Bogleheads philosophy: keep your investment portfolio simple

The book The Bogleheads’ Guide to a Three Fund Portfolio describes a simple, low-cost three-fund indexed portfolio that has outperformed most investors in history.

It’s one of favourite investment books of all time, as it succinctly captures the essence of investing in simplicity using just three funds across fundamental asset classes –

  • Domestic Stocks
  • International Stocks
  • Domestic Bonds

With just these three funds, you can own more than ten thousand securities that you can set and forget for a long time.

The three fund portfolio

With the three fund portfolio that doesn’t include cash, investing in a diversified portfolio is simplified to only three steps –

  • Determine your ideal asset allocation between stocks and bonds
  • Own the total market of each of these asset classes
  • Rebalance periodically to your target allocation

Determining your ideal asset allocation

Between stocks and bonds, hold the your age (x%) in bonds and the rest (100%-x%) in stocks. The reason you need bonds is to prevent panic selling during a stock market crash. For example, in 1932, the US Dow Jones Industrial Average plunged 89%, causing widespread panic.

Stocks let us eat well. Bonds let us sleep well.

If you had all your net worth in stocks, you’d need a 900%+ gain to recover from your losses. Not many people can stomach that.

Between domestic and international stocks, it is not as much of a critical decision given how similar their long-term returns are.

Own the total market of each of these asset classes

Don’t look for the needle in the haystack. Just buy the haystack!

The next step is choosing the vehicle to execute your asset allocation. For US investors, the approach recommended was to own the Total US Stock Index, Total International Stock Index and the Total US bond Index.

This execution can be made through several vehicles.

Using mutual funds:

  • Vanguard Total Stock Market Index Fund (VTSAX)
  • Vanguard Total International Stock Index Fund (VTIAX)
  • Vanguard Total Bond Market Fund (VBTLX)

or using ETFs:

  • Vanguard Total Stock ETF (VTI)
  • Vanguard Total International Stock ETF (VXUS)
  • Vanguard Total Bond Market ETF (BND)

Investors are not limited to Vanguard funds, and they can also use ETFs from other providers like Blackrock iShares –

  • iShares Core S&P Total Market ETF (ITOT)
  • iShares Core MSCI Total International Stock ETF (IXUS)
  • iShares Core Total U.S. Bond Market ETF (AGG)

In Singapore’s context, the approach is slightly different. A proxy to owning the total domestic stock market is through the STI ETF and the best alternatives to owning the total domestic bond market is either the ABF Singapore Bond Index Fund (consisting of mainly government bonds) or the Nikko AM SGD Investment Grade Corporate Bond ETF (consisting of corporate and quasi-government bonds).

For total international stock market, because there is no ex-Singapore fund/ETF out there, the Vanguard Total World Stock ETF (or its London-listed equivalent) is a good proxy.

Keeping costs low

The core tenet of this Bogleheads portfolio construction is the use of low-cost mutual funds or ETFs, which results in hundreds of dollars of potential fee savings through no sales charges, reduced trading commissions, reduced rebalancing fees and reduced annual expense ratios.

With the Vanguard Total Stock Market ETF (VTI) charging just 0.03% of assets annually, compared to 1.5%-5% for mutual funds, it’s a simple equation that lower fees means higher returns for you.

Other benefits of the three-fund portfolio

  • No advisor risk: avoid incompetence and conflicts of interest with your financial advisor who wants the largest income for himself while you want the lowest cost
  • Maximum diversification: There is not a more diversified portfolio out there, and puts you own the efficient frontier of portfolio construction (highest return to risk ratio)
  • No overlap: avoid owning multiple portfolios that own the same securities, resulting in less diversification
  • Easy to rebalance: with just three funds it’s very easy to tell what you need to buy more of to retain your allocation. Everything in between, from sector and style drifts (e.g. rotation from value to growth), are automatically taken care by the portfolio
  • Never underperform the market: because you’re buying the market!

Concluding thoughts

The Bogleheads’ approach to portfolio construction is very popular around the world because of its simplicity in execution – there is even a Wiki dedicated to this.

The approach is simple, understandable and effective. With just three funds, you can outperform most fund managers, keep cost low and achieve maximum diversification – what’s not to like?

If you enjoy reading about the Bogleheads approach to portfolio construction – i.e. simplicity – then you can pick up the book on Amazon to appreciate the full text.

  1. Hi! I’ve been following your blog ever since I came across your Sharesight review. I like your reviews of finance services, I hope you will do more of them!

    FSM1 just launched with their own rsp plan and it seems to be much cheaper than posb invest saver and other brokers/banks. For Singapore domiciled etfs, 0.08% or min sgd 1 to invest but there is minimum sgd 10 to sell. What are your thoughts on their rsp?

    1. Hello WL – thanks a lot for your kind words! I will be doing a review on FSM One soon – stay tuned 🙂

  2. Hi there, how do you deal with the 30% Withholding tax for US ETFs? Wouldn’t it be better to buy LSE Ireland Domiciled ETFs like IWDA?

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