When I began my stock market journey, I was always searching for the next big stock that was going to make me RICH. I kept falling victim to the “stock market experts” out there that promised endless riches if you invest in *insert stock in an up-and-coming industry here*. I was investing in tech start-ups, marijuana stocks, 5G chipmakers, etc. This investment strategy, however, was doomed to continue losing me money. So I got real, and started investing like the true experts.
The hard truth is, there is not one sure-fire method to get rich quick in the stock market. You can try, but you will fail. So what am I investing in now? What should you invest in now? Turns out you only need 3 investments in your portfolio to beat the market average. Let’s see what they are.
What Should You Invest In Now?
As stated above, there is no proven method for predicting the stock market, and getting rich quick. There are plenty of cases where it has happened, sure, but there have been sooo many more people out there that fail miserably, and lose thousands upon thousands of dollars as a result.
Why take up that much risk with your hard-earned money when you can use a simple investment strategy that will consistently earn you a rate of return that beats the market average?
So how is it that I only need 3 investments in my portfolio to beat the market average? Don’t you need diversification to withstand the market volatility?
Yes, you do. Luckily, this strategy involves 3 ETFS (Exchange-Traded Fund). You can generally never go wrong with ETF’s, they’re traded like stocks and are available on pretty much every brokerage, but they serve as mutual funds with much lower fees.
Essentially they encompass a large amount of a certain type of stock. For example, some ETF’s encompass high-dividend paying stocks, some might be for the Tech industry, and some follow the S&P500.
Therefore, the diversification aspect for your portfolio is taken care of since each ETF includes a basket of stocks.
So which 3 ETF’s should we invest in?
The 3-Pronged Investment Approach
1. U.S. Stocks
Your primary ETF that you want to invest in should be the U.S. stock market. There are two main indices that will work.
Vanguard Total Stock Market ETF (VTI): This ETF includes every single U.S. based stock on the market.
Vanguard S&P500 ETF (VOO): This ETF mimics the S&P500 index, or the top 500 companies in the U.S.
For comparison: VTI vs VOO
Both of these have historically performed very well, and you really can’t go wrong with either. It will be up to you which to choose. Read more about it here.
2. International Stocks
For your second investment you’ll want to diversify it up a little with some International stock. The two ETF’s that I’d recommend are:
Vanguard Total World Stock ETF (VT): The Vanguard Total World Stock is, as you would expect, an ETF that mimics the world’s stock market index (including the U.S.).
Vanguard Total International Stock ETF (VXUS): This ETF is similar to VT, except it excludes the U.S. stock market. It gives you good exposure to developed markets in the world such as Europe, as well as emerging markets such as China and Latin America.
Again, both of these have historically performed well. You may be wondering, wouldn’t VT be pretty much the same as combining VTI+VXUS?
The answer is: Sort of. Many people prefer the VTI+VXUS approach over investing in VT for various reasons: You have more control over what % you put into each, whereas VT simply holds 98% of the world’s equities weighted by market caps.
In addition, you can save a bit of money from cheaper expense ratio’s in the VTI+ VXUS method.
If you’re exclusively looking at VT vs VXUS, however, VT is slightly more tax-efficient. Read more about it here.
3. U.S. Bond Market
The third and final market you’ll want to invest in is the U.S. Bond market. This will add stability to your portfolio since stocks are so volatile.
Bond Market’s typically move opposite of the stock market, including in market crashes.
If you’re young, you won’t need much of this in your portfolio. As you get older, however, you’ll want to increase your percentage in the bond market, and diversify further with the International Bond market.
The only U.S. Bond ETF you need to worry about is:
Vanguard Total Bond Market (BND): BND is relatively steady through market crashes, and a great conservative holding to diversify your portfolio.
If you’re at the point in your life where you want to make your portfolio even more conservative, a good international bond stock is BNDX: Vanguard Total International Bond ETF.
How Much Should I Invest In Each?
Once you get your 3 ETF’s picked out, the next question would be how much to allocate in each one?
This depends on your age and how aggressive you want to be.
If you’re in your early twenties, you may not want to even invest in the bond market at all (for now). Allocate between 60-70% in the U.S. stock market and between 30-40% in the International market.
At this age, you can take on more risk so it would be okay to invest 1-10% into one or two individual stocks that you believe in, such as Amazon or Tesla.
The older you get, however, the more conservative you’ll get: Put more of your allocations into the bond market ETF.
A good general rule of thumb for the 3-pronged investment approach would be:
60% U.S. Stock Market
30% International Stock Market
9% U.S. Bond Market
1% Other/Individual Stock you believe in.
I know I know, there’s 4 allocations there. But 99% of your holdings fall into the 3-pronged approach, and this allows you to take on slightly more risk for more gains.
Shift your portfolio focus as you get closer to retirement to be more conservative.
Do your due research before investing in the stock market. Be smart with your money, don’t fall for all the get-rich-quick scams that are out there. This 3-pronged strategy is a method Warren Buffet himself would approve of for most people.
Now, this approach is for someone that doesn’t want to spend a ton of time doing market research.
If you do plenty of research, there are more lucrative strategies out there that can work better. But in general, this is a simple strategy that works just fine for making nice gains at relatively low-risk.
You will earn 7% to 10% returns per year with this method. It is safe, diversified, and proven.
If there’s anything that you should take away from reading this: less is more.
You don’t need 20 different holdings in individual stocks. Sure, the 3-pronged strategy isn’t as exciting as buying Tesla, Disney, and Coca-Cola stocks, but it will certainly earn you profits above market-average at low-cost.
Now, here are the steps you’ll want to follow to get this strategy going:
To maximize this method, you want to set up automatic investments. Pay yourself first, have the money go into your portfolio before you ever see it.
Then, depending on the brokerage you have, you’ll want to set up the automatic Dividend Reinvestment option.
The final step is to forget about it. Just let your money build overtime. No need to check it everyday, it’s going to have it’s ups and downs, but it will always go up in the long-run.
If you’re checking it every day, you may be tempted to sell when the market dips. No, no, no. Don’t you dare touch it. A market dip is just a dip, it will go back up.
The mindset for dips and crashes is that everything is on sale. So buy more before the market prices rise again.
Here’s a graph that illustrates this nicely:
Then, in 10 years, you’ll check your portfolio and see that it has grown waaay more than if you had continued trying to “beat the market”.