I often am asked, “What’s so special about the Three-Fund Portfolio?”

The answer is simple: By owning just three low-cost total market index funds (Total U.S. Equity, Total U.S. Bond, and Total International Equity), investors have historically outperformed the vast majority of mutual funds over time.

I’ll start at the beginning and will attempt to share with you some of the lessons I learned the hard way, over many, many years. Yes, I, a nonagenarian, have seen just about everything the world has to share.

The Roaring Twenties were marked by great exuberance in the stock market. The Dow Industrials climbed from a low of 66 in 1920 to a high of 381 in 1929. Then came the worst Bear Market in U.S. history. The Dow plunged 89% to a low of 41 in 1932. (An 89% decline requires a 909% gain to recover.) A Bear Market in stocks can be a terrifying experience if your financial future is at stake.

I was born in 1924, the year the first open-end mutual fund was established (Massachusetts Investment Trust). The closest equivalents were called “investment trusts.” In 1929, my grandfather, Christopher Coombs, was one of three principals at the top of the world’s largest investment trust—United Founders Corporation. Investment trusts, later called “mutual funds,” must be in my blood.

The year 1929 was the beginning of a long and terrible depression in the United States. Unemployment rose from 3% to 25% of the nation’s workforce. More than 8,500 U.S. banks failed. There was no government insurance, as now provided by the Federal Deposit Insurance Corporation (FDIC), which insures most deposits to $250,000 in insured banks. During that horrible time, many bank depositors lost their life savings.

My parents owned a restaurant on the outskirts of Boston. As the depression deepened, few people could afford to eat out. With fewer and fewer customers, my parents lost the business. Having no other income (Social Security and Unemployment Compensation didn’t exist at that time), our family left Boston and moved into my grandfather’s waterfront winter mansion in Miami. A few years later, Grandfather and his United Founders Corporation went bankrupt. His home was sold on the courthouse steps, and we were forced to move into a small Miami apartment. It was an unexpected shock for all of us.

This was my personal introduction to the stock market.

Lesson learned: A 100% stock portfolio can be dangerous.

After returning from World War II and graduating from the University of Miami, I began selling life insurance. I was the leading first-year agent for the Mutual Benefit Life Insurance Company, and I was just beginning to earn serious money. Despite my wariness of stocks, I joined with other friends to become a member of a newly formed stock investment club, organized by a neighbor who was a Bache & Co. stock broker. The idea was that each member would contribute $50 per month to buy individual stocks, carefully selected by our own revolving three-person Investment Committee.

Our club members started out with great optimism, encouraged by the Bache broker, who soon became our “friend.” (I didn’t know then that every good salesman tries to become your friend.) Unfortunately, our investment club’s stock-picking ability was less than stellar, and despite our careful analysis, we eventually realized that our stock returns (after hidden brokerage costs) were substantially underperforming the overall stock market. This ended our investment club experiment.

This was my personal introduction to stock-picking.

Lesson learned: Believing a broker is your friend can be dangerous.

When the club disbanded, I continued to buy individual stocks, thinking I could do better. After a few more years, it became evident that I was even worse at picking stocks than our investment committee had been. Fortunately, this ended my attempts to beat the market by buying individual stocks.

Lesson learned: Avoid the lure of individual stocks.

My failure to invest successfully in individual stocks made me more determined to find a better way. I began taking regular trips to the library to learn how to “beat the market.”

The library subscribed to dozens of financial newsletters. The most popular newsletter at the time was a bi-weekly, The Mutual Fund Forecaster, which listed hundreds of mutual funds and showed their past performance over various time periods. The Forecaster would recommend which funds to buy (the best performers) and which to sell (the worst performers). I was sold on the idea because the strategy sounded so logical. I bought my own subscription, began buying mutual funds, and dutifully followed the Forecaster’s recommendations for several years. You can guess what happened.

Our portfolio continued to underperform the market and the Forecaster newsletter eventually failed.

Lesson learned: Past performance does not forecast future performance.

Most financial newsletters are written by market timers who believe (or pretend they know) they can forecast Bull and Bear Markets. All market-timing letters claim great forecasting ability, usually by showing selected periods when the writer’s forecast proved to be correct. I decided to give market timing a try, and for several years I followed the forecasting advice offered by various market-timing newsletters. As you can probably guess again, my results were not good. The funds I bought often underperformed the market, and the funds I sold often did better.

Lesson learned: Investment newsletters are a waste of money and market timing doesn’t work.

Still undaunted, my next attempt to “beat the market” was to study the huge Morningstar Mutual Funds binder. It was six inches thick and updated biweekly. The binder was available in most large libraries, but it’s no longer published in print.

Studying the past performance of mutual funds, I learned that Morningstar’s top performing 5-Star funds seldom remained at 5 Stars. Many of the top performers became bottom dwellers. That’s known as “reversion to the mean.” In the investment world, it’s the equivalent of gravity—in time, Newton’s high-flying stock or stock mutual fund will fall. This was eye-opening to me because, after reading all the mutual fund rankings in most newspapers and magazines, I thought all I had to do was buy the top-performing mutual funds to “beat the market.” What else could these rankings be good for? (Answer: to sell newspapers and magazines.)

In 2002, while Jack Bogle was putting the final touches on a speech, “The Telltale Chart,” that he was to make at the Morningstar Investment Conference in Chicago, I took the empty seat beside him. In this keynote speech, accompanied by lots of charts, Jack talked about reversion to the mean and much more. His speech helped those in attendance become better investors—and it can help you, too. You may read that speech by using the link below:

https://www.vanguard.com/bogle_site/sp20020626.html.

Lesson learned (again): Past performance does not forecast future performance.

In 1986, we moved our family securities from Merrill Lynch to Vanguard. It was a very difficult decision because our broker was a long-time friend who sometimes invited us to go sailing on his beautiful sailboat (which I now realize we helped pay for).¹ After we left Merrill Lynch, our broker never invited us to go sailing again.

Looking back, leaving Merrill Lynch and moving to Vanguard was the best financial decision we ever made.

Lesson learned: Avoid expensive stock brokers and their hidden fees.

Thinking I could beat the market with Vanguard’s no-load funds and their low expense ratios, we accumulated 16 Vanguard funds (mostly actively-managed funds) that were doing well at the time. When one of our funds underperformed, I would replace it with a better-performing fund. I didn’t realize it at the time, but I was buying high and selling low. Needless to say, our portfolio continued to underperform the market.

Lesson learned: Buying high and selling low is a losing strategy.

In 1994, I had the good fortune to read Professor Burton Malkiel’s, A Random Walk Down Wall Street and John Bogle’s first book, Bogle on Mutual Funds. Suddenly, a light switch turned on. These two books changed everything I thought I knew about investing. Based on academic studies, they both helped convince this writer to become an indexer. (“Indexing” means owning all the stocks in a certain category, as opposed to picking and choosing individual stocks.)

I now own and have read every book written by Mr. Bogle. I credit Jack with leading me to The Three-Fund Portfolio and a comfortable retirement. I enjoy telling my friends, “I live in the house that Jack built!” and I know many friends and Bogleheads who will make the same sorts of claims. Here’s what we do, by following the simple Boglehead Investment Philosophy: