2-fund vs. 3-fund

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Ron Scott
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2-fund vs. 3-fund

Post by Ron Scott » Mon Oct 30, 2017 10:44 am

Not sure how far back index funds for international go but maybe some of you understand this.
  • Assume Saver A went with a 2-fund and Saver B a 3-fund.
  • The 2-fund is 60-40; total US equities and total bond fund.
  • The 3-fund is 30-30-40; with 30% in international index equities.
  • All funds are low cost, tax efficient, etc.

Over the past 10, 20, 30(?), 40(?) year periods, who made more money; Saver A or Saver B?

AlohaJoe
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Re: 2-fund vs. 3-fund

Post by AlohaJoe » Mon Oct 30, 2017 10:52 am

The person who put it all in bitcoin made the most money.

Is making the most money really the right thing to measure?

(You can check websites like portfoliovizualier.com and portfoliocharts.com to do your own research on these kinds of questions.)

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nedsaid
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Re: 2-fund vs. 3-fund

Post by nedsaid » Mon Oct 30, 2017 11:00 am

I would pick the 3 fund portfolio. Investors, in my view, need International diversification if for no other reason to avoid home country bias. International Stocks, particularly Emerging Markets are cheaper than US Stocks. Since 2008-2009, US has outperformed International, in large part because of flight to quality and a very strong US Dollar. The US Dollar has weakened this year and this has been a big factor in International Stocks outperforming US in 2017. It would be no surprise that a 2 fund portfolio would outperform a 3 fund portfolio given recent US vs International history. I do not believe that US outperformance will continue.
A fool and his money are good for business.

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Re: 2-fund vs. 3-fund

Post by avalpert » Mon Oct 30, 2017 11:00 am

You are asking the wrong question - who would you expect to do better over the next 10, 20, 30, 40 years and why?

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Re: 2-fund vs. 3-fund

Post by DrGoogle2017 » Mon Oct 30, 2017 1:03 pm

I’m not comfortable with 50% international stocks for my stock portion. This is why I didn’t dump my husband’s portfolio into Conservative Lifestyle Fund. You can buy ETFs to mimic those funds with ETFs. The highest I have with international is 30%.

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Re: 2-fund vs. 3-fund

Post by saltycaper » Mon Oct 30, 2017 1:08 pm

Ron Scott wrote:
Mon Oct 30, 2017 10:44 am

Over the past 10, 20, 30(?), 40(?) year periods, who made more money; Saver A or Saver B?
I would guess Saver A. But, what's so special about today?
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: 2-fund vs. 3-fund

Post by bikechuck » Mon Oct 30, 2017 1:46 pm

I prefer four funds as I have approx 5% of my portfolio in TIAA Real Estate.

I have approx 20% of my equities in a Vanguard international index fund but I do realize that this is a trade-off between the diversification that it offers and the currency risk that I am assuming on top of the market risk.

Actually my portfolio includes more than four funds because I am using TIAA Traditional and an older Fixed Annuity (which is not annuitized) that pays a guaranteed annual minimum return of 4.5% as bond substitutes.

Someday I might simplify but in this interest rate environment I do not see the logic in giving up the TIAA Traditional or the Fixed Annuity.

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Re: 2-fund vs. 3-fund

Post by Ron Scott » Mon Oct 30, 2017 2:16 pm

OP here...

I am actually not a big fan of back testing but since there seem to be quite a few posters in this forum who like international equity investing, especially when Jack Bogle himself continues to recommend against it, I think the back testing results might be informative.

I am also a bit leery of investing in international, but I can certainly understand wanting to maintain a strong equity stake even when US valuations are so high. So another way to phrase my question is “has international investing been a good strategy in the past vs. US only (for the long term)?”

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Re: 2-fund vs. 3-fund

Post by Winthorpe » Mon Oct 30, 2017 2:21 pm

avalpert wrote:
Mon Oct 30, 2017 11:00 am
You are asking the wrong question - who would you expect to do better over the next 10, 20, 30, 40 years and why?
Bingo!!

If only we knew the answer to THIS question.

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Re: 2-fund vs. 3-fund

Post by goingup » Mon Oct 30, 2017 2:38 pm

Ron Scott wrote:
Mon Oct 30, 2017 2:16 pm
OP here...

I am actually not a big fan of back testing but since there seem to be quite a few posters in this forum who like international equity investing, especially when Jack Bogle himself continues to recommend against it, I think the back testing results might be informative.

I am also a bit leery of investing in international, but I can certainly understand wanting to maintain a strong equity stake even when US valuations are so high. So another way to phrase my question is “has international investing been a good strategy in the past vs. US only (for the long term)?”
I don't really want to rehash this thing, but Jack Bogle doesn't recommend against international investing. He has said he doesn't think it's necessary. Many folks here describe his position as non-dogmatic. In today's lingo, he might say of international investing--meh.

Here's a quote I snagged from another thread which cited his book Common Sense on Mutual Funds:
Overseas investments - holdings in the corporations of other nations - are not essential, nor even necessary, to a well-diversified portfolio. For investors who disagree - and there are some valid reasons for global investing - I would recommend limiting international investments to a maximum of 20 percent of a global equity portfolio.

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Re: 2-fund vs. 3-fund

Post by Ron Scott » Mon Oct 30, 2017 3:05 pm

goingup wrote:
Mon Oct 30, 2017 2:38 pm
Ron Scott wrote:
Mon Oct 30, 2017 2:16 pm
OP here...

I am actually not a big fan of back testing but since there seem to be quite a few posters in this forum who like international equity investing, especially when Jack Bogle himself continues to recommend against it, I think the back testing results might be informative.

I am also a bit leery of investing in international, but I can certainly understand wanting to maintain a strong equity stake even when US valuations are so high. So another way to phrase my question is “has international investing been a good strategy in the past vs. US only (for the long term)?”
I don't really want to rehash this thing, but Jack Bogle doesn't recommend against international investing. He has said he doesn't think it's necessary. Many folks here describe his position as non-dogmatic. In today's lingo, he might say of international investing--meh.

Here's a quote I snagged from another thread which cited his book Common Sense on Mutual Funds:
Overseas investments - holdings in the corporations of other nations - are not essential, nor even necessary, to a well-diversified portfolio. For investors who disagree - and there are some valid reasons for global investing - I would recommend limiting international investments to a maximum of 20 percent of a global equity portfolio.
In his 10th anniversary edition of the little book of common sense investing jack states “my view that a US only equity portfolio will serve the needs of most investors was (and still is) challenge by, well, everyone.” He goes on to say that since first commenting negatively on investing in international, in 1993, his advice has “worked out well” and notes the differential returns between the US market and international markets during the past 14 years as evidence. He has, however, softened his stance and seems to consider international investing today as more a matter of personal preference, opining that the relative advantage achieved in the US stock market over the past quarter century may have now been arbitragd away, and that the relative underperformance by international stocks may have led to more attractive valuations abroad.

The purpose of my original post above was simply to ask the question going back past 1993, and the question still stands: Has international investing in the past 20, 30, 40 years worked out better than US only?

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Re: 2-fund vs. 3-fund

Post by saltycaper » Mon Oct 30, 2017 3:27 pm

Ron Scott wrote:
Mon Oct 30, 2017 3:05 pm

The purpose of my original post above was simply to ask the question going back past 1993, and the question still stands: Has international US-only investing in the past 20, 30, 40 years worked out better than US only international?
(edited your post to agree with mine)

If by "worked out better", you mean, "made more money to the present day", I think so.

If by "worked out better", you mean, "had better risk-adjusted return as defined by the Sharpe ratio to the present day", I think so.

If by "worked out better", you mean, "made more money no matter the time period", I think not.

If by "worked out better", you mean, "had better risk-adjusted return as defined by the Sharpe ratio no matter the time period", I think not.

If by "worked out better", you mean, "was the correct choice", a resounding no.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: 2-fund vs. 3-fund

Post by nisiprius » Mon Oct 30, 2017 3:58 pm

The question you ask is easily answered for the shorter time periods with PortfolioVisualizer. Portfolio 1 (two funds, U.S. only) is charted in blue, Portfolio 2 (three funds, includes international) is charted in red.

For ten years, Sep 2007 - Sep 2017, the investor with the 2-fund (U.S.-only) portfolio made more money and had higher risk-adjusted return.
Source
The same is true for twenty years, Sep 1997 - Sep 2017.
Source
Image

The results you get of course depend on the specific range of years you choose. During the infamous "lost decade" of 2000 through 2009, we see that the internationalized portfolio made more money and had higher risk-adjusted return.
Image
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Re: 2-fund vs. 3-fund

Post by abuss368 » Mon Oct 30, 2017 5:20 pm

Which investment portfolio is better? That is simple!

Whichever one allows the investor to sleep well and avoid tinkering in good and bad markets.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: 2-fund vs. 3-fund

Post by abuss368 » Mon Oct 30, 2017 5:21 pm

I have family in the Bogle Two Fund and the Boglehead Three Fund and both are excellent choices.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: 2-fund vs. 3-fund

Post by Fclevz » Mon Oct 30, 2017 5:36 pm

From the title, I thought the 2-fund portfolio would be Total World Stock and Total Bond :D

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Re: 2-fund vs. 3-fund

Post by lostdog » Tue Oct 31, 2017 8:39 am

Fclevz wrote:
Mon Oct 30, 2017 5:36 pm
From the title, I thought the 2-fund portfolio would be Total World Stock and Total Bond :D
:sharebeer

When Total World Index becomes admiral shares I guarantee it will become more popular. Hopefully we get Total World Bond Index someday.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

Ron Scott
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Re: 2-fund vs. 3-fund

Post by Ron Scott » Tue Oct 31, 2017 10:02 am

nisiprius wrote:
Mon Oct 30, 2017 3:58 pm
For ten years, Sep 2007 - Sep 2017, the investor with the 2-fund (U.S.-only) portfolio made more money and had higher risk-adjusted return.
The same is true for twenty years, Sep 1997 - Sep 2017.
During the infamous "lost decade" of 2000 through 2009, we see that the internationalized portfolio made more money and had higher risk-adjusted return.
Only 20 years but nice assessment, thanks. Bogle was talking about the 24 years, 1993 to 2016, and found the same advantage for the US.

Thinking long term, I believe Bogle's gut toward US only is probably best. And we avoid currency risk. Good combination.

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Re: 2-fund vs. 3-fund

Post by oldzey » Tue Oct 31, 2017 10:09 am

2-fund is simple, cheap, and is what I do: 80% VTSAX (0.04% ER) and 20% TIAA Traditional (0.00% ER).
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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Re: 2-fund vs. 3-fund

Post by Ron Scott » Tue Oct 31, 2017 10:38 am

oldzey wrote:
Tue Oct 31, 2017 10:09 am
0.04 ER...0.00% ER
So selfish...

How are the poor Wall Streeters supposed to eat?

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Re: 2-fund vs. 3-fund

Post by Sandtrap » Tue Oct 31, 2017 10:43 am

I would like to know which is going to do better, and at what allocation, in the "next" 20 years. :shock:

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Re: 2-fund vs. 3-fund

Post by Ron Scott » Tue Oct 31, 2017 10:47 am

Sandtrap wrote:
Tue Oct 31, 2017 10:43 am
I would like to know which is going to do better, and at what allocation, in the "next" 20 years. :shock:
...and for that you'll need a financial advisor.

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Re: 2-fund vs. 3-fund

Post by goingup » Tue Oct 31, 2017 11:02 am

Ron Scott wrote:
Tue Oct 31, 2017 10:02 am
nisiprius wrote:
Mon Oct 30, 2017 3:58 pm
For ten years, Sep 2007 - Sep 2017, the investor with the 2-fund (U.S.-only) portfolio made more money and had higher risk-adjusted return.
The same is true for twenty years, Sep 1997 - Sep 2017.
During the infamous "lost decade" of 2000 through 2009, we see that the internationalized portfolio made more money and had higher risk-adjusted return.
Only 20 years but nice assessment, thanks. Bogle was talking about the 24 years, 1993 to 2016, and found the same advantage for the US.

Thinking long term, I believe Bogle's gut toward US only is probably best. And we avoid currency risk. Good combination.
Why even post your question if you already had a firm conviction? You have posted before on this forum that you're a US-centric investor. Go for it! Many of us feel holding between 20-50% international makes the most sense going forward, so you're not convincing anyone with backtesting.

I revere Jack Bogle but have no problem owning international equity. :beer

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Re: 2-fund vs. 3-fund

Post by Earl Lemongrab » Tue Oct 31, 2017 12:21 pm

There is never a "right" answer as the future is unknown. In my case I have 10 stock sub-allocations with something like 15 funds (not counting duplicates in different accounts) to implement. Some would find that to be hopelessly complicated. It doesn't bother me. My spreadsheet takes care of all of that.
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Re: 2-fund vs. 3-fund

Post by Ron Scott » Wed Nov 01, 2017 10:58 am

goingup wrote:
Tue Oct 31, 2017 11:02 am
Why even post your question if you already had a firm conviction? You have posted before on this forum that you're a US-centric investor. Go for it! Many of us feel holding between 20-50% international makes the most sense going forward, so you're not convincing anyone with backtesting.
I value your input and your opinions. Please continue to voice them. But please also think about the notion that criticizing ideas leads to a healthy community while criticizing individuals rarely benefits anyone.

I look forward to learning more from you here.

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Re: 2-fund vs. 3-fund

Post by goingup » Wed Nov 01, 2017 11:25 am

Ron Scott wrote:
Wed Nov 01, 2017 10:58 am
goingup wrote:
Tue Oct 31, 2017 11:02 am
Why even post your question if you already had a firm conviction? You have posted before on this forum that you're a US-centric investor. Go for it! Many of us feel holding between 20-50% international makes the most sense going forward, so you're not convincing anyone with backtesting.
I value your input and your opinions. Please continue to voice them. But please also think about the notion that criticizing ideas leads to a healthy community while criticizing individuals rarely benefits anyone.

I look forward to learning more from you here.
Thanks. You, too. :happy

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Re: 2-fund vs. 3-fund

Post by David Jay » Wed Nov 01, 2017 11:59 am

Ron Scott wrote:
Tue Oct 31, 2017 10:47 am
Sandtrap wrote:
Tue Oct 31, 2017 10:43 am
I would like to know which is going to do better, and at what allocation, in the "next" 20 years. :shock:
...and for that you'll need a financial advisor.
:D
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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