Investors have more choices about where to put their money than ever before. There is a wide range of available stocks and bonds, as well as mutual funds, including exchange-traded funds, that combine those two basic vehicles. Add in options, futures and other derivatives, and there is no end to the different kinds of portfolios available.
There are questions about whether or not all of these elements are really necessary for a successful portfolio. Certainly there is a case for ownership of individual stocks or bonds, but a group of people who call themselves “Bogleheads” (after Vanguard Group founder John Bogle, the father of index investing) has argued that three mutual funds or ETFs can provide enough diversification to make up a well-balanced portfolio.
Owning only three funds would certainly cut down on the time it takes to review your portfolio statements, but is a portfolio of just three funds really a good idea? Managing Editor Bobby Raines and Analyst Julian Close debated the issue recently.
Bobby: I think the Bogleheads are basically right on this one. The original suggestion was three Vanguard funds: one that tracks a total U.S. stock market index, one that tracks an international stock index that excludes U.S. stocks and one that tracks investment-grade taxable U.S. bonds. The suggestion was to put 40% in U.S. stocks, 20% in international stocks and the remaining 40% in the bond fund. That gives this portfolio the 60/40 split that is pretty much the industry standard for a well-balanced portfolio.