The 3 Fund Portfolio: Simple Investing That Works (2024)

The 3 Fund Portfolio: Simple Investing That Works (1)

Investing does not need to be complicated. In fact, it can be very simple and highly rewarding. One really great way to invest simply is through a 3 fund portfolio. If done right, you can potentially earn comparable returns to someone with sophisticated techniques. When it comes to your investing approach, the range of options on how to do it is broad.

You can use full-service financial advisors who will take care of everything for you. Or you can choose a DIY model where you’re in charge of making the decisions freeing you from advisory fees.

The Three fund portfolio is an investing approach made widely popular by the Bogleheads. A group of investing enthusiasts inspired by Vanguard's founder John Bogle, a huge advocate for simplified, low-cost index fund investing. This blog post will break down the key things you need to know about the 3 fund portfolio.

So, what is the 3-fund portfolio A.K.A. the lazy portfolio?

The three fund portfolio strategy is an investing strategy where you create a portfolio that only contains 3 assets. These assets are usually low-cost index funds or ETFs (Learn more about the differences between index funds and ETFs).

More specifically, these funds can be broken down into the following asset classes:

  • U.S. Stocks
  • U.S. Bonds
  • International Stocks

This top down method of investing helps countless people grow their nest eggs handsomely. Plus, it's such an easy method and only takes a little time and energy. The most you will need to do is to occasionally monitor the performance of your assets, and that will only take a handful of hours of your time over the entire year.

Does the 3 fund portfolio really work? What are its benefits?

For the investor looking for simplicity, the three fund portfolio strategy may be a good option. But how does it work?

The hallmark of any good investment strategy consists of the following:

  • Diversification
  • Simple asset allocation
  • Low costs
  • Low risk

The three fund portfolio strategy achieves all these goals and more securing higher chances of success. Let's get into each in more detail.

A well-diversified portfolio

The three-fund strategy allows you to diversify your portfolio without getting confused. This is because you don't have to figure out what to pick from thousands of stocks. With this strategy, you focus only on picking three funds. This eliminates the risk of being over-diversified or not diversified enough.

Simplified asset allocation

When it comes to asset allocation, your investing strategy matters. How you allocate your assets will largely be driven by your tolerance for risk, your age, and your long-term goals.

With the three-fund strategy, simplicity drives the asset allocation strategy. U.S. stocks, bonds, and international stocks are typically the primary asset classes.

Low costs

When looking at cost, a three-und investment strategy trumps other strategies on cost for a variety of reasons. Firstly, the strategy is subject to low expense ratios. Secondly, the turnover costs are low, and lastly, from a tax perspective, the strategy is very efficient.

Costs matter because what seems like just a small percentage fee can make a huge dent in your returns. The funds in a 3 fund portfolio are usually the least expensive relative to other funds you can choose from.

Low-risk portfolio

And finally, aside from the above benefits, there are other pros. For instance, there is no risk of advisor bias, unlike mutual funds.

For example, some financial advisors may be biased in a particular direction towards a particular stock, but with the three-fund portfolio, that risk is removed. This is because index funds are passively managed and broadly invested.

In addition, with each fund, rebalancing is very simple, i.e., you set a predetermined asset allocation, e.g., 33% stocks, bonds, and international stocks, and if any of the asset classes fall out of alignment, then you simply rebalance your portfolio as needed, periodically.

The 3 Fund Portfolio: Simple Investing That Works (2)

Who is the 3 fund portfolio for? Beginners and hands-off investors?

So who would most benefit from this strategy? Surprisingly, this is perfect for the person who wants to exert the least amount of effort into putting together an investment strategy. It’s also a great approach for beginner investors.

Some investing strategies involve an intense following of the day-to-day swings in the market or complicated mathematical formulas – but not so with this strategy.

What about target-date funds as opposed to the 3-fund strategy?

These fund types consist of mutual funds that are in sync with your proposed retirement date. In other words, these funds grow with you as you age. For example, someone who is currently 30 might choose a fund with a target date that is 35 years from today. As time passes, the fund automatically rebalances based on risk according to your age.

While you are younger, the fund will take on more risk, but as you grow older, the fund will adjust towards less risky assets. The rebalancing process involves the intervention of a fund manager, although, in the investor’s eyes, it all seems to happen automatically.

The fund manager also chooses how the investments are made, and the costs are passed on to you in the form of the annual management expense.

With the three-fund strategy, since it is more of a DIY approach, there is no active fund management; this means lower costs, and you decide what funds your money is invested in. You'd, however, need to rebalance your investments according to your objectives on your own as time passes.

This does not happen automatically, like with a target-date fund. But, this rebalancing only takes a couple of hours a few times over the course of each year.

3 Fund portfolio asset allocation

As its name implies, the three-fund portfolio consists of three funds which, as mentioned earlier, are U.S. stocks, U.S. bonds and, international stocks. (If you are outside the US, then the stocks and bonds would be local to your country).

While each three-fund portfolio consists of these elements, the actual allocation across each asset class can vary.

The most common way to set up a three-fund portfolio is with:

  • An 80/20 portfolio i.e. 64% U.S. stocks, 16% International stocks and 20% bonds (aggressive)
  • An equal portfolio i.e. 33% U.S. stocks, 33% International stocks and 33% bonds (moderate)
  • A 20/80 portfolio i.e. 14% U.S. stocks, 6% International stocks and 80% bonds (conservative)

A few factors drive the decision on what allocation to choose:

Stocks vs. bonds

If you’re early on in your retirement trajectory, you may want to choose a portfolio that is more heavily weighted in stocks. This allows you to grow your portfolio more aggressively initially.Bonds, on the other hand, provide security, but their returns are much more conservative.

Allocation percentages

In terms of allocation, you may be wondering how best to allocate between stocks and bonds. A really simple way to do it is to use your age with the “100 minus your age” formula. The way this works is that you simply assume your age is equal to the percentage share of bonds in your portfolio, and the rest is allocated towards stocks.

For example, if you are 30 years old, you could allocate 70% to a total stock market fund and/or an international market fund (e.g., 60/10 split) and 30% to bonds and/or international bonds (20/10 split). If you are adding on REITs (Real Estate Investment Trusts), you could allocate 70% to stocks, 20% to bonds, and 10% to REITs.

Examples of funds you can put in a 3-fund portfolio

When it comes to setting up a 3-fund portfolio, some specific fund examples include the following:

Popular U.S. Index Funds

Popular International Funds

Popular U.S. Bond Funds

P.S. You can easily find the ETF equivalents for each of these funds.


Tips before you get started with investing in a 3 fund portfolio

So now that you know how the three-fund portfolio works, here are some key things to consider before you dive into creating your portfolio:

Set clear objectives and goals

Before you get started, getting clear on your goals is crucial. While the three-fund investing strategy is undoubtedly easy, you will want to make sound decisions such as which brokerage you want to work with, how you will allocate assets across different categories, and how much risk you would like to take.

Set up consistentinvestments(automate)

A long-term investment strategy is as good as the money you put into it on a recurring basis. While it is good to get your account up and running, it is even better to consistently contribute towards it each month. If you struggle with doing this consistently, the easiest way to stay consistent is to automate your deposits and investments.

Consider the 4% rule

Before you dive into any investment strategy, you need to ask yourself how much money you will need to retire comfortably. You will want to consider the type of lifestyle you are hoping to achieve and your long-term goals during retirement in order to figure out how much you will need to take out during retirement.

This is known as your withdrawal rate (adjusted for inflation), and it is the percentage of your portfolio that can be withdrawn per year, starting when you begin your retirement, without running short of funds. It can be hard to know all of this in advance, especially if retirement is still far away.

Experts have come up with a simple alternative to figure out your withdrawal rate. This simple formula is known as the 4% rule.

An example of this is if you know you can comfortably live on $40,000 a year, then you would want your retirement nest egg to contain $1 million so that as you withdraw 4%, you’ll have enough to last your entire retirement (which typically averages 20 to 25 years).


Alternatives to the 3 fund portfolio

There are a few other simplified ways to invest similar to the three-fund that you could consider based on your preferences:

The one-fund portfolio

Investing in a total market fund. According to Warren Buffet, everyone, regardless of how simple or sophisticated their investment strategy is, should invest in an S&P 500 fund. For instance, the Vanguard Total Stock Market Index Fund (VTSAX), on average, will give you the standard market return.

With this strategy, you invest in one total stock fund, and you can choose one with a more diversified mix of stocks across large, medium, and small-cap to capture the pros of each type of stock.

The two-fund portfolio

Investing in a total stock fund and bond fund. If you’re looking for additional security, the one fund portfolio might not be enough. It can give you good returns, but it also carries a higher amount of risk. You can counter this risk by adding a bond fund to the portfolio.

Bonds are much more stable than stocks and tend to operate opposite to the way stocks do and can, therefore, stabilize a portfolio during swings in the stock market. An example of a bond fund is the Vanguard Total Bond Market Fund (VBTLX).

The four-fund portfolio

Investing in a total stock fund, bond fund, international stock fund, and international bond fund. As alluded to earlier, the ideal 3-fund portfolio will contain U.S. stocks, international stocks, and U.S. bonds. But those are not the only options.

Some investors may want something more diversified and would, therefore, add another fund. This can be in the form of international bonds such as the Vanguard Total International Bond Index Fund (VTIBX), which may carry more risk but offer room for higher returns.

The five-fund portfolio

Investing in a total stock fund, bond fund, international stock fund, international bond fund, and REIT fund. With four funds in your portfolio, you might consider yourself well-diversified, which is not unreasonable.

However, there are further ways to protect yourself from any negative downturns, such as adding another type of fund to your portfolio, e.g., REITs.

REITs stand for Real Estate Investment Trusts. The underlying assets in the portfolio are real estate properties – assets outside of the stock and bond markets. This can help with further diversification.

REITs are a great way to invest in real estate without having to physically deal with property or tenant issues.

An example is the Fidelity MSCI Real Estate Index ETF (FREL) which is a U.S.-centered REIT ETF that tracks the MSCI USA IMI Real Estate Index. It is built on about 174 holdings, which include data centers, public storage facilities, wireless tower companies, and assisted living facilities, and it is truly low-cost relative to other alternatives.

Try the 3 fund portfolio strategy and start growing your money!

Leveraging a three-fund investing strategy can be a simple and effective way to build long-term wealth. Be sure to do your research and understand any fees, and plan to invest over the long term. As an alternative, check out this all-weather portfolio to see if it's right for you!

Learn all about investing with our completely free course! Also, tune in to the Clever Girl Finance YouTube channel and podcast for top tips on all things money!

The 3 Fund Portfolio: Simple Investing That Works (2024)

FAQs

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 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 the average return of a three fund portfolio? ›

As of Apr 10, 2024, the Bogleheads Three-fund Portfolio returned 4.41% Year-To-Date and 8.15% of annualized return in the last 10 years.

Does the 3 fund portfolio work? ›

A 3 fund portfolio ensures diversification and, thus, minimizes risk in the long term. It includes two domestic asset classes, i.e., stocks and bonds, and an international stocks investment to offer growth opportunities independent of the domestic market condition.

What are the 3 most common investments? ›

Investments are generally bucketed into three major categories: stocks, bonds and cash equivalents. There are many different types of investments within each bucket. Here are six types of investments you might consider for long-term growth, and what you should know about each.

What is the 3 fund rule? ›

Key Takeaways. 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.

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.

What is the 3 fund strategy? ›

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.

What is the safest portfolio? ›

Overview: Best low-risk investments in 2024
  1. High-yield savings accounts. ...
  2. Money market funds. ...
  3. Short-term certificates of deposit. ...
  4. Series I savings bonds. ...
  5. Treasury bills, notes, bonds and TIPS. ...
  6. Corporate bonds. ...
  7. Dividend-paying stocks. ...
  8. Preferred stocks.
Apr 1, 2024

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 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.

What should my portfolio look like at 55? ›

As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.

Which is better VTI or VOO? ›

VTI is a total U.S. market fund and holds more than 3,500 stocks. VTI is better diversified and benefits from small and mid-cap stocks that grow into large caps. VOO is less diversified, tracking the performance of the S&P 500 Index. VOO excludes small and mid-cap stocks.

How do I allocate a 3 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 best allocation for a portfolio? ›

100% Asset Allocation

Another option for the best asset allocation is to use the 100% rule and build a portfolio that's either all stocks or all bonds. This rule gives you two extremes to choose from: High risk/high returns or low risk/low returns.

What is the best asset allocation for a portfolio? ›

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses. Here's how 60/40 is supposed to work: In a good year on Wall Street, the 60% of your portfolio in stocks provides strong growth.

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