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Start with the world—and then subtract.
As I’ve mentioned in numerous articles, my favorite investment is Vanguard Total World Stock Index Fund (symbols: VT and VTWAX). It lets folks invest in every company of any significance from around the globe, with each stock’s weight determined by the company’s stock market value.
But while I think the fund is a great choice and, indeed, it’s been my core portfolio holding, I’m not saying folks should necessarily buy the fund. Rather, I think they should use Vanguard Total World Stock as their starting point, and then ask themselves two questions.
First, what should I subtract?
Remember, Vanguard Total World’s holdings reflect the collective wisdom of all stock-market investors from around the world. If we decide we want, say, less in emerging markets or more in growth stocks, we should have a good reason—because we’re effectively declaring that our judgment is superior to the collective wisdom of all investors.
Second, how much in bonds and cash should I add?
This is about how much risk we want to take, or need to take, or feel we can tolerate. While the collective judgment of all investors, as reflected in Vanguard Total World, is a great starting point when allocating a stock portfolio, we shouldn’t rely on others when settling on our bond and cash allocation. Instead, that’s very much a personal decision.
Thank you JC as you continue to read, write and listen to everything from above.
I recently read two fascinating books: Knowing Enough by John Bogle and William Bernstein, Bogleheads’ Guide to the Three-Fund Portfolio by Taylor Larimore. In both the books, there are many references to Jonathan Clements’ timeless quotes, wisdom and tips.
Jonathan sure had a way of saying a lot without having to fill up pages of text while doing it. This post is like a course in personal investing condensed into a 30 second read.
I’m pleased that Jonathan planned to share parting words of wisdom after passing. I realize most of personal financial management comes down to psychology. We can quickly learn the basics but implementing and sticking with a well designed plan is another matter. Sort of like knowing the importance of healthy eating and exercise, but failing to follow the plan.
I think one ingredient to staying with a plan is simplicity. As Jonathan said, the amount to hold in bonds and cash is a personal decision. VT provides a simple yet excellent way to invest in stocks for those who prefer passive index investing.
“You know you can now go to Vanguard and buy the Total World Index fund, add the Total Bond Market fund onto that and you could have an incredibly diversified portfolio with an asset allocation of your choice with just two mutual funds.”
Those words were Jonathan’s on the Bogleheads on Investing with Jonathan Clements – Episode 3 hosted by Rick Ferri posted November 30, 2018. The first episode guest on Bogleheads On Investing was an interview with John Bogle.
Pretty much everything I needed to know about portfolio simplicity and diversification in a single paragraph.
VT is the only fund in our Roth accounts (40%). That portion of our portfolio is set it and forget it. The other 60% is my traditional account which is mix of US and international Vanguard index ETFs, bond ETFs, and cash. The reason my traditional account is broken up into multiple funds is for rebalancing the entire portfolio, taking cash for current spending needs until we claim Social Security, and then when I turn 73 taking my RMDs.