1-Fund vs 2-Fund vs 3-Fund // Best Portfolio Ranked
Summary
TLDRThis video explores the search for the ideal investment portfolio, comparing three popular options: the One Fund, Two Fund, and Three Fund portfolios. Using historical data from Vanguard funds and Portfolio Visualizer, the video analyzes performance over 13 years, highlighting the trade-off between higher returns and increased volatility. It discusses the importance of risk tolerance, cost considerations, and the need for rebalancing. The conclusion emphasizes that the best portfolio depends on individual circumstances, suggesting a One Fund approach for young investors, a Two Fund for those nearing retirement, and considering international diversification for a global outlook.
Takeaways
- 🔍 The search for the perfect investment portfolio is ongoing, with no definitive 'best' portfolio, as past performance does not guarantee future results.
- 📈 Three popular investment portfolios compared are the One Fund, Two Fund, and Three Fund portfolios, each with different asset allocations.
- 💹 The One Fund portfolio, consisting solely of the Vanguard Total Stock Market Index Fund, showed the highest annualized return over the past 13 years.
- 📊 Volatility is a significant factor; the One Fund portfolio had the highest variance between its best and worst year, indicating a riskier ride.
- 💡 For young and risk-tolerant investors, the One Fund strategy might be ideal due to its potential for higher returns over the long term.
- 👵 As investors near retirement, a transition to a more conservative portfolio, like the Two Fund portfolio with stocks and bonds, may be advisable.
- 🌐 The inclusion of international funds in the Three Fund portfolio did not yield the best performance in the past 13 years, suggesting it's a toss-up.
- 💼 Costs, including expense ratios and time for portfolio management, should be considered when choosing an investment strategy.
- 🔄 Rebalancing is necessary for portfolios with multiple funds to maintain the desired asset allocation, which can be time-consuming.
- 👤 There is no one-size-fits-all portfolio; the ideal choice depends on an individual's risk tolerance, investment horizon, and personal financial situation.
Q & A
What is the main topic of the video script?
-The main topic of the video script is the search for the perfect investment portfolio, specifically comparing three popular investment portfolios: the One Fund portfolio, the Two Fund portfolio, and the Three Fund portfolio.
What is the One Fund portfolio mentioned in the script?
-The One Fund portfolio consists of investing entirely in the Vanguard Total Stock Market Index Fund (VTSAX), which represents equities holding close to 4,000 publicly traded US-based companies.
What are the components of the Two Fund portfolio?
-The Two Fund portfolio is composed of 80% in the Vanguard Total Stock Market Index Fund (VTSAX) and 20% in the Vanguard Total Bond Market Index Fund (VBTLX).
How is the Three Fund portfolio allocated according to the script?
-The Three Fund portfolio allocates 70% in the Vanguard Total Stock Market Index Fund (VTSAX), 20% in the Vanguard Total Bond Market Index Fund (VBTLX), and the remaining 10% in the Vanguard Total International Stock Index Fund (VTIAX).
What tool does the script mention for comparing the performance of these portfolios?
-The script mentions using a free tool called the Portfolio Visualizer to compare the past performance of these portfolios.
What is the significance of the phrase 'past performance is no guarantee of future results' in the context of the script?
-The phrase 'past performance is no guarantee of future results' is used to caution that while historical data is used for comparison, it does not predict or guarantee the same results in the future.
What is the annual rebalancing mentioned in the script and why is it important?
-Annual rebalancing is the process of adjusting the asset allocation of a portfolio back to its original target allocation to maintain its intended risk and return profile. It is important to ensure each portfolio stays within its assigned asset allocation.
What was the best-performing portfolio over the past 13 years according to the script?
-According to the script, the One Fund portfolio had the best overall annualized return over the past 13 years with 11.85 percent.
Why might the One Fund portfolio not be suitable for everyone despite its high returns?
-The One Fund portfolio might not be suitable for everyone because it had the highest volatility, with the biggest highs and lows, which could be nerve-wracking for those with low risk tolerance.
What does the script suggest for investors who are close to retirement?
-The script suggests that investors who are close to retirement might want to consider transitioning to a Two Fund portfolio to reduce volatility and protect their investments as they start withdrawing from their accounts.
What is the role of international funds in the Three Fund portfolio according to the script?
-The script indicates that the role of international funds in the Three Fund portfolio is uncertain, as they have underperformed compared to the other two portfolios over the past 13 years, but they can be considered for diversification.
What are the expense ratios for the funds mentioned in the script?
-The expense ratios mentioned in the script are 0.04 percent for the Vanguard Total Stock Market Index Fund (VTSAX), 0.05 percent for the Vanguard Total Bond Market Index Fund (VBTLX), and 0.11 percent for the Vanguard Total International Stock Index Fund (VTIAX).
Outlines
💼 Investment Portfolio Comparison
The video script discusses the search for the perfect investment portfolio, often referred to as the 'Holy Grail' of investing. The presenter, Tate from Financial Tortoise, aims to compare three popular investment portfolios: the One Fund portfolio, the Two Fund portfolio, and the Three Fund portfolio. The comparison will be based on their performance over the past 10 years using a free tool called Portfolio Visualizer. The presenter uses specific Vanguard funds for the comparison: the Total Stock Market Index Fund (VTSMX), the Total Bond Market Index Fund (VBTLX), and the Total International Stock Index Fund (VTIAX). The analysis will not adjust asset allocation but will include annual rebalancing. The goal is to determine which portfolio is the best in terms of return and volatility.
📈 Performance and Volatility Analysis
The script continues with an analysis of the performance of the three investment portfolios over a 13-year period. The One Fund portfolio, consisting entirely of the Vanguard Total Stock Market Index Fund, showed the highest annualized return of 11.85% but also exhibited the highest volatility, with a 53% variance between its best and worst year. The Two Fund portfolio, with an 80/20 split between stock and bond funds, had a lower annualized return of 10% and a 45% variance. The Three Fund portfolio, with a 70/20/10 split between stock, bond, and international stock funds, had the lowest annualized return of 9.23% but also the lowest volatility with a 43% variance. The presenter emphasizes that while the One Fund portfolio has the highest returns, its higher volatility might not be suitable for everyone, especially those with a low risk tolerance.
🌐 International Funds and Portfolio Recommendations
The final paragraph of the script discusses the performance of international funds and provides recommendations based on the analysis. The Three Fund portfolio, which includes a 10% allocation to the Vanguard Total International Stock Index Fund, had the lowest performance of the three portfolios over the past 13 years. The presenter notes that while international funds have underperformed recently, they have outperformed U.S. funds in the past, such as in the 2000s and 1980s. The script concludes with advice on choosing a portfolio based on age, risk tolerance, and personal preferences. For young, risk-tolerant individuals, the One Fund portfolio is recommended due to its potential for higher returns. For those closer to retirement, a Two Fund portfolio with a mix of stocks and bonds is suggested to reduce volatility. The presenter also acknowledges the importance of considering costs, including expense ratios and the time required for portfolio management, when choosing an investment strategy.
Mindmap
Keywords
💡Investment Portfolio
💡One Fund Portfolio
💡Two Fund Portfolio
💡Three Fund Portfolio
💡Volatility
💡Risk Tolerance
💡Annualized Return
💡Rebalancing
💡Expense Ratio
💡Asset Allocation
💡Diversification
Highlights
The search for the perfect investment portfolio is compared to chasing a rainbow, suggesting it's elusive.
The video compares three popular investment portfolios: the One Fund, Two Fund, and Three Fund portfolios.
Past performance is emphasized as not indicative of future results, setting the context for the analysis.
Portfolio Visualizer is used as a tool to compare the past 10-plus-year performance of the portfolios.
Asset allocation is kept fixed, with only annual rebalancing as an adjustment for the comparison.
Specific Vanguard funds are used for the comparison: VTSAX, VBTLX, and VTIAX.
The One Fund portfolio, with 100% in VTSAX, showed the highest annualized return over the 13-year period.
Volatility matters, especially in relation to risk tolerance, with the One Fund portfolio showing the highest variance.
For young and risk-tolerant investors, the One Fund strategy is recommended due to its potential for higher returns.
The Two Fund portfolio, with a mix of VTSAX and VBTLX, offers less volatility and is suitable for those closer to retirement.
The Three Fund portfolio, including VTIAX, had the lowest performance over the past 13 years.
International funds' performance can vary significantly, with historical periods showing both underperformance and outperformance.
Costs, including expense ratios, are considered minimal for the analyzed Vanguard funds.
The One Fund portfolio has the lowest cost and requires the least time for management and rebalancing.
There is no one-size-fits-all perfect portfolio; the ideal portfolio depends on individual circumstances and preferences.
The video concludes with recommendations based on life stage, risk tolerance, and investment horizon.
Transcripts
the search for the perfect Investment
Portfolio the Holy Grail of the
investment world does it exist is there
such a thing as the best Investment
Portfolio or is it as elusive as chasing
the rainbow so in today's video we're
going to delve exactly into that
question we're going to compare the
three most popular investment portfolios
in the market and see which one really
is the best is it the super simple One
Fund portfolio or the gel Collins two
front folio or is it the tried and true
vocal heads 3 phone portfolio which one
is it going to be let's find out if
you're new to the channel my name is
Tate from Financial tortoise where we
learn to grow our wealth slow and steady
few caveats before we get started one
the one of the most repeated sentences
in the investment world is past
performance is no guarantee of future
results because we do need some data
points to compare these three funds I'm
going to do exactly that using a free
tool called the portfolio visualizer
we'll look at the past 10 plus year
performance of these three months two to
make things simpler I'm going to make no
adjustments to asset allocation these
will stay fixed to make our comparison
easier the only adjustment will be
annual rebalancing to ensure each
portfolio stays within its assigned
asset allocation there third I'll be
using specific real world funds for this
comparison as you can guess my favorites
from Vanguard the Vanguard Total stock
market index fund also known as vtsix
who represent equities holding this fund
holds close to 4 000 publicly traded
us-based companies all large and small
think big boys like apple and Amazon and
even the smallest publicly traded
company so we might have never heard of
Vanguard Total Bond market index fund
also known as vbtlx to represent our
bond holding this fund represents over
10 000 U.S investment grade bonds thank
U.S treasuries and mortgage-backed
securities and Vanguard Total
International stock index fund also
known as vtiax to represent our
International holding this fund holds
close to 8 000 public traded companies
from developed and emerging
International economies excluding U.S
companies fourth given the Inception
date of these funds will only go back 13
years to year 2010 for our analysis
there is a way to go back further using
the tool but it means I wanted to use a
specific Vanguard funds and I really
wanted to to make our comparison be
based off real existing funds okay with
that said let's get started for our one
form portfolio I'm going 100 and
Vanguard stock market index fund also
known as vtsax for our two phone
portfolio I'm going 80 in Vanguard Total
stock market index fund and 20 in
Vanguard Total Bond market index fund
also known as vbtlx for our three fund
portfolio I'm going 70 in Vanguard Total
stock market index fund twenty percent
in Vanguard Total Bond market index fund
and allocating the remaining 10 percent
in Vanguard Total International stock
index fund also known as vtiax all right
so what is the performance result of
these three funds the past 13 years when
we look at purely just an annualized
return for a full period from 2010 until
now the results are as follows the one
phone portfolio in the first place with
11.85 percent the two fund portfolio in
the second place with 10 even and the
three from portfolio in the third place
with 9.23 all right you might be
thinking at this point no brainer right
with close to 12 in annualized return
the one for portfolio 100 of vtsix blows
everyone else out of the water so that
is the best portfolio well sorry to be
the very bad news but like life this
comparison isn't that simple I want to
break down the findings a bit more and
also share with you a few takeaways the
first major takeaway from this
comparison is volatility matters
especially in relation to your risk
tolerance yes when we look at purely
just to annualized return for the full
13-year period no doubt the one form
portfolio outperformed the other two
portfolios however that doesn't tell the
whole story because we are looking at
year by year volatility when we look at
it year by year performance and the
variance between its best and its worst
tier it actually tells a different story
for example the One Fund portfolio at
its best year in 2013 it had an
annualized return of 34 but at its worst
year in 2022 the portfolio dropped by
close to 20 in value we're talking about
53 variance between its best and its
worst year the two-fund portfolio on the
other hand at its best year in 2013 had
an annualized return of 26 percent and
its worst tier in 2022 negative 18 a
variance of 45 percent the three fund
portfolio had the smallest variance at
its best year in 2019 had an annualized
return of 25 and is worst here in 2022
negative 18 a variance of 43 between its
best and its worst year so what does
this all mean while the one phone
portfolio had the best overall
annualized Returns the ride throughout
was quite Rocky it had the biggest highs
however also the biggest lows at its
peak the portfolio Rose as high as 34
but at its lowest it declined by 20 now
the other polio still had their ups and
downs as well but in comparison it was
still less so what's the takeaway here
the one phone portfolio is tempting when
we're just looking at decade-long
average annualized return however we
can't discount the volatility if
volatility makes you nervous a one-fund
portfolio strategy will definitely give
you an ulcer however if you have a
strong stomach and you have time on your
side then it's a different story which
leads to our next takeaway from this
analysis the second major takeaway from
this comparison is that if you're young
and risk tolerant go with the one fund
strategy go strong 100 into stocks
though again past performance is not an
indicator of future performance the data
here is pretty clear when you're 100 in
stocks you're taking the biggest risk
but you also get to read the reward that
comes with that big risk going back to
our three funds if you had invested ten
thousand dollars in each one of these
funds back in 2010 you would have ended
up with the following almost forty
thousand dollars with a One Fund
portfolio four times initial investment
thirty two thousand dollars with the two
fund portfolio and twenty nine thousand
dollars with a three fund portfolio with
a One Fund portfolio you would have
quadrupled your initial investment
whereas with the two fund and the three
fund portfolio you would have only that
it was three times your initial
investment not that but if I could get
more money I'll gladly take it now again
I'm not going to say that the same level
return will occur in the next 10 years
or even 20 years because no one knows
the future however the historical
performance does give me a level of
confidence in having a good chunk of my
money in a total stock market index fund
the third major takeaway from this
comparison is that when it comes to
international funds it really is a
toss-up as you saw earlier the three
fund portfolio has 10 in Vanguard Total
International stock index fund
vtiax unfortunately it had the worst
performance in the past 13 years in
comparison to the other two portfolios
this is because while the Vanguard Total
stock market index funds vtsax and an
annualized returned close to 12 when we
isolate the Vanguard Total International
stock index fund vtiax it only had an
annualized return close to four percent
there are only two years 2012 and 2017
were the international funded slightly
better than the US fund but every other
year it either underperform against a
U.S fund or even had a negative return
When the U.S fund was producing positive
returns so the big question is what to
do when it comes to international funds
giving the track record of the past 13
years she would just forego having
international funds in her portfolio
well again like life the answer is a bit
more complicated when we wind the clock
back we actually see times when an
international market as a whole
outperform the U.S market consistently
year after year and sometimes why
multiples this happened pretty
consistently in the 2000s 2003 2004 2005
2006 2007 and 2009. you wind the clock
back even more and this also occurred in
the 1980s most notably in 1986 the
international market excluding the US
had an annualized return of 63 percent
compared to the same time period the U.S
stocks had an analyzed return of only 15
percent now will this happen again in
the near future or even in our lifetime
I wish I knew and I'm sure many people
as well no one knows what the future
holds so you'll need to make that
decision for yourself based upon your
own world view but be careful not to
jump to conclusions based on what you
see in the immediate news it may seem
like the world is coming to an end based
on what the news shows but the 1980s and
the 2000s were turbulent times as well I
personally hold a little bit of
international funds to make myself feel
better but not so much to make that much
of a difference maybe they'll change in
the future but even I have a hard time
turning off my recency bias the fourth
major takeaway from this comparison is
that we should consider costs when
making the decision on our ideal
portfolio the expense ratios on these
three funds are actually quite minimal
especially when we compare to actively
managed funds Vanguard Total stock
market index fund has an expense ratio
of 0.04 percent Vanguard Total Bond
market index fund has an expense ratio
of 0.05 and Vanguard Total International
stock index fund is most expensive at an
expense ratio of 0.11 this means that
when we have ten thousand dollars invest
in any of these funds the cost will
range from four dollars to 11 annually
for Vanguard to manage our fund for us
though these are pretty minimal When
comparing the purely Financial cost you
can see the one phone portfolio has the
lowest cost given only holds vtsax with
expense ratio of 0.04 percent the two
phone portfolio gets slightly more
expensive because it holds 20 percent of
vbtlx with expense ratio of 0.05 percent
and the three from portfolio is the most
expensive because it has both bbtlx at
0.05 percent and vtiax at 0.11 expense
ratio but to be frank these are minimal
when looking at the bigger picture I
would actually say the bigger cost is a
time it takes to manage these funds the
three funds and the two fund portfolio
requires the level of Maintenance versus
The One Fund you have to ensure that the
asset allocation is aligned every year
this will require something called
rebalancing the act of either selling or
buying specific shares to bring the
asset allocation back online it won't
take you days to do this but will still
take you time so from a cost perspective
if you want to pay the lease and expense
ratio and also don't want to spend any
time rebalancing the One Fund portfolio
might be the way to go all right we
covered a lot so far you might be
thinking hey you said a lot of things
without really telling me much get to
the bottom line what is the best
portfolio which one should I pick well
again sorry to be a mood killer here but
I can't answer that there isn't a
perfect portfolio for everyone there is
no such thing as a perfect portfolio if
someone proclaims that there is one be
very careful around that individual but
there is a portfolio that is ideal for
you let me summarize a few
recommendations based on what we cover
so far one if you're young risk tolerant
and don't want to spend even a second of
your time rebalancing go 100 in stocks
go with a one phone portfolio as you saw
earlier in the data there's a good
chance you'll get the best returns if
you stick with stocks over a long period
of time now you want to make sure you're
investing for the long run meaning 10
plus years and you have the afforded to
stay invested despite what the market is
doing don't react to failing Banks a
pandemic or Wars if you can stay the
course go 100 in stocks and don't have a
heart attack 30 years from now when you
see how much your portfolio has grown an
interesting story Fidelity conducted a
study between 2003 and 2013 where they
looked at client accounts that had the
best Returns the most surprising finding
was this that counts with the best
returns belong to people who had died or
people who had forgotten they had the
account quite interesting huh more
incentive to not touch your portfolio
once you've decided on a strategy moving
on to Second recommendation let's say
you're a bit older you're maybe five to
ten years from retirement when you start
withdrawing from your account in this
case you might want to start adding some
bonds start transitioning to a two-fund
portfolio as you said earlier you won't
have the higher returns like the one
fund portfolio but you will have less
volatility the last thing you want
happening is you're about to withdraw
from your account and your balance dips
by 20 forcing you to sell at a loss more
conservative you are consider more bonds
to reduce volatility third if you're
optimistic about the international
market and are concerned about having
all your money in one country the US ask
them international funds to diversify
your Holdings you can go for either the
traditional 3D phone portfolio or two
phone portfolio for young with U.S
stocks and international stocks
whichever one best suits your life stage
and world view please let me know in the
comments below your preference what
portfolio do you prefer and why again
there is no wrong answer here just an
answer that best aligns with your life
situation thank you guys for watching
and the line of investment portfolios if
you want to know more about some of the
other popular portfolios please check
out my video here until next time all
the best
[Music]
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