Bogleheads Three Fund Portfolio is Garbage

Bogleheads Three Fund Portfolio is Garbage

For investors just beginning their journey down the path of prosperity, you will encounter plenty of investment theories, like Bogleheads Three Fund Portfolio. Only a few of these theories may present themselves as actionable. However, you need to be able to do your own portfolio analysis as to whether or not this advice is hot garbage, or honestly useful.

Jack Bogle, the founder of Vanguard, attempted to create a portfolio of funds for investors with zero experience, which would typically be considered an admirable exercise. However, it consists of a Vanguard-laden, inefficient allocation of underperforming mutual funds, which serves to make Vanguard itself a fee-generating cash cow.

The funds included in Bogleheads Three Fund Portfolio, and the weighting’s are as follows:

  • 50% Vanguard total stock market index (VTSMX)
  • 30% Vanguard total international stock index (VGTSX)
  • 20% Vanguard total bond market index (VBMFX)

Over the past 10 years, the Three Fund portfolio has underperformed the S&P by a nearly 50% margin. If you were to have invested $100,000 in the 3 Fund portfolio, you would have seen a paltry return of $292,000 vs the S&P’s return of $433,000. A Sharpe ratio in the 3 Fund of .87 vs the S&P’s 1.03.

It’s not hard to see how overcomplicating your portfolio can have a major effect on your ability to earn long term returns. The goal here is a journey to prosperity, not a journey to mediocrity. Be very careful when taking advice from heads of Mutual Funds. There is usually an ulterior motive at play. Keep a sharp eye about you.

Consider allocating 5% of your portfolio per individual position. This will leave you with a portfolio containing just 20 stocks. If you are being more aggressive, 10% allocation to each position. All positions should have a trailing stop of 10%. What this means is that if there is a turnaround, and your positions are losing value at a rapid pace, a sell order will go out and stop you from losing more than ten percent. In effect, this can be hugely beneficial if you are passively investing and not able to continually monitor your positions.

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