Simon Constable had a write up at Forbes about the problems that arise when investors have too many funds to choose from. ETF.com's screener shows 669 domestic equity ETFs which includes broad based funds all the way down to the narrowest most specialized ETF but excludes levered and inverse funds.
Simon notes that too much choice becomes overwhelming and can become a deterrent to investors when it comes to choosing funds in their 401k accounts or any other pools of money they might have. His advice for people who either feel overwhelmed or don't want to take the time to sort through some of the funds and build portfolios for themselves is to hire an advisor. As an advisor, I am not going to disagree with his advice of course but not everyone will want to hire someone.
If you're putting money away and you care about your financial future then you're going to have to put in a little work, there is no getting around that but to the extent that investing can be simple you can build a portfolio with two funds that will give you plenty of diversification, allow your pot of money to grow over time, probably never be exciting or even interesting, will probably never be a top performing mix but it will, repeated for emphasis. allow your pot of money to grow. Adding a third fund might help reduce the likelihood of panicking during any large declines that occur in your investing lifetime.
There is nothing new about the following but it may be new to you if you don't do much with investing as implied above or maybe you are very involved with markets and can help someone you know who needs help, wants very little work to do and is unlikely to hire an advisor.
At an absolute minimum, a diversified portfolio needs exposure to stocks and bonds. There are countless ETFs and mutual funds that offer some sort of broad based exposure to all the global markets or just the US market. The cheapest global equity ETF according to ETF.com is the Vanguard Total World Stock ETF (VT). The expense ratio is 0.10% which means it costs $10 per year for every $10,000 invested. Between domestic stocks and foreign stocks, one will always outperform the other whether you're talking about three months, 10 years, whatever and then the one that just outperformed will lag. If one must outperform the other and global funds like VT have both domestic and foreign then you might expect a global fund to be in between foreign and domestic performance-wise which is a long way of saying a global fund will probably never be the best performer.
The chart makes the point visually, ITOT is a broad based domestic ETF and ACWX is a broad based foreign ETF;
For purposes of this post, I am going to use VT but the bigger point is to go broad in the context of very little work and not hiring an advisor.
Fixed income, or bonds, is a little trickier. What makes it trickier in my opinion is the threat of rising rates. Without getting into making predictions, it is important to realize that if rates do rise meaningfully there are many parts of the bond market that could endure equity-like declines. Taking a page from Charlie Munger this is an instance to avoid doing something really stupid as opposed to trying to do something very intelligent. In that light I will suggest something that avoids or minimizes interest rate risk. The yield will be low but it is unlikely to go down in price in a meaningful way, maybe not even a noticeable way and if rates do rise then so will the yield you get. The Schwab Short Term US Treasury ETF (SCHO) shows a very low yield at both Yahoo Finance and ETF.com but the monthly dividend has gone up rapidly over the last year as rates have risen, the most recent dividend annualizes out at 1.71% and the yield is likely to keep going up as treasuries with lower yields held by the fund mature and are replaced by higher yielding issues. Although a little more work, you could also just by two year treasuries directly which right now yield about 2.5%. SCHO has an expense ratio of 0.06% or $6 for every $10,000 invested. If you find something you like better, then by all means.
A common mix between stocks and bonds is 60% in stocks and 40% in bonds. Performance wise you see from the chart above that VT offered the chance for growth, even if it didn't outperform and SCHO was essentially a straight, horizontal line with a dividend that has generally been rising over the last couple of years. Doing something like this, you should rebalance every so often. The way with the least work is to just rebalance annually on a specific date.
Adding a third fund can help with avoiding panic during large declines. There are funds that will take defensive action to switch out of stocks based on a specific trigger point. I have a small position in one of these for clients, the TrendPilot US Large Cap ETF (PTLC). The vast majority of the time the fund is invested in the largest US stocks. There are trigger points where the fund can switch to 50% stocks/50% treasury bills and also 0% stocks/100% treasury bills. Click through to learn more if you're curious.
The positive for using PTLC is that it very likely spare a lot of pain whenever the next big decline comes. The negative is that it will likely be slow to switch back to fully invested in equities when the decline ends which means it should lag coming off the bottom of the next bear market. PTLC will have a lot of overlap with VT which in this context I think is ok. Adding the third fund is more about defense than it is better diversification. Nothing can be perfect in this regard, if some level of protection via a third fund interests you then by all means look for something you think is better or cheaper or both.
One final thought is that if you don't want to do a lot of work and you don't want to hire an advisor while you're building up your savings, that might be ok but it may not be ok after you retire. There are too many things that you can get wrong that can be very detrimental. Most of what I am talking about can be learned by spending some time but if the 60 or 65 year old you still has no interest in spending time on this then you do need to consider hiring someone.