Don’t know where to start to build a long term investment portfolio? Check out these three professional recommendations.

In my other article of <Why You Are Afraid of Investing and Can Never Be Rich> I addressed a few major concerns people have towards investing. I hope you are ready, or even excited to start building your own portfolio. This article explains three simple professional portfolios. They are simple because you only need to invest two to three products and it is proven to generate decent returns with manageable risks in long term investment.

Let’s have a look.

Portfolio 1: Three-Fund Portfolio

This portfolio strategy is quite famous, as explained from the book <The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk>.

Total Stock Market refers to the total US stock market, such as the VTI from Vanguard. 20% International Stocks is to adding international companies and make the portfolio more diversified, this product could be VXUS ETF from Vanguard, I am sure other companies issue similar products too. Intermediate Bonds are bonds maturing between 5 to 10 years. Bonds tend to fluctuate less than stocks, so adding bonds to your portfolio lowers the volatility and balances out the times when interest rates are low, thus bonds prices are higher. It is also backed by the US government and US agencies, so the risks are lower than stocks.

Since 1970, the annual real return is about 5.8%. The average 10-year rolling CAGR is shown in the chart below.

As you can see, anyone who started investing in this portfolio generates a return between 4% and above in most of the years. In the early 1970s you see a negative return because of the stock market crash. For those who invested in the 90s and in 2009 and 2010. The rolling real CAGR (Compound annual growth rate) is above 6%. If you have read my article of <Do This to Retire Early>, you would know a 4% withdrawal has a high success rate and your wealth will not even decrease. So a return above your withdrawal rate is definitely desired. On average, if someone invested $10,000 into this portfolio, 10 years later the portfolio value is expected to be around $17,651, which could be, of course in reality, higher or lower.

Portfolio 2: Classic 60–40

Another portfolio from Jack Bogle, the author of <The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk> and founder of Vanguard, 60–40 portfolio is even simpler than the three-fund portfolio, make it even more time-efficient when you manage your own portfolio and rebalance over time.

In this portfolio, there are no international stocks. But it does not affect too much of the portfolio diversification. Why? Because if you check the companies in the total stock market, most of them are international companies or companies that have a great footprint globally such as Microsoft, Walmart, McDonald, Amazon, Apple, Berkshire Hathaway, Nike, and so on. The large and mid-cap companies in the total stock market are so much affected by global economy and it is considered by many, diversified, and has the exposure to world economy. The average annual return is at 6.1% since 1970, slightly higher than three-fund portfolio.

As you can see, the rolling real CAGR is somewhat similar to the last portfolio, but the highs are slightly higher and the lows are slightly lower. That is why this portfolio is also a bit more volatile than the last one.

If someone invests $10,000 in a random year, with a 10 year period, according to historical data, the expected value of the portfolio is likely to be at $18,062, which could be, of course in reality, higher or lower.

Portfolio 3: Total Stock Market

In this portfolio, funny it is called a portfolio as there is one investment inside. Anyways, in this portfolio, it only consists of total stock market. Many investors believe that the total stock market is diversified enough and they have a strong trust in the US economy, so they prefer one investment that covers all the aspects they want: return, risk, diversification.

It has no bond and therefore much more volatile. And it depends on the performance of US companies so, for investors who have faith in the US economy and can bear higher volatility, this is the choice. Since 1970, the annual real return is 8%.

With greater volatility, you can see that in good years, the CAGR is much higher, and in bad years, the CAGR is much lower. But overall, long term performance return is higher than the previous two portfolios thanks to the globalization and growing economy of the US and development of US companies. If someone invests $10,000, and 10 years later, the expected return would be $21,604, which could be, of course in reality, higher or lower.

To put these three portfolios side by side:

As you can see, the performance and volatilities are smoothened in the three-fund portfolio due to the bond investment. The standard deviation is close to the 60–40 portfolio. For someone who is a bit more risk-averse, adding bonds to your portfolio will make it less volatile, the downside is potential gain is also less compared to a more stocks-driven portfolio. US total stock market performance is the best among those three, I think largely because of the advancement of technologies and globalization. It allows many companies to expand to emerging markets and outsource to cheaper countries. One funny observation is that when a McDonald opened in a country, it symboled the ‘opening-up’ of its economy. On the other hand, it also shows how aggressive or present US companies are.

Final words

The world will continue developing, the economy will continue growing, there will be events that hit the economy but in the long term, we are living in a world that is constantly changing and evolving. It is interesting to know which portfolio you prefer, we all are different in our opinions and risk tolerance, there is no one-size fit solution. I hope this article is interesting to you to see how simple portfolio can deliver a good return long term.

If you want to DIY your portfolio, here is an article you might be interested in: <How To Build An Investment Portfolio>