1-Fund vs 2-Fund vs 3-Fund // Best Portfolio Ranked

Summary

This 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

00:00

💼 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.

05:02

📈 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.

10:02

🌐 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.

Keywords

💡Investment Portfolio

An investment portfolio refers to a collection of financial assets such as stocks, bonds, commodities, cash, and cash equivalents, as well as real estate that an individual or institution holds. In the video, the speaker explores different types of portfolios to determine which might be considered the 'best' based on historical performance. The discussion revolves around finding a balance between risk and return, making 'investment portfolio' a central concept.

💡One Fund Portfolio

The 'One Fund Portfolio' is a simplified investment strategy where all assets are invested in a single fund, often a total market index fund. The video mentions this as one of the portfolios being compared, highlighting its simplicity and the potential for high returns, as exemplified by investing entirely in the Vanguard Total Stock Market Index Fund (VTSAX).

💡Two Fund Portfolio

A 'Two Fund Portfolio' is an investment strategy that divides assets between two funds, typically a stock market index fund and a bond market index fund. The video compares this portfolio to others, noting its balance between risk and stability, as represented by an 80/20 split between the Vanguard Total Stock Market Index Fund and the Vanguard Total Bond Market Index Fund.

💡Three Fund Portfolio

The 'Three Fund Portfolio' is a diversified investment approach that includes three types of funds: a domestic stock fund, a bond fund, and an international stock fund. The video discusses this portfolio's performance over the past 13 years, noting how it includes a 10% allocation in the Vanguard Total International Stock Index Fund, adding a layer of diversification.

💡Volatility

Volatility in finance refers to the degree of variation in the value of a security or portfolio over time. The video emphasizes the importance of considering volatility, especially in relation to risk tolerance. It is used to compare the performance consistency of the different portfolios, with the One Fund Portfolio showing the highest volatility.

💡Risk Tolerance

Risk tolerance is an individual's willingness to take risks in the pursuit of investment goals. The video script discusses how risk tolerance plays a crucial role in choosing the right investment portfolio, suggesting that younger, more risk-tolerant investors might prefer the higher-risk, higher-reward One Fund Portfolio.

💡Annualized Return

Annualized return is the average return on an investment over a year, expressed as a percentage. The video uses annualized return as a key metric to compare the performance of the different portfolios, with the One Fund Portfolio showing the highest return at 11.85% over the 13-year period analyzed.

💡Rebalancing

Rebalancing is the process of adjusting a portfolio's asset allocation back to its original or target weights. The video mentions that the Two Fund and Three Fund Portfolios require annual rebalancing to maintain their asset allocation, which can be seen as an additional maintenance cost in terms of time and effort.

💡Expense Ratio

The expense ratio is the annual fee that all investment funds charge their shareholders. It is expressed as a percentage of assets. The video discusses the expense ratios of the various Vanguard funds included in the portfolios, noting that while they are minimal, they do contribute to the overall cost of managing the portfolios.

💡Asset Allocation

Asset allocation is the process of dividing investment资金 into different asset classes such as stocks, bonds, and cash. The video script explains how maintaining a fixed asset allocation is crucial for the portfolios being compared, and how rebalancing ensures that each portfolio stays within its assigned allocation.

💡Diversification

Diversification is a risk management strategy that mixes a variety of investments within a portfolio. The video touches on the concept of diversification, particularly in the context of the Three Fund Portfolio, which includes international stocks to spread risk across different geographical regions.

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]