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Investing is simple. But it’s not easy. Most people do best with a passive investing approach utilizing index funds. This minimizes unnecessary investing costs, taxes and common behavioral mistakes made when more active approaches to investing are used.

But within this framework, there are countless options for building your portfolio. Strategies range from holding a single fund to building a portfolio of ten or more funds.

Although these strategies have more similarities than differences, it is easy to get hung up on details and get stuck in paralysis by analysis. Ultimately, we each have to decide on a strategy and portfolio that makes sense for us, then act on it.

Taylor Larimore recently released The Bogleheads’ Guide to the Three-Fund Portfolio. This concise easy read makes a compelling argument for this elegantly simple approach to investing.

Here is a review of key concepts of the Three-Fund Portfolio, if this is a strategy you should consider for your portfolio, and whether this is a book you should add to your library.

What is The Bogleheads’ Three-Fund Portfolio?

The Bogleheads’ Three Fund Portfolio consists of three total market index funds; Vanguard’s Total Stock Market Index Fund (VTSAX), Total Bond Market Index Fund (VBTLX) and Total International Stock Index Fund (VTIAX). The Bogleheads are named after Vanguard founder John Bogle. You can build a similar three fund portfolio with index funds or ETFs from companies such as Fidelity or Schwab.

Owning this portfolio means holding over 3,500 domestic stocks, over 8,000 high-quality U.S. bonds and over 6,000 international stocks in a low-cost, tax-efficient manner.

Benefits of Total Market Index Funds

Larimore starts the book with a brief overview of the investment industry, the history of Vanguard and the three total market index funds that make up the Three-Fund Portfolio.

He then dedicates most of his short book to outlining twenty benefits of total market index funds. This section of the book makes a compelling case for using an index fund investing approach. However, the majority of these benefits such as no advisor risk (Benefit 1), no individual stock risk (Benefit 5), low tracking error (Benefit 9), and low costs (Benefit 14) are true of well constructed index funds in general.

Many of the benefits outlined don’t specifically support the Three-Fund Portfolio over other index investing approaches. This level of specificity is what hangs up many investors when constructing a portfolio.

A more compelling argument for using the Three-Fund Portfolio could have been made by focusing on the specifics of this approach that differentiate it from other portfolios, as the title of the book would suggest.

Biggest Benefit of the Three-Fund Portfolio

The biggest benefit of the Three-Fund Portfolio is its ability to provide massive diversification, low costs and tax efficiency while maintaining simplicity. Larimore explains this as he outlines how the Three-Fund Portfolio provides simplified contributions, rebalancing and withdrawals. He also points out the Three-Fund Portfolio provides simplicity not only for DIY investors, but also caregivers and heirs when an investor can no longer manage their own portfolio.

I’d been considering the benefits of simplicity prior to reading the book. Reading it has strengthened my convictions that simpler is better for most investors.

I’ve selected an approach for my own portfolio that adds a small amount of complexity and cost, holding eight funds. This allowed me to give more weight to segments of the market which have little representation in total market funds. I also subdivided funds into segments.

If history is any indicator, the extra risk and effort of giving increased weight to small cap and emerging market funds and subdividing and rebalancing funds gives me a good chance of achieving higher returns over time. Small improvements in returns could substantially impact our lives, given our long investing timeframe and reliance on investment returns due to my decision to walk away from my career so early in life.

However, I helped several family members construct similar portfolios. I’ve since realized most don’t have the inclination to manage that complexity. Nor do they have the need to take on increased risk and cost that comes with it. So we’re gradually moving them towards a Three-Fund Portfolio that’s easier to manage.

I’ll likely migrate my own portfolio in this direction over time. Most investors would likewise benefit from a simple portfolio that is easy to manage on their own.

Too Simple?

Larimore packs a lot of information into a short book. This brevity increases the odds that people will actually read it, implement his recommendations, and thus benefit. For the most part, he hit his mark.

The exception was Chapter 5. This section of the book teaching how to implement the Three-Fund Portfolio felt rushed. It could be confusing to a newer DIY investor who seems to be the book’s primary target audience.

Larimore devoted most of the first fifty pages of the book to laying out the virtues of the Three-Fund Portfolio. He then started Chapter 5 with a step by step process of how to choose your funds, determine your most suitable asset allocation, and decide between mutual funds and ETFs.

After this strong start to the chapter, he advised investing in your retirement plan by looking “first to see if your company plan has a low-cost Target Retirement Fund with a stock/bond mix close to your desired allocation.” The advice to look first to a single target date fund seemed odd, given the emphasis on the Three-Fund Portfolio through the rest of the book.

Larimore then tackles a number of complex topics in only six pages. They include advantages of tax-deferred, taxable and Roth accounts and asset location for optimal tax-efficiency. He also addresses dealing with old investments that don’t fit the Three-Fund Portfolio.

This section was technically accurate and contained some excellent information. However, it could have been better with a more beefed up explanation of these complex topics.

Worth the Read

The Bogleheads’ Guide to the Three-Fund Portfolio is concise, packed with valuable information that can easily be completed in a day. In fact, I read the entire book twice on a recent cross-country flight.

Larimore’s decades of experience managing his own investments and helping other DIY investors as a leader of the Bogleheads is evident.

This book is an excellent resource for a new DIY investor who is overwhelmed trying to put together a portfolio they’re likely to stick with. It will also challenge seasoned investors to test long held beliefs and consider the value of simplifying their investment portfolios.

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