10 Powerful Portfolio Strategies (And Which One is Right for You!) – Part 1

Transcript:

On this episode of the Personal Finance Podcast, 10 Powerful Portfolio Strategies, and which one is right for you?

Whoa. What's up everybody? And welcome to the Personal Finance Podcast. I'm your host Andrew, founder of Master money.co. And today on the Personal Finance Podcast, we're gonna be diving into 10 portfolio strategies and which one could be right. For you. If you guys have any questions, make sure you join the Master Money Newsletter by going to master money.co/newsletter.

And don't forget to follow us on Spotify, apple Podcasts, YouTube, or whatever podcast player you love listening to this podcast on it. If you want to how out the show, consider leaving a five star rating and review on Apple Podcast, Spotify, or your favorite podcast player. Now today we're gonna be diving to 10 different portfolio strategies that you may want to consider.

And what I'm gonna do first is I want you to kind of think through five little bullets here on how to figure out which portfolio is right for you. Now, the best portfolio for you may not even be on this list, or you may learn about a bunch of new portfolios as we go through this episode. And if this episode runs really long, 'cause I have a lot of information that I really want to go through, I'm gonna break.

This down and get into the weeds. This is gonna get a little nerdy, so if you don't like getting into the weeds, try to stick around. You're gonna learn something in this episode, but I'm gonna try to make it as simple as possible for you. So we're gonna take some complex topics with these portfolios and we're gonna make it as simple as I possibly can.

But when we go through this, and that's number one and point number one. Is, I want you to fight for simplicity, meaning that the fewer funds the better for most people. I think having over five funds in most scenarios is gonna be way too much for most people, and so I want you to fight for simplicity if you can, because that is going to help you tremendously in the long run.

Something like a three fund portfolio is great. Maybe you want four funds, maybe you want even five funds, but going above that and you may have some fund overlap. You may have some things that just really increases your diversification like crazy. Now, when I go through these portfolios, by the way, today, I'm gonna go through the least complicated first, and then I'm gonna go through all the way to the most complicated.

And some of these get pretty complicated into how they structure these, uh, and it's gonna be interesting. Number two is you need to understand your risk. Tolerance. Now, what do I mean by risk tolerance? If you have never heard that word before, longtime listeners know what that is. But if you are new to this show and we have lots of new listeners to this show, you need to understand what risk tolerance is.

That means how do you react when the market changes? This is the simplest way to say it. So if the market goes. Up, are you really, really excited and you're just cheering it on? And then when the market goes down, you start to panic and you freak out? Well, that means you don't have a very high risk tolerance.

That means your risk tolerance is fairly low because you are reacting to how the market shifts. Or are you someone where the market goes up and you understand, hey, that's just very normal. The market's gonna go off. And then when the market comes back down, you understand a correction is also very normal.

Well, that means you're probably having a much higher risk tolerance and you're more willing to take on more volatility. And so understanding your risk tolerance is very important. We will have an episode coming up talking about how to evaluate your risk tolerance and how to figure out exactly what it is, uh, and get at least as close as you possibly can to that risk tolerance.

So I will for sure have that coming up. So make sure you're following this podcast if you're not already, uh, to be able to get that episode. Next is to consider your age and lifestyle. So a big. Part of portfolio construction is making sure that you understand where you are in life. If you are about to retire, the last thing you want to do, unless your risk tolerance is really high, which you can absolutely do this, uh, is be 100% all in on the most aggressive stock portfolio that you can possibly have.

Now, some people in retirement, I know that do that. Which is okay if you understand what you're doing, but that is not for most people. As you approach retirement age, a lot of experts will state, Hey, you need more bonds in your portfolio to reduce that volatility, and so that may be something that you want to consider.

Or maybe your risk tolerance is stating, Hey, I'm getting closer retirement. I wanna get some more international exposure. Maybe you wanna to get more exposure to commodities or something that is going to reduce the volatility. Maybe you want more exposure to something else. This can be good for you.

Depending on, again, your risk tolerance, or if you are in your early twenties and you have a very heavy bond portfolio, unless you have a risk tolerance that just cannot handle volatility whatsoever, then you may want to consider adding more stocks to that portfolio because the longer time horizon that you have, the more time you have for recovery to happen in stocks.

A are more volatile, meaning they go up and down more, but at the same time they have typically and historically returned more than something like an all Bond portfolio. And so we wanna make sure that we are constructing our portfolio in a way that makes sense based on where we are. In life. That is a very important thing that most people need to make sure they understand.

Next is we need to prioritize low fees. Now, if we are making this huge complex portfolio that has really high fees and we're adding in mutual funds and we're adding in all of these weird different market sectors in, and the expense ratio on those funds are much higher, it may not be worth it. 'cause it could be eating into our returns.

And so you gotta weigh out the factors of, Hey, how much time is this taking me? Is this eating into my investment returns every single month or every single year? And is this something I really want to be dealing with all the time? Because these fees are high. If these fees are really, really high, you probably don't want to, uh, be investing in those funds for the long run because fees will reduce your portfolio significantly if they are too high.

Again, we try to keep our fees as low as possible here, uh, and that is really, really important. And then is there a way to automate this portfolio? Because automation is the key to building wealth and if it is very difficult to automate a portfolio, maybe your portfolio states that you gotta buy some gold bars and some silver coins and all these different things, well, that's not really automated whatsoever.

And so you wanna make sure that you can automate your portfolio. Automation is the way to build wealth without having to think about it. And for most people here. You wanna build wealth without having to think about it all the time, and so I want that for you. Can you automate your portfolio or is it just overly complicated and it is something that you really can't automate in a simple way?

Those are some of the parameters that I want you to think about at the top of this episode. Now, since there is so much information that I ain't going to be going through in this episode, if I go long, this will be a two-parter. If I don't go long, then we'll just keep it as a one parter, but I'm going to try to make this.

As simple as possible for most of you. But again, I am gonna go into the weeds, but I'm gonna try to make this as simple as possible as we go through this. And so let's start with the first portfolio. All right, so the first portfolio is the one that I call the Simple Path to Wealth portfolio, but this is also one that I, a lot of other people call the One Fund total market strategy.

Now, I first learned about this portfolio by reading The Simple Path to Wealth by JL Collins. If you have not read that book yet, it is one of, if not the favorite of mine when it comes to personal finance books. It is just a very easy, simplistic way to learn about personal finances and how to get your money together.

So if you have not read that book yet, I really enjoyed that book the first time I read it, and I think most people who are new to their financial journey should pick up that book if you have not already. Now what we're talking about here. Is the one fund total market strategy, and this is the simplest way to invest by far in this entire list because all you are doing is putting 100% of your money into one single fund.

Now what fund is that? It is the Total Stock Market Index Fund. Now, this is a fund that I personally own in a number of my different portfolios. It's in my Roth IRA. It's in my 401k, and it is a fantastic fund over the course of the long run because you. Own nearly 4,000 publicly traded companies. And so here is common funds that are used for this.

Uh, a lot of people use V-T-S-A-X. That's what JL Collins uses it in that book, which is Vanguard's Total Stock Market Index Fund. Fidelity has one that is F-S-K-A-X, which is Fidelity's Total Market Index Fund. Schwab has one that is S-W-T-S-X, uh, which is Schwab's Total Stock Market Index Fund. And again, this is one that helps you.

Specifically during your wealth accumulation phase, and what JL Collins argues is that all you need is exposure to the entire stock market, meaning that you are owning every single stock in the entire stock market. Why would you need more diversification than just that? Now, the goal of this portfolio is simplicity, but also maximizing diversification in addition to being able to get an average market rate of return.

And so the argument and the belief on this is that, number one, the US economy will continue to grow over time. Now since the stock market represents the economy, it is expected to increase in value over time. Now, you may be saying to yourself, well, something is going on in the economy right now that is making me worry about the US' future.

If that is the case, here's what I want you to do. I want you to look at the top 10 companies in the US alone, okay? And look at how powerful those companies are. Then I want you to look at the top 10 companies on the international market. I mean, the entire rest of the world. Look at an international fund and look at the top 10 companies.

There is a massive difference between how valuable the companies are in the US stock market and how valuable the companies are internationally. It is not even a question, the differential between the two. Now the second thing is that, hey, I am personally very bullish on America for the future, uh, over the course of the long run.

And so for me, I am always, always investing in the US economy. Things like the total stock Market index fund is great. Now, if you wanna go to the ETF route, by the way, which we did not mention at the beginning, there are things like VTI, for example, which is Vanguard's ETF, which can also, uh, be fantastic for most people.

Now. Secondly is the purpose of this is simplicity. And so you don't have to go out and pick a bunch of individual stocks, and by holding the entire market, you automatically own all the winners. You can think of companies like Apple or Microsoft or Amazon without needing to guess which companies are actually going to succeed.

And so that is another big portion of this portfolio and why JL Collins argues this. It also requires no management. You're just investing. Into one fund every single month. And you don't have to rebalance, you don't have to worry about, Ooh, should I start to, uh, rebalance into all these other funds and make sure everything looks good and I'm 70, 30, 20, and all this different stuff.

Instead, you're just 100%. Into one stock, which is why simplicity comes into play here. And it also is a very low cost portfolio. All these funds we just mentioned have very low expense ratios. For example, V-T-S-A-X has a 0.03% expense ratio, meaning you don't lose money to high fees. And so for a lot of people, this is ideal for long-term investors who want high returns with minimum effort.

If you are the type of person, maybe you're an artist, for example, and you're out there and you're like. I don't want to think about investing ever again in my entire life. I just want the simplest path to make an average rate of return so that I can have a great retirement and be able to do what I want with my free time later on in life.

I want to buy my freedom and I want to give my future self a great life. Well, this is a portfolio that you could consider and, and think through that if you really fit some of this criteria. Now, why might this be better than some other options? This structure is how we're gonna kind of talk through a lot of these other portfolios, but a, this has maximum growth potential because over long periods, stocks have historically outperformed bonds in other asset classes.

And so this may have some of the highest growth potential for you. It's also incredibly simple. We talked about how simple this is, but you are literally just buying one fund. You don't need to track multiple funds, you don't need to track, you know, 10 Ks and, and all these different things of what individual companies are doing Instead.

You're just simply investing into one fund. It also has really broad diversification because you own every single stock within the stock market. You are really well diversified and the fees are so incredibly low that it helps you over the long run. Now, the downside and the biggest risk is that you are in 100% stocks, meaning you will experience significant volatility, uh, in the short run.

When there are things going on in the economy, you get Think of 2007 and oh eight, which we'll talk about here in a second. You could think about some other downturns. You will experience volatility. So this strategy over the course of the last 30 years from 1994 to 2024 has had an annualized return of 10% per year, and 10,000 invested in 1994 would grow to over $200,000 in 2024.

So this outperforms more conservative portfolios that include bonds and alternative assets. Now this strategy is considered high risk, high reward to a lot of investment professionals out there, and if you have a long-term investment horizon of 15 years plus and you can handle that volatility, then this strategy historically.

Delivers some of the best long-term results on this entire list. This is one of the best long-term results that we will see on this list. Uh, and we will look through how it actually is performed in good times and bad times now. So the best year for this portfolio has been 36%, which was 1995. When the market was completely booming, this portfolio captured all of the growth and it delivered huge, massive returns.

Now it's the worst year, and you're gonna see this is gonna be the worst year for a lot of these portfolios. Uh, is gonna be 2008, which is the great financial crisis. And this is over the course of the last 30 years, by the way. And this portfolio lost a third of its value. And if you had $1 million invested, it would've dropped to $630,000.

Now this my friends. Is why we do not invest our emergency fund, because as you can see, if you lose, your portfolio goes down 37%. You had a million dollars saved up, it goes down to 630,000 in a single year. That cannot feel good for a lot of investors out there. Now, I was in college when this happened, uh, and so I didn't feel it in my portfolio, but I know it can't feel good when your portfolio drops that much.

And the reason why we look at this, the reason why we look backwards is because we wanna see what the worst case scenario is for some of these portfolios. Now, the tech boom, which was the 1990s and the early two thousands, it performed incredibly well as companies like Microsoft. And Amazon continued to grow and during the.com crash, which was 2000 to 2002, it lost 40% of its portfolio during the period as internet stocks collapsed.

So what you have it as 37% is the worst. It's actually the.com crash was its worst year thus far, and it had a strong comeback after the March, 2020 crash. Quickly regaining losses into new highs, and its biggest risk overall is that it is a hundred percent stocks, like we said before. So this is going to be a portfolio for people who.

Are willing to take on that volatility who have really long-term time horizons. So who is this great for? It's great for young investors, twenties, thirties, or forties. And again, this is not financial advice, this is just me kind of broadly talking about these, but this is for young investors in their twenties, thirties, or forties who have a long-term time horizon or people who simply do not wanna micromanage their portfolio.

A lot of you out there may not wanna micromanage your portfolio. You want the simplest possible route, uh, to get there. And that may be one. And then investors who can tolerate short-term losses in exchange for high gains over the course of the long run. Now, this is not ideal for retirees or people who need money soon because a big stock market crash could devastate your savings if you withdraw money in the short run.

So this is something where it is debatable. To say is someone who is a retiree who is close to that retirement age, should they be a hundred percent in stocks. JL Collins retired and he is a hundred percent in stock. This is his portfolio in retirement. And so some people with a high risk tolerance who understand how to withdraw money from their portfolio and they can do it in a flexible way.

This may be something for them, but if you don't understand that completely, then it may not be the best portfolio for you. Now, also, it's not ideal for investors who get nervous in downturns. If you get nervous in downturns, it may not be the best for you. Now, the bottom line of this one is if you want high returns, I.

And if you want low fees and you want minimal effort, the one fund total market strategy may be one of the best choices. Uh, for those who want the least amount of work of having to worry if they wanna automate. This is one of the best to automate into, 'cause it's very simple. You're just automating into one fund.

And if you are someone, uh, who has the patience and discipline to stay invested, no matter what happens, then this may be a great portfolio for you. Let's get into the next one. Alright, the next one is Warren Buffett's 90 10 portfolio. Now this is one of my favorite portfolios and probably one that I lean closer towards in a lot of my different portfolios that I have put together.

Uh, and the reason for that is because it is just more closely related to where I am in life. And so we call this the Warren Buffet portfolio because Buffet himself has stated that if something happens to him, his money for his family will be invested just like this. So here's how it works. The 90 10 portfolio is an investment strategy recommended by Warren Buffett in his 2013 letter to Berkshire Hathaway shareholders.

So every single year. Warren Buffett has this letter that comes out, uh, that he sends to his shareholders within his company, which is Berkshire Hathaway, which is a top 10 holding in the s and p 500. And he suggests in that letter that the average investors who want simple but effective investment strategy should put their money this way.

Okay, now you can go read this, the. Shareholder letters are public out there. You can go find the 2013 shareholder letter. It is in that letter, and it is a really, really good read, actually, if you're looking into this portfolio. But 90% of their money should be in a low cost s and p 500 index fund, and then 10% in short term government bonds such as US Treasury.

Bonds. Now again, he said he's putting his money in this exact strategy, this 90 10 strategy, because he believes it is a low maintenance yet high return approach. So what stocks would be in the 90% stock fund? So this would be something like Vanguard's s and p 500 Index Fund, which is also VF IAX. Fidelity has an s and p 500 index fund, which is FX A IX.

And then Schwab has an s and p 500 index fund, which is SW. PPX. And then for the 10% bonds, if you're looking for short-term treasury bonds, this would be something like Vanguard Short-Term Treasury Index Fund, which is V-S-B-S-X. And then Fidelity has a US Bond index fund, which is FX NAX. Now. Buffett has his family's money in those Vanguard funds.

Actually, he believes in Vanguard. Him and Jack Bogle were friends. Uh, and so he believes in Vanguard's funds and the way that they actually manage those portfolios. And so this 90 10 strategy, uh, will be something that you can see a lot of investors who want to grow over time. Uh, they may want to look at this 90 10 strategy.

Now, here's why it is constructed this way. Uh, first is the stock market grows over time. So 90% of the portfolio states that the stock market is going to grow over time, and Buffet believes that betting against the US economy is a really bad idea. He says that over and over and over again. That is how he's become one of the richest people in the world, is continuously betting on the US economy, thinking it is the greatest economy of all time and historically.

The s and p 500 has averaged about 10% annual returns over long periods to investors. So the long-term investor is going to see those historic returns of 10%. If you were invested in the eighties, the nineties, the two thousands, the 2010s, you're gonna see that 10% rate of return. And by putting 90% in the s and p 500 index fund, you capture the performance of America's largest companies, all 500.

It's actually a little more than 500, but it's the 500 largest companies in the US stock market. This includes giants like Apple. Microsoft, Amazon. You're also going to see companies like Berkshire Hathaway is in the top 10 Warren Buffett's company, but you're also gonna see other big companies like Nvidia.

You're gonna see Meta. You're gonna see some of these massive, massive companies that we all know and love. Now, number two is. Bonds and bonds are going to help reduce volatility slightly. So the 10% in short term bonds provide some stability during stock market crashes. And so when we see some of those crashes, it just gives us a little additional stability and they act as a cushion ensuring that you have some cash, like investments that don't crash as hard as stocks and the bad years.

But this portfolio is built for long term growth while providing a small safety net through the long term. Now. Warren Buffett has a ton of really great investment quotes, but one of his best ones is when he talks about investing in stocks. He said, if you're not willing to invest in a stock for over 10 years, then don't even think about investing in it for 10 minutes, because this is how you have to think as a long-term investor, and that is how this portfolio is constructed for the long-term investors who want to be in the market for a very long period of time.

Now why this portfolio might be better than others? Let's talk about some of the pros on this. It has higher returns than traditional portfolios because of that 90% stock allocation. This means your portfolio will grow more than a balanced portfolio, and you can see something like a 60 40 portfolio is not gonna grow as fast.

And over the long term stocks outperform bonds, which we talked about even in the first portfolio. And so this one maximizes long-term gains, but it has slightly less volatility than a 100% stock portfolio because it has at least that 10% bond allocation, which reduces, uh, that risk slightly. Now you won't experience quite as severe losses during stock market crashes, but still it's only 10% of your portfolio.

You're gonna feel the pain, some, uh, if the market goes down, but it just helps reduce that some way, shape or form. So this is like, for example, this portfolio is how I like to do my 401k allocation is a 90 10. That's just the way I personally do. It doesn't mean you need to be doing it. Uh, but that's just the way that I personally do it because I like the way that it's constructed and I believe in investing in the long run.

And so that is the way I have mine set up. Now it's very simple to manage with just two funds. You can easily rebalance this portfolio if you want to stick to that 90 10 allocation. And there's no need to pick individual stocks again. So it is incredibly simple. Now, what are some drawbacks? It's still very volatile, meaning that it is still gonna go up.

It is still gonna go down in market crashes because it has a 90% stock allocation, and so it can still drop 30, 40% when there is a bad market. We'll talk about the performance here in a second. It is not ideal for retirees who want to have less volatility. If a retiree is close to retirement age or they want less volatility, then investors nearing that age may prefer more bonds, uh, such as a 60 40 portfolio or something along those lines.

Now we'll get into higher allocations in a second of bonds, uh, as we go through some of these other portfolios. Now, how has the performance lasted over the course of the last 30 years? Well, the annualized return for this portfolio set from 1994 to 2024 for the example, is gonna be 9.5% for a year. And that's gonna be the range because we can see entire years, uh, for those allocations, for all these portfolios is how we look at this.

And it has been 9.5% per year, which has been slightly less than a hundred percent stocks due to the bond allocation. And $10,000 invested in 1994 grew to $180,000, uh, up to 2024 compared to 200,000 when you have a hundred percent stocks. Now adding bonds slightly reduces return, but it also provides smoother performance during downturns.

And so that's something you definitely wanna make sure that you're considering as well, is because it, it does help with that. Now how it performs in good and bad times. Now, the best year was actually 1995 again, plus 34%. And during those bull markets, this portfolio captures nearly all the stock markets upside.

Now its worst year was 2008. During the great financial crisis, this portfolio lost one third of its value, but performed slightly better than a hundred percent stock portfolio. Which lost 37%. So the hundreds percent stock portfolio in the worst of times lost 37%. This actually had a 5% difference at 33%.

This is why I like to look back at this stuff because I wanna see what is the big difference. Well, that 10% bond allocation actually saved you 5% loss in your portfolio. Is that worth it for you? It depends because we gotta see the growth is also 0.5% every single year. Now the 10% bonds provided some protection but didn't completely eliminate that risk.

Obviously. Now the tech boom in the nineties and two thousands, it performed very well with this s and p 500 soaring. And in the.com crash, which this is over the course of two years, so 2000 to 2002, it lost 40%, but slightly better than the all stock portfolio because the all stock portfolio, uh, if we look back at that as well was uh, 40% loss.

And so it is slightly better. But just by a few percentage points, it was not that much better. The COVID-19 crash, uh, fell 30% in March, but it rebounded pretty quickly after that. And so these are some of the big areas that I look over the course of the last 30 years. It's the.com boom. It is the.com crash.

It is the 2008 crash, which is the first place I always look is that 2008 crash. 'cause that's as bad as it can get. Um, and so I wanna see how these are looking now, the biggest risk again. These crashes will still hurt. It'll still hurt your portfolio. You will still see an impact, but you're trying to lock in those long-term gains, and your hope is that over the long run, you will see longer term gains.

That is the goal with this portfolio. That is why Warren Buffett constructed it this way, and so that is his hope for investor. So who should use this strategy or who should consider this strategy or do more research into this strategy? It is great for investors in their thirties, their forties, or their fifties.

Who want high growth, but slightly less volatility. And people who want a simple passive and investment approach, or those who can handle stock market downturns and stay focused and invested for decades. If you are a long-term investor like I am, I'm gonna be investing for the next 70 years. If I live to a hundred, we'll see.

Uh, and so my goal is to make sure that, um, I am doing this over the course of the long run, but my goal is if I'm gonna live to a hundred, I'm gonna stay invested. And so that's the big thing there. Now it's not ideal for retirees or conservative investors who may need more than 10% bonds for stability and anyone who panics and more crashes, this is also not for you.

'cause as you can see, it dips 33% in the 2008 crash. And so if you wanna see your portfolio dip 30 or 40% and you can't handle that, then this is gonna be something that may not be the best one for you. But the key is having the patience to stick with it, uh, through market crashes. That is why this one is going to be one we want to.

Look at, uh, over the long run. Let's go to the next one, which is a lot more conservative. All right, so our third episode that we have here is the Scott Burns 50 50 Couch Potato Portfolio. Now, what it is, is the Couch Potato Portfolio is a lazy two fund portfolio designed for simplicity and stability. So this is also one of the most.

Simple portfolios out there. And it was created by Scott Burns, who is a well-known personal finance columnist, uh, to help investors achieve solid returns with minimal effort. Now, I do like that name, the Couch Potato Portfolio. 'cause it makes you think, oh, I don't wanna do anything. Uh, which really you don't.

If you set this up properly and you start to automate it. So the asset allocation for this one, if you don't know what asset allocation means, that's just a mix of stocks and bonds in the portfolio, is 50% US stock market for growth. That is the purpose of that one and 50% bonds for stability. And so as you can see, if any portfolio has 50% bonds, it is a very conservative portfolio.

That's what I want you to think about. If the allocation is 50 50. And bonds are 50%. It is going to be a very conservative portfolio. Now, the idea is super simple. You invest in just two funds, then sit back and let the market do the work. Now, common funds for 50% stocks are the Vanguard Total Stock Market Index Fund, or the Fidelity Total Market Index Fund, or the Schwab Total Market Index Fund.

So the Vanguard one is V-T-S-A-X. These are all the same funds that we talked about when it came to the uh, one fund portfolio. At the top of the show, uh, the Fidelity one is F-S-K-A-X, and then the Schwab one is S-W-T-S-X. And so those are the stock allocations that you can consider. And there are some out there for bonds as well, like the Vanguard Total Bond Market Index Fund, or B-B-T-L-X or Fidelity's US Bond Index Fund, which is F-N-A-A-X, or we have Schwab's US Aggregate Bond Index Fund, which is SWA.

Gx now, this is one of the easiest portfolios to manage and is perfect for anyone who doesn't want to have any stress whatsoever about investing. Now, why is this portfolio constructed this way? Why did he set this up in this way? With the 50 50 portfolio, and it is designed with two main goals. Number one is growth plus stability.

So he is looking for a way to. Grow his money, but still have stability in place, uh, over the long run. Now the stock portion helps this portfolio grow while the bond portion stabilizes it during market crashes, and it is simple and passive. So there's no stock picking, there's no need for frequent adjustments, just 50 50 and rebalance once every single year.

So that is a big part of this one is you're going to have to rebalance once every single year, whereas the first one, you don't rebalance the Warren Buffett portfolio. You're also gonna have to rebalance at least that 10%. And then you have to rebalance once a year with the 50 50 portfolio. Now, why 50% stocks and 50% bonds?

Now stocks are gonna drive that long-term growth, meaning that 50% in the stock market ensures your portfolio keeps up with inflation and it grows over time. And then the bond allocation lowers the impact of stock market crashes and makes it easier to stay invested. So a lot of people. Who panic and they sell.

This may be a good portfolio for you if you can't stay invested because you panic. And so a 50 50 allocation is great for conservative investors, uh, who want some stock market exposure, but don't wanna take on too much risk. If risk is something you want no part of. This could be something to consider.

Now why this might be better than some other options for certain people is that it's super easy to maintain because it's just those two funds. And a beginner can set this up in five minutes. And so that is why a lot of people do like this is because a beginner can set it up, but there's less volatility than a hundred percent stocks.

And stocks can be very volatile. I meaning they go up and down all the time where this is gonna reduce that volatility and smooth out the ride. And it's great for people who worry about losing money in America crash. So if you're someone who worries about that constantly, uh, this could be great for you and it has much better performance in an all bond portfolio.

So all bond portfolios really aren't something a lot of people do unless you have a lot of money. It's tough to retire on an all bond portfolio. And so with a hundred percent bond portfolio, it is way too conservative for most people. But with 50% stocks, you can get strong growth without excessive risk, is what the argument is here.

And so that is. Some of the things that a lot of people like to think through. Now, the drawbacks here, and this is a big, big, big drawback for me as a long-term investor, is you get much lower return than having a higher stock allocation, especially if you have that long-term time horizon. You may be sacrificing way too much growth by doing something like this.

And bonds don't perform well in inflationary periods either. So if interest rates rise, bonds may struggle dragging down performance. As interest rates rise, they negatively impact bonds. And so that can drag down performance. Now, the performance over the course of the last 30 years from 1994 to 2024 is 7.6% per year, which that is actually higher than I thought it was going to be when I was preparing this episode.

But it is 7.6% per year, and $10,000 invested in 1994 would grow to a hundred thousand dollars. So every 10 Gs that you invest every year, it grow to a hundred thousand dollars by 2024. Over the course of that 30 years, now this is lower than 90 10. A hundred percent stock portfolios, but comes with significantly less risk.

And so if you remember the a hundred percent stock portfolio over the course of that 30 years grew to $200,000 with $10,000 invested. So double what this grew to. Uh, but at the same time, if you do not like volatility, it probably weathered out those storms. You still get some growth there, and it's still much better than keeping your money in cash or just keeping it at all bonds.

Now, how does it perform in bad times? This is the reason why we do this. And this is the purpose as to why we do this. So in 1995 when the market was booming, its best year, it was up 27%, which is pretty good in comparison to some of these other allocations as well. Uh, this was still performing very well because of the boom of the s and p 500.

It's worst year. Was actually 2022, so its worst year was not 2008, which is absolutely fascinating to me. But unlike all stock portfolios that lost 30 to 40% bad years, this strategy had a much smaller loss. It only lost 16%, and its worst year was 16%. This is the reason why you invest in these, because the all stock portfolio lost close to 40%, and if you look at the Warren Buffet portfolio, it lost.

33%. And so there's a big allocation difference here of how much you can lose. Where its worst year was 16%. And so if you are someone who's conservative, this is a consideration that some people can have. Now, it underperformed compared to all stock portfolios during the tech boom. Now, during the.com crash, which was over the course of two years, not just one year, 2000 to 2002, this dropped around 20%.

Now during the 2008 financial crisis stocks crashed 37% and this only fell 15 point a half percent, meaning an investor would have much less pain, uh, than stocks did. So that is something where you could see a big, big difference in why you hold this portfolio. Now, during the COVID-19 crash stock dropped 30%, but this only lost about 12% with this portfolio.

Uh, and so the biggest risk here is lower long-term growth If you're in your twenties or your thirties. And also bonds can underperform in high inflationary rates. So if you see inflation and if you're trying to predict the future here, if you're into that, I am not into that. But if you are trying to predict the future and you think inflation is going to be a big impact over the course in the next decade, this will also underperform significantly because of inflation, because it has 50% bonds and so it's tough to perform.

Uh, when interest rates rise, bond prices fall. And so that's where you want to think through that a little bit more too. So who should use this strategy specifically? It is great for conservative investors who want less volatility and people close to retirement who can't afford big market crashes and beginners who want simple and low maintenance portfolios.

But it is not ideal for young investors, uh, in their twenties through forties. Who have time to recover from market crashes, they should be thinking through higher growth unless they have a risk tolerance that just cannot handle it. And people who want maximum long-term returns, a hundred percent or a 90 10 buffet portfolio is gonna be the way to look at that more so than this one specifically.

And so this is an easy worry-free way to invest, but it sacrifices growth to level out some of that volatility. So if you want steady, reliable returns without big crashes, this is a great option. Now this is also a great option for folks. Maybe you made a lot of money in business. And you sold a business, for example, and let's say you made $50 million and you're like, $50 million is fine to me.

I don't need some high stock allocation. I'm just trying to preserve this wealth over time. Uh, maybe that is something you want to consider, um, as well. So you wanna do more research into that. I still personally would probably do a 90 10, but for some people, if you're just trying to preserve your money and make sure you don't have to have these market downturns where you're having multimillion dollar swings, that may also be another reason to consider.

Let's get into the next one, which is the Bogle Head three fund strategy. Number four is the Bogle Head three fund strategy. So this is a very popular investment portfolio and is one that I think a lot of people in the early financial independent space. When I was researching personal finance in like 2009, 2010, 2011, 2012, this was a huge strategy that a lot of people were talking about.

And a lot of people still do this, uh, to this day. But the Bogle Head three fund portfolio is a diversified, low-cost investment strategy that follows the principles of Jack Bogle, who is the founder of Vanguard and the pioneer of the Index Fund. And this portfolio is widely recognized by the Bogle Heads community.

I. As one of their favorite portfolios by far. Now here's how this works. This has a, a larger stock allocation and it actually has a stock allocation closer to the Warren Buffet portfolio, but as you're going to see it's not exactly the same. Now, you can actually adjust these three funds in a couple of different ways, but this is the Bogle head version is number one, is the US Total Stock Market Fund.

And so this is going to be 70% of the portfolio covers all the US companies. Number two is an international stock market fund, and this is gonna be 20% of the portfolio provides exposure to companies outside of the us. So they get some international exposure involved here. Um, which as you'll see a lot more of these portfolios will from here on out.

And then we have the total bond market, which is gonna be 10%, which adds stability with us. Bonds. So some funds that you can use for this would be the Vanguard Total Stock Market Index Fund or V-T-S-A-X, the Fidelity Total Market Index Fund for the total stock market, which would be F-S-K-A-X, and the Schwab Total Stock Market Index Fund would be SWT.

Sx, and so that's the stock allocation for the US allocation. Then for the international stock market, some funds to consider that, a lot of them consider, and usually the bulkheads use, uh, Vanguard Funds, but some of them are now moving towards Fidelity and Schwab is the Vanguard Total International Stock Index Fund, which is VTI.

Ax, the Fidelity Total International Index Fund, which is V-T-I-H-X and the Schwab International Fund, which is S-W-I-S-X. Those are some considerations that you can have there. And then the total bond market is Vanguard's V-B-T-L-X. Fidelity's is FX NAX, and Schwab's US Aggregate Bond Index Fund is Swag X actually.

That's a pretty cool name. Swag X. Uh, so this strategy is built on broad diversification and simplicity. So this is actually still a very simple portfolio. You're only owning three funds, but there is broad diversification and there is simplicity. So why is it constructed this way? You are first diversified across US and international markets.

So a lot of people will argue that you always need to have international exposure because when the US stock market is not doing well, international markets will. Perform better. Now, you could see this in the short run when tariffs were issued on some other countries here in the US where you would see a difference maker in some of the US and international funds.

And so some of these international funds would perform a little better than the US stocks because of some of those economic indicators. And so instead of investing. In the US only the portfolio does add that international exposure to include companies worldwide. So some of the biggest ones on the international fund would be Toyota and Samsung and Nestle.

So those are some of the big companies, uh, in the international fund. And the US stock market makes up 43% of the global market. So investing internationally reduces dependence on one country's economy. Now the argument for someone who was gonna say, Hey, I am not gonna invest in international funds.

Instead I'm just gonna keep it into the total stock market index fund. Is that the Total Stock Market index Fund has tons of companies who do business outside the US from Apple to Tesla to Nvidia, to all these different companies that are in the s and p 500. So that would be the argument to the other side.

Now, they also have bonds in this portfolio just to lower that volatility and help stabilize the portfolio, and they provide a safe. Fixed income cushion during those downturns. Now, the bogleheads are huge into index funds, meaning that they invest in index funds because they outperform most active funds over time, and they do this due to lower fees and broad diversification.

They also have no need to pick stocks. Or time the market. And so that's why they do this over that timeframe as well. And it balances growth and risk management, uh, is what their argument is. Now, why this may be a better option than other portfolios. One, you get that global diversification. Unlike the one fund total market strategy, this portfolio does include international stocks and reduces the dependence on the US economy.

It is more stable than 100% stocks, meaning that over time the 10% bond allocation does smooth out market volatility. Making the portfolio slightly more stable. It is easy to manage and rebalance because with just three funds, it makes it straightforward. It's still low maintenance. You can rebalance on three funds pretty easily, and there's no need to time the market.

Now, some drawbacks, it has slightly lower returns than a hundred percent stocks because of that bond exposure. And international markets typically lag behind. So my argument has always been, you know, with international markets, they do lag behind at least over the course of the last 10 to 15 years. And so that is something where they do underperform some of the US stocks over the last few decades.

And bonds can also underperform in inflationary periods like we've talked about with some of these other ones. And so the performance over the course of the last. 30 years, and this is gonna be something that, uh, is very good over the course of the last 30 years is 9% per year. So 10,000 invested in 1994, grew to $140,000 in 2024.

Now this portfolio outperforms the 50 50 couch potato portfolio, but it does trail the 90 10 in the a hundred percent stock allocation portfolio that we talked about thus far. Now its best year was actually 2003, which is very interesting where international stocks surged, outperforming the US market that year.

And this was a 30% return in 2003. Now its worst year was 34%, which is 2008. It lost a lot more, so it lost a little more than the Warren Buffet portfolio actually, which is. Really interesting, um, but still had some significant declines. The tech boom of the 1990s to 2000, it performed very well because of the stock portfolio and during the.com crash had smaller losses than the a hundred percent stock portfolio due to the bonds there.

But it still had a similar losses to the Warren Buffet portfolio. Now during the C 19 crash, it fell significantly, but also recovered quickly. Its biggest risks. There's two big risks here is that the international stocks can underperform, and so some years US stocks significantly outperform international markets, and I've seen that over the course of the last few decades.

Again, at the time recording this, actually, there has been tariffs issued and so the international funds are actually performing decently, but outside of that. There has been, you know, really high under performance. Secondly is bonds may also provide protection. If interest rates rise, bonds lose value. But again, with 10% allocation, you don't really have to worry about them.

Who is this strategy good for? This is great for long-term investors who want simple but effective passive strategies or people who want global diversification through US stocks and people who want less volatility, meaning a hundred percent stocks, but still strong returns. This is not. In any way, shape, or form ideal for investors who want that maximum growth, a hundred percent stock portfolio or the buffet 90 10 strategy will likely return more over those decades.

Uh, but it depends. You never know what's gonna happen. You know the past doesn't mean that the future is gonna be the same. And people who don't believe in international investing, this is not ideal for you whatsoever either. If you make the case that international investing is a waste of time, which some people do, then that may not be.

The portfolio for you. And so this is gonna be something that I think a lot of people need to understand is gonna have a huge, huge difference maker, uh, when it comes to the Bogle head. Alright, so this episode is going to turn into a two-parter because I'm only for through the first four here. Uh, and so I'm hoping you guys are enjoying this episode as much as I am so on.

Part two of this podcast episode, what we are going to see is next. The first one we're gonna go through, uh, to give you just a head start to understand what's coming up next is we're gonna go through Dave Ramsey's four fund portfolio. We're gonna go through Bill Bernstein's, no brainer portfolio. We're gonna go through Ray Dalio's portfolio.

We're gonna go through the Yale. Endowment portfolio and we're gonna go through our friend, uh, friend of the show, Paul Merriman's portfolio as well in addition to one other. So this is gonna be one that is an action packed episode, so we were gonna go through the next six portfolios in the next episode coming up.

So make sure you are subscribed to this podcast to get that. We'll see ya on the next episode.