Index funds.
Own the entire market at minimal cost.
An index fund is a fund designed to match a market index, not beat it. Over 15 years through 2024, no U.S. equity category had a majority of active managers beating their benchmark. The cheapest, most boring option, owning the entire market via an index fund, has beaten most professionals consistently.
Per the SPIVA 2024 scorecard: 65% of large-cap U.S. active managers underperform the S&P 500 over a single year, more than 90% over 10 years, and 0 out of 22 U.S. equity categories had a majority beating their benchmark over 15 years. Owning the index, paying 0.03%, and not touching it has beaten most professional managers consistently. The three-fund portfolio (total US, total international, total bonds) is the simplest implementation.
Section 1 · What an index fund actually is
An index fund is a fund designed to match the performance of a market index, not beat it.
The S&P 500 index: the 500 largest US companies by market capitalization. An S&P 500 index fund holds all 500 stocks in proportion to their market cap. When a company grows, its weight in the fund grows. No manager picks stocks. No manager charges high fees to do so.
ETF vs mutual fund
- ETFExchange-Traded Fund (ETF)A basket of investments (stocks, bonds, or Bitcoin) that trades on a stock exchange like a single share.: trades on an exchange like a stock. You buy and sell at market price during trading hours.
- Mutual fund: priced once per day at close. You buy and sell at the next day's net asset value.
For long-term investing the difference is minimal. Pick the lower-expense option from a major provider (Vanguard, Fidelity, Schwab).
Section 2 · The three-fund portfolio
Popularized by John Bogle (founder of Vanguard) and the Bogleheads community verify×DON'T TRUST, VERIFYClaim: The three-fund portfolio was popularized by John Bogle and the Bogleheads community.Verify at: Bogleheads three-fund portfolio wiki ↗The Bogleheads wiki is the canonical reference for the philosophy and implementation..
Fund 1: Total US Stock Market
- Holds every publicly traded US company. Large, mid, and small cap in proportion to market cap.
- Vanguard: VTI (0.03% expense ratioexpense ratioThe yearly fee an investment fund charges, taken as a small slice of your balance. A 0.03% ratio costs $3 per year on every $10,000 invested. Lower is better.Full definition)
- Fidelity: FZROX (0.00% expense ratio)
- Schwab: SCHB (0.03% expense ratio)
Fund 2: Total International Stock Market
- Every publicly traded company outside the US. Developed and emerging markets.
- Vanguard: VXUS (0.07% expense ratio)
- Fidelity: FZILX (0.00% expense ratio)
- Schwab: SCHF (0.06% expense ratio)
Fund 3: Total Bond Market
- US investment-grade bonds, government and corporate. Lower return than stocks, lower volatility.
- Vanguard: BND (0.03% expense ratio)
- Fidelity: FXNAX (0.025% expense ratio)
- Schwab: SCHZ (0.03% expense ratio)
verify×DON'T TRUST, VERIFYClaim: Expense ratios for VTI, VXUS, BND, FZROX, FZILX, FXNAX, SCHB, SCHF, SCHZ as listed.Verify at: Vanguard fund pages ↗ · Fidelity fund research ↗ · Schwab Asset Management ↗Expense ratios change rarely but check current values before purchase.
Section 3 · Asset allocation
The stock/bond split depends on your age and risk tolerance.
110 minus your age in stocks, the rest in bonds. At 30: 80% stocks, 20% bonds. At 50: 60% stocks, 40% bonds. At 70: 40% stocks, 60% bonds. The right number for you depends on your specific time horizon, income stability, and ability to hold through a 50% market drop without selling.
US vs international allocation
One of the most debated questions in passive investing. The honest position: we do not know whether US or international will outperform going forward. Holding both eliminates the need to predict.
Common splits within the stock portion: 60-70% US, 30-40% international.
The Bitcoin holder's view
Bitcoin serves a function similar to international diversificationdiversificationSpreading investments across different assets so a drop in one doesn't devastate your entire portfolio.Full definition and inflationinflationA general increase in prices over time, meaning each dollar buys less than it did before.Full definition protection. A Bitcoin holder might simplify to US stocks plus Bitcoin, reducing bond and international allocation. The full case is in Bitcoin Allocation. The honest counter: Bitcoin's volatility is not the same as bonds' stability, and it is much shorter-history than the S&P 500.
Section 4 · Why expense ratios compound
An expense ratio is the annual fee a fund charges, expressed as a percentage of your investment.
- 0.03% on $100,000: $30 per year.
- 1.00% on $100,000: $1,000 per year.
The difference compounds. $10,000 invested for 40 years at 7% gross return:
- 0.03% fund: approximately $146,600
- 1.00% fund: approximately $102,900
- Difference: approximately $43,700
Add $500 per month over 40 years at the same return:
- 0.03% fund: approximately $1.31M
- 1.00% fund: approximately $978,000
- Difference: approximately $330,000
The 1% fee is not 1% of your returns. It is 1% of your entire balance every year. Over decades the compounding cost is enormous. See Expense Ratio Impact Calculator for your specific numbers.
Section 5 · Tax-loss harvesting (taxable accounts only)
Selling an investment at a loss to realize a tax deduction, then buying a similar (but not identical) investment to maintain market exposure.
Example
- You hold VTI (Total US Market).
- VTI drops 20%.
- You sell VTI, realizing a $20,000 capital losscapital lossThe dollar amount you lose when you sell an investment for less than you paid for it. The IRS lets you use these losses to cancel out investment profits and save on taxes.Full definition.
- You immediately buy SCHB (similar exposure, different fund family).
- You have a $20,000 tax loss to offset other gains. Your market exposure is unchanged.
The wash-sale rule
You cannot buy the "same or substantially identical" security within 30 days of selling at a loss. VTI and SCHB are different enough (different fund families, different underlying indexes) to avoid the wash-sale rule verify×DON'T TRUST, VERIFYClaim: The wash-sale rule prohibits repurchasing the same or substantially identical security within 30 days of selling at a loss.Verify at: IRS Topic 409 ↗"Substantially identical" is interpreted by tax professionals; consult a CPA for edge cases..
Bitcoin is currently not subject to the wash-sale rule. You can sell at a loss and immediately repurchase. Verify whether legislation has changed this in your tax year. See Tax-Loss Harvesting for the full mechanics.
When it matters
- Only useful in taxable accounts. Not relevant in IRAsIndividual Retirement Account (IRA)A personal retirement savings account with tax advantages. Two main types: Traditional (tax now, pay later) and Roth (pay now, tax-free forever).Full definition or 401(k)s.
- Most impactful during market downturns when you have other gains to offset.
- Up to $3,000 of net losses per year can offset ordinary income; the rest carries forward.
- S&P Dow Jones Indices. SPIVA U.S. Year-End 2024 Scorecard. · spglobal.com/spdji/spiva. 2024 data: 65% large-cap underperform 1 year, >90% over 10 years, 0 of 22 U.S. equity categories had a majority of active managers beating their benchmark over 15 years.
- Bogleheads three-fund portfolio wiki · bogleheads.org/wiki/Three-fund_portfolio.
- Bogle, John C. The Little Book of Common Sense Investing. Wiley, 10th anniversary edition, 2017. The full mathematical case for indexing.
- IRS Topic 409: Capital Gainscapital gainsThe profit from selling an asset for more than you paid for it. Taxed differently depending on how long you held the asset. and Losses · irs.gov/taxtopics/tc409. Includes the wash-sale rule.