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Why The 3 Fund Portfolio Is King - YouTube
Channel: Jarrad Morrow
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there's a very easy do-it-yourself
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method to investing that not only
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outperforms the vast majority of retail
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and professional investors but also
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saves you a ton of time energy and money
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along the way and that investing method
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is called wait for it the refund
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portfolio in this video i'll show you
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what makes this way of investing so
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successful the steps to properly create
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this portfolio in your account which
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aren't always so obvious i'll give you a
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list of the funds needed to create the
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portfolio and then i'll show you the
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actual historical returns based on a few
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back tested three fund portfolios that i
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put together if you get some value from
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this video then please hit that thumbs
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up button if not for me then please do
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it for my dog molly because
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she's staring at me right now waiting
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for me to get done filming so that we
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can go outside and play the three fund
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portfolio is made up of you guessed it
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three different funds nothing more and
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nothing less as with anything you can of
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course customize it beyond those three
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if you want but the results may vary
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based on how many shares of speculative
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investments that you decide to add
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beyond those three the three types of
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funds consist of number one a total u.s
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stock market index fund which
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essentially holds every single stock
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traded on the stock market we're talking
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small cap mid cap and large cap stocks
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which makes up around 4 000 u.s based
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companies number two a total
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international stock index fund that
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excludes stocks that are headquartered
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within the united states these are
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stocks that make up developed and
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emerging international economies and are
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equal to roughly 7 600 different stocks
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and finally a total u.s bond market
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index fund which consists of a mixture
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between maturities that are short
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intermediate and long term in total
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there's a little over 10 000 of these
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when you own a total market index fund
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you basically have money invested in
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essentially every single stock in bond
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traded on the stock market between these
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three funds you'd hold a little more
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than 21 500 different stocks and bonds
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across the world at the lowest cost
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possible you're instantly diversifying
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your money by only having to worry about
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purchasing three different funds as jack
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bogle the guy who introduced the first
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index fund to retail investors like us
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once said why look for the needle
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meaning those individual winning stocks
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when you can just buy the whole haystack
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by investing in these three types of
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funds there is zero overlap when it
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comes to stocks and bonds portfolio
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overlap happens when you invest in
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multiple funds that hold the exact same
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stocks which in turn makes you less
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diversified than you might think you are
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an easy way to remember this is when
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diversification decreases your risk will
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increase only having to own three
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different investments sounds pretty
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simple right yep like so simple that you
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don't even need to pay one of those
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expensive professional advisors what to
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pick your investments that'll most
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likely underperform the market over the
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long run right did we just become best
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friends do you want to go do karate in
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the garage it's no secret that advisors
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make money off of you because that's how
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they get paid and the amount that
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they're paid comes directly from the
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returns of your investments there's two
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main ways that they make money off of
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you number one by charging you either an
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ongoing percentage based on your account
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balance which i've seen on average is
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about one percent or a flat fee no
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matter the size of your account and or
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number two by getting a cash kickback
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from the company that manages the fund
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that they're having you invest in i
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don't know if you caught that but it
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sounds like there might be a little bit
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of a conflict of interest for that one
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right of course there is but naturally
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they're gonna try to hide that from you
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if an investment advisor told you to
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invest in the same three low-cost funds
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for the rest of your life then would you
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be willing to pay them an ongoing one
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percent fee every single year would it
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be worth paying them twenty thousand
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dollars in fees because if you invested
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ten thousand dollars today and paid them
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one percent per year for thirty years
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then the total fees that you would pay
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from the annual fees plus the
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opportunity cost would add up to
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nineteen thousand eight hundred dollars
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now let me put that in terms that we can
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all understand that equals two thousand
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four hundred and seventy five chipotle
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burritos yes you heard me correctly you
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would pay more in fees than that initial
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ten thousand dollars that you invested i
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don't know about you but i wouldn't be
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willing to give up over six and a half
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years worth of daily chipotle burritos
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for them to do something as simple as
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put me into a three-funded portfolio
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they want to make it as complicated as
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possible to make it appear like they're
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doing something productive with your
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money by constantly fiddling with your
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portfolio to justify charging you one
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percent if they knew that you knew that
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it was as easy as buying three low-cost
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index funds then they'd be out of a job
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which is why you'll most likely only
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hear this sort of good advice from a
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fiduciary financial advisor because they
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are legally obligated to act in your
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best interest and the trustworthy ones
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usually only charge a flat fee as
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opposed to an ongoing yearly fee not all
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non-fiduciary financial advisors are
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professional scumbags but we do have to
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acknowledge the fact that their
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incentives aren't aligned with helping
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you make the best investment decisions
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investing in a refund portfolio reduces
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the amount of time that you need to
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spend with and pay a financial advisor
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whose goals aren't aligned with yours
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but avoiding a shoddy advisor isn't the
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only reason to use a refund portfolio
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it's also a good way to avoid the risk
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that comes from an active fund manager
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that's handling how money is invested
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within a mutual fund that you invest in
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low-cost total stock market index funds
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held within a 3-fund portfolio are
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passively managed funds which means that
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the fund managers aren't choosing what
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to buy sell and hold actively managed
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funds on the other hand are run by
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people who are choosing which stocks to
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buy sell and hold to successfully pick
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the right stock combo to outperform a
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basic total stock market index fund
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these fund managers need to have some
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level of skill to achieve that
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outperformance but time after time the
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data shows that it's nearly impossible
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to successfully do this over long
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periods of time the hot fund manager
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everyone talks about today turns out to
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be the loser of tomorrow that everyone
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eventually forgets about in a paper
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published in the journal of finance
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called luck vs skill in the cross
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section of mutual fund returns fama and
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french found that on a practical level
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our results on long-term performance say
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that true outperformance and net returns
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to investors is negative for most if not
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all active funds in the paper they did
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admit that when returns are measured
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before costs and expense ratios there is
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stronger evidence of manager skill but
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this is irrelevant though because you're
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not getting into these funds without
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paying a fee it's like saying i have
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this awesome new electric car but
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there's nowhere for me to charge the
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thing so i can't really turn it on and
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drive it all i can do is look at it look
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at that that's nice and shiny which
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brings up another advantage that the
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three fund portfolio has the three index
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funds that make up the portfolio are
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extremely low cost the price for each
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can vary from fund to fund which we'll
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cover in just a minute but compared to
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most other funds out there they're the
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lowest since they are passively managed
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for example the vanguard etf versions
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have an expense ratio of point zero
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three percent point zero eight percent
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and
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five percent that means for every ten
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thousand dollars invested you're paying
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an expense of three dollars eight
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dollars and three dollars and fifty
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cents per year a study from the
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financial research corporation called
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predicting mutual fund performance set
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out to determine if there were any ways
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to predict the future performance of a
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mutual fund they tested 10 different
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predictors like past performance morning
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star ratings expenses turnover manager
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tenure asset size and a few more things
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they came to the conclusion that the
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best way to reliably predict the future
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performance of funds was by looking at
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the expense ratio and nothing else they
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call a favorable expense ratio an
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exceptional predictor for bonds and a
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good predictor for stock funds based on
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this research if you want to pick a
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successful fund then ignore everything
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else and just look for the one with the
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lowest expense ratio and lucky for the
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three fund portfolio those three total
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stock market index funds are about as
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low cost as they get hang tight because
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i did all of the leg work for you by
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putting together a list of the exact
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tickers that you might want to use i'll
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cover those in just a minute it was cold
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in here and now it's hot so the jacket
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had to come off when it's all said and
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done the biggest selling point of a
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refund portfolio is that it's just easy
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literally dummy proof contributing money
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to your investment account on a regular
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basis and spreading that money among
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only three funds is easy rebalancing
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once per year across only three funds is
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easy when it comes to withdrawing money
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when you're older you only have to pick
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between three funds to sell off which is
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easy when choosing what to invest in you
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only have three funds to worry about
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which is easy investing isn't
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complicated at all but for some reason
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we like to make it out to be more than
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it actually is there is zero correlation
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between spending a bunch of time trying
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to pick stocks or mutual funds or
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spending a bunch of money on an advisor
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and an increase in your investment
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returns successful investing has more to
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do with your psychology than anything
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stick with the refund portfolio process
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and get on with living your life because
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the returns will take care of themselves
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the first step in building your three
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fund portfolio will be to choose the
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three funds that you'd want to use
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here's a list of the exact funds that
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you'd want to hold depending on which
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investing platform that you use all you
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do is choose one from the total us funds
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one of the total international funds and
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one of the total us bond funds side note
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if you're building this portfolio within
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a 401k then you might not have access to
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a total u.s stock market fund now if
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that's the case then you should have
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access to some sort of s p 500 fund
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which you can substitute in its place
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you don't have to but i'd suggest
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choosing funds from the same road just
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to make things a lot easier for you as
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you can see all the funds are exclusive
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to their respective investing platforms
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except for the vanguard etf versions
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those vanguard etfs can be purchased on
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any investment platform which is why
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they're my number one choice to the far
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left you can also see that i've ranked
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each three fund mix i did that because
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the more that i looked into each one the
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more i realized that they are not all
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created equally even though the expense
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ratios for each fund within a category
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is going to be different they're not far
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off enough to where i'd steer you away
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from any of them the issue i have is
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that when the name of a fund says total
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u.s stock market index i would assume
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that the fund would hold literally every
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single stock on the us market the same
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goes for the total international and
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total bond index as well but the more i
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started to look into each one the more i
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realized that that's far from accurate
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most of these funds do not actually hold
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quote unquote everything here's the same
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list and next to each ticker symbol i
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have how many stocks or bonds are held
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within each one based on this info the
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only true u.s stock international stock
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and bond funds are the ones offered by
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vanguard that's not to say that you
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should avoid any of the others but it's
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something to be aware of the returns
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will most likely be pretty close between
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all of them but if you want to get the
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closest return to the market as possible
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then go with the vanguard funds once
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again the good news is that with the
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vanguard etfs they can be purchased on
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any investment platform out there the
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next step will be to choose an asset
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allocation meaning out of one hundred
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percent how much should go towards each
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of the three funds this is quite
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possibly the most important decision
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that you'll have to make so pay
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attention because it's going to have a
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direct impact on your expected return
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and risk level the more risk you want to
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take for example the more stocks and
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less bonds that you want to hold the
[687]
higher expected return the inverse is
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also true so the less risk that you want
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to take i.e the more bonds and less
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stocks the lower expected return here's
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a chart i put together showing you how
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different stock and bond allocations
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would have performed over the past 34
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years on the first line the zero percent
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stock and 100 bond allocation would have
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only netted you an average of 5.73
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annual return during the worst year you
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would have only lost 2.66 percent with a
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max drawdown of 5.96
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on the last line i tested a 100 stock
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and 0 bond allocation for 34 years it
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gave us an average annual return of
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basically 10
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but and this is a big but you would have
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had to have been able to handle a worst
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year return of negative 38
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and a max drawdown of negative 52 that
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means that if you had a million dollar
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portfolio and you were 100 percent in
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stocks then at one point you would have
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been down 520 000
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and your refund portfolio would be worth
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480 000 yes of course your investments
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eventually recovered but you need to ask
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yourself if you could handle that kind
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of drawdown on your portfolio and not
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panic sell that point when the portfolio
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was down 52 percent was the housing
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market crash which started towards the
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end of 2007. there were a lot of
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unknowns during that time and looking
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back on it now we know how things played
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out but if you were in the middle of it
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then you had zero clue if the whole
[779]
financial system was going to crash to
[781]
make things even worse your portfolio
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during that time would have been
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underwater for a little over five years
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and two months let me say that again in
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a different way it would have taken your
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portfolio
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1885 days to fully recover from that 520
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thousand dollar loss so you need to ask
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yourself could you handle not selling
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and continuing to invest during that
[805]
time if you are invested in 100 stocks
[808]
because to get that 10 average annual
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return over those 34 years you would
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have had to have not sold and continued
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to invest money every single month even
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when it looked like there wasn't any
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light at the end of that tunnel that's
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one of the prices that you have to pay
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for that higher average annual return
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always keep that in mind and i didn't
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even put in here data of other times it
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crashed too because that wasn't the only
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time there was another time where i
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think it was down like 43 or 48 as well
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based on the odds and history we know
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that it's likely your portfolio will
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tank potentially like that at some point
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between now and when you disappear from
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this earth if you want your money to
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grow in a meaningful way then you have
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to have a decent amount of your money
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invested into stocks which means that
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times like these are going to hurt no
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matter what if you don't think that you
[856]
can handle huge swings like that but
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still want to give your money a fighting
[860]
chance to grow then start with the 5 10
[863]
or 20 percent bond allocation within
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your 3 fund portfolio you're also going
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to want to continue investing even when
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times look really really ugly in the
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economy and the stock market when it
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comes to how much to put towards
[875]
international stocks this is a tricky
[877]
one that's been debated so many times
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now because of that i refer back to jack
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bogle the founder of vanguard on this
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one for a long time he was completely
[885]
against allocating any money towards
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international stocks his thought process
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was that if you already own a total u.s
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stock market index then you naturally
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have exposure to international markets
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because a lot of those corporations do a
[900]
ton of business overseas but as time
[902]
went on he changed his stance a little
[903]
bit he ended up saying that he would be
[905]
fine if someone held anywhere between 0
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and 20 of their portfolio in
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international stocks so do what you want
[912]
with that info if you're really not sure
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then start out with something like ten
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percent in it in international and then
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adjust it up or down from there when it
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comes to rebalancing your portfolio to
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get your allocations back to where they
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should be i would only plan on doing
[925]
that once per year don't worry about
[927]
doing it any more than that one of my
[929]
favorite investing platforms that i use
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and i love that makes the whole refund
[933]
portfolio investing a lot easier is m1
[936]
finance i'll have a link in the
[938]
description of this video to check them
[939]
out and also get a free 30 from them now
[942]
it's time to implement the strategy for
[944]
yourself if you have any additional
[945]
questions beyond what i've covered so
[947]
far please leave them down in the
[948]
comments below and i will try to try to
[950]
answer every single one of them for you
[952]
but there's two things that i really
[953]
need to stress to you though number one
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it is extremely important to invest
[957]
money into this type of portfolio on a
[959]
regular basis consistency is key the
[962]
returns i showed you were all what
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happened in the past and do not give us
[966]
any indication of how things will play
[968]
out in the future for all we know the
[970]
returns for everything going forward
[972]
might be lower now if that's the case
[974]
then the best thing that you can do is
[976]
to shove as much money as possible into
[978]
those investments on a regular basis the
[980]
returns of a 100 stock portfolio might
[983]
only net you an annual return of 5 as
[986]
opposed to that 10 that we saw but i
[988]
would rather be earning 5 on a portfolio
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of 800 000
[993]
than one that's only worth hundred
[995]
thousand dollars because i wasn't
[996]
investing on a consistent basis and
[998]
number two there's going to come a time
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most likely multiple times when things
[1002]
look very dark and grim within the world
[1005]
the economy and the stock market i am
[1007]
talking really really ugly kind of like
[1010]
when we were in the middle of the
[1011]
housing market crash of 2008 i need you
[1013]
to ignore all of that noise continue to
[1016]
invest stay optimistic don't fiddle with
[1019]
this portfolio and stay the course
[1021]
corrections and bear markets will come
[1023]
and go but i can promise you one thing
[1025]
if your three fund portfolio is crashing
[1028]
then everyone else is most likely are as
[1030]
well but the only people who actually
[1032]
lose money are the ones who sell or
[1034]
start messing with their portfolios
[1036]
during that time because they're the
[1037]
ones who are locking in their losses by
[1039]
doing those things i've met a few people
[1041]
who sold their investments at the bottom
[1043]
of the housing market crash and still
[1045]
haven't fully put their money back into
[1047]
the market now those people had to push
[1049]
out the retirement dates another 10 in
[1052]
15 years because of that panicked
[1055]
decision make sure to hit that thumbs up
[1056]
button before you go check out the
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description for more resources and
[1060]
playlists to help with all of your
[1061]
personal finance and investing needs
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i'll see in the next one friends done
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