I’d guess that many of the monkeys here were attracted to finance initially because of an interest in stock investing. Maybe you received some shares as a gift when you were young, or you wanted to become the next Warren Buffet, or you just enjoyed the challenge and potential rewards that come with picking winning stocks.
My parents were not financially adept enough to get me interested in investing at a young age, and the first finance book that I read was A Random Walk Down Wall Street, which effectively immunized me against making too many boneheaded financial decisions.
After devoting a decent chunk of time over the past couple of years to reading about different investing styles, however, I decided to just stick to low cost index funds. And probably no more than 3—here’s why…
1. It’s easy to be well diversified.
With just three funds, you can easily get exposure to US stocks, bonds, and international stocks. Sure you can add other assets…but is it really necessary when just three funds will give you access
Many "Bogleheads"—a group of investors who favor index investing as inspired by Vanguard Group founder John Bogle—suggest a three-fund portfolio consisting of the U.S.-focused Vanguard Total Stock Market Index fund, Vanguard Total International Stock Index, and Vanguard Total Bond Market Index . Together, the three mutual funds, which also offer ETF shares, track more than 15,000 global securities.
2. There's less to worry about.
There’s a wealth of literature from the world of behavioral economics which tells us that more choices can actually overwhelm us and lead to sub optimal results. Focusing on sticking to an asset allocation and re-balancing every year is difficult enough for many people—why muddy the water with trying to add more funds than you absolutely need?. See here: here:
Experts also are quick to point out that even a simple portfolio needs tending—investors shouldn't just set it and forget it. "The biggest pitfall [for all investors who decide on an asset mix and invest accordingly] is behavioral, when people don't want to rebalance," says Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Mass., and San Diego. For instance, if equities have taken a hit, you should consider buying more equities and selling off other asset classes, and "that's extraordinarily hard to do," he says.
3. They perform well.
If you get market returns and manage to save on transaction fees and on management fees, you’ll likely beat most other investors anyway. See here:
Investors don’t need to try and “beat the market.” Investors only need to match the market, something that is surprisingly difficult to do. In a column on How Did Your Portfolio Perform in 2010? I suggested ways to compare the return of your portfolio with the return of the market. It isn’t quite as easy as it seems, and financial advisors often want to compare portfolios they manage to benchmarks that are not a valid comparison. Take time to do this calculation and you may be surprised at how your portfolio really isn’t performing as well as you thought.
4. Active investing is hard.
You probably won’t be the next Warren Buffet.
But you can take his advice:
Even Warren Buffett recommends that “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” (Warren Buffet, Letter to Shareholders, Berkshire Hathaway Berkshire Hathaway Annual Report, 1997) With only these three funds in your investment portfolio you can benefit from low costs and broad diversification and still have a portfolio that is easy to manage. You don’t need 10 or more holdings to be diversified when these three best buys should do it.
Monkeys, what say you? Have your views on individual stock investing evolved over the years? Is the lure of active investing too great to resist? How many of you are index fund devotees?
