One of the biggest decisions you'll make as an investor is your investing strategy. There's a near-endless number of approaches out there. It's important to find one that you're comfortable using so you're happy with the results and not second-guessing if you should stick with it.
The three-fund portfolio is a strategy that gets lots of love from investors, and for good reason. It can deliver strong growth and low risk over long time periods, and it's easy to manage. If you're trying to figure out how to set up your investments, the three-fund portfolio could be the solution.
What is the three-fund portfolio?
The three-fund portfolio is an investment portfolio with U.S. stocks, international stocks, and U.S. bonds. As the name suggests, it contains three investment funds:
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- Total stock market index fund
- Total international stock index fund
- Total bond market fund
Exact asset allocation depends on each investor's age and risk tolerance. Younger investors may put more of their portfolios in the stock market funds. Older investors who are closer to retirement will likely want more money in bonds.
The Bogleheads, a term for investors who follow the investing philosophy of Vanguard founder John Bogle, popularized the three-fund portfolio. It's now the portfolio of choice for many investors.
How to build a three-fund portfolio
To build a three-fund portfolio, invest in a total stock market index fund, a total international stock index fund, and a total bond market fund. These can be either mutual funds or ETFs (exchange-traded funds). What's most important is that they have low fees -- an expense ratio of under 0.10% is ideal, without any transaction fees for buying and selling.
You can find these three types of funds with all the popular stock brokers. Some have their own version of these funds, but there's little difference between them. You don't need to worry about whether a total stock market fund from Vanguard or Charles Schwab is better. Choose whichever is most convenient for you and available with the broker you use.
The other consideration is your asset allocation between these funds. Here are a few popular options:
- An 80/20 three-fund portfolio with 64% U.S. stocks, 16% international stocks, and 20% bonds. This option prioritizes growth and is good for investors with high risk tolerance.
- An equally weighted three-fund portfolio with 33% to 34% in each asset. This option is balanced, with moderate growth potential and risk.
- A 20/80 three-fund portfolio with 14% U.S. stocks, 6% international stocks, and 80% bonds. This option is highly conservative and designed for preserving wealth.
Pros and cons of the three-fund portfolio
There are quite a few benefits to the three-fund portfolio. Here are some of the biggest advantages of this strategy:
- You have a diversified portfolio containing over 10,000 securities.
- It keeps fees to a minimum, since you're investing in index funds with low expense ratios.
- It performs well for long-term investors. U.S. and international stocks have strong growth potential, and bonds provide stability.
- You can set up the asset allocation to fit your needs, so you have some control over how your portfolio is set up.
- It doesn't take long to build or to maintain. All you need to do is keep your asset allocation where you want it.
No investing strategy is perfect for everyone. Here are the most notable drawbacks to the three-fund portfolio:
- Although it's not too time-consuming, you can't "set it and forget it." If you're looking for a completely hands-off portfolio, a target-date fund may be a better choice.
- You don't have full control over your portfolio if you follow this strategy as intended. You only invest in those three types of funds, meaning no stock picking or alternative investments, such as real estate or crypto.
- Bonds can limit your portfolio's growth. While you can keep bond allocation to a minimum with the three-fund portfolio, some may prefer to hold off on bonds entirely when they're decades from retirement.
Is a three-fund portfolio right for you?
The three-fund portfolio is a sound investing approach, and you can't go wrong with it. If you set up asset allocation appropriate for your age, a three-fund portfolio will most likely perform well. I say "most likely" because nothing is guaranteed with investing, but this strategy is one of the safer options.
There are situations where another approach could be a better choice. If you aren't interested in bonds for the time being, then the three-fund portfolio isn't for you. If you want full control over your portfolio, stock picking may be the way to go. But if you're looking for a straightforward strategy with good performance and no glaring flaws, the three-fund portfolio fits the bill.
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FAQs
Advantages of the three-fund index portfolio
Is the 3 fund portfolio good? ›
The three-fund portfolio is a historically proven great investing strategy that has a long track record of success, thanks to its features we're going to cover below. The reality of successful investing is much more boring than what many influencers and "finance gurus" will pitch you.
What is the average return of a three fund portfolio? ›
The Bogleheads Three Funds Portfolio is a Very High Risk portfolio and can be implemented with 3 ETFs. It's exposed for 80% on the Stock Market. In the last 30 Years, the Bogleheads Three Funds Portfolio obtained a 8.00% compound annual return, with a 12.37% standard deviation.
What is the Boglehead strategy? ›
Bogleheads create a good plan, avoiding attempts to time the market, and then stick with it ("stay the course"). This consistently produces good outcomes over the long term.
What is the Lazy 3 fund portfolio? ›
The Three Fund Portfolio, also called the Lazy Portfolio, is a simple yet popular portfolio amongst passive index investors. It is designed to provide broad diversification across the stock and bond markets while incurring minimal costs, taxes, and overhead.
What are the disadvantages of a 3 fund portfolio? ›
Cons of a Three-Fund Portfolio
Rebalancing. A three-fund portfolio is not set-it-and-forget-it. You will still need to pay attention to your overall allocation and rebalance when necessary to stay aligned with your investment goals. No room for alternatives.
What are some benefits of three-fund portfolio? ›
Advantages of the three-fund index portfolio
- Diversification. Over 10,000 world-wide securities.
- Contains every style and cap-size.
- Very low cost.
- Very tax-efficient.
- No manager risk.
- No style drift.
- No overlap.
- Low turnover.
Bogle recommended allocating between stocks and bonds based on an investors age and risk tolerance. Younger investors may favor a higher stock allocation, while older investors closer to retirement may shift more assets to bonds. Bogle suggested a reasonable starting point is allocating 60% to stocks and 40% to bonds.
What is the best 3 fund portfolio allocation? ›
Here are a few popular options: An 80/20 three-fund portfolio with 64% U.S. stocks, 16% international stocks, and 20% bonds. This option prioritizes growth and is good for investors with high risk tolerance. An equally weighted three-fund portfolio with 33% to 34% in each asset.
What is the best portfolio mix for retirement? ›
Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you're still working and investing, you might consider that allocation or something with even more growth potential.
A lazy portfolio is a set it and forget it collection of stock and bond mutual funds or ETFs, invested in percentages that fit with your personal risk profile. The idea behind this concept is that most investors do not beat the investment returns of the major market indexes.
What is David Abrams investment strategy? ›
The firm's investment strategy is opportunistic and follows a fundamental, value-oriented approach. Investments generally are made with a long-term time horizon and are typically unlevered and long-biased.
What is Dave Ramsey portfolio? ›
Dave Ramsey recommends a 100% equity portfolio consisting of actively managed mutual funds. He recommends growth (mid cap), growth & income (large cap), aggressive growth (small cap) & international funds @ 25% each.
What is Ray Dalio all weather portfolio? ›
About Ray Dalio's All Weather
Ray Dalio's All Weather portfolio is an investment strategy designed to perform well across different economic conditions. The goal of the All Weather portfolio is to generate consistent returns while minimizing risk, regardless of the economic environment.
Who are the big three-fund managers? ›
A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost ...
Who are the Big 3 passive funds? ›
“BlackRock, Vanguard, and State Street are often lumped together for the purpose of considering large passive managers within the U.S.,” Stewart told Institutional Investor.
Is 3 a good return on investment? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
How many funds make an ideal portfolio? ›
Unless you are very well versed with the markets and have expert knowledge about mutual funds, a good rule of thumb would be to own: Large Cap Mutual Funds: Up to 2. Maybe 3 at best. Beyond that, it doesn't make sense as there will be a great overlap in the shares owned by your mutual funds.
What is the growth rate of the 3 fund portfolio? ›
As of Apr 2, 2024, the Bogleheads Three-fund Portfolio returned 5.41% Year-To-Date and 8.07% of annualized return in the last 10 years.
What is the difference between 3 fund portfolio and S&P 500? ›
A 3 fund portfolio is an asset allocation mix comprising three asset classes, domestic stocks, international stocks, and domestic bonds. Standard & Poor's 500 is a market index that tracks the market value and performance of the top 500 US large-cap stocks.
