The following article is an excerpt from the book, Work Your Money, Not Your Life .


For most people, investments and food are on opposite ends of the “fun” spectrum. Many would say preparing a meal or going out to dinner (pre-COVID-19 of course) is an enjoyable experience, whereas thinking about investments may bring up feelings of stress, anxiety, or boredom.

Believe it or not, the considerations for constructing your investment portfolio are a lot like planning a meal. You need to figure out your goals and timetable, and perhaps most importantly, how much of the process, if any, you want to handle yourself.



Meal Options

Most of us typically prepare a meal in one of three ways.

The easiest option is to simply go to the prepared foods section of the grocery store and pick up a ready-to-eat meal — requiring you to simply reheat and eat, and leaving you ample time to binge watch Love is Blind on Netflix NFLX. While this option may be the priciest, it requires minimal preparation and cleanup.

Alternatively, you could make the meal yourself, but take some shortcuts by paying a little more for pre-cut vegetables. This way, you’re able to avoid chopping onions and wiping away your tears for what feels like eternity — yet still get most of the benefits of a home-cooked meal.

Or finally, you may opt for the most traditional (and laborious) approach — you head to the grocery store to purchase the individual ingredients you need to make a nice meal, sous chef, cook, and clean up afterward. That may be the cheapest option, but it also takes up most of your evening.

The thought process you go through to decide how to prepare a meal parallels that of how to build your investment portfolio. In both cases, multiple options are available that will get you to the same destination (i.e., nourished or properly invested). However, the cost and time commitment required for each option will vary.

The underlying ingredients you choose to use in your meal or investment portfolio can simplify or complicate your meal preparation or investment plan. Ingredients that simplify either will likely cost a little more.

In both situations, there is no one-size fits-all option that will be right for everyone. People with a greater interest in cooking or investments may gravitate toward the more hands-on, time-intensive options. Those who are less interested may choose to pay more for simpler options requiring little cleanup or ongoing management.

Investment Options

Just like with meals, there are many ways to build an investment portfolio. For do-it-yourself investors, I like to break the process down into three potential base structures you can use.

The first option is to create a one-fund portfolio using a target-date fund. Most of these funds have names that may include “Target Retirement Fund [Year] or “Target [Year].” Not only do target-date funds simplify the upfront selection process since you only need to buy a single fund, but they also take care of the ongoing portfolio management. Specifically, they rebalance the portfolio to the target asset allocation while also decreasing the exposure to stocks in the fund as you approach the specified target retirement date — a task you would be otherwise responsible for handling or outsourcing. This option is most like getting a meal from the prepared foods section.

Another option is to use a three-fund portfolio structure, which was originated by Taylor Larimore and popularized by the Bogleheads. In this portfolio, instead of buying just one mutual fund or exchange traded fund (ETF), you would buy three or more funds to achieve your target mix of stocks and bonds. Typically, the three funds would consist of a total US stock market index fund, a total international stock market index fund, and a total US bond market index fund.

To keep this option rather simple, you could buy the same three funds, in the same proportion, in each of your different investment accounts. On an ongoing basis, you would be on the hook for periodically rebalancing your portfolio to ensure your mix of stocks and bonds in each account was close or equal to your original targets. As you approached your goal target, you would also be responsible for gradually decreasing the proportion of stocks in your portfolio. This option is kind of like preparing your own meal using pre-cut vegetables — it’s a little cheaper than getting a fully prepared meal, but involves more work as well.

Your third option, which I refer to as an asset-located portfolio, would build on the fundamentals of a three-fund portfolio structure. Like the three-fund portfolio, this strategy would require you to buy three or more funds to reach your target mix of stocks and bonds, and you would be responsible for the ongoing rebalancing and risk management of your portfolio.

However, unlike a three-fund portfolio, where you maintained the same mix of stocks and bonds across account types, you would unlikely use the same allocation in each account type with an asset-located portfolio. Instead, you would focus on placing the most tax-efficient investments, like a total stock market index fund, in your taxable brokerage account, and the least tax-efficient investments, like a real estate investment trust fund or taxable bond fund, in either your pre-tax or Roth accounts. Like preparing a meal from scratch, this structure is the most cost and tax-efficient, but it also requires the most amount of work.

How To Decide

When determining which base portfolio to use, you’re trying to balance two competing priorities: efficiency and simplicity.

As your portfolio becomes more efficient from a cost and tax perspective, it will also become more complex and take more time to manage on an ongoing basis. The simplest portfolio includes having just one fund, which is easy to track, and doesn’t require much ongoing management or intervention. The trade-off for that simplicity is you will pay a slightly higher fee, you may lose some flexibility, and you could have a less tax-efficient portfolio.

Some people, like my friend Alberto, are super interested in personal finance and want to be very hands-on with their investment portfolio, so they choose a more complex portfolio implementation that requires a fair amount of upkeep. Others may think of investing as just another item on their to-do list that they need to tackle, and don’t want it to consume their lives. If you fall into the latter bucket, having a one-fund portfolio may be totally fine. You’ll get close to the market return, can rest easy that you’re invested properly, and will still pay low fees compared to investors who use a financial advisor or actively managed funds.

Your Strategy Can Change

The investment structure you decide on today doesn’t have to be the strategy you stick with forever. Circumstances change, and what was best for you in your 20s may not be ideal later down the road. That’s exactly the message David Oransky, financial planner at Laminar Wealth, tells those who want to manage their own investment portfolios.

“If you’re new to investing and have no taxable accounts, a one-fund portfolio could be a good way to get started, and still leaves open the option to change your strategy in the future with minimal consequences,” Oransky says. That’s because with pre-tax and Roth accounts, it’s relatively easy to pivot strategies and move money within those accounts without incurring taxes today.

Having investments in a taxable brokerage account begins to complicate matters because as you sell holdings in a taxable account that grow in value, you could pay hefty taxes. This is why Rick Ferri, financial advisor and author of All About Asset Allocation , among other books, says, “Make sure you’re absolutely in love with the equity mutual funds and ETFs you decide to put into your taxable account because like marriage, divorcing yourself from those holdings later can often be a taxing experience.”

If you’re a novice investor and have a taxable account, Oransky thinks the three-fund portfolio strategy could be a good way to start investing more efficiently, while giving you the flexibility to move to an asset-located portfolio strategy in the future. “If you start with a three-fund portfolio strategy in each of your accounts and down the road decide it’s worthwhile to asset-locate across your accounts, you could likely sell the bond fund in your taxable account with little to no capital gains tax,” he says.

This article was written by Roger Ma from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.

Thomas J Cooper, CFP®, CPPT profile photo
Thomas J Cooper, CFP®, CPPT
Certified Financial Planner, Fiduciary
NAMCOA (Naples Asset Management Company®, LLC)
Mobile : 352-857-7273