Three-fund strategy to bind them all

eye of sauron glass cloud to accompany using Sauron's three ring quote for a three-fund strategy.I’m pretty sure Sauron had no need to invest money. But if he did, he’d probably use a three-fund strategy despite being an evil genius. Investing often seems daunting and complex. But it can also be simple.

Simple you say?

There are ETFs, IRAs, Roths, REITs, Stocks, Expense Ratios, Unrealized Gains, Capital loss, CAGRs, Small Cap, Large Cap, Mid Cap, Short-Term, Long-Term, Intermediate-Term, TIPS, T-Bills, T-Notes, CDs, Cash and many more. What’s simple about all that?

Now don’t confuse simple with easy. I mean running a marathon is simple, you just keep running until you cross the finish line. And no-one would say running a marathon is easy. But investing can also be complex for a number of reasons and in no particular order:

1) Financial Education

Not everyone learns personal finance and is financially literate growing up so the world of investing seems complex.

Talking about money even among friends / family also tends to be discouraged. And it’s kind of boring too so likely not the best dinner party conversation topic, unless one is bragging about their bitcoin investment increasing ten-fold. Which is still a bad dinner party conversation topic.

The short guide If You Can is a great way to start learning.

2) Psychology

There’s an incredible amount of psychology when investing. From Fear of Missing Out to Fear of Losing It All. There’s now a whole field of psychology devoted to this area called Behavioral Economics.

It’s easy to be a little irrational when it comes to finance and I’m certainly no exception.

3) Seeking Perfection

Investing choices can also become complex when trying to reach the “best” possible outcome. Whether it’s a complex asset allocation, factor-based portfolio or individual stock picking, they can all make investing more complicated.

And since all the models are based on past-performance, it’s hard to know if they’ll apply over your investing time frame. If you’re 20 years old now, that could be another 45 years of accumulation.

A lesson 20 years in the making

I’m not the world’s fastest learner but even so, it took me an especially long time to appreciate the following, both in investing and in my career:

Perfect is the enemy of good

My point here is that your investing strategy doesn’t have to be “perfect”, it just has to be “good enough”. That 5% small-cap allocation really won’t make all that much difference to your investments.

In terms of strategy, time and saving more money is a much more reliable path to success than hoping for a 9% growth in your investments over the next thirty years. A bird in the hand and all that.

Even Scott Sterling, the world’s unluckiest investor, also managed pretty well despite just about everything going wrong.

Keeping it simple: the three-fund strategy

A simple investment strategy is to use only a couple of low-cost ETFs or mutual funds. These are usually referred to as Lazy Portfolios because, well, you’re being lazy while the portfolios are doing all the work. One of the more common lazy portfolios is the three-fund strategy.

But for more details on that, I’m going to defer to mymoneywizard’s guide to the three-fund portfolio as it’s a great one-stop guide on how to get started.

The image for this article is actually a large disk of gas surrounding Fomalhaut, one of the brightest stars in the sky.

Quote of the Day

An optimist will tell you the glass is half-full; the pessimist, half-empty; and the engineer will tell you the glass is twice the size it needs to be.

– Anonymous

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