So many investment choices, so many potential portfolio decisions. The inventory of stocks, bonds, funds and other financial assets for sale is big enough to fill a big-box store. But there’s a downside to shopping at financial supermarkets: It injects complexity into the investing process.
That can lead to portfolio miscues, such as chasing high-fliers that have already run up in price, investing in assets you don’t understand, or buying a bunch of funds that own many of the same stocks (which means you’re less diversified than you think).
“The more complex your portfolio is, the easier it is to get out over your skis,” says Matt Fleming, a wealth adviser at Vanguard Personal Advisor Services.
The good news? You can play it simple and build a portfolio using just three funds. If you choose correctly, you’ll get a low-cost, diversified mix of stocks and bonds that’s easier to track and manage.
This strategy, popularized by “Bogleheads” (investors who embrace the low-cost, index-fund approach espoused by the founder of Vanguard, the late John Bogle), includes investments in three asset classes: U.S. stocks, international stocks and U.S. bonds. The portfolio consists of index funds or exchange-traded funds that charge rock-bottom fees and invest in baskets of securities that cover an entire investment universe.
A popular approach is to buy one fund that invests in the total U.S. stock market, one that tracks the total international stock market, and one that covers the total U.S. bond market.
Using Vanguard Total Stock Market Index (symbol VTSMX, expense ratio 0.14%), Vanguard Total International Stock Index (VGTSX, 0.17%) and Vanguard Total Bond Market Index (VBMFX, 0.15%), you’ll gain exposure to the equivalent of some 3,900 U.S. stocks, 7,500 foreign stocks and 18,000 U.S. bonds. (ETF versions of the funds are also available.)
Building a similar portfolio using total market funds offered by providers such as Fidelity and iShares is just as easy.
To make this strategy work, make sure your target weightings of U.S. stocks, foreign stocks and bonds remain in line with your risk tolerance. And it’s on you to rebalance the portfolio periodically.
Also, remember that the best you can do with index funds is match the gains of the index, minus any expenses. You won’t beat the market. But that’s okay. “Being average is fine, because so many people’s returns are below average,” says Jeffrey Wood, an investment adviser at Lift Financial.
One last piece of advice: For a simple portfolio to succeed, you must stick to the plan. “Even simple solutions fail if you bail at the wrong time,” Fleming says.