Simplify Your Investment With a Portfolio of 3 Funds
One of the key investment issues is, of course, what to invest in . You know this has to be a mutual fund, right? You’ve heard that “low cost” and “variety” are good things. But what does it actually look like? Spend a little time on the personal finance forums for help, and you’re bound to meet someone praising the practicality of a three-fund portfolio.
This type of investment portfolio was popularized by the Bogleheads, a group of super-fans of Jack Bogle, founder of the Vanguard Group and creator of the index mutual fund. His thesis is that you just need to keep three different funds in your retirement account, covering three different asset classes, in order to retire richly.
The funds should be a general US stock index, a general international stock fund, and a general bond index fund, where “general” means that it includes a wide variety of stocks, in the case of stock or bond funds, which gives you the most variety for your money . (He does not view cash as an investment asset .)
“The general fund of the stock market covers stocks of companies with large, medium and small caps, while the S&P 500 only covers the high-cap market,” writes CNBC . The variety makes it ideal for passive investors who leave their assets alone for a while, for example, as stated above, in your retirement account. More active investors with different goals may think of different things. But for many of us, the hands-off approach works. Instead of listening to the investment industry, which has no shortage of new funds and tricks to try, you stick with what works.
Here are Vanguard funds that fit the three-fund approach:
- Vanguard General Stock Index Fund (VTSAX)
- Vanguard Total International Stock Index Fund (VTIAX)
- Vanguard Common Bond Market Fund (VBTLX)
But you will find almost the same funds from other providers such as Fidelity Total Market Index Fund (FSTMX) or Schwab Total Stock Market Index Fund (SWTSX). In fact, back in August 2018, Fidelity announced that two of its first free index funds are the Fidelity Zero Total Market Index Fund (FZROX), which has about 2,500 holdings, and the Fidelity Zero International Index Fund (FZILX), which is “dedicated to investing in the vast majority of the most valuable companies listed on international exchanges, ”according to Motley Fool (however, they do not have the same holdings as the non-free version, for example, so you want to compare on a site like Morningstar before you buy). Differences, if any, between shared index funds across brokers are likely to be subtle.
For Bogleheads, simplicity is the key to success. Instead of fiddling with a bunch of different funds that give you access to different parts of the market, you pick three generic funds and let them sit. “These funds are most like a truly passive investing in stocks,” notes the Motley Fool. Another important point: their content is inexpensive, both in terms of fees and taxes.
Once you have selected three general funds, you decide from there the asset allocation. For example, you might keep the largest percentage of your money in a US stock fund, then in an international stock fund, and then in a domestic bond fund. There is a heated debate on the Boglehead forum about how much of each should be kept, especially when it comes to international funds.
“In my book, I recommend that international equities accounted for 20 percent of the capital of American investors”, – said Marketwatch Taylor Larimore, Bogleheads founder and author of “Guide to the portfolio three funds” of The Bogleheads . “It’s a trade-off between what Jack Bogle recommends (0 to 20 percent) and what the Vanguard study recommends (20 to 40 percent). The problem is that no one knows in advance which road will turn out to be the best. ”
If your 401 (k) plan does not give you access to these funds, Larimore told Marketwatch that “the [S&P] 500 index fund is a good replacement.” It is not that comprehensive, but it is the best option.
Larimore explained the call in a 2012 post on the Boglehead forum:
* Avoids wasting time, confusion and potential mistakes when trying to choose the best from thousands of mutual funds and ETFs. * Very diversified with over 15,000 securities worldwide (less risk). * Very low expense ratios. * Very low (hidden) operating costs. * Very cost effective in terms of taxation. * Many advantages of simplicity. * Less but more funds lead to earlier eligibility for cheap Admiral shares. * No risk advisor. * No risk of the fund manager. * No style drift. * No asset bloat. * No tracking error leading to strategy rejection. * No overlap of funds. * Lack of preliminary launch, which reduces the profitability of the sub-index. * Automatic rebalancing within each fund. * Less anxiety. Never underestimates the market. * Easy to service for owner, spouse, guardians and heirs. * More free time.
Obviously, this is not the only way to invest, it is just one option with a large support network. Coming back to the important point, this is also known as “core” holdings. Once you have them and let them sit, you are of course free to add other investments to them. But you want to make sure that you are continually contributing to these fixed assets. Sometimes simplicity is all you need.