How to Invest for a Lifetime

R
Rob Berger • Aug 06, 2024

Audio Brief

Show transcript
This episode provides a step-by-step guide to constructing a diversified investment portfolio designed to last a lifetime. There are three key takeaways from this discussion. First, start with a simple, broadly diversified core covering global stocks and bonds before adding niche investments. Second, select your core portfolio's complexity from one, two, or three-fund approaches based on your desired control and simplicity. Third, utilize separate stock and bond funds for enhanced flexibility in asset allocation and tax-efficient placement. The foundation of any robust investment strategy is a "non-negotiable core" portfolio. This core broadly covers US stocks, international stocks, and bonds across the global market. Its purpose is long-term growth and diversification before considering specialized assets. The core can be built using one, two, or three funds. A single all-in-one fund, like a target-date or life strategy fund, offers maximum simplicity. Two-fund portfolios separate global stocks and bonds, granting more control over the overall allocation. The three-fund approach further divides equities into US and international segments for granular domestic versus foreign balance. Breaking down the portfolio into distinct stock and bond funds provides direct control over asset allocation. This separation also enables strategic tax location, allowing investors to place different asset types in the most tax-advantageous accounts, such as holding bonds in tax-deferred vehicles. After establishing this core, investors may consider optional "tilts" with smaller allocations to asset classes like real estate REITs or inflation-protected securities for further diversification. By focusing on a simple, diversified core and understanding fund complexity, investors can build resilient portfolios for the long term.

Episode Overview

  • The episode provides a step-by-step guide on how to construct a diversified investment portfolio designed to last a lifetime.
  • It introduces the concept of a "non-negotiable core" portfolio that covers the entire global stock and bond market.
  • The host compares the pros and cons of building this core using one-fund, two-fund, or three-fund approaches, using Vanguard funds as examples.
  • It explores optional asset classes that can be added to the core portfolio for further diversification or to target specific investment factors, such as real estate (REITs) and inflation-protected securities (TIPS).

Key Concepts

  • Non-Negotiable Core Portfolio: The foundational element of the strategy is a portfolio that invests in the entire market, encompassing US stocks, international stocks, and bonds.
  • One-Fund Solutions: The simplest method involves a single, all-in-one fund like a Target-Date Retirement Fund (which automatically adjusts its asset allocation over time) or a LifeStrategy Fund (which maintains a fixed asset allocation).
  • Two-Fund Portfolio: This approach separates global stocks (e.g., VT) and bonds (e.g., BND) into two distinct funds. This gives the investor more control over their overall stock-to-bond allocation and allows for better tax location strategies.
  • Three-Fund Portfolio: This further divides the equity portion into a US stock fund (e.g., VTI) and an international stock fund (e.g., VXUS), paired with a bond fund (e.g., BND). This offers granular control over the domestic vs. international stock balance.
  • Portfolio "Tilts": After establishing the core portfolio, investors can optionally add smaller allocations to specific asset classes like real estate (REITs), inflation-protected bonds (TIPS), emerging markets, or small-cap value stocks to gain more exposure to those areas.

Quotes

  • At 01:06 - "I'm going to first show you what I would call the core of the portfolio. These... for me are non-negotiable." - The speaker introduces his core investment philosophy, emphasizing the importance of starting with a broadly diversified base that covers the entire market.
  • At 03:28 - "These target-date funds include everything we need to build a core, non-negotiable portfolio, but the asset allocation will change depending on which specific target-date fund you choose." - Explaining that a single target-date fund can serve as a complete core portfolio, with its primary variable being the stock/bond mix determined by the target year.
  • At 08:25 - "When you break the stocks and the bonds into two funds, you then get to determine what percentage you put in each." - Highlighting the main advantage of a two-fund portfolio over a single-fund solution, which is gaining direct control over the asset allocation.

Takeaways

  • Start by building a simple, low-cost, and broadly diversified core portfolio that covers US stocks, international stocks, and bonds before considering any niche investments.
  • Choose your portfolio's complexity (1, 2, or 3 funds) based on your desire for simplicity versus control. A single fund is easiest, while multiple funds allow you to customize your asset allocation and optimize for tax efficiency.
  • Splitting your portfolio into separate stock and bond funds gives you the flexibility to place assets in the most tax-advantageous accounts (e.g., holding bonds in tax-deferred accounts like a 401(k) or IRA).