Book Boglehead Guide Three-Fund Portfolio – Taylor Larimore
Retire Richly. Financial independence. The Boggleheads Guide to the Three-Fund Portfolio. Taylor Larimore. Piggybank nose on coins
“The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk” by Taylor Larimore is a personal finance and investment book. Larimore proposes that most investors, including those already financially independent, can achieve superior long-term investment portfolio results with less risk by simply investing in three low-cost total market index funds or passive ETFs. These three Vanguard funds are identified as a U.S. Total Stock Market Index Fund, a Total International Stock Index Fund, and a Total Bond Market Index Fund. It argues the case for "majesty of simplicity" in investment portfolio design and highlights the high costs and unpredictable investment returns associated with actively managed funds and typical investing psychology. Book may help readers towards early retirement; as part of efforts towards financial independence retire early; or otherwise to become financially independent. \
BOOKS BY TAYLOR LARIMORE AND BY OTHER BOGLEHEADS AUTHORS
RATINGS FOR THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO BY TAYLOR LARIMORE
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BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO PROPOSES A SIMPLE, LOW-COST INVESTMENT PORTFOLIO
Embrace Investment Simplicity: The book champions a remarkably simple yet effective investment strategy centered around a three-fund portfolio. This approach involves investing in just three low-cost total market index funds: a U.S. stock market fund, an international stock market fund, and a U.S. bond market fund. By focusing on these broad market segments, investors can achieve maximum diversification with minimal complexity. The book argues that this simplicity not only saves time and reduces stress but also often leads to better long-term results by avoiding the pitfalls of active management and market timing.
The Superiority of Low-Cost Indexing: A core message of the book is the power of investing in total market index funds. These funds are designed to track the performance of an entire market, ensuring investors receive their fair share of returns. The book highlights numerous benefits of indexing, including lower costs, reduced risk, and historically above-average returns compared to most actively managed funds. By avoiding the expenses associated with active management, such as higher fees and turnover costs, index fund investors are positioned to retain more of their investment gains over time.
The Critical Importance of Long-Term Discipline: The book underscores the necessity of staying the course as a fundamental principle for investment success. It advises investors to develop a sound asset allocation plan based on their goals and risk tolerance and to resist the urge to deviate from this plan in response to market fluctuations or short-term trends. The book emphasizes that trying to time the market or chase fleeting returns is often detrimental to long-term performance. Consistency and a long-term perspective are presented as key to weathering market volatility and achieving financial goals.
“Buy three total market index funds ... and put yourself on the far surer road to financial success”
“Three low-cost mutual funds are all you really need”
BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO ADVOCATES A SIMPLE, PASSIVE, LOW-COST, DIVERSIFIED PORTFOLIO
The Three-Fund Portfolio consists of three low-cost total market index funds: These are the Vanguard Total Stock Market Index Fund (or a similar fund from another provider), providing broad exposure to the U.S. equity market; the Vanguard Total International Stock Index Fund (or equivalent), offering diversification across global stock markets; and the Vanguard Total Bond Market Index Fund (or a similar offering), providing exposure to a wide array of high-quality U.S. bonds. The beauty of these funds lies in their vast diversification and low expense ratios.
Low costs are the most reliable predictor of future investment performance: The book cites numerous studies and expert opinions, including those of John C. Bogle and Morningstar, emphasizing that the expense ratio is a key determinant of long-term returns. By minimizing investment costs through low-cost index funds, investors retain a larger portion of the market’s returns.
Diversification reduces risk without sacrificing returns: The Three-Fund Portfolio offers maximum diversification across thousands of securities worldwide. This broad exposure minimizes the impact of any single company or sector’s underperformance, leading to a more stable and predictable investment journey. Experts like Harry Markowitz recognize the fundamental benefit of diversification.
Trying to "beat the market" is a futile endeavor for most investors: Larimore recounts his own unsuccessful attempts at stock picking, market timing, and following investment newsletters. He cites Warren Buffett’s analogy of monkeys throwing darts and the statistical evidence presented in the SPIVA Scorecard and other studies to demonstrate the difficulty, if not impossibility, of consistently outperforming the market through active management.
Simplicity leads to better investor behavior and outcomes: The straightforward nature of the Three-Fund Portfolio makes it easy to understand and maintain. This simplicity helps investors avoid emotional decision-making during market volatility and encourages them to "stay the course," which is identified as the most crucial piece of investment wisdom by John C. Bogle.
PERSPECTIVE OF TAYLOR LARIMORE, AUTHOR THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO
Taylor Larimore brings a wealth of personal experience and a deep commitment to investor education to this book. As a World War II combat veteran, Larimore embodies the discipline and long-term perspective that he advocates for in investing. His narrative is deeply personal, detailing his own journey from a struggling family during the Great Depression to unsuccessful attempts at active investing, including investment clubs, individual stock picking, chasing hot mutual funds, and following market-timing newsletters. These firsthand experiences lend significant credibility to his later embrace of John C. Bogle’s index fund philosophy.
Larimore's pivotal moment came after reading Bogle’s "Bogle on Mutual Funds" and Burton Malkiel’s "A Random Walk Down Wall Street," which convinced him of the merits of indexing. He became a dedicated follower of Bogle’s principles and a key figure in the Bogleheads community, even founding the initial "Vanguard Diehards" online forum, which later became Bogleheads.org. His close friendship with John C. Bogle and his deep understanding of Bogle's vision are evident throughout the book.
Larimore’s perspective is clearly that of an investor advocate, deeply concerned about the costs and complexities that often plague the financial industry and detract from individual investors’ returns. His writing reflects a strong moral belief that finance should be simple, honest, and fair, echoing Bogle’s own ethos. His dedication is further underscored by his decision to donate all royalties from this book to The John C. Bogle Center for Financial Literacy.
“The majesty of simplicity”
“Most investors will be far better off if they follow Taylor’s simple strategy”
BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO – CLEAR, SIMPLE, ACTIONABLE, ENDORSED INVESTMENT PORTFOLIO
Clarity and Accessibility: The book presents a potentially complex topic in a remarkably clear, concise, and easy-to-understand manner. Larimore avoids jargon and uses straightforward language, making it accessible to investors of all levels of experience. The structure of the book, with its numbered benefits and step-by-step guides, enhances readability.
Strong Foundation in Evidence: The book’s recommendations are not based on speculation but are firmly grounded in historical data, academic research, and the collective wisdom of the Bogleheads community. The inclusion of quotes from numerous financial experts further strengthens its arguments.
Actionable and Practical Advice: The book doesn't just explain the theory behind the Three-Fund Portfolio; it provides a clear and practical roadmap for implementation. The five-step guide to getting started, along with advice on fund selection, asset allocation, and account types, empowers readers to take concrete action.
Investor-Centric Approach: True to the Boglehead philosophy, the book consistently prioritizes the best interests of individual investors. It exposes the potential pitfalls of high-cost active management and conflicted financial advice, advocating for a low-cost, simple strategy that puts investors in control of their financial futures.
Reinforcement of Key Principles: The book effectively reinforces core investment principles such as the importance of low costs, diversification, and a long-term perspective. The emphasis on "staying the course" is particularly valuable in helping investors navigate market volatility.
Endorsements from Respected Figures: The praise from prominent financial commentators like Jonathan Clements and Christine Benz, as well as from former Vanguard Chief Investment Officer Gus Sauter, adds significant weight and credibility to the book’s message.
BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO MAY OVERSIMPLIFY COMPLEX FINANCIAL SITUATIONS
Potential for Over-Simplification: While the simplicity of the Three-Fund Portfolio is a major strength, some more sophisticated investors or those with unique financial circumstances might perceive it as an oversimplification. The book primarily focuses on the core strategy and does not delve deeply into more nuanced investment topics or alternative approaches, though it does acknowledge that adding funds increases complexity and cost. However, Larimore explicitly distinguishes "simple" from "simplistic," suggesting the strategy's depth despite its apparent ease.
Limited Discussion of Complex Financial Situations: The book is primarily geared towards the average investor. It offers general guidance on asset allocation and account types but may not fully address the complexities of high-net-worth individuals, those facing intricate tax situations, or those with very specific financial goals beyond general wealth accumulation and retirement planning. While it mentions consulting professionals when appropriate, the focus remains on the self-directed simplicity of the Three-Fund Portfolio.
Repetitive Messaging: The emphasis on low costs and the importance of "staying the course" is repeated throughout the book. While this reinforcement is likely intentional and beneficial for many readers, some might find it somewhat redundant.
“How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors”
“Cost Matters Hypothesis: The gross return ... minus the costs ... equals net return”
WHO SHOULD READ THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO?
Beginner investors: Those new to investing will find the book's clear explanations and step-by-step guidance invaluable in establishing a sound and effective investment strategy from the outset.
Intermediate investors: Individuals who have some investment experience but are overwhelmed by complex strategies or disappointed with the performance of actively managed funds will find the book's simplicity and evidence-based approach refreshing and potentially transformative.
DIY investors: Those who prefer to manage their own investments and want a straightforward, low-cost, and time-efficient strategy will appreciate the practicality and empowerment offered by the Three-Fund Portfolio.
Investors seeking peace of mind: The simplicity and diversification of the Three-Fund Portfolio can lead to greater confidence and less anxiety about investment decisions and market fluctuations.
HOW DOES THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO COMPARE TO OTHER BOOKS?
"The Bogleheads’ Guide to Investing" by Larimore et al. (2006): This book provides a broader overview of the Boglehead investment philosophy and various aspects of investing beyond just the Three-Fund Portfolio.
"The Bogleheads’ Guide to Retirement Planning" by Larimore et al. (2009): This guide focuses specifically on retirement savings and withdrawal strategies, aligning with the long-term perspective of the Three-Fund Portfolio.
"Bogle on Mutual Funds" (1994): This seminal work lays out many of the arguments for index fund investing and low costs.
"Common Sense on Mutual Funds" (1999): This classic emphasizes the importance of simplicity, low costs, and long-term investing.
Other similar works that advocate for simplified, low-cost index fund investing include Bill Schultheis’s "The Coffeehouse Investor" and William J. Bernstein’s "The Four Pillars of Investing" and his booklet "If You Can".
What makes "The Bogleheads’ Guide to the Three-Fund Portfolio" unique is its laser focus on this specific investment strategy. While other Bogleheads books and similar works may cover a broader range of investment topics, Larimore’s guide delves deeply into the rationale, benefits, and implementation of the Three-Fund Portfolio. It serves as a dedicated and comprehensive manual for investors seeking to adopt this particular simplified approach. Furthermore, Taylor Larimore’s personal narrative and his central role in the Bogleheads movement give this book a distinct voice and authority within the community. His decades of experience and his direct advocacy for this strategy, combined with the numerous testimonials from fellow Bogleheads, create a strong sense of community and shared wisdom.
“Investing in index funds is the only way to guarantee that you’ll receive your fair share”
“Stay the course. It’s the most important single piece of investment wisdom”
CONCLUSION - BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO
"The Bogleheads’ Guide to the Three-Fund Portfolio" by Taylor Larimore is a valuable and highly recommended resource for investors seeking a simple, effective, and low-cost path to long-term financial success. It clearly articulates the compelling case for investing in just three total market index funds, supported by robust evidence and the wisdom of the Bogleheads community. Larimore's personal journey and his dedication to investor-centric principles make this book a trustworthy and empowering guide. By demystifying the investment process and emphasizing the power of simplicity, low costs, and diversification, this book provides a clear roadmap for investors to outperform most with less risk and achieve their financial goals with greater confidence and peace of mind.
ABOUT TAYLOR LARIMORE, AUTHOR THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO
Taylor Larimore is a key figure in the Bogleheads community and draws upon his own extensive and often frustrating experiences with active investing before embracing the index fund philosophy championed by John C. Bogle, the founder of Vanguard.
“Simplicity is the master key to financial success”
“A simple portfolio of 3 funds ... less is actually more”
FREQUENTLY ASKED QUESTIONS ABOUT THE BOGLEHEADS GUIDE TO THE THREE FUND PORTFOLIO
What exactly is the "Three-Fund Portfolio" being recommended?
The "Three-Fund Portfolio" is a simple investment strategy that involves holding just three low-cost total market index funds: the Vanguard Total Stock Market Index Fund (for the U.S. stock market), the Vanguard Total International Stock Index Fund (for the non-U.S. stock market), and the Vanguard Total Bond Market Index Fund (for U.S. bonds). Author Taylor Larimore favors the all-market index fund as the best choice for most investors, suggesting they "Buy the haystack" instead of trying to find the needle. Investors can now construct this portfolio with companies like Schwab and Fidelity, which also offer similar low-cost total market index funds.
Why is such a simple portfolio of only three funds being touted as a superior strategy?
The book argues that this simple portfolio can outperform the vast majority of mutual funds over time with less risk.
Low Costs: Total market index funds have low expense ratios and low turnover, leading to significantly lower costs compared to actively managed funds. The book emphasizes that fund costs are key to ultimate returns.
Maximum Diversification: By investing in total market index funds, investors achieve maximum diversification across the entire U.S. and international stock markets, as well as the U.S. bond market, which helps to lower risk. There is no fund or securities overlap in this portfolio.
No Advisor Risk: The simplicity of the Three-Fund Portfolio allows most investors to avoid the additional cost and risks of using a broker or financial advisor.
No Fund Manager Risk: Index funds simply track their benchmark, eliminating the risk associated with individual fund manager performance and their potential departure.
Tax Efficiency: Total market index funds are generally tax efficient, especially when held in taxable accounts, as they tend to have low turnover and generate fewer taxable events.
Simplicity: The portfolio is easy to understand and maintain, requiring low maintenance and making it simpler for investors, caregivers, and heirs. Experts like Jonathan Clements believe that using broad-based index funds to match the market is brilliant in its simplicity.
How do I actually set up a three-fund portfolio?
Choose Your Funds: Select three low-cost total market index funds: a U.S. stock market fund, an international stock market fund, and a U.S. bond market fund. These are available from various companies like Vanguard, Fidelity, and Schwab, all of which offer similar low-cost options.
Determine Your Asset Allocation: Decide on the appropriate percentage of your portfolio to allocate to stocks (both U.S. and international) and bonds based on your investment goals, time horizon, and risk tolerance. The book suggests that for U.S. investors, 20% of your equity (stocks) should be placed in a total international stock index fund. Vanguard offers a free Asset Allocation Tool to help with this decision.
Select Your Account Type: Choose the best type of investment account(s) for your situation, such as tax-advantaged accounts like Traditional or Roth IRAs or 401(k)s when possible, or a taxable brokerage account. The book provides guidance on when to use a Traditional versus a Roth IRA.
Implement Your Plan: Purchase shares of your chosen index funds according to your desired asset allocation within your selected account(s). If you have existing investments, you may need to exchange or sell them, keeping in mind any potential tax implications in taxable accounts. The book provides five steps to minimize taxes when transitioning a taxable account.
Maintain and Rebalance: Over time, your initial asset allocation may drift due to different performance of the asset classes. Regularly review your portfolio and rebalance it back to your target allocation by buying or selling assets as needed. The book notes that rebalancing is easy with only three funds.
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