When it comes to investing, simplicity is the name of the game. For intelligent, passive investors, the goal is to come up with an investing strategy that meets the needs of the investor and simultaneously is easy to abide by. Our recommended portfolio is a spin on the famous three-fund portfolio made famous by the Bogleheads community.
Before we get into the breakdown of The Simple Portfolio, it’s important to point out that a smart, well informed investor is advised to always maximize all tax-advantaged accounts whenever possible. Every dollar invested into a tax-advantaged account is a dollar that gets a guaranteed return due to tax savings, and thus those accounts should always be the first to be filled out.
Beyond that, most investors will eventually end up with an outsized portion of their investments in regular taxable accounts, and that’s where we will focus our efforts on when coming up with a simple portfolio. Since the vast majority of an investor’s assets will be subject to taxes, it is important to look for assets that are tax efficient. That is, funds that favor growth in share value over interest and dividends are generally considered to be tax-efficient.
Without further ado, here’s a breakdown of The Simple Portfolio using a sample allocation for a young but seasoned investor with several wage earning years under their belt. As per the best asset allocation formula in the world, an investor at the young age of 30 with the default risk tolerance should allocate 9% of their portfolio to bonds and 91% to stocks, with the following breakdown:
- 68.25% in Total US Market Index Fund (VTSAX)
- 18.20% in Total Developed Markets Index Fund (VTMGX)
- 4.55% in Total Emerging Markets Index Fund (VEMAX)
- 9.00% in Intermediate-Term Tax-Exempt Municipal Bonds Fund (VWIUX)
That’s it. Four simple funds that achieve a target asset allocation with reasonable tax efficiency. Common personal finance sense dictates that stock funds be placed in taxable accounts as those will yield fewer dividends than fixed-income bond funds. For the bond fund itself, an intermediate-term fund of well diversified municipal bonds will be subject to a medium amount of sensitivity to interest rates, while providing income that is exempt from federal tax. For investors in high tax brackets that also reside in states with high state income taxes, there are also state-specific tax-exempt municipal bond funds that can be used as alternatives.
Note: in our breakdown of The Simple Portfolio, we make references to Admiral shares of Vanguard mutual funds, as those are our recommended investment products with excellent expense ratios and fund minimums that should eventually be achievable to the vast majority of readers.