Using Just Three Funds to Build a Globally Diversified Portfolio
This headline appeared on the front page of the Wall Street Journals June 15th Personal Finance Section. The article presents a case for why you may want to consider a streamlined portfolio of mutual funds.
While this is the first time Ive seen this strategy discussed in the media, my own portfolio (of mutual funds) is down to only four funds. So naturally the article caught my eye.
YOURE NOT LIKELY TO HEAR THIS ONE FROM YOUR FINANCIAL ADVISOR
The WSJ article states: Despite its delightful simplicity, I cant recall ever meeting an adviser who uses the three-fund mix. In part, I suspect advisors feel that to justify their fees they have to advocate more-complex portfolios.
KEY POINTS FROM THE ARTICLE
1. Despite the trend toward increasing complexity, all you really need to build a globally diversified index portfolio are three funds: a total market index fund that tracks the broad U.S. stock market, a foreign-stock index fund and a bond index fund.
2. Not only is (this approach) simple yet well diversified, but also you are guaranteed to outperform most investors in actively managed funds who own a similar stock-bond mix...(because), most actively managed funds lag behind the market averages...dragged down by hefty investment costs.
3. Much of the balance of the article goes into the pros and cons of why you may or may not want to own index vs. actively managed. And / or index vs. value funds.
[06/20/2005: This post was revised to incorporate this link to the original story. When the blog was originally posted, the article was only available to WSJ's online subscribers.]
Disclosure: While the article discusses the merits of index fund vs. actively managed and value funds, I am exclusively in low-cost actively managed, with a bias toward value.
Disclosure: At this point in my life Im a cautious investor. As such, my views may or may not be applicable to your investment needs. My portfolio also contains a high percentage of non-fund assets. I respect that your needs and tastes may differ.
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