The 3 Fund Portfolio

ADVERTISING DISCLOSURE

The 3 Fund Portfolio is an investment portfolio that only contains 3 assets. If you’ve read our guide on asset allocation then you might recognize the phrase 3 Fund Portfolio.

This investment strategy may seem simple, but the underlying principles are solid. It helps you easily create a well-diversified portfolio with low fees.

Let’s jump into what the 3 Fund Portfolio actually is, how it works, and how you can make your own. But first, let’s make sure we are all on the same page.

What’s an investment portfolio anyway? Your portfolio is the collection of assets that you own. If you have all of your investments at Vanguard, then that’s where you’d go to see your portfolio. Yours might even be spread amongst a few different financial institutions.

This is pretty common if you have a 401K from work with one brokerage and your IRA with another one. In that case, you’d want to take a step back and look at your overall investments to see your entire investment portfolio.

Why Investors Love 3 Fund Portfolios

The beauty of the 3 Fund Portfolio lies in its simplicity and efficiency. The typical 3 Fund Portfolio contains a U.S. ‘total market’ index fund, an international ‘total market’ index fund, and a bond ‘total market’ index fund.

You might remember that picking individual stocks is for dummies and that buying and holding index funds (or ETFs) is the way to go.

Equity index funds are simply investments that are comprised of many different stocks. So by buying a piece of an index, you are actually purchasing small slivers of tons of different companies. It takes the guesswork out of having to pick individual stocks or trying to beat the market. Even the average professional on Wall Street can’t consistently beat the market, so it’s foolish to think you’ll be able to.

Is The 3 Fund Portfolio The Simplest Way To Invest?

If you want to manage your own investments but want to have an even simpler investment plan, you can invest everything in a single target-date fund. Target-date funds automatically adjust their asset allocation to increase the number of bonds that they contain as you approach retirement age. This is simply to lower the risk.

The dirty little secret is that many target-date funds are simply the 3 Fund Portfolio masked with a clever name. The nice thing about creating your own 3 Fund Portfolio is that you will have more control and better tax-efficiency than you’d get in a target-date fund.

Target-date funds also tend to have very conservative allocations, so many people will prefer to have more exposure to stocks (and less to bonds) in order to have a higher chance of generating higher returns over time. Just remember that the market is unpredictable and that historical performance is not an indicator of future performance.

Your Asset Allocation Determines How ‘Risky’ Your 3 Fund Portfolio Will be

Your split between domestic stocks, international stocks, and bonds will determine how risky your portfolio is. The more bonds you have, the less risk you’ll be taking.

We love the advice shared by John Bogle, founder of Vanguard, in his incredible book, with regards to this topic. For younger investors, he recommends investing 80% in stocks and 20% in bonds. He drops this down to 70% stocks for older investors (45yrs +). For those already retired, a split of 60% stocks to 40% bonds might make more sense.

Ultimately, these are only rough guidelines, and you will need to decide what works best for you. If you have a long investment horizon and are less risk-averse, having 95% of your investments in stocks might be right for you. It’s a personal decision that must be made with your investment goals in mind. Think about how you’d react if you were to lose 40% of your portfolio in a short period of time due to a market downturn like in 2008 / 2009. If you think you might panic and sell everything then perhaps having more bonds would help settle your mind (and stomach).

Asset Allocation Pro-Tip: If you decide to invest using only 1 target-date fund, don’t just choose a fund based on your retirement date. Look into the % of the fund allocated to bonds and decide if that’s the mix you feel comfortable with. If you have a target-retirement date of 2045, but like the allocation of the 2055 retirement-date fund better, then go with that.

They are usually pretty good at picking the right year, but it’s always best to double-check. After all, this is your future we are talking about.

Sample Three Fund Allocation

Sample 3 Fund Portfolio 1

AssetAllocation %
U.S. Stock ‘Total Market’ Index Fund60%
International Stock ‘Total Market’ Index Fund30%
Bond ‘Total Market’ Index Fund 10%

Sample 3 Fund Portfolio 2

AssetAllocation %
U.S. Stock ‘Total Market’ Index Fund45%
International Stock ‘Total Market’ Index Fund35%
Bond ‘Total Market’ Index Fund 20%

Sample 3 Fund Portfolio 3

AssetAllocation %
U.S. Stock ‘Total Market’ Index Fund50%
International Stock ‘Total Market’ Index Fund35%
Bond ‘Total Market’ Index Fund 15%

Sample 3 Fund Portfolio 4

AssetAllocation %
U.S. Stock ‘Total Market’ Index Fund55%
International Stock ‘Total Market’ Index Fund25%
Bond ‘Total Market’ Index Fund 20%

Example Index Funds For A 3 Fund Portfolio

Vanguard Index Funds

Fund Name

InvestmentsFund Ticker
Vanguard Total Stock Market Index Fund *U.S. StocksVTSAX
Vanguard Total International Stock Index Fund *International StocksVTIAX
Vanguard Total Bond Market Index Fund *U.S. BondsVBTLX

*Admiral Funds Require a $3K Minimum Investment

Fidelity Index Funds

Fund NameInvestmentsFund Ticker
Fidelity ZERO Total Market Index FundU.S. StocksFZROX
Fidelity Total Market Index FundU.S. StocksFSTMX
Fidelity ZERO International Index FundInternational StocksFZILX
Fidelity Total International Index FundInternational StocksFTIHX
Fidelity U.S. Bond Index FundU.S. BondsFXNAX
Fidelity U.S. Bond Index FundU.S. BondsFBIDX

Charles Schwab Index Funds

Fund NameInvestmentsFund Ticker
Schwab Total Stock Market Index FundU.S. StocksSWTSX
Schwab International Index FundInternational StocksSWISX
Schwab U.S. Aggregate Bond Index FundU.S. BondsSWAGX

Example ETFs In A 3 Fund Portfolio

Vanguard ETFs

Fund NameInvestmentsFund Ticker
Vanguard Total Stock ETFU.S. StocksVTI
Vanguard Total International Stock ETFInternational StocksVXUS
Vanguard Total Bond Market ETFU.S. BondsBND

Blackrock iShares ETFs

Fund NameInvestmentsFund Ticker
iShares Core S&P Total Market ETFU.S. StocksITOT
iShares Core MSCI Total International Stock ETFInternational StocksIXUS
iShares Core Total U.S. Bond Market ETFU.S. BondsAGG

Charles Schwab ETFs

Fund NameInvestmentsFund Ticker
US Broad Market ETFU.S. StocksSCHB
International Equity Index ETF (SCHF)International StocksSCHF
U.S. Aggregate Bond Index ETFU.S. BondsSCHZ

Is A 3 Portfolio Great For Everyone?

No, but it would work well for most people. Especially if you want to keep your investments simple. It won’t work well for someone who has absolutely no desire to manage their own investments (nothing other than having someone else take care of it for them will).

The main advantages of the 3 Fund Portfolio are its simplicity, low costs, broad diversification, ease of rebalancing, and the fact that it won’t underperform the market (since it’ll track the broader market). If these characteristics are attractive to you as you think about your investments, it’s certainly worth looking into!

You also need to have to be aware of any investment minimums for the funds. Some Vanguard Funds have a minimum of $3,000, which means you’d need at least $9,000 to invest in order to start with a 3 fund portfolio there. You can always just use ETFs if you don’t have enough yet since those don’t have minimums.

Thankfully, they have lowered their minimums on a lot of funds.

If you aren’t sure how to save enough to get there, you’ll want to read our step-by-step guide to budgeting. It’ll be your first line of defense when it comes to saving and investing more of your money.

FAQs

What Is A 3 Fund Portfolio?

A simple investment portfolio that uses only 3 assets. Most commonly, these simple portfolios include a US stock “total market” index fund, an international stock “total market” index fund, and a bond “total market” index fund.

Can I Use A 3 Fund Portfolio If My Investments Are Spread Across Different Accounts?

Yes! You have a couple of options. You can create an overall portfolio so that across all of the accounts you only own the 3 assets. Or you can duplicate your 3 Fund Portfolio in each of your investment accounts. It’s common to have your 401K or 403B and IRAs in different accounts, so you aren’t alone.

Can I Use More Than 3 Assets In My 3 Fund Portfolio?

You can use more investments, but remember that part of the benefit of this strategy is its simplicity.

4 thoughts on “The 3 Fund Portfolio”

  1. I only started investing a few months ago when I turned 18! I live in Canada and the most tax-advantaged vehicle for people with low incomes is the TFSA since it uses after-tax dollars. Of course, mine is a bit sad right now since there’s only like $1500 in it (university eats up the rest of my money), but I have a four ETF allocation. One, VCN, tracks the Canadian market (it’s about 65% of my portfolio). VFV, which follows the S&P 500, is about 10-15%. I’m aiming to increase its allocation once I can save enough money to buy a share (and yes, I realize how sad that sounds). The rest is split evenly between a developed markets ETF (XEF) and a bond ETF (ZAG). It’s a very aggressive portfolio, but since I’ll only need it in a few decades I figure I had the time. That being said, any advice? I’m a bit caught between saving for the near future (in case tuition increases or something like that) and investing in my TFSA. I mean, I have a 12-month emergency fund but half of that is tied up in a GIC ladder, most of which will mature in less than a year. I don’t exactly have a job, so the lack of income is what’s pushing me to squirrel everything into savings. Do you think I’m maybe being a bit too excessive? Most of my money is coming from participating in studies since it’s more flexible and I can choose the hours.

    Reply
    • Congrats on the amazing progress even though you are only 18. I know it may feel like you aren’t doing enough and it can be stressful, but believe us… you are going to be WAYYY ahead of your peers. With regards to your question, your allocation seems fair. Yes, it’s aggressive, but you have time on your side. We are less familiar with VCN but since you live in Canada, it makes sense to invest in canadian dollars. The lack of an income is due to being in college? If so, that makes sense. Continue to do what you are doing. Save as much as you can while still leaving yourself a buffer in case of an emergency. Focus on your academics so that you can get your ideal job. Remember, life is a marathon, not a sprint. Out of curiosity, where’d you learn about personal finance so young? Well done!

      Reply
  2. Hi Camilo and Francisco! I’m 27 years old, a college graduate, and very new to investing. I haven’t managed my money well, however I am motivated to do things differently with ambitious hopes of being financially free. As we speak, I have a mere $393.47 in my bank account. My top priority is paying down my high-interest credit cards, but I opened a Brokerage Account and Roth IRA Brokerage Account with Vanguard last week. Just to dip my toes in, I put $10 in each account. I know how meager this sounds, but I’m determined to work with what I’ve got and improve as I go. As you mentioned, I would need at least $9,000 to invest in a three fund portfolio using Vanguard Index Funds. Realistically, I won’t have that money for a while. However, I could do the all-in-one Target Retirement Fund for $1,000. It seems I could also invest in the three fund portfolio using Vanguard ETFs for even less. I’m still learning the difference between ETFs and Mutual Funds, and I’m not sure what the difference is when buying stocks/bonds with money in the Brokerage Account versus the Roth IRA Brokerage Account. All in all, I’m wondering if you have thoughts about me investing in the Target Retirement Fund versus a three fund portfolio with ETFs? I also welcome any other thoughts or feedback.

    I learned of you from the podcast Optimal Finance Daily, and it’s changed my outlook for the better. Thank you, Finance Twins!

    Reply
    • Hey Heatherlee, thanks so much for reading. There’s a lot of info in your comment, so I hope we answer all of your questions. To start, you said you have both a brokerage account and an IRA. Both are accounts used to make investments, but there’s a few differences between them. The standard brokerage account is a taxable account, which means any profits realized will be taxed as capital gains. There are also no restrictions on how much you contribute or when you decide to withdraw that money from a taxable account. The IRA, on the other hand, is specifically for saving for retirement. For that reason it offers tax savings that the normal account doesn’t offer. The caveat is that there are some restrictions around how much you can contribute to the account annually and when the money can be withdrawn penalty free. More details about IRAs can be found in this article: https://thefinancetwins.com/what-is-an-ira/ . What you ultimately decide to invest in within those accounts depends on a few things. If you aren’t that excited or passionate about doing the investing on your own, the target date fund is great because you kind of set it and forget it. You just have to continue to regularly invest and put more money into it. Just make sure you aren’t paying a ton of fees. Vanguard funds are great.

      Reply

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