Rob Berger

Keeping tabs on your investments can be a headache. That’s particularly true, if like me, you have a number of different accounts. While my favorite investment tracking app is Personal Capital, another tool I use is a free investment tracking spreadsheet. 

I’m going to walk through the spreadsheet in this article and video (see below). You can get a free copy of the spreadsheet here. It’s extremely easy to use and will help you track your investments, asset allocation and mutual fund fees. And as you’ll see, it’s a great tool when it comes to rebalancing your portfolio. 

It consists of three sheets–Asset Class, Holdings and Stocks.

Investment Holdings Spreadsheet

The first step in using the spreadsheet is the Holdings sheet. This is where you should start. The data that I have in here is just demo data. This is not my actual portfolio, though, I do own many of the mutual funds that are listed here. But this is where you start and you want to enter your portfolio. And you could include mutual funds, ETFs, stocks, whatever you’d like. 

The color coded cells in the columns for Account, Symbol (i.e., Ticker) and Shares are the cells where you need to enter information. All of the other cells contain calculated values based on the Ticker.

For each fund we need to designate an asset class (Category column). The drop-down contains most major asset classes, but you can add more. For example, you could add categories for REITs, emerging markets or small cap stocks. (The video below explains how to do this.) 

Next you’ll enter the number of shares that you own for each investment. The spreadsheet pulls in the price using a Google Finance function, and the total value is then automatically calculated based on a simple formula. It works the same with the fund expense ratio. A Google Finance function pulls in the data and the weighted expense ratio is just a simple formula. 

Individual Stock Spreadsheet

The spreadsheet works with individual stock holdings as well. The original version of this spreadsheet, linked to above, contains a separate sheet for stocks. In the current version I use, I just incorporate them into the Holdings sheet. Google Finance functions pull in the same data for stocks as it does for mutual funds (except there’s no mutual fund expense ratio).

In terms of asset allocation, you have two options. You can classify stocks just like we classify mutual funds. I could, for example, classify my holdings of Apple and Berkshire as US stocks. Alternatively, you could create a separate classification called Stocks and separate them from mutual funds and ETFs for purposes of asset allocation. That’s what I’ve done because my Apple holdings have grown so much it skews my asset allocation plan (that’s a good problem to have!). 

Asset Class Spreadsheet

Once you have all of your investments into the holdings sheet, we can then now go to the Asset Class tab. This is where the magic happens. There’s a lot going on here and I want to walk through it for you. 

This is the target asset allocation that we’re using in the spreadsheet. It’s in the My Target column. You’ll want to put in your own target asset allocation. If you add other categories beyond what I have in the spreadsheet, you’ll want to add rows for each here. The best asset allocation for you is going to depend on your age, debt, investment goals, time horizon, risk tolerance, and other factors.

Once you have your target asset allocation, the sheet compares it to your actual allocation. Next you’ll see the difference between the actual portfolio value and what the target is. Now you’ll notice that some of these cells are red and some are white. Red cells mean that the difference between our target and actual allocation is greater than the Threshold we’ve defined in the next column.

As a general rule, I set the threshold for rebalancing at 20% of the allocation for each asset class. For example, an asset class with a 25% allocation would have a threshold of 5%. An asset class with a 10% allocation would have a 0.50% threshold. This is based on research by Dr. Gobind Daryanani, CFP (See Opportunistic Rebalancing: A New Paradigm for Wealth Managers, Journal of Financial Planning, January 2008).

The significance of the threshold is that once an asset class exceeds that threshold, it turns this cell red. Now it’s up to you to rebalance your portfolio, always keeping tax consequences in mind. Of course, you can set the threshold to whatever you want. To help with rebalancing, I’ve added a column to my current spreadsheet to show the amount by which each asset class is over or under my target allocation.

Video

In this video I walk through how to use the spreadsheet. Keep in mind that I’m regularly updating the spreadsheet to add new features, so the current version may be slightly different than what you see in the video.

Final Thoughts

I use this investment tracking spreadsheet primarily to rebalance my portfolio. It’s just much easier than any other stock tracking app. To monitor my asset allocation, investment fees, performance, and retirement goals, I rely on Personal Capital, but there are several really good investment tracking apps available.

A three fund portfolio is a simple approach to investing that, as the name suggests, involves just three mutual funds or exchange-traded funds. In just three funds, an investor can build a diversified, low cost portfolio that’s easy to manage.

Popularized by the Bogleheads, the three fund portfolio is one of several “Lazy Portfolios.”  But don’t let the simplicity fool you. A three fund portfolio has outperformed most comparable actively managed portfolios over the past several decades. In this article, we’ll look at what comprises a three fund portfolio, its diversification, its historical returns, and how to easily build and manage the investments. We’ll also look at a few ways you can supercharge the returns without a significant increase to volatility by adding a few more funds to the mix.

What is a 3-Fund Portfolio?

A three fund portfolio, as the name suggests, consists of just three mutual funds. The three funds cover U.S. stocks, international stocks and U.S. bonds.

U.S. Stocks

The U.S. stocks portion of the portfolio typically consists of a total market index fund. These funds invest in virtually all of the available public companies headquartered in the United States. An example of such a fund would be the Vanguard Total Stock Market Index Fund (VTSAX).

In some cases, an investor can choose to substitute an S&P 500 Index Fund in place of a total market stock index fund. The historical returns and volatility of a total U.S. market index fund and S&P 500 Index fund are very similar. While I prefer a total stock market fund in a three fund portfolio, this may not be an option inside of a 401k or other workplace retirement account. In those circumstances, an S&P 500 Index fund is a perfectly sound alternative. 

International Stocks

For the international stocks, there are many total international stock index funds that one could use. I’ve invested in Vanguard’s Total International Stock Index Fund (VTIAX) for years. This fund invests in public companies headquartered outside of the United States, including in both developed countries (e.g., Germany and France)  and emerging markets (e.g., Brazil and China).

U.S. Bonds

For the bond portion of the portfolio, an index fund focused on U.S. bonds is typically used. For example, the Vanguard Total Bond Market Fund (VBTLX) would make an ideal investment for the three fund portfolio. This fund seeks to track the investment performance of the Bloomberg Barclays US Aggregate Float-Adjusted Index.  This index broadly tracks the government and investment-grade U.S. bond market.

Is a 3-Fund Portfolio Diversified?

At first glance, the three fund portfolio may not seem well-diversified. With just three funds, one can mistakenly believe that it’s too narrowly focused. Here it’s important to remember that one cannot determine the diversification of a portfolio based on the number of mutual funds or ETFs in the portfolio. I’ve seen investment advisors put clients in more than 20 funds, and yet have very little diversity.

In the case of the three fund portfolio, it is extremely diversified. For equities, it includes companies headquartered in both the United States and throughout the world. It includes both large companies and small companies. And while the bond portfolio invests just in U.S. bonds, it covers both government and corporate bonds. 

In fact, each of these funds represent investments in thousands of  stocks and bonds:

• Vanguard Total Bond Market Index Fund:  10,025 bonds
• Vanguard Total Stock Market Index Fund:  3,640 stocks
• Vanguard Total International Stock Index Fund:  7,361 stocks

 Yeah, a three fund portfolio is diversified.

Historical Returns of a 3-Fund Portfolio

The returns of the portfolio depend in large part on how much of the portfolio is allocated to each of the three funds. We’ll look at that in a minute. Based on a standard 80/20 portfolio, however, the returns have been excellent over the last several decades. In fact, over the long-term this portfolio outperforms the majority of actively managed mutual funds.

Since 1987, the three fund portfolio has returned compound annual growth rate of over 16% using the following allocation and assuming a $10,000 starting balance and $500 monthly contributions adjusted for inflation:

• US stock market 50%
• Global stock market excluding the U.S. 30%
• Total U.S. bond market 20% 

Here, it’s important to understand how contributions to a portfolio can affect its returns. In the above screenshot, I assumed a starting balance of $10,000 in January 1987. I also assumed monthly contributions of $500, adjusted for inflation. If instead we assumed a $10,000 initial contribution with no additional monthly investments, the compound annual growth rate of the portfolio would be just over 8.5%. 

Why would this be? It’s because the monthly contributions were made at different price points. With dollar-cost averaging, we invest in both good times and bad. This stream of investments affect the compound annual growth rate of a portfolio, just as systematic withdrawals in retirement do.

Regardless, the three fund portfolio has performed very well over the last three to four decades.

How to Create a 3-Fund Portfolio 

We need to answer three questions when building a three fund portfolio:

1. What percentage do we allocate to each fund?
2. What mutual fund family do we use?
3. Where do we hold our investments?

What percentage do we allocate to each fund?

For long-term investors saving for retirement, I believe that a 90/10 portfolio is ideal. Such a portfolio, however, will from time to time suffer significant losses in the short-term. For those that are unwilling to handle that volatility, an 80/20 or even 70/30 portfolio is certainly reasonable.

As you make the decision, keep in mind that the expected returns and volatility can vary significantly based on the stock to bond allocation. Indeed, it’s the most important decision one makes with regard to asset allocation. The following chart shows the compound annual growth rate and standard deviation of these three portfolios based on an initial contribution of $10,000 and no additional monthly Investments. 

The above allocations are merely suggestions. One of the features of the three fund portfolio is that you can customize the allocation to your specific requirements. Even within say a 90/10 portfolio, there’s no set rule on how much should be allocated to U.S. stocks vs international stocks, for example.

That being said, I tend to put about 60% of the stock allocation in U.S. stocks and 40% in international stocks. This is consistent with the Bogleheads’ approach. 

What mutual fund family do we use?

You can build a three fund portfolio using any low-cost index funds. While Vanguard is the most popular choice, it’s certainly not the only option. Below I’ve listed mutual fund options from major mutual fund companies, and I’ve also included the ETF options from Vanguard.  I’ve also included the funds one could use from the Thrift Savings Plan to build a three fund portfolio.

Vanguard

• Vanguard Total Stock Market Index Fund (VTSAX)
• Vanguard Total International Stock Index Fund (VTIAX)
• Vanguard Total Bond Market Fund (VBTLX)

• Vanguard Total Stock ETF (VTI)
• Vanguard Total International Stock ETF (VXUS)
• Vanguard Total Bond Market ETF (BND)

Fidelity

• Fidelity ZERO Total Market Index Fund (FZROX) or Fidelity Total Market Index Fund (FSKAX)
• Fidelity ZERO International Index Fund (FZILX) or Fidelity Total International Index Fund (FTIHX)
• Fidelity U.S. Bond Index Fund (FXNAX)

Charles Schwab

• Schwab Total Stock Market Index (SWTSX)
• Schwab International Index (SWISX)
• Schwab U.S. Aggregate Bond Index Fund (SWAGX)

Thrift Savings Plan

• C fund
• I Fund
• F Fund, or alternately, the G Fund

T. Rowe Price

• Total Equity Market Index Fund (POMIX)
• International Equity Index Fund (PIEQX)
• U.S. Bond Enhanced Index Fund (PBDIX) 

How to Build a 3-Fund Portfolio in M1 Finance

One of the easiest ways to build and manage the three fund portfolio is through M1 Finance. M1 Finance is an online broker that charges virtually no fees and makes building and rebalancing a portfolio very easy.

One key aspect that makes it ideal is that the portfolio can be rebalanced with the click of a button. M1 Finance does not charge any trading fees, and you can set the allocation of each fund as you wish. As you make new contributions, M1 Finance allocates them to the funds in your portfolio in a way to rebalance them to your original asset allocation.

I created the portfolio in M1 Finance, which you add to your portfolio in M1 Finance if you use the broker.

Supercharge the 3-Fund Portfolio

There are several ways one can increase the expected returns of a three fund portfolio without significantly increasing its volatility. While these require investing in additional funds in the portfolio, the portfolio is still very manageable. In addition, if you use M1 Finance, the addition of one, two or three more funds does not increase the work required to manage the portfolio.

4-Fund Portfolio–U.S. Small Cap Value

A 4-fund portfolio adds a small cap fund to your portfolio. It’s common to use a fund focused on value stocks given their long-term performance.  If you choose to add a small cap fund, you can replace the Vanguard Total Stock Market ETF with a Vanguard S&P 500 ETF, although this certainly isn’t necessary.

5-Fund Portfolio–Emerging Markets

A 5-fund portfolio adds emerging markets to the international portion of the portfolio.  Emerging markets have a higher expected return than developed countries, but they also have significantly more volatility. In the context of an overall portfolio, however, the added volatility should be minimal.

6-Fund Portfolio–REIT

A 6-fund portfolio adds real estate.  Here it’s important to make sure that any REIT funds are held in a tax-deferred retirement account. REITs distribute a significant percentage of their income each year that is taxed as ordinary income. As a result, I would not recommend this 6-fund portfolio for a taxable account.

FAQs

Final Thoughts

The 3-fund portfolio is an easy, diversified and low-cost way to invest. In my view, it should constitute the core of any portfolio, if not the entire portfolio. M1 Finance is an ideal broker to build the 3-fund portfolio, given its zero trading costs, ability to invest small amounts of money, and easy rebalancing tools.

You’ve just come into some money. Whether it’s a bonus, a tax refund, inheritance, or from the sale of a business, a big question is how do you invest the money. Is it better to invest it all at once, or should you spread the investments out over time? In this article we’ll compare lump sum investing versus dollar cost averaging.

Three years ago I sold part of my business. The result was a lump sum that I planned to invest. The big question then was whether to invest it all at once or to slowly invest it over time. I chose lump sum investing, and it worked out well. Yet lump sum investing is not always the best choice. We’ll first look at the difference between these two approaches. Then we’ll walk through nine factors to consider as you make the best choice for you.

Dollar Cost Averaging vs. Lump Sum Investing

Let’s first make sure we understand the terminology. Lump sum investing is easy. You take your windfall and invest it all at once. If you follow an asset allocation plan of 70% stocks and 30% bonds, for example, you would immediately invest the money accordingly.

Dollar cost averaging, by contrast, spreads investments out over time. For example, you may invest 1/12th of your money each month for 12 months. With dollar cost averaging (DCA) , you need to decide over what period of time you’ll put your money to work. In one Vanguard study, which we’ll look at in a minute, they considered DCA investments spread out over 6 months all the way up to 3 years.

There is no one “right” answer to how long you should spread out your investments if you follow the DCA approach. The longer the time period, the longer your money sits in a cash account waiting to be invested. The shorter the time period, the faster you expose your money to the risks and rewards of the market.

9 Things to Consider When Investing a Windfall

1. We Can’t Predict the Future

It’s important to accept that we cannot know in advance whether investing all of the money at once will end up being the best result. There’s just no way to know in advance which approach will put more money in our pockets. In the words of Yogi Berra,

It’s tough to make predictions, especially about the future.

It’s important when it comes to investing that we understand the limitations of our knowledge. Don’t be fooled by investment news that’s filled with market predictions. As Warren Buffett says, a stock market prediction tells us more about the prognosticator than it does the future.

2. Even Accurate Market Predictions Don’t Help

Even if we knew where the market would stand a year from now, we still wouldn’t know whether lump sum investing or dollar cost averaging would lead to the best result. Now that may seem counterintuitive. The reason is simple.

Let’s assume that we knew the market would be up 10% a year from now. What we don’t know is how it got there. We can image three scenarios:

1. The market gradually rises throughout the year, arriving at a 10% gain.
2. The market soars well above 10%, but then falls back down at the end of the year, arriving at a 10% gain.
3. The market tanks well into loss territory, much like it did in 2020, then rises later in the year, arriving at a 10% gain.

For scenario #1, lump sum investing would be best to benefit from the nice steady gains for the year.

For scenario #2, lump sum investing would also work out best. Why? Because we would be buying at the low point for the year. Dollar cost averaging would have us buying at elevanted prices during the year.

Scenario #3, however, would favor dollar cost averaging. Because the market sank during the year, DCA would allow us to invest in the market at lower and lower prices.

So even if we knew the outcome of the market for the year, that still wouldn’t tell us which approach would work out better.

3. Market Valuations can be Misleading

The above example assumed we knew the market would go up by 10% over the next year. Some believe the market is overvalued and may go down over the next year. Even if we assume they are right and that the market will be down by 10% or more, we still cannot know whether lump sum or dollar cost averaging would lead to the best outcome. Why? For the same reasons we just discussed. We don’t know how it’s going to get from where it is today to where it might be a year from now.

4. History Favors Lump Sum Investing

While there’s a lot we don’t know, we do have several factors that can help us make a reasonable decision. Vanguard published a study in 2012 that compared lump sum investing with dollar cost averaging. Here’s how the study worked:

• Vanguard looked at three different markets–the United States, United Kingdom and Australia.
• It then examined rolling 10 year periods from 1926 to 2011. The rolling periods incremented by month, so Vanguard examined over 1,000 10-year rolling periods.
• It considered different stock/bond allocation.
• For dollar cost averaging, Vanguard looked at periods ranging as short as six months to as long as 36 months.

Vanguard found that at the end of the 10-year period, lump sum investing beat dollar cost averaging about two thirds of the time. The results were consistent across the U.S., the United Kingdom, and Australia.

If you’re a numbers person and want to take the approach that gives you the best chance of having more money, then according to this study, lump sum investing would be your best approach. 

5. Avoiding Losses Favors Dollar Cost Averaging

Some of you may be more concerned about losing money than you are maximizing your returns. Vanguard’s study provides insight into this perspective as well. What it found was that during a down market, dollar cost averaging resulted in losses less frequently than lump sum investing. Specifically, the study found that lump sum investing declined in value 22.4% of the time. Dollar cost averaging was down 17.6% of the time.

So if your concern is preservation of assets, dollar cost averaging might be the better approach.

Track Your Investments for free: Personal Capital Review and User's Guide

6. The Difference is Modest

While lump sum investing wins out most of the time, the difference is relatively small. Assuming a 60/40 portfolio in the United States, lump sum investing beat out dollar cost averaging after a 10 year period by 2.3%. So I don’t think we’re talking about huge sums of money. While I’m a big believer that every basis point counts, for most of us it’s probably not a life changing decision.

7. Consider Your Risk Tolerance

Our emotions can get us into trouble when it comes to investing. That’s true when we get scared, and it’s true when we get excited. Both can lead us down the wrong path. Vanguard highlighted this fact in its study:

But if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use. Of course, any emotionally based concerns should be weighed carefully against both (1) the lower expected long-run returns of cash compared with stocks and bonds, and (2) the fact that delaying investment is itself a form of market-timing, something few investors succeed at.

If an investor goes all in with a lump sum investment and then the market craters, it could have a negative effect on them for years to come. To protect against this outcome, dollar cost averaging may be the better approach. It’s also consistent with the concept of loss aversion. As Daniel Kahneman, author of Thinking, Fast and Slow, found back in 1979, “losses loom larger than gains.” 

However you choose to invest a windfall, it’s important to think about the emotional side of investing, not just the numbers. 

8. Focus on Your Goals

It’s always important to consider your ultimate goals. If you can reach your goals taking a more conservative approach, why would you assume more risk? This is particularly true for those nearing retirement.

When you’re 20 and come into some money, you have a long runway to deal with any mistakes that you might make or bad markets. When you’re my age your runway is a little shorter. You don’t have as much time to recover from some big mistakes. So it’s always important when you’re making any financial decisions to always keep the end goal in mind. Once you’ve won the game, stop playing. I think it’s worth keeping that in mind as you make this decision for yourself. 

9. Follow a Plan

You should always have an investment plan. If you want to dollar cost average, come up with a plan, put it in writing and stick to it.

For example, you may decide to dollar cost average over 12 months. You’re going to take one-12th of your money and invest it in each of the next 12 months. Put the plan in writing and then do it no matter what.

Let’s think back to last year–2020. Let’s imagine in January you planned to dollar cost average over the next year. In January and the first half of February, everything seems to be going just fine.Then in March the floor drops out from under us. Would you have stuck to your plan? Would you have continued to invest 1/12th of your windfall each month?

It’s critical that whatever you decide to do, plan it out, put it in writing and stick to it. That avoids the market timing that Vanguard warned about. In fact, if we look back to last year, had you gotten scared and abandoned your plan, you would have come to regret it. Of course, 2020 could have worked out differently. The market could have continued to fall. 

And that’s the point. We don’t know how the market will perform in the future. That’s why it’s so important to come up with a plan, put it in writing, and stick to it. We should do that with our asset allocation plan and our approach to rebalancing.

Final Thoughts

There isn’t one right answer in the lump sum investing versus dollar cost averaging debate. The above, however, represents the key factors to consider. Whatever you decide, put your plan in writing and follow it.

Investment fees can wreck havoc on your wealth. Think bull in a china shop destruction. What’s worse is that it can happen without you even knowing. The fees seem small and insignificant while they drain your portfolio of its earning potential. In this article, we’ll look at just how costly investment fees can be and what you can do about it.

In this article, we are going to examine four aspects of investment fees. First, we’ll look at the numbers to see just how big an impact seemingly small fees can have on your wealth. Then we’ll consider whether high investment fees translate into better returns. Third, we’ll look at how to determine the investment fees you currently pay. And finally, we’ll look at a free tool that I use every day that includes an investment fee analyzer.

Investment Fees Matter . . . A Lot

Even a 1% fee, over a lifetime of investing, can significantly reduce the value of a portfolio. Using Vanguard data, we know that from 1926 through 2019 an 80% stock and 20% bond portfolio returned 9.7% a year. Let’s imagine we invest $1,000 a month over a 40-year career. Using this savings calculator, we know that the portfolio would grow to about $5.8 million.

Yes, compounding is a beautiful thing.

Let’s now assume we pay an advisor 1% of our investments for their services. That’s a standard fee in the industry, although you can find less expensive and more expensive advisors. The result is that on an after fee basis, our returns drop from 9.7% to 8.7%. The result is a portfolio of just $4.3 million. The one percent fee cost us about $1.5 million, or 25% of our wealth.

Fees matter.

High Fees Do Not Generate Better Returns

In defense of fees, some argue that higher fees generate better returns. Studies do not support this conclusion. A study by S&P Global published in 2020 found that actively managed funds underperformed their respective index over a 10-year period:

Large-cap funds made it a clean sweep for the decade—for the 10th consecutive one-year period, the majority (71%) underperformed the S&P 500. Their consistency in failing to outperform when the Fed was on hold (2010-2015) or raising (2015-2018) or cutting (2019) rates deserves special note. Of the large-cap funds, 89% underperformed the S&P 500 over the past decade.

The results for mid-cap and small-cap funds weren’t much better–”84% of mid-cap funds and 89% of small-cap funds underperformed over the longer 10-year period.”

Studies by Morningstar have similar results.

How to Find a Mutual Fund’s Expense Ratio

Determining a mutual fund’s expense ratio is easy. As a starting point, a prospectus will include this information. Most 401k and other workplace retirement accounts should also provide this information. If you know the ticker symbol of the fund, you can also find the expense ratio on Morningstar. I have a video series that walks you through how to use Morningstar’s free tools.

Keep in mind that the expense ratio is not the only fee a mutual fund will charge. They also charge transaction fees that aren’t reflected in the expense ratio.

As for advisors, make sure you understand the fees they are charging you. If you don’t know what they are, ask.

Free Fee Analyzer Tool

Finally, there is a free tool you can use to evaluate your investment costs. It’s called Personal Capital. One feature of the tool is called the Retirement Fee Analyzer. Once you connect all of your investment accounts, the tool first determines the expense ratios of all of your investments. It shows you this information for each fund and it calculates the weighted average expense ratio for your entire portfolio.

Beyond the data, Personal Capital also provides two tools to evaluate your investment fees. First, it compares your fees to a benchmark. Personal Capital uses 0.50% as its benchmark. More importantly, it shows how the fees will impact your wealth over time. Here’s what it looks like.

Keep in mind that the Fee Analyzer does not factor in any advisor fees you may be paying. It just looks at the expense ratios of the funds that are in your portfolio.

It’s easy to forget about investment fees. Yet they are one of the most important aspects of investing. They are also a great indicator of returns. The lower the fees, the higher your returns. That’s why index funds are such an important part of long-term investing.