I had to be convinced all other strategies were bad before settling on this one, so I want to save you 20 years of mistakes I made with reasons why they won't beat a 3 fund “Bogle” portfolio.
-
Picking individual stocks is a losing strategy. The market is buoyed mostly by "superstocks." Even if you pick your 20 favorites, if you don't guess correctly and include that decade's "supers" you'll lag the index. If you didn't guess Dell Computer in the 90s (up 55,000%) or stuff like Invisalign or Walgreens this decade, you missed out on a lot of returns that were captured with whole market indexes.
-
Don’t bother with dividends. There’s a lot of focus on stocks that pay out 4 or 5% in cash a year and the desire to dump $1m into them and collect $50k a year in cash and never sell anything, but the way US tax code works, selling stocks for capital gains after 1 year of holding is identical to collecting qualified dividends, so you should only look at total returns and ignore dividends by themselves.
-
Algorithmic trading and Excel schemes won't work. On Quantopian.com you can design complex trading schemes and backtest them against a hundred years of stock data to see if your algorithm should beat the market and then they’ll give the best backtested algorithm access to $100k for the entire next month and let them have the profits. In that month, just as many lag the index as beat it because people are working on Wall Street and making millions a year to design the same algorithms, and it’s a zero-sum game.
-
Active management is a scam. There are tons of articles roasting stock pickers for claiming they can guess which stocks will outperform the index. Some do, but most don’t, and there’s no way to differentiate who can pick winners from who can’t. Check out Warren Buffet’s bet with the hedge fund guys that he won. Further, actively managed funds have much higher fees, which even fractions of a percent will erode your earnings a great deal over decades.
The only guaranteed winning strategy is to hold a majority of the entire stock market (including international if you want, though it's debatable) and a minority of bonds and keep the same percentage by buying and selling as the market ups and downs shift you away from that percentage. Instead of gambling certain companies will do well, you’re gambling that all companies on earth tomorrow will be worth more than they are today, which is pretty safe. Over the past 100 years, if you did this, you’d make about 9% a year.
So at your age you might buy 50% US stock market (VTI), 25% international market (VXUS), and 25% total bond market (BND). Watch out for whether the bonds are municipal; it may make a difference for your taxes. If you give Vanguard a good chunk of money, they’ll give you people to chat with for free about this stuff. Just make the trades yourself so you don’t get hit with their advisor fee.
The bonds won’t make much of anything, and that’s by design. They’re there to get you to buy low and sell high. If you have $500k in the US market, $250k international, and $250k in bonds and the US market tanks in half due to something catastrophic, you’ll have $250/$250/$250 so you’re at 33%/33%/33%. Sell half your bonds that are still worth $250k and buy US stocks at their discounted price to get you back to 50% US stocks. When stocks double, sell high so you have reserve cash during the next downturn to buy stocks when they’re cheap again.
