The Best Starting Portfolio for Busy Doctors

Physicians and Doctors have busy schedules. Full-time clinicians often work well over 40-hour weeks. Managing their assets can prove burdensome for physicians looking to prioritize their financial health. Between their professional careers, social life, health, and hobbies, how is a doctor supposed also to be the arbiter of their financial prosperity? Is there a simple way to diversify and manage your investment portfolio? Are any mindless options offering financial security and match (or beat) market returns? I am here to introduce you to the best starting portfolio for doctors. The Three-Fund portfolio is different from my idea, but its strategy is simplistic and perfect for doctors looking to maximize returns and minimize headaches. Here is the best starting portfolio for busy doctors!

Understanding the Three-Fund Portfolio

The Bogleheads’ community originally popularized the Three-Fund Portfolio. For those who do not know, the Bogleheads is a term to honor Vanguard founder John Bogle. Bogleheads are investing enthusiasts who participate in the Boglehead forums. Jack Bogle largely inspires their investing advice, and their campaign is to ‘give ordinary investors a fair share.’ Sounds pretty good to me! 

The Three-Fund Portfolio consists of three essential index funds:

• The Total U.S. Stock Market Index Fund
• The Total U.S. Bond Market Index Fund
• The Total International Stock Market Index Fund

This approach is crucial as it prioritizes diversification across domestic and international stocks and bonds. This helps mitigate risk and enhances the long-term growth potential. The genius of this strategy lies in its simplicity, making it the best starting portfolio for busy doctors.

The Relevance of the Three-Fund Portfolio for Doctors

Medical professionals often need more time to dedicate to managing their investments due to the demanding nature of their careers. The Three-Fund Portfolio aligns perfectly with their needs, offering a low-maintenance yet effective investment strategy. By focusing on a smaller number of low-cost index funds, doctors can avoid the complexities of active trading and free up more time for their personal lives, interests, and professional careers.

In other words, unless you have a burning desire to micromanage your investment portfolio or to day trade (and statistically, you shouldn’t), then the Three-Fund strategy is the best of both worlds. There is ample evidence that everyday investors rarely beat market returns.

Why waste extra time researching individual stocks when you can index the market, diversify across asset classes, and then move on! Its relevance lies in its ability to diversify your investments across domestic and international stocks and bonds while keeping the overall theme simple. Let’s talk about the crucial benefits of this approach, the best starting portfolio for busy doctors!

Benefits of the Three-Fund Portfolio

The benefits of the Three-Fund Portfolio are vast; however, for the sake of this article, three categories of benefits are worth discussing. These include diversification, cost-effectiveness, and effort (or lack thereof). Let’s briefly touch on each.

Diversification

The first significant benefit of the Three-Fund Portfolio for doctors is its diversification. Though simple, it is effective. See, the Three-Fund Portfolio’s allocation to stocks and bonds provides broad diversification. This reduces vulnerability to market volatility or significant economic changes. This diversification helps cushion the impact of any asset’s poor performance on the entire portfolio.  

Here is an example. Let’s say you feel you are a savvy day trader and remain bullish on Tesla stock. If Tesla makes up 20% of your portfolio and the company takes a massive hit, then you lose… a lot depending on how much you have invested. However, though Tesla has a significant market share in the U.S. economy if you use Vanguard’s Total Stock Market Index Fund Admiral Shares (VTSAX) for your U.S. stock investments, then given how their fund is weighted based on market share, if Tesla tanks, then only 1.62% of this VTSAX is impacted.  

This is what the safety of diversification offers. Of course, this means that if Tesla skyrockets in price, you receive less benefit, but rarely can investors predict this. As such, it is best to get rich slowly.

Cost-effectiveness

Next, let’s touch on the cost-effectiveness of the Three-Fund Portfolio approach. Index funds typically have lower expense ratios compared to actively managed funds. The Three-Fund Portfolio’s emphasis on low-cost index funds minimizes fees, allowing doctors to keep more of their investment returns.  

Picking on Vanguard’s VTSAX again, they currently advertise an expense ratio of 0.04%. The expense ratio is a fee charged to the investor (you) to cover a fund or ETF’s operating cost. They are deducted from dividend and capital gains distributions, not the principal. Compared to one of the largest actively managed ETFs, JPMorgan Equity Premium Income ETF, and their expense ratios of 0.35%! 

Let’s say you have $10,000,000 to invest. You want to put it away in a single fund for 20 years and never touch it; just let it accumulate interest. For this example, you can expect a yearly investment return of 6%. If you put all $10,000,000 into Vanguard’s VTSAX and left it alone, with an expense ratio of 0.04%, the future value of your investment by 20 years would be approximately $31,830,172.52. Over those 20 years, Vanguard’s expense ratios would cost you $241,182.20.  

Let’s say instead you invest all $10,000,000 into the JPMorgan Equity Premium Income ETF with an expense ratio of 0.35%, still with an estimated yearly rate of return of 6%. Now, at 20 years, the future value of your investment would be $30,018,571.93. With its higher expense ratios now, this actively managed fund would cost you nearly $2,052,782.79 over that same 20-year period. This is a difference of $1,811,600.59! Just by using a well-diversified Vanguard fund, you would save yourself almost $2,000,000.00 in fees! 

Minimal effort

The final benefit worth discussing is the minimal effort required for the Three-Fund strategy. With a simple asset allocation and periodic rebalancing, the Three-Fund Portfolio requires minimal ongoing management. Physicians can rest assured that their investments are on track without constant monitoring.  

For things that matter, like our financial well-being, effort is essential. However, the caveat to remember is that more investment effort does not necessarily correlate with larger revenue generation at a certain point. Sometimes, the more straightforward approach may also be the best!

Performance and Historical Analysis

Historical data also supports the effectiveness of the Three-Fund Portfolio approach. Don’t believe me, check out its metrics on Portfolios Lab. This link likely offers more information than you care to know, but for the quants out there, I decided to include it. The story’s moral is that this strategy has demonstrated consistent growth over the long term and outperformed more complex investment approaches. While critics may argue that its simplicity could lead to underperformance, historical performance shows that the Three-Fund Portfolio has held its own against more intricate investment methods.  

Implementing the Three-Fund Portfolio step-by-step

Now I have you convinced that this strategy may be helpful. Let us briefly discuss how this strategy can be implemented for your portfolio.  

Fund selection

Choose reputable index funds with low expense ratios. Opt for a Total Stock Market Index Fund, a Total Bond Market Index Fund, and a Total International Stock Market Index Fund to cover a wide range of assets. Here are some examples to get you started:

Vanguard

• Vanguard Total US Stock Market Index Fund Admiral Shares (VTSAX)
• Vanguard Total International Stock Index Fund (VTIAX)
• Vanguard Total US Bond Market Fund (VBTLX)

Fidelity

• Fidelity ZERO Total Market Index Fund (FZROX)
• Fidelity ZERO International Index Fund (FXILX)
• Fidelity US Bond Index Fund (FXNAX)

Charles Schwab

• U.S. Broad Market ETF (SCHB)
• International Equity Index ETF (SCHF)
• US Aggregate Bond Index ETF (SCHZ)

Blackrock iShares

• iShares Core S&P Total Market ETF (ITOT)
• iShares Core MSCI Total International Stock ETF (IXUS)
• iShares Core Total US Bond Market ETF (AGG)

These are just a few examples of the Three-Fund Portfolio strategy using various exchange-traded funds (ETFs) or mutual funds. To see more examples, check out this article on bogleheads.org about the Three-Fund Portfolio.  

Asset allocation

Next, let’s discuss your asset allocation. Here, it is vital to determine the allocation that suits your risk tolerance and financial goals. A common approach is a 60% allocation to domestic stocks, 20% to international stocks, and 20% to bonds. Some argue that this is still a high-risk asset allocation. That is true in a sense, but many parameters also influence it.

In his book The Bogleheads’ Guide to the Three-Fund Portfolio, Taylor Larimore says that your bond allocation percentage should reflect your age. For example, if you are 30 years old, you should allocate 30% of your assets to bonds. If you are 70 years old, you should allocate 70% to bonds, as you are likely entering or already in retirement, and market volatility can directly impact your retirement fund and quality of life.  

Brokerage account

How does one house this Three-Fund Portfolio? Open an account with a reliable brokerage that offers the selected index funds mentioned. Many brokerage firms provide commission-free trades for specific funds. I choose to use Vanguard as they are user-friendly, straightforward, and their customer service has always been excellent. If you are looking for more information on the best platforms and apps for investing, check out The Best Investment Apps and Platforms for Busy Physicians!

Initial investment

How much should one initially invest? Well, my friend, that is strictly up to you. Some of these funds may have an initial investment requirement. For example, Vanguard’s VTSAX admiral shares require an initial investment of $3,000.00. However, shop around, review individual investment platforms, expense ratios, and barriers to entry, and decide what suits your needs!  

Rebalancing

Lastly, let us discuss the importance of rebalancing. Rebalancing means regularly reviewing your portfolio to maintain the desired asset allocation. This can help ensure that market fluctuations don’t overwhelmingly skew your investments. If you apply the Three-Fund Portfolio to your investments, stocks or bonds may over or underperform over time. As this continues, it will affect the overall percentage distribution in each asset class. I recommend rebalancing at least annually.   

Overcoming challenges and pitfalls of the Three-Fund Portfolio

While the Three-Fund Portfolio offers substantial advantages, challenges can arise. These can include emotional investing, market volatility, and the temptation to time the market. To overcome these challenges, staying disciplined and avoiding impulsive decisions is essential. Ensure that a long-term perspective is maintained, and you will create a sound financial footing and not fall prey to market ‘fads.’ As with any investment strategy, it could be better. However, for the busy, hard-working doctor, this strategy offers time-tested and simplistic strategies to help you safely build wealth.  

Additional resources for learning

Books

While creating this article, I utilized several additional resources that I found very helpful. The first resource is a book I have sitting on my bookshelf. It is The Bogleheads’ Guide to Investing. It is a great read and an introduction to practical and effective investing advice. Further, Taylor Larimores The Bogleheads’Guide to the Three Fund Portfolio is another great supplemental read. I highly recommend both of these books. 

The White Coat Investor

The White Coat Investor offers many great articles on the Three-Fund Portfolio. Articles I recommend to our audience include The Bogleheads’ Guide to the Three-Fund Portfolio and Annuities, Securities, and the Three-Fund Portfolio – Podcast #243.  

Physician on FIRE

The Physician on FIRE is also no stranger to the Three-Fund Portfolio approach. Here is a great article titled Investing in a Three-Fund Portfolio Across Numerous Accounts. Get the Spreadsheet!

Expense ratio calculator

Lastly, I used this Omni expense ratio calculator for some of the calculations included above to help me better demonstrate the importance and cost of varying expense ratios. Play around with this tool utilizing various expense ratios and see how much it can affect the real rate of return!

Take home points

Securing financial prosperity is tough, but it can be easier than individuals make it. Let’s be honest. Enough research has supported that day trading and timing the market doesn’t work for the average investor. Unless investing is your full-time job (and if you are reading this, it likely isn’t), then statistically, you will not consistently beat the market. So why not make it easy on yourself and use a time-tested and effective method? Let the Three-Fund Portfolio work for you so you can have peace of mind and free time. THAT is why this is the best starting portfolio for busy doctors. As always…

Stay motivated!

The Motivated M.D.

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