Is a Three-Fund Portfolio Right for You? (2024)

Is a Three-Fund Portfolio Right for You? (1)

If you want to uncomplicate investing, a three-fund portfolio approach can be a simple way to growth wealth over time. This strategy involves choosing three mutual funds or exchange-traded funds (ETFs) to create a diversified portfolio. The three-fund portfolio is often associated with the Bogleheads, named after Vanguard founder John Bogle. It’s a lazy way to invest, but is it right for you? Understanding how it works and the pros and cons of investing in just three funds can help you decide. A financial advisor can help you set up a portfolio that reflects your goals, timeline and risk profile.

What Is a Three -Fund Portfolio?

A three-and portfolio is an investment portfolio that’s built around three funds. In a typical three-fund portfolio approach, this includes:

  • A domestic stock index fund

  • An international stock index fund

  • A bond index fund

These can be mutual funds or exchange-traded funds. Index funds are a popular choice for a three-fund portfolio because they can offer simplified diversification with moderate risk and moderate cost. By tracking an entire benchmark or market index, you can gain exposure to all of the assets in that index.

Three-fund portfolios are designed to provide a comprehensive approach to diversification since they include both domestic and international stocks as well as bonds. The goal is to choose funds that represent the market as a whole.

The weighting for each of the three funds can depend on your risk tolerance, time horizon and objectives for investing. If you’re still 30 years away from retirement, for example, then you might have an 80/20 split. In this case, 80% of your portfolio is allocated to stocks and 20% is allocated to bonds. Within the stock segment of your portfolio, you’d have to decide how much to allow to U.S. stocks and how much to allocate to international stocks.

But that’s one of the most appealing features of the three-fund portfolio. It’s very easy to customize and tailor to your needs.

Pros and Cons of a Three-Fund Portfolio

As with any investing strategy, there are advantages and disadvantages to using a three-fund portfolio approach. Looking at both sides can help you decide whether it makes sense for you. Now let’s get into the specific pros and cons of the three-fund portfolio.

Pros of a Three-Fund Portfolio

  • Simplified diversification. Diversifying your portfolio matters for managing risk. A three-fund approach can make it easier to diversify if you’re choosing funds that reflect the market as a whole.

  • Lower costs. Using index funds to construct a three-fund portfolio may be more cost-effective overall. Since index funds follow a passive investing strategy, they’re typically less expensive than actively managed funds.

  • Invest with ease. Investing can be overwhelming to a beginner and it may be challenging for seasoned investors from time to time. A three-fund portfolio lets you keep things as simple as possible while building wealth.

Cons of a Three-Fund Portfolio

  • Returns.Index funds, by nature, are designed to match the market not beat it. So if your goal is to achieve above-average returns, a three-fund approach may not suit your needs in terms of performance.

  • 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. Using a three-fund approach to investing in its truest sense means sticking with the domestic stock, international stock, bond index fund formula. Investing in real estate or cryptocurrencywould mean straying away from the core of how a three-fund portfolio works.

Example of a Three-Fund Portfolio

Is a Three-Fund Portfolio Right for You? (2)

A three-fund portfolio isn’t complex. It just means choosing one representative fund to include in your portfolio from the domestic stock, international stock and bond categories. These funds can all belong to the same family or come from different mutual fund companies. And you can substitute ETFs in place of mutual funds.

So, for example, say you want to build a three-fund portfolio using Vanguard index funds. Your portfolio might look like this:

  • Vanguard Total Stock Market Index Fund (VTSAX) – 60% allocation

  • Vanguard Total International Stock Index Fund (VTIAX) – 20% allocation

  • Vanguard Total Bond Market Fund (VBTLX) – 20% allocation

Now, say you want to choose ETFs instead but you want to lean more heavily on domestic stocks. Your portfolio might look like this:

  • Vanguard Total Stock ETF (VTI) – 70% allocation

  • Vanguard Total International Stock ETF (VXUS) – 10% allocation

  • Vanguard Total Bond Market ETF (BND) – 20% allocation

The funds you choose don’t all have to come from the same place. For example, you could choose one Vanguard fund, one Fidelity fund and one fund from Charles Schwab. The goal is to stick with the three-fund allocation, with one fund from each category.

How to Build a Three-Fund Portfolio

Constructing a three-fund portfolio is meant to be as simple as possible. You can do so through an online brokerage account. The first step is deciding which funds to invest in; the second is choosing how much of your portfolio to allocate to each one.

When evaluating index funds or ETFs, start by looking at what each fund invests in or which index it tracks. A total stock market index fund can offer broad exposure to the entire market. A fund that tracks only the S&P 500 or the Russell 2000, on the other hand, is more narrowly diversified since you’re only getting exposure to a segment of the market.

Next, compare the costs for different funds. Specifically, look at the expense ratio. Ideally, you’re trying to find broad index funds that offer the highest level of diversification and returns with the lowest cost profile. If you’re considering funds with a higher expense ratio, look at the performance and historical track record of the fund to judge whether it’s worth the added cost.

Finally, think about how much you want to allocate to each fund in your portfolio. This can depend largely on how long you have to invest and your risk tolerance. The younger you are, the more of your portfolio you can likely afford to allocate to stocks. But keep in mind that stocks are risky and international stocks have the potential to be riskier than domestic ones.

Bonds can offer a safer counterbalance to stocks. Allocating too much of your money into bonds early in your investing career could cost you returns, however. Talking to your financial advisor can help you decide which funds might suit your needs the best.

The Bottom Line

Is a Three-Fund Portfolio Right for You? (3)

A three-fund strategy may work well for you if you want to keep investing as simple and hassle-free as possible. While you likely won’t beat the market with this approach, you can build wealth for retirement consistently over time. Just remember to pay attention to fund expense ratios and trading fees, as these costs can detract from the returns you’re earning.

Tips for Investing

  • If you’re still not sure whether a three-fund portfolio might be right for your financial plan, consider speaking to a financial advisor who can help you figure it out.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Target date funds offer an alternative to index funds and the three-fund portfolio strategy. These funds base their asset allocation on a target retirement date, i.e. 2045, 2050, 2055, etc. If you have a 401(k) plan you invest in at work, you likely have target date funds as an investment option. While target date funds can also simplify investing, it’s important to consider the type of returns they might produce and what you might pay to own them.Photo credit: ©, ©, ©

The post How to Build a Three-Fund Portfolio appeared first on SmartAsset Blog.

Is a Three-Fund Portfolio Right for You? (2024)


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.

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.

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 3 portfolio rule? ›

A three-fund portfolio aims to diversify your portfolio across three asset classes: domestic stocks, international stocks, and domestic bonds. You can use a three-fund approach in most 401(k) accounts. Investors choose the allocation of funds that suit their goals.

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 is considered a good portfolio return? ›

A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.

What is the ideal mutual fund portfolio for a 35 year old? ›

Let's factor in your age. There's a useful formula that suggests you invest a percentage equal to a hundred minus your age in a carefully selected portfolio of Equity Mutual Fund SIPs. That would be 65 per cent (100-35) of your monthly savings, which translates to Rs 39,000 per month (65 per cent of Rs 60,000).

What is the ideal mutual fund portfolio for a 40 year old? ›

An effort should be made to have a balanced portfolio - that is - having 40% equity and 40% debt funds. “Around 5% should be kept as emergency cash. Around 5% should always be maintained to take advantage of new opportunities," said Ajay Agarwal.

What is the most optimal portfolio? ›

An optimal portfolio is one designed with a perfect balance of risk and return. The optimal portfolio looks to balance securities that offer the greatest possible returns with acceptable risk or the securities with the lowest risk given a certain return.

How many funds is too many in a portfolio? ›

Financial planners say it is difficult to put a cap on the number of schemes in an investor's portfolio, as investors increasingly use mutual funds to meet both long-term and short-term goals. However, they feel investors should restrict themselves to 10 schemes, as a higher number is difficult to monitor and manage.

How do you manage a three-fund portfolio? ›

A three-fund portfolio isn't complex. It just means choosing one representative fund to include in your portfolio from the domestic stock, international stock and bond categories. These funds can all belong to the same family or come from different mutual fund companies.

What is the golden rule of the portfolio? ›

Hold your investments long-term. Like adding to your investment over time, holding your investment long-term is really important to building your wealth, generating more profit. Your money needs years to grow, and with time, it can grow exponentially and generate higher returns.

What is the Bogle recommended portfolio? ›

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.

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 ...

What is the riskiest type of fund? ›

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.

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.

How do you calculate the expected return of a 3 stock portfolio? ›

The basic expected return formula involves multiplying each asset's weight in the portfolio by its expected return, then adding all those figures together. In other words, a portfolio's expected return is the weighted average of its individual components' returns.

Is 30% return on portfolio good? ›

A 30% annualized return is a stunning good return, better than almost all other investors (pros included) if sustained over the years. Since you have only been trading a short time you might want to consider whether such a return is attributable to skill, to a bull market, to luck, or a combination of those factors.

What is the average ROI for a portfolio? ›

Average Stock Market Return for the S&P 500

Fortunately, you can use data from Nobel Prize-winning economist Robert Shiller to approximate the S&P 500. Using Shiller's data, since 1971 the S&P 500 has delivered an annualized return of 7.58%—or 10.51% with dividends reinvested.

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