The Surprising Alternative to a 3 Fund Portfolio

In this video, we're going to take a look at a 3 Fund Portfolio and Target Date Fund to determine where each of them comes out ahead and where they fall short.

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A 3 fund portfolio is a popular investment strategy that aims to offer broad diversification with just three index funds or exchange-traded funds (ETFs). This approach is admired for its simplicity and effectiveness.

Diversification- With these three funds, you're spreading your investment across thousands of different stocks and bonds. This diversification helps to reduce the risk of a poor-performing company or sector significantly affecting your overall returns.

Asset Allocation- The proportion of your investment in each of the three funds determines your portfolio's overall risk and expected return.

Rebalancing- Over time, as the value of your investments rises and falls, your portfolio's allocation can drift from your desired mix. To maintain your intended allocation, you periodically sell assets that make up a too-large percentage of your portfolio and buy those that make up too small a percentage.

Simplicity- One of the main appeals of the 3-fund portfolio is its simplicity. By holding just three funds, it's easy to monitor, rebalance, and manage. Plus, it avoids the pitfall of overcomplicating things, which can lead to analysis paralysis for many investors.

Low Costs- The funds recommended for a 3-fund portfolio are often passively managed index funds or ETFs, which tend to have lower expense ratios than actively managed funds. Over time, these savings can compound, leading to better net returns.

Global Exposure- With just the U.S. and International stock funds, you're exposed to virtually the entire global stock market. This means that if a particular region or country is performing well, you'll have a stake in it.

A target date fund starts with a mix of investments that leans towards higher returns but with a higher risk, like stocks. As you get closer to the "target date" (typically the year you intend to retire), the fund slowly adjusts, moving to safer assets like bonds, to protect what you've earned. The goal is to maximize growth when you have time on your side and to protect your gains as you approach retirement.

Asset Allocation Over Time- The main characteristic of a target date fund is its shifting allocation between equity and fixed income. Early on, when the target date is many years away, the fund tends to be weighted more heavily towards riskier assets like stocks because they have the potential for higher returns. As the target date approaches, the fund automatically rebalances and shifts its weighting towards more conservative assets like bonds and cash equivalents, aiming to preserve the wealth that's been built up.

Ease of Use- One of the primary benefits of target date funds is their simplicity for investors. By choosing a fund with a target date that matches their expected retirement year, investors get a diversified portfolio that automatically adjusts its risk profile over time. This can be especially appealing to individuals who prefer a hands-off investment approach.

Fund Fees- Like all mutual funds, target date funds charge fees. These fees can vary widely depending on the provider and the specific funds chosen within the target date fund. It's essential to be aware of these fees as they can impact the overall return on investment.

Differences Among Providers- While the general concept of the target date fund remains consistent, the actual asset allocation, glide path, and underlying investments can differ significantly among providers.

Post-Target Date- Some target date funds don't just stop adjusting once the target date is reached. Instead, they continue to become more conservative for several years after the target date, reflecting the ongoing needs of retirees.

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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.

[gerryshoshensky]

Keeping asset classes separate in the drawdown phase is preferable to keeping everything in a single TDF. For example, if the market is down, I can draw from a separate fixed-income fund to avoid selling equities at a loss. A TDF just doesn't give you that kind of flexibility.

[AlwaysLoudAA]

My 3 fun portfolio is VOO, VUG, and SCHD. Have 28k in it so far and adding 6500 more every year for my IRA. I'm 27 btw.

[eddiemalvin]

Three fund portfolio with annual rebalancing (SP500, Small Cap & International... screw bonds). I was introduced to this approach back in 2001 when it was referred to as "The Armchair Millionaire" portfolio. It has served me well.

[seriousfaith]

I've been a huge proponent of the three fund for a couple of decades. I saw the beauty of the TDF when I helped my son set up his first 401k account. He's not into finance and not really interested to learn. So we just just put him in a TDF and let it rip. TDFs aren't optimal...but they're a lot better than doing nothing or taking some ham fisted approach at managing it over the years. I'd love for him to get interested...but I'm more interested in knowing he can just cram 15% of the salary in there, collect his 8.5% match and retire well in 35 years.

[zanychelly]

Three fund for me: S&P500, US debt/bonds and a mid/small cap fund.

A dual fund would be: US total market + US debt/bonds fund.

[ddillonhr]

I was on a target date fund through my 401k but decided to switch it up to a mix of Large Cap, Small Cap, and International. Will move to bonds later closer to retirement. All 3 were lower expense ratios as well.... .10, .125, and.1425 compared to the .15 of the Target Date Fund. I will note that those differences barely make any difference though. I didnt like the 40% exposure to international that the target date fund had so trimmed that down to 20%

[Dagzfromearth]

3 fund portolio, though mine has a few more in my 401k because of funds available. but if i did a target date, i'd choose one that is a bit further out than my time horizon, so it would stay more aggressive for longer.

[cjlossp]

I only have an FXAIX. I use to be invested in 3-5 funds to "diversify". SP500 outperformed every fund after 3 years. When SP500 was down every other fund i had was down as well.

[mikelarson]

Despite the time involved it seems the target date fund is more conservative for my liking. If you are 40 years out you should not have any bonds and the target fund does. Also the expense ratio in the target fund is higher which will cost you money in the said 40 years. Also just rebalance a couple of times a year in your index funds.

[robby]

3 fund lets you control the glide path. I think the M1/fidfolio may be the endgame or where they let you autoset the glide path yourself instead of modifying it a little bit every year.

[JarradMorrow]

Are you on team 3 Fund Portfolio or Target Date Fund?

[jonm.]

I have both: my 401k in in TRDF and I have a Roth IRA that’s setup with a three fund portfolio

[markaustin]

The 3 fund portfolio is probably better in the accumulation phase of building wealth. The draw down phase is easier with a single TD or other type of balanced fund.

[willritchie]

I am definitely on team 3 fund. My core portfolio has a twist though. VPU for income and stability and a little growrh instead of bonds, VIOO and IVOO for growth and broad diversification because I do not like the weighting of the S&P 500 and both S&P 400 and S&P 600 have a profitability factor involved in building the indexes.

[cgjohnst]

Part of me wishes I had gone with a 3 fund portfolio when I started investing, but I had never heard of it at that time. It’s been an emotional roller coaster playing stocks with my account while my wife’s account is mostly mutual funds. I’ve lost on some and won on some, but now that I’m transitioning to different mutual funds I feel a lot more calm.

[cbarts]

Holy moly what a great video. Your channel is going to blow up.

[cgjohnst]

Part of me wishes I had gone with a 3 fund portfolio when I started investing, but I had never heard of it at that time. It’s been an emotional roller coaster playing stocks with my account while my wife’s account is mostly mutual funds. I’ve lost on some and won on some, but now that I’m transitioning to different mutual funds I feel a lot more calm. I’m not doing just 3, but I think 3 is a great idea if you want broad exposure without spending much time thinking about it.

[johndon]

Mr. Morrow, thanks for your videos. I enjoy your style, speed and value highly your no BS / "here's how it really works" usable information. Keep it up

[bonitahill]

Yeah TDF fee’s in the 401k have access to is 0.055% so hmmm ... Once I left TDF just so burned I doubt I will use them in my future... Nice Vid 😊!!

[doctorgap]

My 401k is set up with a target date fund which they decided when I'm gonna retire and does not let you change the date. Obviously I'm not letting them dictate when I retire, i invest much more elsewhere but not losing the match haha