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

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

CHAPTER ONE
The Investment Industry
The U.S. investment industry is the largest and most profitable in the world.
A 2013 study by the United States Consumer Financial Protection Bureau
reported the following: “The total amount spent annually by financial
institutions and other financial service providers on consumer financial
products and services, including both awareness advertising and direct
marketing, is approximately seventeen billion dollars.” (Italics mine.) This
money comes out of the pockets of the industry’s customers and goes into
the pockets of company owners, brokers, financial advisors and others
seeking to make a profit at the expense of investors.
Rick Ferri, CFA, a former stock broker, retired financial advisor, and author
of eight financial books, wrote: “Let’s face it: Most investment companies
are in business to make money from you, not for you. Every dollar you save
in commissions and fee expenses goes right to your bottom line.”
Just as the gambling industry wants people to think they can beat the
casino, the investment industry wants investors to think they can beat the
market. Of course, a few lucky gamblers do beat the casino, but MOST
DON’T. It is the same for investors: Some will beat the market, but MOST
WON’T.
Why do some investors outperform the market while others don’t?
Princeton professor Burton G. Malkiel, who co-inspired my “light switch
on” moment, mentioned in the Preface, with my reading of his timeless, A
Random Walk Down Wall Street, offers this explanation: “A blindfolded
monkey throwing darts at a newspaper’s financial pages could select a
portfolio that would do just as well as one carefully selected by experts.”
This, of course, means that in a room full of monkeys, as in a room full of
mutual fund managers, there will be winners. Unfortunately—for monkeys,
managers and investors—the winners are unlikely to repeat.
Bill Miller is a perfect example. Mr. Miller was the manager of Legg Mason
Value Trust (LMVTX). His fund is the only mutual fund that was able to
beat the S&P 500 Index 15 years in a row. Miller became a celebrity in the
mutual fund world, and investors eagerly poured their money into his fund.
Unfortunately, like many winning mutual funds, LMVTX plunged to the
bottom 1% of its Morningstar category over the next 15 years. Remember:
Reversion to the Mean, like gravity, does bring us all back to earth.
Many in the financial services industry hate indexing because it is difficult
for them to make money selling low-cost index funds. The industry spends
billions of dollars attempting to convince us that they can help us beat the
market by choosing winning individual stocks, bonds and mutual funds for
us. (Fact: They cannot.)
In the 35th anniversary edition of the Hulbert Financial Digest, publisher
Mark Hulbert wrote that, when he began tracking newsletters in 1980, there
were 28 of them. Of those 28, only 9 have survived. The rest are gone. Of
the 9 newsletter survivors, only 2 have ever beaten the market (measured by
the Wilshire 5000 Total Market Index) on a risk-adjusted basis. Just 2 out of
28; those are pretty poor odds.
The benefits of low-cost index funds and exchange-traded funds (ETFs),
which Bogleheads have been preaching about for nearly 20 years, are now
becoming more widely known and accepted. The evidence of the superior
performance of index funds has become so overwhelming that, in April
2017, the New York Times reported that, “thanks to the power of its index
funds, Vanguard is pulling in more money than all of the other fund
companies in the business.”

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