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IN THE DYNAMIC AND often volatile world of investing, simplicity can be a powerful ally. While the allure of complex strategies and exotic investments may seem appealing, many investors find themselves overwhelmed and underperforming as a result. Enter the three-fund portfolio—a straightforward, diversified approach that offers numerous benefits to investors of all levels. In this article, we delve into why investors should embrace this minimalist strategy and explore specific index funds that can help build a robust portfolio.
Understanding the Three-Fund Portfolio. At its core, the three-fund portfolio is built upon the principles of diversification, low cost, and simplicity. The strategy involves investing in just three broad asset classes: U.S. stocks, international stocks, and bonds. By allocating funds across these three pillars, investors can achieve a well-rounded portfolio that balances risk and return.
The Benefits of Simplicity. One of the primary advantages of the three-fund portfolio is its simplicity. With just three index funds, investors can construct a diversified portfolio that requires minimal maintenance. This simplicity is particularly beneficial for novice investors who may feel overwhelmed by the complexities of the financial markets.
Moreover, the three-fund portfolio offers cost-effective exposure to a wide range of asset classes. Index funds, which aim to replicate the performance of a specific market index, typically have lower expense ratios compared to actively managed funds. This cost efficiency can significantly impact long-term returns, allowing investors to keep more of their hard-earned money.
Harnessing the Power of Diversification. Diversification is a cornerstone of prudent investing, and the three-fund portfolio excels in this regard. By investing in U.S. stocks, international stocks, and bonds, investors spread their risk across different asset classes and geographical regions. This diversification helps mitigate the impact of market fluctuations and reduces the overall volatility of the portfolio. Specific index funds for the three-fund portfolio:
1. Total Stock Market Index Fund (U.S. Stocks). Vanguard Total Stock Market Index Fund (VTSAX) is a popular choice for gaining exposure to the entire U.S. equity market. This fund tracks the performance of the CRSP US Total Market Index, which includes large, mid, small, and micro-cap stocks. With a low expense ratio and broad diversification, VTSAX is an excellent core holding for the U.S. stock portion of the portfolio.
2. Total International Stock Index Fund (International Stocks). For exposure to international equities, investors can consider funds like the Vanguard Total International Stock Index Fund (VTIAX). VTIAX seeks to mirror the performance of the FTSE Global All Cap ex US Index, providing access to stocks from developed and emerging markets outside the United States. With holdings spanning various countries and industries, VTIAX offers diversification beyond domestic borders.
3. Total Bond Market Index Fund (Bonds). Bonds play a crucial role in balancing the risk of a portfolio, and the Vanguard Total Bond Market Index Fund (VBTLX) is a top choice for fixed-income exposure. VBTLX tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which includes a diverse mix of investment-grade bonds, such as Treasury, corporate, and mortgage-backed securities. By holding a broad range of bonds, VBTLX helps stabilize the portfolio during periods of market volatility.
Conclusion. In an era marked by complexity and uncertainty, the three-fund portfolio stands out as a beacon of simplicity and effectiveness. By investing in just three index funds—representing U.S. stocks, international stocks, and bonds—investors can build a well-diversified portfolio that is easy to manage and low in cost.
While the specific index funds mentioned above are popular choices, investors should conduct their own research and consult with financial advisors to determine the most suitable options for their individual needs and risk tolerance. Whether you’re a seasoned investor or just starting your journey, embracing the three-fund portfolio strategy can pave the way for long-term financial success.
The above was created by ChatGPT based on this request: “Write an 800-word article on why investors should own the three-fund portfolio, naming specific index funds.” To read more about this experiment, check out Man vs. Machine.
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An excellent idea with using the AI. Thanks for demonstrating the outcomes.
A basic meat-and-potatoes article. Decent, unexciting, and sort of elementary. Whether or not it is right is not really the issue – it states what is perhaps the most commonly-held belief about investing: that one’s portfolio should have a mix of these three types of investments and each should be an index fund. (I seem to recall that it doesn’t reflect your own portfolio, Jonathan. I think you recently stated your commitment to a total international index fund. And it doesn’t reflect mine, because I’m still betting that bonds will continue to lag equities everywhere, and so I greatly underweight them in my own portfolio.)
I do wish generally that more human authors would dive into more detail about why diversification is so important and how it really works.
Thank you for identifying the AI written posts.
That way I don’t have to bother reading them.
the simple path to wealth
I had a vintage ChatGPT that was simple to use and provided short answers to my questions. It was called the 8 Ball.
Again, not bad.
Interesting that Chat GPT provided Vanguard Funds as an example and included an International Fund recommendation. I asked Chat-GPT to write a similar article but to identity 3 Fidelity funds. It named a similar bond fund and total index fund but instead of an International Fund it named a REIT fund.
A REIT fund? That’s a little bizarre.
I agree that this reads like a pamphlet, not a Humble Dollar article.
I don’t know why these AIs keep starting their paragraphs with bolded headings. It’s becoming a dead giveaway.
You should experiment with prompting the AGI: give it a persona, describe the intended audience and their interests/expertise, list an outline and ask it to fill in details, and see what it can do.
…, or not!
I could have done that — and I imagine that’s what those who want to palm off AI articles as human-written are doing — but I was curious to see what these tools would come up with on their own, and especially how far they’d venture into fiction.
Captain Kirk is a good example on how to use AI. The computer gave him information. The computer did not create nor did it make decisions.
This AI robo-test piece is flat / two-dimensional (e.g. devoid of humanistic qualities) and is notably lacking of the humbleness which normally makes HD articles a daily must-read for site devotees.
I am worn out and done with this AI experiment, though I do appreciate the exercise by Jonathan to help add some evidential context on the “all things AI” mania currently gripping the masses (and most media outlets).
Counting the days until real writers return…
We will return to regularly scheduled programming on Wednesday.
❤️
The article stayed true to its prompt (Write an 800-word article on why investors should own the three-fund portfolio, naming specific index funds”) but I wonder if a human writer would have realized that human readers who are reading such a basic article would probably like a next-step piece of info: what percentage of allocation is recommended for each of the three funds, maybe giving examples for various age ranges? But perhaps those kinds of useful examples are “covered” by the article’s broad disclaimer at the end: “investors should conduct their own research and consult with financial advisors.”
I miss the human touch of personal stories and specific experience.
Although the advice was good, the article read like an informational pamphlet—a little flat but altogether not bad.