The Surprising Alternative to a 3 Fund Portfolio
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- čas přidán 12. 08. 2023
- In this video, we're going to take a look at a 3 Fund Portfolio and Target Date Fund to determine where each of them comes out ahead and where they fall short.
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A 3 fund portfolio is a popular investment strategy that aims to offer broad diversification with just three index funds or exchange-traded funds (ETFs). This approach is admired for its simplicity and effectiveness.
Diversification- With these three funds, you're spreading your investment across thousands of different stocks and bonds. This diversification helps to reduce the risk of a poor-performing company or sector significantly affecting your overall returns.
Asset Allocation- The proportion of your investment in each of the three funds determines your portfolio's overall risk and expected return.
Rebalancing- Over time, as the value of your investments rises and falls, your portfolio's allocation can drift from your desired mix. To maintain your intended allocation, you periodically sell assets that make up a too-large percentage of your portfolio and buy those that make up too small a percentage.
Simplicity- One of the main appeals of the 3-fund portfolio is its simplicity. By holding just three funds, it's easy to monitor, rebalance, and manage. Plus, it avoids the pitfall of overcomplicating things, which can lead to analysis paralysis for many investors.
Low Costs- The funds recommended for a 3-fund portfolio are often passively managed index funds or ETFs, which tend to have lower expense ratios than actively managed funds. Over time, these savings can compound, leading to better net returns.
Global Exposure- With just the U.S. and International stock funds, you're exposed to virtually the entire global stock market. This means that if a particular region or country is performing well, you'll have a stake in it.
A target date fund starts with a mix of investments that leans towards higher returns but with a higher risk, like stocks. As you get closer to the "target date" (typically the year you intend to retire), the fund slowly adjusts, moving to safer assets like bonds, to protect what you've earned. The goal is to maximize growth when you have time on your side and to protect your gains as you approach retirement.
Asset Allocation Over Time- The main characteristic of a target date fund is its shifting allocation between equity and fixed income. Early on, when the target date is many years away, the fund tends to be weighted more heavily towards riskier assets like stocks because they have the potential for higher returns. As the target date approaches, the fund automatically rebalances and shifts its weighting towards more conservative assets like bonds and cash equivalents, aiming to preserve the wealth that's been built up.
Ease of Use- One of the primary benefits of target date funds is their simplicity for investors. By choosing a fund with a target date that matches their expected retirement year, investors get a diversified portfolio that automatically adjusts its risk profile over time. This can be especially appealing to individuals who prefer a hands-off investment approach.
Fund Fees- Like all mutual funds, target date funds charge fees. These fees can vary widely depending on the provider and the specific funds chosen within the target date fund. It's essential to be aware of these fees as they can impact the overall return on investment.
Differences Among Providers- While the general concept of the target date fund remains consistent, the actual asset allocation, glide path, and underlying investments can differ significantly among providers.
Post-Target Date- Some target date funds don't just stop adjusting once the target date is reached. Instead, they continue to become more conservative for several years after the target date, reflecting the ongoing needs of retirees.
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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.
Keeping asset classes separate in the drawdown phase is preferable to keeping everything in a single TDF. For example, if the market is down, I can draw from a separate fixed-income fund to avoid selling equities at a loss. A TDF just doesn't give you that kind of flexibility.
So true. So do you plan to just wait it out when it’s time to withdraw more?
My 3 fun portfolio is VOO, VUG, and SCHD. Have 28k in it so far and adding 6500 more every year for my IRA. I'm 27 btw.
I recently took a similar approach to my 3 fund portfolio.
Voo and vug are mainly the same at least the top allocations, think about this one carefully
Voo and vug are mainly the same at least the top allocations, think about this one carefully
Hell yeah man rock on! I'm 27 as well and have similar goals, but sadly I have nothing in my IRA yet.
I blame it on my 3 kid portfolio 😂 but really that's no excuse I need to be smart and invest more for the future.
Nice! I’m 33 and have vti and schd as my core portfolio
I was on a target date fund through my 401k but decided to switch it up to a mix of Large Cap, Small Cap, and International. Will move to bonds later closer to retirement. All 3 were lower expense ratios as well.... .10,.125, and.1425 compared to the .15 of the Target Date Fund. I will note that those differences barely make any difference though. I didnt like the 40% exposure to international that the target date fund had so trimmed that down to 20%
Great video. I appreciate the work done on it! New subscriber.
Three fund portfolio with annual rebalancing (SP500, Small Cap & International... screw bonds). I was introduced to this approach back in 2001 when it was referred to as "The Armchair Millionaire" portfolio. It has served me well.
This is what im going with to!
Yep i'm not interested in Bonds. I will take the rough with the smooth. My investment is not part of my retirement fund its purely a Dollar cost average experiment!
Pie on trading 212
SP500 40% (My access to American Market)
International 40% (My international Access and US)
Russel2000 10% (my small cap growth)
International Dividend 10% (i wanted an easy option to rebalance at some stage and draw a steady income it also allows me to add any dividend with any left over cash to rebalance easier) HOPEFULLY
I've been a huge proponent of the three fund for a couple of decades. I saw the beauty of the TDF when I helped my son set up his first 401k account. He's not into finance and not really interested to learn. So we just just put him in a TDF and let it rip. TDFs aren't optimal...but they're a lot better than doing nothing or taking some ham fisted approach at managing it over the years. I'd love for him to get interested...but I'm more interested in knowing he can just cram 15% of the salary in there, collect his 8.5% match and retire well in 35 years.
Great Video Jarrad, but what fund( 3 or target date ? ) would you suggest for someone already in retirement. ?
Three fund for me: S&P500, US debt/bonds and a mid/small cap fund.
A dual fund would be: US total market + US debt/bonds fund.
Holy moly what a great video. Your channel is going to blow up.
Glad it was helpful
Yeah TDF fee’s in the 401k have access to is 0.055% so hmmm ... Once I left TDF just so burned I doubt I will use them in my future... Nice Vid 😊!!
I am definitely on team 3 fund. My core portfolio has a twist though. VPU for income and stability and a little growrh instead of bonds, VIOO and IVOO for growth and broad diversification because I do not like the weighting of the S&P 500 and both S&P 400 and S&P 600 have a profitability factor involved in building the indexes.
3 fund lets you control the glide path. I think the M1/fidfolio may be the endgame or where they let you autoset the glide path yourself instead of modifying it a little bit every year.
Another great video, thanks Jarred
Glad you enjoyed it. Appreciate the feedback 👍🏻
Mr. Morrow, thanks for your videos. I enjoy your style, speed and value highly your no BS / "here's how it really works" usable information. Keep it up
I appreciate that!
On a tangentially related topic. What are your thoughts on dividend
funds as one approaches or is already in retirement? For example, if
they held something like a 2 or 3 funds portfolio but wanted something
that offered an income stream and (maybe) lower risk. Is converting
the 2 or 3-fund portfolio advisable from your perspective? (Maybe this
is a topic for a future video?)
The 3 fund portfolio is probably better in the accumulation phase of building wealth. The draw down phase is easier with a single TD or other type of balanced fund.
I have both: my 401k in in TRDF and I have a Roth IRA that’s setup with a three fund portfolio
For myself I just find it better with a 3 fund. While my parents they like using the target date fund having no worries how they're diversifing the portfolio.
My 401k is set up with a target date fund which they decided when I'm gonna retire and does not let you change the date. Obviously I'm not letting them dictate when I retire, i invest much more elsewhere but not losing the match haha
3 fund portolio, though mine has a few more in my 401k because of funds available. but if i did a target date, i'd choose one that is a bit further out than my time horizon, so it would stay more aggressive for longer.
This is a good idea I've never thought about it, in that way. Thanks
Part of me wishes I had gone with a 3 fund portfolio when I started investing, but I had never heard of it at that time. It’s been an emotional roller coaster playing stocks with my account while my wife’s account is mostly mutual funds. I’ve lost on some and won on some, but now that I’m transitioning to different mutual funds I feel a lot more calm. I’m not doing just 3, but I think 3 is a great idea if you want broad exposure without spending much time thinking about it.
Part of me wishes I had gone with a 3 fund portfolio when I started investing, but I had never heard of it at that time. It’s been an emotional roller coaster playing stocks with my account while my wife’s account is mostly mutual funds. I’ve lost on some and won on some, but now that I’m transitioning to different mutual funds I feel a lot more calm.
Despite the time involved it seems the target date fund is more conservative for my liking. If you are 40 years out you should not have any bonds and the target fund does. Also the expense ratio in the target fund is higher which will cost you money in the said 40 years. Also just rebalance a couple of times a year in your index funds.
Target date funds now can be 0.045%. Fees super low but agree with you
How long do they expect "late retirement" will last? Because for 2 of my great grandparents their "late retirements" were over 20 years. For two of my great-great uncles, their "late retirements" lasted for over 30 years.
I could never wrong but I feel like dynamic rebalancing would cause loss of gains over time because you are distributing more money in an underperforming fund and under investing in an over performing fund for the sake of balance. I feel like that would be a negative caused by over managing. What do yall think on this logic?
VTI and international etf that’s all you need 😊
You say don't buy index funds on another platform, but I have everything in Schwab so I don't want to have a separate Vanguard account. In another video, you say I can buy the Vanguard ETFs for the same funds. Why not do this?? Is there still more of a fee??
Are you on team 3 Fund Portfolio or Target Date Fund?
Booglehead till the end
No Target date funds for me
Target date in my 403b. A 80/20 balanced fund in my HSA. My Roth is 100% stocks in multiple funds.
I know the consensus says target date funds are a good way to go but I don’t like them and I’m an expert lol..no really, I just don’t like them for my next 10 years..prob more towards retirement for less risk
A three fund I like better. Saves money when you take out cuz then you can choose which fund made money and take out of there,. If it's a poor year and bonds are doing better, take from there. Whereas a target fund will take $ from all.
Molly is so cute! ❤
Is it wrong to use cost basis to determine allocation instead? It seems too complicated and time consuming to constantly recalculate how much should go where. I prefer to say, this stock gets 700 and that stock gets 300 every month, even if one stock is now worth significantly more. Done. Maybe I've been doing it wrong.
I'm not sold on a small fund portfolio. I've got 25 stocks and funds
Cutomization!
What is your favorite 3 fund portfolio / Etf? Ty
Here are my top 5 ETFs. The 3 I like within a 3 fund portfolio are on the list czcams.com/video/Gs0KBX1jC7w/video.html
Vanguard, don’t they sell a bunch of target date funds.
TDF was taking too much in management. A Vangard TDF through Fidelity, had a .075 expense ratio, and a quarterly Fidelity management fee on top of that! I didnt even realize it for several years! Ask Questions. Be careful!!!
The mandate is coming soon that all employers automatically place their employees into a 401K plan. I’m assuming auto-enrolling them in target date funds, I like this move but who’s in charge? If employees where better educated than I think it be better for them to have a say so into their finances, rather than just leaving it up to someone else. 🤷
targert date only ever grew about 5% a year I went to a big cap and the last 3-4 years my 401K has been over 20%. kicking my self in the butt o lost like 5 years.
No target for me
When you say taxable and non taxable account, do you mean a traditional 401k and roth?
When I say "taxable" I'm referring to a non-retirement account. Sorry for the confusion.
@jarradmorrow Thank you for this! I am 54 with both a 401k and Traditional IRA in TDFs. I did this in my 40s when I was uneducated on investing. I’m not happy with my traditional target in fidelity freedom 2035 and want to move that one to 3 funds. I’m scared about selling and rebuying. Though selling high is great I’m also buying high. Is this something I need to worry about or does it come out net net? If you were looking for content, I would love to see a video how to do this. I have been searching and searching and can’t find anything. Appreciate you and Molly!
What about your target date fund are you not happy with?
Exp ration .70. Turnover 23% Biggest issue US 40% Int’l 35% Bond 27% Short term debt 4%
I’m not this conservative. Last 5yr growth is only 6.67 which is so frustrating considering where the S&P has been last five year. (12.31%). My fault. I should have learned earlier!!
@@L2Living365 Fidelity has an Index version of what you have (Exp 0.12) but that won't change earnings that much. If you want to be closer to the S&P you'll probably have to reduce bonds. TDF's are a bit high international stocks.
No taxes when sell and buy if not removing money from ira, correct?
@@L2Living365agree all the targets I looked into are 53% domestic then 35%. Why are foreign so high? Rather have target fund with 70/20/10
Quick question, I am opening a Roth IRA for the first time . Is it better to to a 2 fund or 3 fund portfolio? I am 25 .
If I was 25 I would just buy voo from vanguard. You have a lot of years left
Fidelity HSA
That’s my top pick right now
S&P 500 only outperforms 3 fund portfolio and Target date funds over any time period. The idea of investing in bonds during the accumulation period severly diminishes performance. I have compared S&P 500 to hundreds of portfolios; S&P 500 wins every time.
The issue isn’t the bonds with the TD its allocation of domestic stock and foreign stock. You can pick a TD date of 2070 say when your 40 which means retire at 90 so more “aggressive” but foreign stocks and domestic don’t change from 2050 to 2070.
I have SCHD in my vanguard Roth IRA. Do you know if I'll get charged any additional fees?
❤❤
I just have VT. Set it and forget.
That's a solid strategy. Keep it up 👍
Target date fund like 2050 has a 30% intl stocks! Too high volatile . No 🙏 thanks
M1 refused to accept me as a client with zero debt. Their loss. 😄
Really? What was the reason they denied you?
No! target date funds dont grow your kiney or give divs...
I'm not sure what "kiney" is, but they do pay out dividends
Fidelity doesn't
I don’t screw around with low roi bonds, or target date funds or foreign crap stocks. S&P 500 all day.
Second!!
🥈🥈🥈
First!
🥇🥇🥇
My 3 fund portfolio has slightly earned more and lost less compared to target date funds. ITS A great option for people who don't understand how to do a 3 fund or coffee house portfolio. the target date portfolios through my fidelity are all way high on bond... so hard pass