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OT: Investing Three Fund Portfolio

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Raritan83

Senior
Sep 6, 2011
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Cedar Grove
Been reading a lot lately about index fund investing and having your portfolio made of three index funds (total market, international index and bond index). Anyone have any experience or thoughts on it? Seems like you will always slightly lag the market and never beat. That said some stats say 86% of funds lag the indexes plus have higher fees.

Makes sense in theory but tough to give potential returns up. Always been a dividend growth investor and never really explored this.
 
Indexing investing is a great marketing job by vanguard. No downside protection. It's not always about " beating the market". It more about lowering your downside capture ratio. Markets are at highs this is the worst time to index. Indexing makes sense when everything is going up and there is easy money to be made (09). Now is not a good time to index.
Posted from Rivals Mobile
 
Not sure what bond index it's following, but I'd rather have a human being managing that portion. A manager wouldn't put good money after bad & ride Fannie Mae or GM down to zero just because it's part of the index.
 
Given the market is overvalued, passively managed funds (index funds) generally outperform managed funds about 85% of the time and have lower fees. They are a good way to get exposure to a broader market sector. Right now with the Fed backing away from quantitative easing and anticipating rising interest rates you may want to keep a stronger cash position. It looks like a choppy ride in the market for 2015, good luck.
 
Index investing is great marketing, but also the correct product for most investors. The vast majority of people screw up their investments when they fiddle with them. The downside protection of drip investing into indexing is that you don't so something stupid, like take money off the table after a crash (which is incredibly common).

Unless you're going to spend a great deal of time on it (and you have the correct personality for it), you shouldn't monkey around with active investing. Also, unless you have a lot of money you're not getting any top advice from investment firms. The guy who will help you invest your 100k is the guy who isn't good enough to get the job advising people with more money.

The interesting new products are things like wealthfront & betterment, which use algorithms to rebalance your portfolio. I'm not sure how they'll play out in the long run, but it's hard to imagine that they will be worse than the investment advice most small investors get.
 
If you're interested in this approach, check out marketwatch.com/lazyportfolio to see performance of a variety of these simple portfolios ranging from three to seven funds.
 
Originally posted by THERAC:
Indexing investing is a great marketing job by vanguard. No downside protection. It's not always about " beating the market". It more about lowering your downside capture ratio. Markets are at highs this is the worst time to index. Indexing makes sense when everything is going up and there is easy money to be made (09). Now is not a good time to index.
Posted from Rivals Mobile
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This is simply not true. In four out of the last seven bear markets, actively managed funds did not beat their index.
 
Warren Buffet in
2013 Bershire Hathaway annual letter to investors.
"My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors - whether pension funds, institutions or individuals - who employ high-fee managers."
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My opinion is the average semi-engaged, non-professional investor spends too much time looking at returns and not enough comparing fees. Personally my allocation is a little more broad, with some exposure to world and growth markets on the equity side and some corporate bonds in the fixed income area. Absolutely agree with long term outlook with a focus on low cost.
 
if you go the index route do it with a long time horizon. Vanguard works because their fees are insanely low. Active funds can beat in short term - but no consistency long term (Madoff was the only one - and see where that one really was all about)!

Had an IRA in Vanguard 500 since 1999 and was impressed with performance through some bad market cycles (nice bounce back).
 
What do people think about bond funds (like PIMCO Total Return)? With interest rates expected to rise, I would think these would not perform well and cash may be a better option. What I don't know is whether these types of funds are able to perform well in an increasing rate enviornment. Anyone have any thoughts?
 
Originally posted by RUBigFrank:

if you go the index route do it with a long time horizon. Vanguard works because their fees are insanely low. Active funds can beat in short term - but no consistency long term (Madoff was the only one - and see where that one really was all about)!

Had an IRA in Vanguard 500 since 1999 and was impressed with performance through some bad market cycles (nice bounce back).
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Yes, anything I do would be long term (30+ years God willing).
 


Heygents - Im not talking about bear markets. I am talking about corrections. Also, what you are basicly saying is there are only two ways to invest; active funds or index funds. There at 20 other ways to invest (example separately managed accounts, hedge funds, direct indexing and others. If you know what you are doing these aren't bad routes).

Indexing as a whole is very bad advice as most index funds are MARKET CAP WEIGHTED. Also, buying an index and just holding it right now is a very very bad idea as the market is high. (If you are talking about indexing right now you probably arent that smart with investing and you should probably have some assist you).

Most people have zero idea what they are doing and have no clue as to what indexes to buy. For instance the Russell 2000 has been lagging the S&P for the past two years. That might not be a bad place to go but most people they will not know this an buy the S&P.

The bottom line is, if you index you still need to managed the indexes you choose and sell those at the right times. Just buying an index and holding it forever is just plain reckless. Vanguard has done a tremendous job selling their story of low cost indexing but in reality they have their own agenda.
 
The best marketing job of all has been done by Investment managers who have convinced ordinary people that they should be managing their assets. Its been proven over and over again that the investment advisors that most people would have access to do not outperform passive investing over the long term after fees are taken into account.

This post was edited on 3/13 11:22 AM by mdMoose
 
"What do people think about bond funds (like PIMCO Total Return)?"

Bill Gross left Pimco in September. Any performance numbers are pretty much obsolete now. I would sell Total Return & move to a smaller fund that could be more nimble.
Posted from Rivals Mobile
 
I have been investing for more than 30 years and the S & P 500 has been a runaway winner over individual stocks, other funds, (stock and bond)etc. plus it's so easy.

I
 
Originally posted by THERAC:


Heygents - Im not talking about bear markets. I am talking about corrections. Also, what you are basicly saying is there are only two ways to invest; active funds or index funds. There at 20 other ways to invest (example separately managed accounts, hedge funds, direct indexing and others. If you know what you are doing these aren't bad routes).

Indexing as a whole is very bad advice as most index funds are MARKET CAP WEIGHTED. Also, buying an index and just holding it right now is a very very bad idea as the market is high. (If you are talking about indexing right now you probably arent that smart with investing and you should probably have some assist you).

Most people have zero idea what they are doing and have no clue as to what indexes to buy. For instance the Russell 2000 has been lagging the S&P for the past two years. That might not be a bad place to go but most people they will not know this an buy the S&P.

The bottom line is, if you index you still need to managed the indexes you choose and sell those at the right times. Just buying an index and holding it forever is just plain reckless. Vanguard has done a tremendous job selling their story of low cost indexing but in reality they have their own agenda.
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So of those 20 different ways to invest, which method do you suggest for the average guy who is investing his family's non-emergency fund cash? And please list the fees associated with your suggested methods and why, all in, they are much better than low cost indexing. Because I know you can't actually be saying the average schmo will be able to get into a hedge fund, so there's gotta be something else here. Separately managed accounts - isn't that just being charged a higher fee before you decide on what you ultimately want to invest in, and when you want to get out of certain investments? Things people can do on their own and pay less?

No offense, and maybe this isn't the case, but you sound like a couple of the financial planners I know who have had money running away from them when people realize they can do the same work on their own and pay 200 bps less for the luxury.
 
Originally posted by THERAC:


Most people have zero idea what they are doing and have no clue as to what indexes to buy. For instance the Russell 2000 has been lagging the S&P for the past two years. That might not be a bad place to go but most people they will not know this an buy the S&P.
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Well, yes, obviously the people who have no clue what they are doing and what index to buy should opt for hedge funds, direct indexing or managed accounts.

You laid out exactly why people shouldn't do those things, they don't know what they are doing. Hell, even if they know what they are doing, the chances are they won't perform better than a generic index (as has been proven time and time again).

It's not perfect, but it's a damn lot better than most anything else for the vast majority of people. Almost by definition, anyone who asks for investment advice on the RU football board, is the type of person who should be doing simple drip index investing.




This post was edited on 3/13 2:08 PM by MoobyCow
 
Originally posted by Raritan83:


Originally posted by RUBigFrank:

if you go the index route do it with a long time horizon. Vanguard works because their fees are insanely low. Active funds can beat in short term - but no consistency long term (Madoff was the only one - and see where that one really was all about)!

Had an IRA in Vanguard 500 since 1999 and was impressed with performance through some bad market cycles (nice bounce back).
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Yes, anything I do would be long term (30+ years God willing).
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For someone in your position with limited opportunities and a 30 year horizon, forget the bond index. Go global equities via index. Keep pumping money in on a regular basis to dollar cost average over time. Another option is a target retirement date fund via Vanguard indexes which will move down your equity position as you approach retirement. At your retirement horizon, it will basically be all equity but it does incorporate a bit more diversification (into other equity strategies).

I buy the Buffett strategy for the average investor. If you are him, you go very concentrated active equity. But most people are not him.
 
dup

nm
This post was edited on 3/13 2:59 PM by srru86
 
Originally posted by srru86:
From today's Washington Post
What to do with $10,000? Try an old-fashioned 'coffee can fund.'
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this approach is akin to dollar cost averaging into index funds over time. The index includes both winners and losers over time but the winners outpace the losers as equities generate positive rates of returns over all 30 year horizons. If the husband continue to only buy recommended stocks for 30 years he would have wound up with hundreds of stocks, effectively an index.
 
Originally posted by MoobyCow:

Originally posted by THERAC:


Most people have zero idea what they are doing and have no clue as to what indexes to buy. For instance the Russell 2000 has been lagging the S&P for the past two years. That might not be a bad place to go but most people they will not know this an buy the S&P.
Click to expand...
Well, yes, obviously the people who have no clue what they are doing and what index to buy should opt for hedge funds, direct indexing or managed accounts.

You laid out exactly why people shouldn't do those things, they don't know what they are doing. Hell, even if they know what they are doing, the chances are they won't perform better than a generic index (as has been proven time and time again).

It's not perfect, but it's a damn lot better than most anything else for the vast majority of people. Almost by definition, anyone who asks for investment advice on the RU football board, is the type of person who should be doing simple drip index investing.




This post was edited on 3/13 2:08 PM by MoobyCow
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Not to mention he talks about timing and knowing when to buy and sell. Crap that;s exactly what you want to avoid if you are just the average joe on here. Otherwise, you end up being likely father-in-law who panicked in in 2008/2009 and sold $500K in equities and moved all to cash. If he just sat in his index funds and reinvesting dividends he would have been just fine but now is kicking himself.
 
Originally posted by Crazed_RU:

Originally posted by MoobyCow:

Originally posted by THERAC:


Most people have zero idea what they are doing and have no clue as to what indexes to buy. For instance the Russell 2000 has been lagging the S&P for the past two years. That might not be a bad place to go but most people they will not know this an buy the S&P.
Click to expand...
Well, yes, obviously the people who have no clue what they are doing and what index to buy should opt for hedge funds, direct indexing or managed accounts.

You laid out exactly why people shouldn't do those things, they don't know what they are doing. Hell, even if they know what they are doing, the chances are they won't perform better than a generic index (as has been proven time and time again).

It's not perfect, but it's a damn lot better than most anything else for the vast majority of people. Almost by definition, anyone who asks for investment advice on the RU football board, is the type of person who should be doing simple drip index investing.




This post was edited on 3/13 2:08 PM by MoobyCow
Click to expand...
Not to mention he talks about timing and knowing when to buy and sell. Crap that;s exactly what you want to avoid if you are just the average joe on here. Otherwise, you end up being likely father-in-law who panicked in in 2008/2009 and sold $500K in equities and moved all to cash. If he just sat in his index funds and reinvesting dividends he would have been just fine but now is kicking himself.
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Yikes! I've been kicking myself since I didn't buy more in early '09; I can only imagine the regret of selling at or near the bottom.

Reminds me of an elderly acquaintance who suffered with poor market returns in the 70's & sold all his stocks by '82, which was pretty much the beginning of a decades-long bull market run. Oops.
 
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