Asset Allocation - Three-Fund Portfolio How should you invest your money? This is one of the first questions new investors will ask. With so many options, many people get stuck or confused on how to start. In this video, I am going to show you how anyone can easily build a globally diversified portfolio. This portfolio uses a strategy that according to a Nobel prize winning economist, is mathematically certain to outperform most investors. All it takes is three investments. 0:00 Intro 0:45 What is Asset Allocation? 2:00 Benefits of Diversification 3:42 Three-Fund Portfolio 4:34 Choosing Your Allocation 8:49 Rebalancing 9:55 Glide Path: Asset Allocation and Age 10:59 Target Date Retirement Funds 14:58 Constructing the Three-Fund Portfolio & Taxes 16:37 Tilting / Three-Factor Model 18:10 Investment Advisors 19:55 Summary --- Referral Links Get $20 when you try Personal Capital (when linking an investment account): https://pcap.rocks/n55809 Get a $300 bonus, 6% back on groceries, 3% back on gas: http://refer.amex.us/NICHODReH5?xl=cp19 Get a $200 bonus, 5% back on groceries, 3% back on dining: https://www.referyourchasecard.com/18a/DTB6NLQM25 Get $30 and cash back when shopping online: https://www.rakuten.com/r/ENJAYD2?utm_campaign=RAF&utm_medium=RAF%20share&eeid=45830 Great Books for Financial Independence Bogleheads’ Guide to Investing: https://amzn.to/3KOcRB7 Bogleheads’ Guide to the Three-Fund Portfolio: https://amzn.to/33UuBu1 Asset Protection: Concepts and Strategies for Protecting Your Wealth: https://amzn.to/3oarULI Retirement Planning Guidebook: https://amzn.to/3skso3h All About Asset Allocation: https://amzn.to/34gLIG4 Equity Valuation and Analysis: https://amzn.to/3g9LKSM Disclosure: Referral links this are affiliate links. At no additional cost to you, I might earn a commission if you make a purchase. --- Building any portfolio should start with an asset allocation plan. Asset allocation is how you spread your investments across different asset classes. It is one of the most important tools for meeting your investment goals. Asset allocation can get complex, but most people don’t need to go beyond the basics. In which asset classes should you invest? Enter the three-fund portfolio: 1. US Stock Index 2. International Stock Index 3. US Bond Index This portfolio may sound too simple or not well diversified. However, between the two stock index funds you would own over 10,000 stocks in over 40 countries. The US bond index holds thousands of bonds from hundreds of issues, including government bonds, corporate, and mortgage bonds. You couldn’t do better yourself if you tried. This is really all you need. How much of each should you buy? First, let’s start by acknowledging I am not a licensed investment professional. I am sharing what I have learned from reading numerous books on asset allocation, and how I invest in my portfolio. You should always consult a professional if you have questions or don't want to be accountable for your own decisions. You need to determine your goals and risk tolerance. If you are investing for a short period of time or are risk averse and will struggle sleeping with the market potentially dropping 50% in one year, you should hold a high percentage of bonds. If you can tolerate a 50% drop in one year, are investing for the long term, and want the best return, you should hold a high percentage of stocks. I’ll give two examples: My portfolio: 55% US Stock, 25% Int Stock, 20% US Bond My Grandpa’s portfolio: 17% US Stock, 8% Int Stock, 75% US Bond Re-balancing - every year you will want to re-balance your portfolio. This is because some asset classes will do better than the others. You don’t want to try and market time, as most investors are horrible at this and end up doing the opposite, selling low and buying high. You need to pick a date and re-balance yearly to your allocation. Glide Path - Most investors should start with more risk when they are young and gradually decrease the risk as they approach retirement. This allows for capturing the long term market returns when a big drop wont really affect you. This is when you are in the building or accumulation phase of life, you are seeking growth and appreciation. However, once you are in the phase where you need the cash, you decrease the risk to avoid having a year where you are cashing out after a big drop. You can even buy one index fund and get what is more or less the equivalent of the three fund portfolio. These are target-date retirement funds. They are the default option in most peoples’ 401k plans. * I said advisors will sometimes get "kickbacks" in the video. The more correct term here is commission. The net effect is you pay more in fund expenses and they get a payment from the fund provider. --- Disclaimer: I am not a financial adviser. My videos are for educational purposes and are my opinions. There is no guarantee you will be successful following my opinions.