April 14, 2014

A Simple Portfolio of Three Funds

Some experts are pushing a back-to-basics approach to investing. As drastic as it may sound, they say its possible — even at times desirable — to construct a very well-diversified portfolio using just three low-cost mutual funds or ETFs.

Which three funds to use? A classic trio provides exposure to U.S. stocks, foreign stocks and U.S. bonds.

Many Bogleheads — a group of investors who favor index investing as inspired by Vanguard Group founder John Bogle — suggest a three-fund portfolio consisting of the U.S.-focused Vanguard Total Stock Market Index (VTSMX)fund, Vanguard Total International Stock Index (VGTSX), and Vanguard Total Bond Market Index (VBMFX). Together, the three mutual funds, which also offer ETF shares, track more than 15,000 global securities.

This is a very interesting piece to me for a couple reasons:

• They suggested something similar to this in 2008 and I posted on it in An Investment Portfolio Using Only Three Index Funds .
• I implemented that plan but took it one step further from the above. I lowered expenses even more by investing in Vanguard Admiral shares . 

If you look at the results over the past several years, youll see that this plan has worked out quite nicely. )

I have altered my investments a bit over the time I first wrote on this issue and now. For instance:

• Ive lowered the amount I have in bonds. I now have very little in bonds. Ive always been on the aggressive side with my asset allocation and have never had a large amount in bonds, but given their low returns, the chance that interest rates will rise at some point (thus lowering the value of current bonds), and my willingness to deal with stock volatility, I dont have much need for bonds at this point in my life.
• Ive moved my bond money (plus some!) into what I think is a better income producer — real estate. In addition to trying to be smart about real estate investing, I also had a bit of luck, I invested in the right market (where I lived at the time). Heres a piece (from the firm that manages my properties) that talks about Grand Rapids, Michigan being a great place to invest in real estate. Yes, its a bit sales-y by someone with a vested interest, but the case is compelling, no?
• Ive also put some money into Vanguards Small Cap Index fund (VSMAX) as I want some money in new/growing businesses.

Anyway, I prefer simple investing and thus really like the three-fund plan. How about you?