Introduction:
Building wealth is a dream for many people, but achieving it is not easy. While some may land high-paying jobs or receive windfalls, such as inheritances or lottery wins, for most people, investing consistently over time is the key to becoming rich.
However, many Americans shy away from investing due to a fear of losing their money. In this article, we present an investment strategy that not only helps to build wealth but is also simple and reliable: the three-fund portfolio.
What exactly is a three-fund portfolio?
A US stock index fund, an overseas stock index fund, and a US bond index fund are the three index funds that make up the three-fund portfolio.
The strategy involves investing in index funds with low expense ratios to keep costs low.
By not picking individual stocks, investors are guaranteed to earn the average market return, something that most professional money managers are not able to do consistently. Investors can create a three-fund portfolio using exchange-traded funds (ETFs) instead of regular index mutual funds if they prefer.
2•Advantages of the Three-Fund Portfolio:
One of the important advantages of the three-fund portfolio is the diversification it offers. By investing in index funds, investors are eliminating the need to position themselves appropriately by buying individual stocks. This approach ensures that investors are invested in funds ranging from the largest companies in the United.
States to the smallest companies in China. The second advantage of the three-fund portfolio is its low cost. The large index funds used to create a three-fund portfolio are the least expensive funds to own. Small percentage changes in fees can cost thousands or even hundreds of thousands of dollars swings in future wealth. The third advantage is how easy it is to rebalance the portfolio holdings. Rebalancing is a process of periodically adjusting portfolio allocations to make sure investors are still on target.
3•Historical Performance of the Three-Fund Portfolio:
The historical performance of the three-fund portfolio demonstrates how effective this approach can be. The financial world has long believed that with enough experience and expertise, one can outperform the market and be the recipient of lucrative returns. However•
, a recent study has shown that even the most financially adept investors cannot obtain returns that a three-fund portfolio can for their endowment funds. The three-fund portfolio outperformed top quartile endowment funds on time frames of three years, five years, and ten years. This high-level performance required no significant level of investing expertise or the constant need to move money around in the portfolio.
Conclusion:
The three-fund portfolio is a simple and effective investment strategy that offers diversification, low cost, and ease of portfolio rebalancing. The historical performance of this approach shows how reliable and effective it has been for decades. Achieving a 6% return may not sound exciting, but it requires next to no effort on the investor’s part due to the approach’s simplicity.
The rule of 72 shows that doubling your money takes only 12 years at this rate. With this in mind, the three-fund portfolio may be the best approach to building wealth for novice and experienced investors alike.