I recently stumbled upon this simple ETF buy and hold strategy, called the Three Funds Portfolio. This is advocated by the Boggleheads.
I. Components of the
three mutually exclusive total market funds:
a)
Vanguard
Total Stock Market Index Fund (VTSAX / VTI) – introduced in 1992, allows investors to own more than 3,500 U.S.
company stocks at extremely low cost.
b)
Vanguard
Total Bond Market Index Fund (VBTLX / BND) – introduced in 1986, allows investors to own more than 8,000 very
diversified, high-quality U.S. bonds.
c)
Vanguard
Total International Stock Index Fund (VTIAX / VXUS) – introduced in 1996, allows investors to hold more than 6,000
international stocks, including emerging market stocks.
II. Steps to construct portfolio:
Step 1: Decide
what funds to include in your portfolio. Hopefully you’re convinced that the
three funds listed above are the only three you need.
Step 2: Choose an asset allocation. This will
determine your expected return and expected risk.
A portfolio with a higher stock allocation has a higher expected return with
higher volatility.
In reference to international stocks, Larimore
references Bogle:
“Jack Bogle says he’s fine with 0% internaional but feels that 20%
may be okay for investors who want some international exposure.”
III. Benefits of the three funds portfolio:
Larimore explained the appeal
in a 2012 post on the Boglehead forum:
* Avoids wasted time, confusion and the possibility of
mistakes trying to pick the best of thousands of mutual funds and ETFs.
* Very diversified with over 15,000 worldwide securities
(lower risk).
* Very low expense ratios.
* Very low (hidden) turnover costs.
* Very tax-efficient.
* The many Advantages of Simplicity.
* Fewer but larger funds results in earlier eligibility for
low-cost Admiral shares.
* No adviser risk.
* No fund manager risk.
* No style drift.
* No asset bloat.
* No tracking error to cause abandonment of the strategy.
* No fund overlap.
* No front-running that reduces sub-index returns.
* Automatic rebalancing within each fund.
* Less worry. Never under-performs the market.
* Easy to maintain for the owner, spouse, caregivers and
heirs.
IV. Reference:
Three-fund portfolio by Boggleheads
The Bogleheads’ Guide to the
Three-Fund Portfolio
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