How to Beat the 3-Fund Portfolio (Maybe)
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- Опубліковано 1 чер 2024
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Today we answer a viewer's question about adding to a 3- fund portfolio. Personal Capital: robberger.com/go/personal-cap...
A viewer named Jeff asked me about an evaluation Personal Capital performed of his 3-fund portfolio. Personal Capital correctly noted that the portfolio is heavily tilted toward large cap tech stocks, with little allocation to real estate, commodities or small cap stocks.
We examine these issues to decide whether this is a problem and some possible alternatives for those looking to add to a 3-fund portfolio.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase and/or subscribe. However, I only recommend products or services that (1) I believe in and (2) would recommend to my own mom. - Розваги
John Bogle : "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Beat me to it Alpha Male
Thanks Rob another thought provoking video. Your videos are by far the best on UA-cam.
Solid Video Rob...With the way the market is moving, we'll mostly hold for longer than 2030 to realize profit gain.
Rob - Thanks for all the thought provking & informative videos... I learn more from your videos than my financial advisor...
Good video! Thank you for sharing the information and running the portfolio simulations.
Thanks Rob. Appreciate the perspective you gave.
Rob: super helpful as always. Please keep these videos coming. You are doing a great job!
I second that!
Excellent, as always! Very helpful.
Rob, always appreciate your videos. I hadn't watched any in a few months and was surprised you didn't have anything analyzing the current market. But maybe you don't do that. I thought it was interesting you mentioned small cap and Emerging Markets. I remember when everyone was supposed to have those in their portfolios, but it appears to me that in the last 10 or 15 years Whenever there is a major Market correction it favors large caps and there's a massive flight to them, so small and mid caps and emerging markets and international are all languishing in relative terms
If buying "winning funds" or excluding "losing funds" beat the market, we would all chase that strategy until it provided little/no return. AKA efficient market hypothesis.
Because of competition, there are no long-term strategies that beat the market without accepting additional risk.
The thing that helps me to continue holding my shares is dividends. When my ETF's pay their quarterly dividend, I say to myself, everything is gonna be okay. March, June, September, and December are wonderful months to keep me enthusiastic about the market. I have a four ETF portfolio, and I am very satisfied with it. That keeps me calm.
Would you mind sharing your ETFs? Or at least similar ones. I am wondering if you use basic index funds or more specialized funds tailored to income (value or dividend growth). I also assume your portfolio value is in the 7 or high 6figures so as to make the quarterly payments reasonably high. Thanks!
Are you engaging in emotional investing? Isn’t that dangerous?
Thank you Rob, helpful analysis. Your pithy summaries are a helpful antidote to the obfuscation of the typical financial industry claptrap. - Bill
Hi Rob. In supplementing the 3-fund portfolio, why do you prefer the small-cap value as opposed to small-cap? I have been looking at both VB and VBR to add to my portfolio and am having a hard time deciding between the two.
Rob great discussion - my video is limited to 360p?
Shoot. I just got a new Mac and it apparently doesn't carry over all of my Final Cut Pro settings! I'll fix it on the next one.
A great video at 360p is better than a crappy video at 4K. Just saying.
Great stuff, as usual, Rob. I’m following your 6-fund portfolio minus the REITs. But I have 15% of my portfolio in real estate investments (class B apartment complexes) through private equity (similar to Open Door Capital but a less flashy operation). I’ll let you know in 20 years whether it all worked out ;). You’re looking younger every day!
Everybody should read and learn from this comment, particularly the last sentence. Nicely done!
Michael, i have a question about where to put those investments. I have 3 accounts, roth, 401k and brokerage, I think reits goes on a roth hands down but how do you spread the other investments? Thank you
@@fabiGBOtown you should ask Rob! Most ppl would put REITs in a tax advantaged account for tax reasons; I might favor a traditional IRA/401(k) over a Roth for my REITs. I don’t own REITs. Good luck!
@@michaelevans5328 hi Michael, thanks. Hopefully on Tuesday I'll get a chance to on his live.
Rob - you mentioned before you have invested in SCHD. If that is still the case, does that mean you are tilting to both large cap value and small cap value? I do that and was wondering if that was still your position. Thanks for all the great videos and go Buckeyes!!
@Rob Berger When you say you have 10% weighting to small cap value, does that include the weighting of all your investments (based on the Morningstar 9 category matrix since total market index funds have some exposure to small cap value) or are you referring to you have a small cap value fund that comprises 10% of your portfolio (which are not weighted completely small cap value on the Morningstar matrix and also includes some midcap and blend/growth exposure)?
IMO, the TFP has enough exposure to the alternatives. SCV supposedly gives extra risk factors, but I'm not convinced it will continue (hasn't in ~15-20 years). I think it's mostly splitting hairs and the extra complexity doesn't justify it in my mind.
@rob Berger Do you have a preferred fund to use for small cap value exposure? Thanks!
The thing I found amusing about personal capitals advisory service (who I left this year) is that they preach a sector diversified fund approach. Yet, when I would look at the sector breakdown of their fund, it was always tech heavy. I'm guessing this is because without that, they would not have been making returns that were close to the market.
Thanks for info glad we skipped the free check-up!
Good analysis Rob. The fact that this advisor recommended adding commodities and gold,and said that it would help him get better results, makes me feel a lot better about not using an advisor. I know you always recommend small cap value, but every time I run it through portfolio visualizer, it seems do worse and doesn’t outperform the S & P 500. I don’t think I’m a fan of small caps. There are so many of them, they are extremely volatile, they don’t pay dividends, and they are often the stocks that fare the worst during a downturn. I’m ok with sticking to the small cap allocation in my total market funds.
Your reasons for sticking with the total market index make sense. The part about portfolio visualizer is misleading though.
Small cap value (SCV) has consistently outperformed large growth (S&P 500) across the historical data.
The issue seems to be time scale. Yes, the S&P 500 has outperformed SCV over the last decade or two. But we have more than a hundred years of data in the US, and even more international data showing the opposite. You're missing the forest for the tree.
You are right that smaller companies are more risky (and volatile) because they have an uncertain future value. For this reason, their prices are "cheap" relative to big, popular companies. Across 30-year periods and international stock markets, this portion of the market has historically produced higher returns.
@@ajrobbins368 That all sounds reasonable and I don’t doubt those facts. I guess my analysis of VTSAX, VOO and VBR didn’t go back that far. I only have 15 years left until retirement though. Not sure I want to roll the dice on small companies that haven’t proven themselves. At this stage, I’m all about large, boring, value stocks that have been around forever and pay healthy dividends.
@@happytravels2480 You seem like a very reasonable person with a solid plan. As Rob said at the end of this video, whatever plan you can follow for the long-term will produce the best outcome.
*Why take unnecessary risk?*
Only if you need the money.
Sometimes people don't invest or even save until later in life, so they may need a small cap value "boost" to have enough money for retirement.
@@ajrobbins368 That’s a great way to put it. “Only take the risk if you need to”. I have reached the point where I don’t need to take added risk anymore. I’m definitely more conservative and falling into the preservation/income phase vs risk/growth as of late.
@@happytravels2480 I’m also conservative about risk now at 65. But somewhat changed my mind when I saw my in-laws kept a 60/40 portfolio until there death in their 90’s. They left there children nice inheritance.
I think all the pushback you get on the simple index fund approach is because most people are thinking short-term. They just can't get past it. I think we simply need to swamp/saturate UA-cam with deferred gratification videos (marshmallow tests, etc) along with the explanation of the long term approach. Heck it's for this reason alone that many people don't do a 401k...long term is just not in the picture. That's also why there's a movement to make people auto-enroll in a 401k
Hey Rob, could you do a video on what happens if a brokerage shuts down? For example, imagine M1 suddenly closed their doors. What would happen to our holdings on M1?
Your assets would be transferred to another brokerage...someone would be appointed or would pay for those accounts (take them over)....or you'd get the option to transfer your stuff elsewhere or cash out.
Whether you use Vanguard or M1 you actually own the ETF that you invested in so that if M1 goes under, you still own your shares.
I like the idea of adding small cap value for having extra diversification; there have been times when the stock market is down but small cap value is up, however what bugs me is that I'm not sure about how much to allocate to small cap value. I know there is no _right_ answer, however, I want to have a good reason to choose one allocation in order to stick with it.
The Paul Merriman Foundation is a non-profit organization that works to educate Do-It-Yourself investors. They have research on small cap value and several life strategies to suit different levels of risk tolerance.
I highly recommend their website and UA-cam channel to you.
is it just me who can only see it in 360p. difficult to read the recorded screen.
Yeah, my bad. I'm going to repost it in 4k in a few minutes.
Blurry for me too
@@rob_berger 7 hours later, I'm still seeing only 360.
One thing I've found in my own experience is that if I pay a fee to an advisor, I am more likely to stick with their recommended allocation and stay invested in the long term. If I do all my own investing, I am more likely to change my mind about what I'm invested in. I hate paying an advisory fee and I think I can do a better job by myself with index investing, but when I look at my history, that isn't the case. In effect, the fee may be buying me more than just the advisor's expertise. It may be buying peace of mind and a long-term approach that I think I should be able to achieve all by myself, but in practice find it hard to actually do.
It seems that anytime you want to diversify further you take from the broad US stock market fund and never from the international fund. For years, I had 15% in international and it very rarely compared to US stock. Would you ever consider a three fund portfolio of only: S&P 500, US small cap value and US bonds?
NO ONE can buy past performance.
If buying past winners was a profitable long-term strategy, no one would lose money investing.
Example: The ARK Innovation ETF (ARKK) substantially beat the market in 2020 and 2021. This year it has dropped by more than 50%.
"For years, I had 15% in international and it very rarely compared to US stock."
So what? International stocks have beat US for decades at a time if you look back.
Poor performance last decade does not predict future performance.
If one country was a "sure bet" and always provided higher returns, everyone everywhere would invest and exhaust the higher returns.
It's called market efficiency.
The US has been on a winning streak for more than a decade, so investors have flocked to US companies, adding to the winning streak. Now US stocks are valued based on profits expected many years in the future, so companies must beat high expectations for a decade to provide decent returns. (Possible, but far from a "sure bet.")
International stocks are looking cheap by comparison. Expectations of growth/profit are much more reasonable. Emerging markets are particularly cheap, partially because they are exposed to more risk.
You can always use the Yale etf portfolio if you want a portfolio that is more diversified. You can diversify even more and do the S&P 500 and add the Russell 2000.
Every portfolio is included in total US market. It is easier to stick to through thick or thin.
That's why I chose a U.S. total stock market fund over a S&P 500 fund.
Good show, but I'm going to stay with the basic 3 fund approach. It's just so simple, and I'm afraid if I start tweaking it, I'll just keep tweaking.
I think investing is more of an art than a science. It takes independent thinking and looking at things at an absolute logical way. An example of it being more of an art and not a science is that if a surgeon made as many mistakes as Warren buffet then you probably wouldn’t go to that surgeon. Warren Buffett considered to be an absolute best investor made a lot of mistakes in his days, most recent one is purchasing four major airlines and then selling them at a huge loss. After which the airlines did recover. This is an interesting industry where following the best does not necessarily will mean great returns. Everyone is ultimately left to think for themselves.
For dummies like, investing is just a science. Invest in VTI, hold it for long term for 20years , get 8% compounding interest, retire happily 😅
I'm near retirement and began the process of setting up a three fund strategy. I've been systematically moving funds into FSKAX (total market fund) for a few months to that end. However, I'm leery about moving any funds to a bond index fund due to rising interest rates. Some sources say the interest rate rise has been factored in at this point but others say stay away from bond index funds right now. Do you have any advice on this?
As interest rates rise, bond prices fall and yields rise. It's mathematics. Stocks (equity) can (and have) gone to zero. Wars/revolutions have deleted entire stock markets. Bonds (debt) are different.
Bonds have a principle amount that is paid out when they mature, so they have a "price floor." The only risk is default, called "credit risk." So government bonds are safer than corporate bonds, which translates to lower yield on treasury bonds and higher yields on corporate bonds.
NO ONE knows the future, so I would plan my portfolio according to that fact. Diversify with both equity and debt according to your risk tolerance. Ignore the constant bombardment of headlines and price fluctuations. The only true test of your strategy is the end result you get in retirement.
Great content but blurry video
Rob, can you fix the resolution? It’s all blurry and unreadable.
Hi Rob, for me, gold is an alternative to fixed income rather than equity. I prefer to compare its performance to bonds than US or Intl stock market. In my portfolio (25 y/o), I'm currently 90% equity, 5% bonds, 5% gold. If it slightly underperforms, oh welll
Interesting. I've not considered that approach. Don't you have concerns though given that gold is more volatile than short to intermediate term bonds?
@@rob_berger I'm not bothered by it's volatility for long-term investing. An important consideration is it's extremely low correlation to equity. According to the asset correlations page on Portfolio Visualizer, GLD has 0.07 cor to VTI and 0.42 to BND. BND has a 0.12 cor to VTI.
5 percent tilt is inconsequential. Demo it, you will see.
RISK = REWARD over the long-term (meaning 15+ years)
Another name for risk is "uncertainty."
Uncertainty has infected the US stock market in 2022. Expectations of growth are declining for the 1st time since the pandemic started. Prices have fallen to match the new environment of uncertainty.
Investors now see the future as more risky, not the "sure bet" the US market previously appeared.
Accepting that risk and embracing uncertainty has paid off over ever 20-year period in stock market history. (Unless the market is ended by war and/or revolution.)
Rob, why video quality so low?
How to beat the 3 fund: VOO, SCHD, QQQM 😂
Is that a Mikhail Tal games collection on your shelf?
Try it with the best 1 fund portfolio. IJS the S&P Value 600.
Did you do something wrong with the video? This one only shows a max resolution of 360 but others are much higher resolution.
Which Small cap value mutual fund or etf has a strong long term track record with very low expenses?
viov
I am 80% in cash right now due to a job change, and my question is: Do i get back in the market all at once today, or dollar cost average over the next weeks?, months? This is for bucket 2 or 3 depending how you look at it.
Do lump sum and get into market quickly.
The data is too small to read and if I blow it up it’s too blurry to make out.
I wonder if putting 10% in high dividends etfs 4 or 5 would give enough dividends to supercharge a roth account. What do you think? Jepi, divo, schd etc. Is what I'm talking about
Dividends are NO different from selling shares, except the company decides the amount and timing.
If you choose to reinvest them, congratulations, you now own the same $ amount as you started with.
ALL long-term price appreciation depends on the accumulation of company assets.
Dividends actually reduce company assets because the shareholders receive cash directly from the company balance sheet.
@@ajrobbins368 thank you. Is it the same with Reits? In the example used for growing a roth with dividends?
@@fabiGBOtown Real Estate Investment Trusts (REITs) are structured a bit differently than most companies. They are legally mandated to distribute profits to shareholders as periodic cash dividends. They also make-up a tiny portion of the total stock market.
As I understand it, these companies specialize in specific real estate niches (such as infrastructure, industrial, commercial, or residential properties) and use low interest loans to collect rent/lease payments and turn a profit for shareholders.
That's most of what I know about REITs. I imagine acquiring more rental properties/lease agreements is what drives asset growth. And when property values rise.
@@fabiGBOtown I'm not sure which example of "growing Roth with dividends" you mean. One of Rob Berger's videos mentions holding assets that are expected to grow the most in a Roth IRA. That means ETFs and stocks, including REITs. He said bonds can go in the traditional IRA instead.
No one is sure exactly what the tax laws will look like 20 years from now, so I have heard differing recommendations about tax-advantaged accounts. I highly recommend researching it or, if you have enough money at stake, meeting with a real tax advisor.
Just a guess, but would assume Personal Capital is presenting portfolio complication to imply benefit from their AUM services. Their free tools are good, but as soon as they see the $ amount you link to the models, they are like bears on honey. Want to find out how many ways you can say “no”?
Say, Rob, you scheduled the video with Michael Kitces for 8/5 - is that really the date you intended?
PSA: NO ONE can buy past performance.
If buying past winners was a profitable long-term strategy, no one would lose money investing.
Example: The ARK Innovation ETF (ARKK) substantially beat the market in 2020 and 2021. This year it has dropped by more than 50%.
Perhaps "what goes up must come down."
This is known as "reversion to the mean" in finance.
360p?????
There’s a big point missing here. The dividends from ETF’s. A $1m portfolio could give you $20k annual dividends, depending on your portfolio. Shouldn’t that be factored in, as it potentially could reduce your 4% further ? Or am I nuts 🌰 😮😊?
Dividends are NO different from selling shares, except the company decides the amount and timing.
If you choose to reinvest them, congratulations, you now own the same $ amount as you started with.
ALL long-term price appreciation depends on the accumulation of company assets.
Dividends actually reduce company assets because the shareholders receive cash directly from the company balance sheet.
i have 5 etfs, but i cant have certain stocks for a few reasons so i have to. otherwise i would go with 3
Should I have a 3 fund portfolio in a Roth IRA or should I remove the bonds? I’m almost 30.
Do whatever you want my G. You good money either way facts no cap 💯
Missed out on Oil & Gas being a haven during the past few months, eh?
RISK = REWARD over the long-term (meaning 15+ years)
Know how much risk you will need to reach financial freedom. Check the academic research for well documented risk-reward factors.
Just pump everything you can into VT & BNDW every week and forget it.
If we can base our retirement investment outcome on 5% return, why anyone should take on more risk and spending more time to fussy about it? We need more time to enjoy the life instead worrying & playing with the market.
I’m beginning to feel that way after 2020-2022. I feel like I’m ready to have a life besides stressing about the market and my portfolio
Some investors don't have enough money for a comfortable retirement. The extra risk could help them achieve their financial goal of not running out of money in old age.
I enjoy running scenarios in Portfolio Visualizer and have found two interesting points:
1. International Developed Markets have a higher CAGR and lower Standard Deviation than Global Markets, and
2. Having 20% Mid Cap Value has a higher CAGR and a lower Standard Deviation than Small Cap Value.
So my take on the four fund portfolio is: 30% Total US Market, 20% International Developed Markets ex US, 30% Total Bond Market and 20% Mid Cap Value,
Huh? How’d you get such a high international investment?
hard to read for 360p
I know. A missed a setting in a new version of Final Cut Pro. Fixed going forward.
Dividends are NO different from selling shares, except the company decides the amount and timing.
If you choose to reinvest them, congratulations, you now own the same $ amount as you started with.
ALL long-term price appreciation depends on the accumulation of company assets.
Dividends actually reduce company assets because the shareholders receive cash directly from the company balance sheet.
How is that possible when the money comes from free cash flow? After dividends are paid, my number of shares increase, the amount invested increases, and my cost basis decreased. I didn't add any additional capital.
@@craigdenney5720 Think about it. Cash is removed from the balance sheet of a company you already own (a tiny portion of) and transfered to your account.
Each of your shares just depreciated in value because your company now owns less cash. Share price is adjusted for the loss on the "ex-dividend date" before the dividend is actually sent to shareholders.
Share price = assets (cash in this case) - liabilities (debt) + expected future cash flow
When you DRIP reinvest, your investment returns to its original size (adjusted for market price fluctuations) because you now own more shares of lower value/price per share.
VTI 75%
ESS 10%
VTIA 5%
BND 10%
Bond etfs are horrible though..
As interest rates rise, bond prices fall and yields rise. It's mathematics. Stocks (equity) can (and have) gone to zero. Wars/revolutions have deleted entire stock markets. Bonds (debt) are different.
Bonds have a principle amount that is paid out when they mature, so they have a "price floor." The only risk is default, called "credit risk." So government bonds are safer than corporate bonds, which translates to lower yield on treasury bonds and higher yields on corporate bonds.
NO ONE knows the future, so I plan my finances according to that fact. Maintain an emergency fund. Diversify with both equity and debt according to your risk tolerance. Ignore the constant bombardment of headlines and price fluctuations. The only true test of your strategy is the end result you get in retirement.
get a better camera
The International market has been stagnant for years. I don’t understand the appeal.
Diversification, at least in name. In our globalized world, there's probably more correlation and contagion if shit hits the fan
Neither do I, unless it is Canada.
NO ONE can buy past performance.
If buying past winners was a profitable long-term strategy, no one would lose money investing.
Example: The ARK Innovation ETF (ARKK) substantially beat the market in 2020 and 2021. This year it has dropped by more than 50%.
Used to think international was needed. For years. Then I realized it is a larger drag than cash.
@@rocksez5101 Don't let "recency bias" decide your asset allocation. Check portfolio visualizer and you will see international equity has outperformed US equity for decades at a time.
But a decade-long US bull market has lulled investors into a false sense of security. Recent US outperformance is unusual historically and unsustainable, hence the 2022 bear market.
Past performance (both under- and over-performance) does NOT predict future performance.