Please note: The following financial “Bootcamp” is still under development. The information is intended for beginner investors — those who want to invest but don’t know where to start. Do not misconstrue this “Bootcamp” as financial advice. This site is meant to educate investors on one investment strategy where many alternatives exist. Best of luck in your financial endeavors!
The (Modified) Three-Fund Portfolio
To preface this “Bootcamp”, it is important to note that there is no “best” way to invest. There are plenty of viable investment strategies — Fundamental Analysis, Technical Analysis, etc. — but Ellipsis Finance advocates for a single strategy (Three-Fund Portfolio) for ease of understanding. This strategy is easy to implement for new investors and relatively safe for risk-averse investors. If you are interested in pursuing higher returns or more active investing, please consider investment strategies other than the below Three-Fund Portfolio strategy.
John Bogle’s Three-Fund Portfolio allocates investments across US stocks, International stocks, and US bonds. By investing in one index fund for each of these three targets, you (the investor) can mirror the respective performances while minimizing your costs. This investment strategy provides diversification via index fund investing, which invests fractional amounts in each company or bond within the index. Diversification reduces risk (similar to “don’t put all your eggs in one basket”), leading to a lower-risk, low-cost portfolio.
Advantages of the Three-Fund Portfolio
Very low-cost and tax-efficient
Never under-performs the market (less stress and worry)
Simple!
Diversification across companies, styles, and cap-sizes
Easy to re-balance
Out-performs most investors
The following buckets describe each of the three aforementioned fund areas while adding a fourth: “Play”. If you do not desire to invest in individual stocks of your choosing, feel free to disregard this fourth bucket. Investing will hopefully be fun, and the “Play” bucket is a way to keep investors engaged and attuned to market events without entirely sacrificing the integrity of this investment strategy. Below the descriptions are potential low-cost index funds with Fidelity, Vanguard, and Charles Schwab.
US Stocks
US Stock index funds seek to match the total return of a massively broad range of publicly traded companies in the US. The exact market coverage may vary by fund.
Fidelity: FZROX
Vanguard: VTI
Schwab: SCHB
Int’l Stocks
International Stock index funds seek to match the total return of a massively broad range of internationally traded (excluding the US) companies. The exact market coverage may vary by fund.
Fidelity: FZILX
Vanguard: VXUS
Schwab: SCHF
US Bonds
US Bond index funds offer exposure to the total bond market comprised of investment grade bonds. The exact bond coverage may vary by fund.
Fidelity: FXNAX
Vanguard: BND
Schwab: SCHZ
Play
This fourth bucket is intended for investors interested in picking individual stocks or ETFs that they believe will grow. This bucket is at the discretion of the investor and holdings may be chosen by fundamental analysis, IPO-hype, etc.
Up to you! Including:
Amazon, Tesla, Google, Draftkings, Square, etc.
Portfolio Allocation by Age
The chart to the right shows a suggested portfolio allocation strategy by age across the four buckets above. Hover over an age (on the x-axis) to see the suggested allocation!
For instance: A 30-year old with a Fidelity account could invest 55% in FZROX, 30% in FZILX, 10% in stocks of his or her choosing, and 5% in FXNAX.
Please note that the recommended allocation assumes a high risk tolerance and aggressive investing mindset. More conservative investors seeking to avoid volatility may choose to increase the US Bonds allocation. That being said, being aggressive may yield higher returns over time.
As a young investor, the vast majority of your portfolio should be in stocks (US and International). Over time, your allocation to bonds will increase with age, as your risk tolerance and time horizon decrease. Meanwhile, your allocation to stocks will decrease proportionally. This recommended allocation assumes 10% reserved for speculative (Individual Stocks) investments. If you have no desire to invest in individual stocks, you may reallocate this 10% to US Stocks instead.
Action Plan
Invest your money in order of these steps, getting as far as you can! Keep in mind that the money you allocate to these investments should only be after paying for your necessities (food, rent, etc.)
Do not worry if you do not complete each of the 8 steps. Any progress is still progress!
Confused? Check Investopedia’s Glossary!
Save in an emergency fund (1-3 months’ expenses)
Max out your 401k / 403b (up to match)
Pay down ALL debt (except mortgages)
Expand your emergency reserves (up to 6 months’ expenses)
Max out your HSA ($3,500)
Max out your IRA ($6,000)
Invest more in your 401k / 403b (up to $19,000)
Invest through your brokerage account