As an investor, you have to make a choice:
- be a gambler;
- own the casino.
If you think that the second option is the more reasonable, keep reading.
If you want to build wealth, you have to simply get your money at work and invest it in an Index Fund.
I’ll show how to build a 3 Fund Portfolio with a bunch of index funds.
Why Index Fund?
Taylor Larimore in his book “The Bogleheads’ Guide to the Three-Fund Portfolio.” explains:
“In 1986, we moved our family securities from Merrill Lynch to Vanguard. It was a very difficult decision because our broker was a long-time friend who sometimes invited us to go sailing on his beautiful sailboard (which I now realize we helped pay for). After we left Merrill Lynch, our broker never invited us to go sailing again. Looking back, leaving Merrill Lynch and moving to Vanguard was the best financial decision we ever made.”
A portfolio with a total of three total market index funds has far more chance to outperform the majority of other actively managed funds.
Wall Street brokers earn their wages mainly from investment expenses ( commission, fees, etc) they charge on you every time you hit the “buy” or “sell” button in your investment account.
“ Most investment companies are in business to make money from you, not for you. Every dollar you save in commissions and fee expenses goes right to your bottom line.” – Rick Ferri
Investment companies will try to convince you to invest your hard-earned money in an active fund, claiming that, by this way, you’ll have a chance to outperform the market.
Is this possible? …No.
Why? Because, almost all of active fund managers regularly underperform the market, however, they will still earn their wages from fees you pay.
Many studies demonstrate fund managers may outperform the market for a limited time frame, but almost nobody can repeatedly do it in the long run, and usually who outperform in the past, tend to underperform in the future.
A clear example:
Bill Miller was the manager of Legg Mason Value Trust (LMVTX) a fund that beat the S&P 500 Index for 15 years.
He became a real celebrity and investors were eager to put all their money into his fund.
Unfortunately, like almost any mutual fund, over the next 15 years also LMVTX plunged down, underperforming the S&P500.
The financial services industry really hates index funds, because it is extremely difficult to make real money offering a low-cost, low-fee index fund, so they will constantly attempt to convince you that you are a smart guy and, if you want, you can beat the market by choosing individual stocks.
…Well, You simply cannot.
Only a few managers succeeded in outperforming the market for a short period of time, but their result must be compared with the high fees you have to pay for their services.
These fees, in the long run, highly impact on your investment returns.
Index funds are actually the only and best way to minimize investment fees, adding the maximum diversification to your portfolio.
Diversify and keep it simple.
Prof. Scott Galloway, in his “Algebra of Wealth”, says:
“Investing over the long-term pays out, but there are always dips along the way. Diversification is the kevlar that protects you — with it, bad decisions will still hurt, but they won’t prove fatal. Diversification, in other words, is your bulletproof vest.”
Thanks to index funds, investors can easily diversify their investments and buy worldwide securities at an incredibly low cost.
The world’s first retail index fund was created in 1976 by the legendary Jack Bogle, founder of the Vanguard Group, and based on the S&P500 index fund.
By buying a share of this fund, you will obtain a piece of all 500 components of the Index, a good diversification at a very low cost.
Shortly after, many other funds were created by Vanguard.
Here are the most important.
Index Fund to invest in. How to create a 3 Fund Portfolio.
VTSAX / VTI – Vanguard Total Stock Market Index Fund
By buying it, you’ll almost own a share of the entire US Stock Market (actually more than 3,500 U.S. company stocks) at a very low cost.
You can choose the Admiral shares (min. $10k) or the ETF version with a T.E.R. (Total Expense Ratio) of 0.04%.
This means that an investment of $10k will cost a total of $4/year.
VBTLX / BND – Vanguard Total Bond Market Index Fund
Created in 1986.
If you choose this, you’ll own more than 8,000 high-quality U.S. bonds.
The T.E.R. is 0.05%
VTIAX / VXUS – Vanguard Total International Stock Index Fund
Created in 1996.
It holds more than 6,000 international companies stocks, including emerging markets.
Total expense ratio of 0.12%
By choosing these 3 funds (or their equivalent from your broker) you’ll have an optimal exposure of your investment to different asset classes, different industries, and different markets.
Keep Investing, Keep it Simple, Keep it Diversified.