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Which is better--15 funds or 4?
Taylor Larimore 11-21-1999, 9:18 PM | Post #17632 | 
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In Conversation 3637 I listed our 15 Vanguard fund portfolio. I have suggested an "ideal" 4 fund portfolio. Why don't I practice what I preach? Reason: the capital gain taxes we would pay makes switching impossible. This is one reason Mel and I developed Conversation # 3321, "Your First Step"--because it is essential to start with a long-term plan that we can stick with.

With the introduction of the Total Stock Market Index fund in 1992 and the Total International Stock fund in 1996, it is no longer necessary to own large portfolios. Now, with only four funds, it is possible to own all the securities in every asset-class, style, and cap-size, in exact proportion to their market weight. These four funds are:

Total Stock Market Fund
Total Bond Market Fund
Total International Fund
A Money-Market Fund

ADVANTAGES:
Maximum Diversification
Zero overlap
No manager changes
No style drift (from index)
Never a need to rebalance
Probability of beating most funds
Never below average performance
Minimum maintenance
Lowest possible cost
Low taxes
Simplicity

I think the advantage of owning this simple portfolio, is nearly overwhelming for most investors. It is easily proportioned to the desired stock/bond/cash allocation.

For those who want to overweight certain areas, it is easy to add the appropriate type fund(s)--and more complexity.

High-income investors should substitute tax-exempt bond funds for the Total Bond Market and perhaps the Prime MM fund. Hi-income invesors 'might' benefit by substituting a combination of tax-managed funds for the Total Stock Market fund.
Taylor

Originally posted in thread: 3679
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