The three portfolio rule, the old school fund proposed by Jack Bogle in the 1980s believes that all an investor needs is three ETFs in their portfolio.
One ETF for the foundation, one for low risk and the other for high growth high risk.
But risks have changed in the last forty years. In the 80s bonds were perceived as low-risk assets, and treasury bonds were perceived as prime collateral. The idea that bonds have maturity risk, that the principal paid when the bond matures is depreciated away due to monetary inflation did not factor into the equation.
Bond default is not a risk today, as the central bank can create the currency and lend to the government to honour its debt commitments.
But bond investors are releasing that the capital is being eroded due to monetary inflation, and when that becomes a consensus the bond market crashes as it did in 2023.
Bogle advocated bonds in case of a market downturn if stocks drop then bonds will keep a portion of your portfolio safe.
This doesn’t work any more due to the maturity risks currency debasement of holding bonds.
For the year 2022, bonds were down 22% and in 2023 treasury bonds with maturity over ten years fell by more than 40%.
Moreover, if we look at the Vanguard Total Bond Index Fund ETF over five years it is down 15% year to date.
“The three portfolio rule, the old school fund proposed by Jack Bogle in the 1980s believes that all an investor needs is three ETFs in their portfolio”
WIN INVESTING
Applying the three portfolio rule bonds are no longer the safest part of the portfolio
The crack-up boom in the monetizing of public debt in the 2020 pandemic lockdowns and the subsequent worse treasury bond market crash in 2023 could have resulted in a paradigm shift for investors.
So the Vanguard Total Bond Index Fund ETF could continue underperforming for decades.
Bond ETF Vanguard Total Bond Market ETF three-year average of losing money at -2.6% per year. With inflation that is compound losses.
If bonds won’t cut it, applying the three-portfolio rule in 2025, what is the low-risk part of the portfolio?
We must replace the bond ETF with another ETF that will do well when the market drops. The low-risk ETF will not have growth or technology stocks yet will catch a bid in a bull market as we don’t want to be left out from profiting on rising markets.
“The crack-up boom in the monetizing of public debt in the 2020 pandemic lockdowns and the subsequent worse treasury bond market crash in 2023 could have resulted in a paradigm shift for investors”
WIN INVESTING
Look for a US dividend-paying ETF as a low-risk part of your three portfolio rule
Schwab US dividend equity fund SCHD ETF over the past five years is up over 40%.
SCHD pays a dividend of 3.5% and has been growing annually for the last decade.
Even in the SCHD fund’s worst year in 2018, it was down 5.56% and paid a 3.5% dividend.
So, this dividend fund grows when it is good and loses almost nothing when it has a bad year.
Three portfolio rule; the foundational part of the portfolio
So, you want an ETF that tracks the performance of the indexes.
For example, the S&P 500, VOO, SPY, SPLG or an ETF that tracks the total US stock index VTI.
“The ETF risk part of the portfolio seeks the highest potential rewards, but it is also the riskiest part of your investment portfolio” – Win Investing
High-risk part; three portfolio rule
The ETF risk part of the portfolio seeks the highest potential rewards, but it is also the riskiest part of your investment portfolio.
You are seeking higher rewards than investing in the S&P 500.
This ETF will typically consist of technology and growth stocks.
The top money-making stocks are AI technology and all the growth sectors.
There are a bunch of ETFs that can fit into this category
It is best to look for broad-spectrum ETFs rather than a specialist ETF
Broad Growth ETFs include SCHG, QQQM, and VUG.
These ETFs have a wide range of growth companies in various sectors and industries, making them less risky than if they were in one specific industry.
So this might consist of a technology ETF like VGT, Vanguard Information Technology or VanEck Semiconductor like SMH.
So if you put $500 per month for 30 years in Vanguard Total International Stock ETF (VXUS) for a total of 30 years, you would have $398,000,
But if you put $500 per month for 30 years in a Schwab US Large-Cap Growth ETF SCHG, you would have $3,500,000.
“Investors know that we usually have eight to ten good years followed by two bad years” – Win Investing
Here are the ETFs for the three portfolio rule; foundation, safe and stable and high-reward risk
The three best-performing world champion ETFs to hold
Foundational (VOO, SPY, SPLG and VTI)
Safe/stable ETF SCHG
Higher Reward but a little bit risky QQQM, SCHG or VUG.
Investors know that we usually have eight to ten good years followed by two bad years.
The market has a correction or reset and then goes back to a good decade or so.
So why set up your portfolio to protect one year of bad to ten years of good?
The three portfolio rule is about diversification
You want to manage the percentages of where you invest in those three ETFs based on age and what stage you are at in your life.
If you are already in retirement, holding some of that money outside the stock market would be wise.
Retirement age means you have enough money stacked up to live off for the rest of your life.
A market downturn lasts 1 to 2 years, and during that time, you don’t want to be talking money out of the stock market.
Keep three years’ living expenses in a high-yield savings account.
Then allocate 50% in a dividend ETF, 40% in a foundational ETF and 10% in a growth ETF.
If you are 5 years from retirement, allocate 40% in the Dividend ETF, 40% in the foundational ETF, 20% in a growth ETF, and two years cash living expenses.
If you are 10 years from retirement, 40% Dividend ETF, 30% foundational ETF and 30% growth ETF with one year of savings in a high-yield savings account.
20 years from retirement
Dividend ETF 30%, 35% foundational ETF, Growth 35% and six months worth of cash.
30 years from retirement
30% Dividend ETF, 30% foundational ETF, 30% Growth and 10% doing your research into individual stocks and cryptos.
