Why use a 3 fund portfolio?
The rationale for using the 3-fund portfolio is diversification. Just because the S&P 500 has out-performed a 3-fund balanced portfolio (recently) doesn't mean that will always be true. There have been times in the last 50 years where International stocks (or US Bonds) performed better than US stocks.
The three-fund portfolio is a strategy that gets lots of love from investors, and for good reason. It can deliver strong growth and low risk over long time periods, and it's easy to manage. If you're trying to figure out how to set up your investments, the three-fund portfolio could be the solution.
- Returns. Index funds, by nature, are designed to match the market not beat it. ...
- Rebalancing. A three-fund portfolio is not set-it-and-forget-it. ...
- No room for alternatives.
The Bogleheads Three Funds Portfolio is a Very High Risk portfolio and can be implemented with 3 ETFs. It's exposed for 80% on the Stock Market. In the last 30 Years, the Bogleheads Three Funds Portfolio obtained a 7.78% compound annual return, with a 12.39% standard deviation.
The Three Fund Portfolio, also called the Lazy Portfolio, is a simple yet popular portfolio amongst passive index investors. It is designed to provide broad diversification across the stock and bond markets while incurring minimal costs, taxes, and overhead.
A 3 fund portfolio ensures diversification and, thus, minimizes risk in the long term. It includes two domestic asset classes, i.e., stocks and bonds, and an international stocks investment to offer growth opportunities independent of the domestic market condition.
How many funds are enough? One thing you should always remember is that a lot of funds in your portfolio doesn't mean you have a diversified portfolio. A portfolio with 15 funds that have overlapping is not diversified. You should have no more than 4 funds in your portfolio.
In general, the international fund should go into a taxable account, the bond fund should go into a tax-advantaged account, and the domestic equity fund should fill in the remaining space. You may need to hold the same (or equivalent) funds in multiple accounts to have ideal asset allocation and asset location.
Rebalancing is about managing risk, not chasing investment returns. Rebalancing your portfolio once a year is plenty. Rebalancing less frequently may be even better if your portfolio is diversified from the outset.
The most common way to set up a three-fund portfolio is with: An 80/20 portfolio i.e. 64% U.S. stocks, 16% International stocks and 20% bonds (aggressive) An equal portfolio i.e. 33% U.S. stocks, 33% International stocks and 33% bonds (moderate)
What is a lazy portfolio?
A lazy portfolio is a set it and forget it collection of stock and bond mutual funds or ETFs, invested in percentages that fit with your personal risk profile. The idea behind this concept is that most investors do not beat the investment returns of the major market indexes.
Key Takeaways. A three-fund portfolio aims to diversify your portfolio across three asset classes: domestic stocks, international stocks, and domestic bonds. You can use a three-fund approach in most 401(k) accounts. Investors choose the allocation of funds that suit their goals.
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
I put my personal 401(k) and a lot of my mutual fund investing in four types of mutual funds: growth, growth and income, aggressive growth, and international.
Bogle recommended allocating between stocks and bonds based on an investors age and risk tolerance. Younger investors may favor a higher stock allocation, while older investors closer to retirement may shift more assets to bonds. Bogle suggested a reasonable starting point is allocating 60% to stocks and 40% to bonds.
Dave Ramsey recommends a 100% equity portfolio consisting of actively managed mutual funds. He recommends growth (mid cap), growth & income (large cap), aggressive growth (small cap) & international funds @ 25% each.
Investing philosophy
The Bogleheads approach begins with an investor deciding on percentage allocations to various asset classes, such as U.S. stocks, international stocks, U.S. bonds, etc. The desired allocations are then implemented using low-cost vehicles which are true to the targeted asset classes.
As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.
You should therefore only keep as many funds in your portfolio as you're comfortable monitoring. For example, if you hold 10 or 20 different funds, you'll need to keep a close eye on the changing value of all these investments to make sure your asset allocation still matches your investment goals.
An optimal portfolio is one designed with a perfect balance of risk and return. The optimal portfolio looks to balance securities that offer the greatest possible returns with acceptable risk or the securities with the lowest risk given a certain return.
What is the ideal mutual fund portfolio for a 35 year old?
Let's factor in your age. There's a useful formula that suggests you invest a percentage equal to a hundred minus your age in a carefully selected portfolio of Equity Mutual Fund SIPs. That would be 65 per cent (100-35) of your monthly savings, which translates to Rs 39,000 per month (65 per cent of Rs 60,000).
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
In that case, a 30-year-old might allocate 80% of their portfolio to stocks (110 – 30 = 80), and a 60-year-old might have a portfolio allocation that's 50% stocks (110 – 60 = 50) — which is a bit more aggressive than the previous 40% allocation.
For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
So if you're 20, you would invest 80% in stocks and 20% in bonds. If you're 60, you would invest 40% in stocks and 60% in bonds. This formula is an oversimplification, but I like it because it gives you the idea of how your asset allocation should change as you age.
