Is the 3 fund portfolio good enough?
If you set up asset allocation appropriate for your age, a three-fund portfolio will most likely perform well. I say "most likely" because nothing is guaranteed with investing, but this strategy is one of the safer options. There are situations where another approach could be a better choice.
Returns. As of Feb 9, 2024, the Bogleheads Three-fund Portfolio returned 1.61% Year-To-Date and 8.01% of annualized return in the last 10 years.
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.
Fewer than 10 ETFs is likely enough to diversify your portfolio. ETFs are wonderful instruments offering diversification at a minimal cost. Indeed, ETFs are investment vehicles containing many investments and are therefore already diversified.
So, a "three-fund portfolio" might consist of 42% Total Stock Market Index, 18% Total International Stock Index, and 40% Total Bond Market fund. For example, Taylor Larimore's "Lazy Portfolio" consists of these three funds based on the investor's desired asset allocation.
Cons of a Three-Fund Portfolio
Returns. Index funds, by nature, are designed to match the market not beat it. So if your goal is to achieve above-average returns, a three-fund approach may not suit your needs in terms of performance. Rebalancing.
There's a reason that 12% tends to be used as a benchmark, according to Blanchett. The average historical return from 1926 to 2023 is 12.2%, according to a monthly data set called stocks, bonds, bills and inflation, or SBBI.
An optimal portfolio is a portfolio which is most preferred in a given set of feasible portfolios by an investor or a certain category of investors. Investors' preferences are characterized by utility functions and they choose the venture yielding maximum expected utility.
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.
How many S&P 500 ETFs should I own?
You only need one S&P 500 ETF
You could be tempted to buy all three ETFs, but just one will do the trick. You won't get any additional diversification benefits (meaning the mix of various assets) because all three funds track the same 500 companies.
3 Fund portfolio asset allocation
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)
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
| Return (%) | ||
|---|---|---|
| Portfolio | #ETF | Feb 2024 |
| Stocks/Bonds 60/40 Momentum | 2 | 4.18 |
| Stocks/Bonds 80/20 | 2 | 2.78 |
| Dedalo Three | 2 | 3.46 |
Diversifying your portfolio matters for managing risk. A three-fund approach can make it easier to diversify if you're choosing funds that reflect the market as a whole. Lower costs. Using index funds to construct a three-fund portfolio may be more cost-effective overall.
Retiring on $500,000 may be possible, but it probably won't be easy. In addition to aggressive saving and strategic investing, you'll need to be honest about your needs and thoughtful with your spending.
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.
Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you're still working and investing, you might consider that allocation or something with even more growth potential.
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.
$3,000 X 12 months = $36,000 per year. $36,000 / 6% dividend yield = $600,000. On the other hand, if you're more risk-averse and prefer a portfolio yielding 2%, you'd need to invest $1.8 million to reach the $3,000 per month target: $3,000 X 12 months = $36,000 per year.
How much money do I need to invest to make $1000 a month?
Keep in mind, yields vary based on the investment. Calculate the Investment Needed: To earn $1,000 per month, or $12,000 per year, at a 3% yield, you'd need to invest a total of about $400,000.
According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation. Because this is an average, some years your return may be higher; some years they may be lower.
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.
Short-term investors or those with low risk tolerance would do best with a portfolio containing 50% bonds and 50% stocks. Keep in mind when rebalancing your portfolio that buying and selling investments can incur transaction costs, plus there will be tax considerations on sales.
Retirement-Minded: Your 40s
Sample Asset Allocation: Stocks: 60% to 70% Bonds: 30% to 40%
