose initial reliance was on maintaining a diverse portfolio, with a minimum of overlapping but large number of index funds to reflect most all segments of the stock market. I had some success but at great cost of my time, effort and mental health. In the end we have built a substantial retirement portfolio which has put us in a comfortable financial position. A year ago to reduce our complex investment strategy I changed over to fewer funds principally based on the "Three Fund Portfolio" strategy plus a less than 10% position in REIT and green energy indexed funds. The idea was to simplify and probably improve efficiency.

My question: what are legitimate approaches to applying the 3 fund strategy in a multiple account portfolio? Both my wife and I have Traditional and Roth IRAs; the traditional IRAs of which are by far the largest of our holdings. We additionally have one non-retirement account.

1. Need we maintain all 3 funds in each of the 4 retirement accounts (for a minimum total of 12 funds)? [We only hold the Total U.S. Stock Market fund in the non-retirement account to avoid taxable events associated with International Stocks and U.S. Bonds.]
2. I have been thinking of reducing the two Roth IRAs to just comprise the Total U.S. Stock Market fund, thinking I could rely on the traditional IRA's for balancing asset allocation (getting us down to a minimum of 8 funds).
3. Since my traditional IRA is twice the size of my wifes, might I further reduce her Traditional IRA to just the Total U.S. Stock Market fund as well (getting us down to a minimum of 6 funds)?

Any insights will be appreciated.
Thanks.
Take a look at the BH wiki article https://www.bogleheads.org/wiki/Asset_a ... e_accounts. There are several approaches that can work, but each has its own pros & cons. Finding one you and your wife can stick with should be a key objective, I think.

Also, consider making one change at a time and see how it goes. You don't have to tweak your portfolio to "perfection" all in one go. Aim for a little improvement at each step, and decide afterwards if you've made enough improvement to be "done".

Also, if you don't mind international bonds as an asset class, you could use one of Vanguard's LifeStrategy or Target Retirement funds in one (or more) of your accounts. This will (1) help simplify / minimize the number of funds overall, (2) provide some degree of automatic rebalancing.
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bertilak
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Re: Three Fund Portfolio in context of multiple accounts

Post by bertilak »

sycamore wrote: Sat May 08, 2021 10:43 am As a general statement, is it really such a big difficulty? Maybe, maybe not
I don't know the answer. I just thought it was an interesting point that I had never considered before. As I said, I don't even have a Roth so won't be spending much more time on it. If someone has a Roth and is thinking about asset placement, I still think it is "worth considering,"
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
coachf
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Re: Three Fund Portfolio in context of multiple accounts

Post by coachf »

Here is an example of how I approached allocation across multiple accounts within the last several months in an effort to simplify my portfolio.

Overall goal portfolio allocation is 90% equity/10% fixed income/guaranteed. TIAA Traditional is being moved to my Traditional IRA each year.

I am 37 and expect to retire at 65. I am slowly working towards four funds and I have contemplated getting to three funds by doing away with my large cap growth and small cap blend funds and going with TIAA Equity Index.

Old Allocation
Goals across entire portfolio
TIAA Large Cap Growth Index Fund 53%
TIAA Small Cap Blend Index Fund 7%
TIAA International Equity Index Fund 23%
TIAA Emerging Markets Index Fund 7%
TIAA Bond Index Fund 8%
TIAA Traditional 2%

Roth IRA
TIAA Large Cap Growth Index Fund
TIAA Small Cap Blend Index Fund
TIAA International Equity Index Fund
TIAA Emerging Markets Index Fund
TIAA Bond Index Fund

Traditional IRA
TIAA Large Cap Growth Index Fund
TIAA Small Cap Blend Index Fund
TIAA International Equity Index Fund
TIAA Emerging Markets Index Fund
TIAA Bond Index Fund

Current Employer 403b
TIAA Large Cap Growth Index Fund

Former Employer 403b
TIAA Traditional

Current Allocation
Goals across entire portfolio
TIAA Large Cap Growth Index Fund 55%
TIAA Small Cap Blend Index Fund 10%
TIAA International Equity Index Fund 25%
TIAA Bond Index Fund 8%
TIAA Traditional 2%

Roth IRA
TIAA Large Cap Growth Index Fund 54%

Traditional IRA
TIAA Small Cap Blend Index Fund 6%
TIAA International Equity Index Fund 25%
TIAA Bond Index Fund 7%

Current Employer 403b
TIAA Large Cap Growth Index Fund 3%
TIAA Small Cap Blend Index Fund 3%

Former Employer 403b
TIAA Traditional 2%
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