Why I will set up a trident and a 3 fund portfolio after the next stock market correction

If you follow the blog, you know that I’ve been selling out my stocks. While I plan to invest heavily in the stock market as part of my strategy to retire early, I expect a market correction soon. I know exactly what I will buy when the correction happens. That would be a set of simple portfolios including the trident portfolio, a 3 fund portfolio, and Portuguese stocks for tax reasons. The first two portfolios are lazy portfolios, while the latter is a much more actively managed portfolio.

Trident portfolio

The trident portfolio, which I learned from Milos Baljozovic, is composed of US small-cap value stocks, gold and long term US treasuries. The trident portfolio has consistently outperformed many other portfolios. This includes the 3 fund portfolio between 1972 and 2015, as shown here. Some argue that this is mainly due to gold and long term treasuries, which have grown a lot in the past. Long term treasuries are particularly low at the moment, so we should be careful when assessing this data.

The same source, reports the following, based on the portfolio visualizer:

This portfolio is specialized on capital gains; Gold doesn’t pay dividends and US small-cap value stocks barely do. The most interest of the portfolio comes from long term US treasuries.

3 fund portfolio

The 3 fund portfolio is composed of a domestic and international total market funds, and a bond total market fund. There are multiple advantages to this portfolio, including its simplicity and tax efficiency (depending on the funds you choose and where you live). Although I don’t plan to move from Portugal anytime soon, I will use the US as the reference for the domestic fund and the world for the international fun. You can check out another more detailed definition of the 3 fund portfolio here.

Most likely, I will go with a vanguard 3 fund portfolio. I think the term “vanguard 3 fund portfolio” is given to the three fund portfolio when it is composed of vanguard funds. The best option for me is, I believe, to go with the “Vanguard Total Stock Market Index Fund”, “Vanguard Total Bond Market Index Fund” and the “Vanguard Total International Stock Index Fund”. I will choose their ETF versions, i.e. the funds with the tickers VTI (total market vanguard ETF fund), BND (Total Bond vanguard ETF) and VXUS (total international market ETF) in equal value proportions. Note that these funds trade at different values, so adjustments are needed if you want to have equal proportions (33%) of each one of them.

Reasons

The primary reason to go with these two lazy portfolios is the lack of time. On top of that, their past yields have been interesting. I don’t really have time to keep myself updated of the Portuguese and the US market to make active decisions. I will do an active management of my Portuguese stocks as I like to keep myself well informed with respect to the local market and I will be a customer of many of the companies I will hold shares of.

More details

As a Portuguese tax resident, I have to pay attention to a variety of factors, as the Portuguese tax code is considerably different from the US tax code. First, and more importantly, you cannot defer paying taxes on dividends to the future. This means that if some dividends clear on your account, you must pay taxes on them, even if you reinvest them. As a result, I must pick funds that automatically reinvest dividends so that I don’t pay as much on taxes. If you recall correctly, I follow a free cash flow investing model, which, at first glance, does not match well with this strategy. This means that I have to know upfront that I would reinvest dividends on the same fund even if they cleared on my account.

The trident portfolio doesn’t generate significant dividends (for the reason that small-cap stocks do not pay significant dividends themselves). Long term bonds do pay recurrent interest, but I am not that much concerned with paying taxes on that. The most susceptible tax for both the trident and the 3 fund portfolios would be paid on capital gains during the rebalancing (which is commonly a small part of the portfolio).

I will most likely not buy REITs because although they match my investment model, I already have enough exposure to it. 🙂