The Really Simple ETF Fund Strategy
As a beginning investor your best portfolio isn’t some complicated trading strategy, a mix of high-cost actively managed mutual funds or even buying individual stocks. Its actually buying the entire market using low-cost exchange traded funds from just a few fund families, most often Vanguard, Fidelity, TRowe Price or even Schwab.
This is an investing approach inspired by Vanguard's founder John Bogle; a huge advocate for simplified, low-cost investing.
This really simple ETF fund strategy is an investing strategy where you create a portfolio that contains only three low-cost index Exchange Traded Funds (ETFs).
This strategy gets you invested in nearly the entire stock market and includes:
Broad U.S. stock market
Broad U. S. Bond market
This strategy is easy and only takes a little time and energy.
The most you will need to do is to occasionally monitor the
performance of your assets.
This Strategy works Well for Beginners
and Hands-off Investors
This is perfect strategy if you are new to investing and want a low-risk,
reasonable return approach that works well for long-term investors. I
t will also outperform short-term investing strategies and actively traded
mutual funds. Consider this strategy to build your core portfolio before
jumping into individual stocks.
A Well-Diversified Portfolio
This really simple strategy allows you to diversify your portfolio without a l
ot of study or effort on your part. You don't have to pick from thousands of
stocks, missing out on great opportunity by sticking with just a few stocks.
Low costs and Low Risk
When looking at cost, this really simple strategy trumps other strategies because it seeks out the lowest expense ratios. And with low turnover, trading costs are low. Plus from a tax perspective, the strategy is very efficient.
Costs matter because what seems like just a small percentage fee can make a huge dent in your returns. All other things being equal, select the least expensive funds you can choose from.
This is also a low-risk approach for a few important reasons:
No risk of advisor bias, some financial advisors may be biased in a particular direction towards a particular stock
Index funds are passively managed
You are broadly invested.
Simplified Asset Allocation
When it comes to asset allocation, how you allocate your assets will largely be driven by three factors including your:
Tolerance for risk
Plus rebalancing is very simple. You set a predetermined asset allocation, perhaps 33% stocks, bonds, and international stocks and if any of the asset classes fall out of alignment, then you simply rebalance your portfolio, as needed, most often just once or twice a year.
What is included in this strategy
According to Warren Buffet and several other successful investors, everyone should invest in an S&P 500 fund. Just consider it a core holding and a good place to start.
You can invest in the S&P 500 with the Vanguard S&P 500 ETF (VOO) and it comes with a super low expense ratio of .03%. By investing in the S&P 500, you’ll get the market return that most investors try (and typically fail) to beat.
But we are going one step further by investing in the total stock market, including a more diversified mix of stocks across large, medium and small-cap to capture the pros of each type of stock. Use the Vanguard Total Stock Market ETF (VTI) also with a super low expense ratio of just 0.03%, because it gives you ownership in more than 3,500 stocks across the entire market. This provides a more diversified portfolio than the S&P 500 portfolio.
Bonds are historically more stable than stocks and tend to operate opposite to the way stocks do and can, therefore, bonds stabilize a portfolio during swings in the stock market. For our really simple strategy use the Vanguard Total Bond Market ETF (BND) with an expense ratio of just 0.04%. By investing in over 8,500 corporate and U.S. government bonds, this index fund gives you a broad, diversified portfolio of U.S. bonds.
The U.S. economy is only a fraction of the global economy; you can increase diversification by adding an international stock market index fund.
The Vanguard Total International Stock ETF (VXUS) gives you broad exposure to both developed international stock markets and emerging markets.
The most common way to set up a three-fund portfolio is with an:
Aggressive approach: An 80/20 portfolio: 65% U.S. stocks, 15% International stocks and 20% bonds
Moderate Approach An equal portfolio: 34% U.S. stocks, 33% International stocks and 33% bonds
Conservative A 20/80 portfolio: 14% U.S. stocks, 6% International stocks and 80% bonds.
Stocks vs. bonds: If you’re younger, choose a portfolio that is more heavily weighted
in stocks. This allows you to grow your portfolio more aggressively. Bonds provide some
risk protection but their returns are much more conservative.
Allocation percentages: A really simple way to allocate between stocks and
bonds is to use your age with the “100 minus your age” formula. Simply use your age
to equal to the percentage share of bonds in your portfolio and the rest is allocated
towards stocks. Some investors prefer a 110 minus you age approach. The important t
hing is to do what is comfortable for you.
For example, if you are 30 years old, you could allocate 70% to a total stock market fund
and/or an international market fund (e.g. 60/10 split) and 30% to bonds and/or
international bonds (20/10 split).