I only have 3 funds in my main publicly-traded portfolio. One fund for stocks, one for bonds, and one for real estate. That’s it.
This 3-fund portfolio is called the Basic Portfolio.
It’s simple. It’s powerful. And it’s better than almost anything expensive financial planners and robo-advisors will tell you to do.
The Goal of the Basic Portfolio:
The Basic Portfolio is an all-weather, evergreen portfolio designed to allow the investor to sleep well at night.
The goal of the Basic Portfolio is to have a core portfolio that allows the investor to sleep well at night because it doesn’t take any crazy gambles in any direction.
We want to build wealth consistently without any crazy gambled. We want boring, broad exposure so that we can consistently sock money away in the portfolio without worrying about anything.
Why I Only Have 3 Funds
I only have 3 funds in my publicly-traded portfolio because I’m only looking for unleveraged, long exposure to three basic asset classes within this portfolio:
- Bonds, and
- Real estate
That’s it. So that’s all I have. They’re the three asset types that have predictably generated the most stable returns over the last few centuries – business, real estate, and debt – and it makes sense to get exposure to all three in one portfolio.
Why Not Pick [XYZ] Alternative Assets?
There are, of course, other asset classes in publicly traded securities – like MLPs (pipelines) and BDCs (volatile companies that borrow money and lend money to other companies). But you don’t need them in the Basic Portfolio.
Specialty securities are just that: specialty. And when it comes to pipelines and business debt in your core portfolio, you shouldn’t get creative because it creates a plethora of problems that require you to make blind gambles.
Here’s a short list of asset classes you don’t need in the Basic Portfolio:
- MLPs. These are linked to oil and gas and you can get oil and gas exposure without betting the farm in normal equities. If you’re an accredited investor, you can also do what I’ve done and get even better exposure to oil and gas through direct investments like oil wells and oil and gas royalties. MLPs historically are taxed to death while providing fairly meager returns. Why complicate your life if you’re not going to be paid handsomely to do so?
- BDCs. These are very volatile entities that borrow money and then lend it to other risky entities. They bounce all over the place, are taxed to death, and are leveraged on a pretty crazy level. If you don’t believe me, check out this famous BDC in 2009 and tell me you’d like to see your portfolio drop like 80%+ because you got too cute.
- Commodities. This is more for speculators and hedgers. There’s a role for it, but not in the typical person’s portfolio.
- Gold and Silver. Similar to commodities in general, you don’t need gold or silver in your main portfolio. I like physical gold and silver, but not in publicly traded accounts. Gold and silver should be seen as doomsday insurance and shouldn’t pollute your portfolio that you’re building to grow your wealth.
- Foreign. If you live in the United States, then you live in a unique situation where it’s probably riskier to get a lot of global equity exposure than it is safer. Sure, it might lower volatility, but you have other ways to achieve that goal. I wouldn’t touch Europe or China with a ten foot pole right now because they have all sorts of unique risks that US assets don’t have on the same level. Plus, US companies have all sorts of global exposure, so it’s not like US assets are completely isolated. This is the one area where you could mix it up a little and it’s probably perfectly fine. For example, you could create a 4 or 5 fund portfolio and it would work OK.
Just don’t overthink it. Stocks, real estate, and bonds pay and/or grow consistently over time. The Basic Portfolio only needs the three.
Stocks and real estate give you long-term growth and bonds give you much-needed stability and extra risk-adjusted returns by nature of the assets.
NOTE: I’m saying you don’t need the above. I’m not saying that you shouldn’t invest in them. In the end, most financial decisions are a personal decision and I have utterly no idea what’s going on in your particular situation.
Why Not Pick 187 Different Funds?
For each asset class I want exposure to, I’m only picking one fund. For stocks and real estate, I’m picking the broadest, most boring funds.
Nothing special, nothing complicated, nothing actively traded – just simple, boring, and basic.
Quite a few financial experts (or perhaps I should say “complexity experts”) claim that you actually get better risk adjusted returns because different types of stocks, for example, behave differently over time, so you want to mix and match them to optimize the ups and downs and returns.
This is, for the most part, a voodoo science by people who don’t understand how comically oversimplified their data sources are. Just because value stocks have performed X over the last 20 years doesn’t mean they’ll do the same over the next 20 years. Just because IT stocks have performed X over the last 10 years doesn’t mean they’ll perform Y over the next 10 years.
If anything, mixing and matching your stocks just gives you more of a chance to screw up your allocation so that you accidentally gamble on the part of equities that won’t do that well. Most robo-advisors who do this lose out for no reason.
I’ll cover this more in other articles, but here’s a quick rundown:
- You shouldn’t have a dedicated fund for a specific type of stock because you don’t want to double down on that type of stock – let’s the broad index guide you with how much of each type of stock is in your portfolio. The total stock market ETF by Vanguard won’t have you gambling extra on oil, for example. That’s one less risk to your portfolio.
- The data most people use to figure out their little ratios are usually pretty comically short-sighted. The last 30 years is drastically too short to have any clue how on earth anything performs over time. Plus, markets react to themselves, so if anything, past behavior is less likely going forward.
- Why? Why do it? Why not just not do it and be fine? Why gamble when you don’t have to gamble? It’s inherently irrational given the above.
How I Picked the 3 Funds
In my particular application of the Basic Portfolio, I use the following 3 funds, all from Vanguard:
- VTI: Vanguard Total Stock Market ETF. I want as much stock market exposure as possible. That means total, not just the big ones.
- VCLT: Vanguard Long-Term Corporate Bond ETF. This is more complicated, but given my time horizon for traditional retirement and the need for current income and the desire to offset stock and real estate drops with this fund, I went with long-term corporates. You could pick something else for your situation and possibly do better.
- VNQ: Vanguard REIT ETF. This is a great fund with wonderful real estate exposure from the REIT market. Extremely broad and plain vanilla, especially with their wonderful recent changes that made it even more broadly focused on REITs.
I picked ETFs because they’re extremely efficient and are all offered on the wonderful M1 Finance portfolio platform.
I picked Vanguard funds because Vanguard is a wonderful organization doing the good work of providing funds that exist to allow investors to make a profit rather than to skim as much as possible from those investors. Vanguard is truly one of the great organizations in human history.
How to Integrate Your Time Horizon
My time horizon is tricky. I want to build wealth for the long haul, but I also want to make sure my net worth doesn’t fluctuate too wildly because I’m retired. My assets aren’t just about 50 years from now – they might need to be used right now.
At the same time, I don’t need to necessarily treat this like a typical retirement portfolio, because this is only my publicly traded portfolio. I also have all sorts of companies and investments in private assets set up.
That I have other investments while most beginners won’t doesn’t mean this portfolio can’t be used by everyone – this fact just informs what my ratios will be for each of the three funds.
Remember, if anything, you should be investing in other markets as well – like rental properties, small business, direct lending, and oil wells. We’ll cover this in other articles on this website, but for now, let’s just focus on the publicly traded portfolio elements.
How I Picked the Fund Percentages
This is where things get uncomfortably arbitrary. People love the idea of portfolio creation being some kind of super-science where you have super-computers using super-formulas and super-math to figure out the best super-portfolio.
Money doesn’t work like that. Most of portfolio creation begins with someone eye-balling a few different asset classes, then mixing them together until it seems like it makes sense. I wish I were kidding. This is true for the super professionals as well.
Stocks should be the core growth asset of every portfolio. The data seems to show that portfolios with extra real estate have tended to do well over time, with the best portfolios somewhere in the 20-30% range. And bonds should be used at a level that depends on the age of the investor – the older you get, the more you should shift towards fixed income.
Will This Portfolio “Beat the Market”?
No. This portfolio will not beat a 100% stock portfolio.
It’s not trying to do that, either – because a stock market portfolio is great over a 100 year timeline, but for those of us who need to have a high-degree of certainty that we can rely on it in a much sooner timeline need to have other assets like real estate and bonds in the portfolio.
That said, this portfolio almost certainly will beat similarly structured portfolios over time.
This portfolio has done better than the Vanguard Balanced portfolio, the Wealthfront portfolios, and the Betterment portfolios over the last 5 and 10 years, respectively. And they’ve done better with less complexity.
It’s almost like super-complicated strategies don’t pay off for the regular person… and those strategies were designed to make the strategists money and not the investors. Huh.
Do Any Experts Suggest Doing This?
Actually, yes. I am not the first person to suggest a simple portfolio with 3-7 asset types or funds.
Here are some world-famous investors who have advocated similar strategies:
- Harry Brown made the 4-asset “Permanent Portfolio” popular.
- David Swensen suggested a 6-fund portfolio.
- Warren Buffett suggests some people try a 1-fund portfolio.
That said, most of these portfolios miss some pretty important concepts:
- You shouldn’t gamble on a particular economic scenario like inflation.
- You shouldn’t gamble on just one asset class, because life is chaos.
- You shouldn’t mix gold and cash (which don’t earn or grow).
There have been periods of time where each of the above other simple portfolios have worked. But that’s not good enough. We need a portfolio designed for the future – not just extended periods of time that hopefully look like things are right now.
Should You Copy This Fund?
I have no idea. That’s a personal decision and reflects all sorts of facts to which I’m not privy. You have to figure it out for yourself.
The dirty-little-secret of capitalism is that everybody has to become their own professional capitalist. Nobody else can do it for you.