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).