Focusing on dividends usually leads to suboptimal portfolios where you have insufficient diversification and trail the market on longer time horizons. There’s nothing magical about dividends specifically, and generally you’re better off focusing on total return and getting over the mental hurdle of selling investments during the withdrawal phase.
Three fund portfolios aren’t sexy but they are recommended because they offer excellent diversification, are simple to reason about, and require little to no maintenance.
Only you can choose what’s right for you but my advice is to keep a majority of your investments boring and if you’ve got the itch to chase return allocate a small percentage for “fun” investments where failing won’t break your retirement.
Generally when folks are talking about a three fund portfolio they mean something like VTI + VXUS + BND, rather than arbitrarily grabbing three funds.
A three-fund portfolio is a portfolio which uses only basic asset classes — usually a domestic stock “total market” index fund, an international stock “total market” index fund and a bond “total market” index fund.
Let’s set aside specific funds for the moment, we’ll get back there, first let’s talk about diversification.
In the most extreme portfolio you could yolo Tesla options. This takes on a lot of risk. It could make you a ton of money, or it could lose all your money. Less extreme you could buy a direct single stock, it’s less risk than options, but it could still make or lose you a lot of money if you pick the “right” or “wrong” stocks. It’s very hard to consistently pick the best stocks that have high growth while avoiding the bad stocks that crater. To do it flawlessly would require a time machine or extreme luck.
To mitigate that risk of picking stocks poorly, many people buy baskets of stocks (like the sp500). And you can take this further: Why just the biggest companies and not the total US market? Why just the US and not international stocks? Why just stocks and not other asset classes like bonds or real estate? The short answer is that we don’t know where growth will come from nor the world event that will drive them.
It’s also important to realize that diversification reduces the variance in outcomes, and while people concentrate on the fact that you’ll have less downside it also means less upside. The latter become obvious if you look at which stocks shot up in an index you own and compare your return on the index vs if you’d held just the few stocks that did well. This is why you’ll sometimes hear people call it ”diworsificstion”.
So back to your questions:
Why VTI vs QQQ: they have vastly different diversification profiles (3,500 stocks vs 100), so generally you’d expect QQQ to have more risk, which means more upside and downside potential
Why BND vs SCHD: bonds are a different asset class vs stock, and despite some functional similarities with dividends, they don’t behave the same in all market circumstances, so again you’re looking at a diversification call
None of this is trying to tell you what to do, but I think the framing on your approach is wrong, you’re comparing a diversified portfolio with the return on a less diversified portfolio. Ideally you start with assessing your risk tolerance and then choose allocations from there.
That’s a valid point. I was concerned about the US market being far too tech heavy right now. I have a ton of tech in my 401k naturally because of how it’s investing.
I liked $RSP (equal weight fortune 500) over $VOO or $VTI but the fees seem a hit high. QQQ seemed to allow me to limit my exposure by choosing to just get a little if I want
My brokerage has more passive income based which keeps me stable in tough times or emergencies. Not sure if that is the right call, but it helps me sleep at night.
I like investments that rebalance. The less I need to think about, the better. I’ll be tinkering around with my investing as I dollar cost average into other funds.
Thank you for being so awesome and giving me some great perspectives and offering fill on advice and why you came to those conclusions.
I hear a lot about 3 fund portfolios and such. Wouldn’t it be smarter to focus on dividend investments so you never have to sell?
What are some good investments to consider?
I hear a lot about covered call ETFs and VOO. Is there something I should consider that’s non-stock related?
Boring reply incoming.
Focusing on dividends usually leads to suboptimal portfolios where you have insufficient diversification and trail the market on longer time horizons. There’s nothing magical about dividends specifically, and generally you’re better off focusing on total return and getting over the mental hurdle of selling investments during the withdrawal phase.
Three fund portfolios aren’t sexy but they are recommended because they offer excellent diversification, are simple to reason about, and require little to no maintenance.
Only you can choose what’s right for you but my advice is to keep a majority of your investments boring and if you’ve got the itch to chase return allocate a small percentage for “fun” investments where failing won’t break your retirement.
That’s a solid answer. What I hear a lot of is QQQ, VOO, and, SCHD.
But why not get the best of growth and the best of dividends and forget the VOO?
I’m up for ideas, as you may tell. I don’t know what exactly I am doing yet.
Generally when folks are talking about a three fund portfolio they mean something like VTI + VXUS + BND, rather than arbitrarily grabbing three funds.
I think I understand. I do have a few questions as I go through the info.
Wouldn’t QQQ have a better upside than VTI?
VXUS would be at a tax disadvantage, but likely offset by BND and the US Dollar.
BND is very dependent on interest rates.
I may may am probably am wrong here, but it seems like this strategy seems a bit dated (even through a bit of research I’m seeing that).
Let’s set aside specific funds for the moment, we’ll get back there, first let’s talk about diversification.
In the most extreme portfolio you could yolo Tesla options. This takes on a lot of risk. It could make you a ton of money, or it could lose all your money. Less extreme you could buy a direct single stock, it’s less risk than options, but it could still make or lose you a lot of money if you pick the “right” or “wrong” stocks. It’s very hard to consistently pick the best stocks that have high growth while avoiding the bad stocks that crater. To do it flawlessly would require a time machine or extreme luck.
To mitigate that risk of picking stocks poorly, many people buy baskets of stocks (like the sp500). And you can take this further: Why just the biggest companies and not the total US market? Why just the US and not international stocks? Why just stocks and not other asset classes like bonds or real estate? The short answer is that we don’t know where growth will come from nor the world event that will drive them.
It’s also important to realize that diversification reduces the variance in outcomes, and while people concentrate on the fact that you’ll have less downside it also means less upside. The latter become obvious if you look at which stocks shot up in an index you own and compare your return on the index vs if you’d held just the few stocks that did well. This is why you’ll sometimes hear people call it ”diworsificstion”.
So back to your questions:
None of this is trying to tell you what to do, but I think the framing on your approach is wrong, you’re comparing a diversified portfolio with the return on a less diversified portfolio. Ideally you start with assessing your risk tolerance and then choose allocations from there.
That’s a valid point. I was concerned about the US market being far too tech heavy right now. I have a ton of tech in my 401k naturally because of how it’s investing.
I liked $RSP (equal weight fortune 500) over $VOO or $VTI but the fees seem a hit high. QQQ seemed to allow me to limit my exposure by choosing to just get a little if I want
My brokerage has more passive income based which keeps me stable in tough times or emergencies. Not sure if that is the right call, but it helps me sleep at night.
I like investments that rebalance. The less I need to think about, the better. I’ll be tinkering around with my investing as I dollar cost average into other funds.
Thank you for being so awesome and giving me some great perspectives and offering fill on advice and why you came to those conclusions.