three fund portfolio

Three Fund Portfolio – Investing Made Easy

If you’ve read our post on mastering asset allocation then you might recognize the phrase ‘Three Fund Portfolio’. The ‘Three Fund Portfolio’ simply refers to an investment portfolio (the collection of all of your investments) that only contains three investments.

Put more simply, 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.

The beauty of the Three Fund Portfolio lies in its simplicity and efficiency. The typical Three 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 Three 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 amount 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 Three Fund Portfolio masked with a clever name. The nice thing about creating your own Three 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 Three 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.

Sample Three Fund Allocation

Portfolio 1

Asset Allocation %
U.S. Stock ‘Total Market’ Index Fund 60%
International Stock ‘Total Market’ Index Fund 30%
Bond ‘Total Market’ Index Fund 10%

Portfolio 2

Asset Allocation %
U.S. Stock ‘Total Market’ Index Fund 45%
International Stock ‘Total Market’ Index Fund 35%
Bond ‘Total Market’ Index Fund 20%

Portfolio 3

Asset Allocation %
U.S. Stock ‘Total Market’ Index Fund 50%
International Stock ‘Total Market’ Index Fund 35%
Bond ‘Total Market’ Index Fund 15%

Portfolio 4

Asset Allocation %
U.S. Stock ‘Total Market’ Index Fund 55%
International Stock ‘Total Market’ Index Fund 25%
Bond ‘Total Market’ Index Fund 20%

Index Funds In The Three Fund Portfolio

Vanguard Index Funds

Fund Name Investments Fund Ticker
Vanguard Total Stock Market Index Fund U.S. Stocks VTSMX
Vanguard Total Stock Market Index Fund – Admiral* U.S. Stocks VTSAX
Vanguard Total International Stock Index Fund International Stocks VGTSX
Vanguard Total International Stock Index Fund – Admiral* International Stocks VTIAX
Vanguard Total Bond Market Index Fund U.S. Bonds VBMFX
Vanguard Total Bond Market Index Fund – Admiral* U.S. Bonds VBTLX

*Admiral Funds Require a $10K Minimum Investment

Fidelity Index Funds

Fund Name Investments Fund Ticker
Fidelity ZERO Total Market Index Fund U.S. Stocks FZROX
Fidelity Total Market Index Fund U.S. Stocks FSTMX
Fidelity ZERO International Index Fund International Stocks FZILX
Fidelity Total International Index Fund International Stocks FTIHX
Fidelity U.S. Bond Index Fund U.S. Bonds FXNAX
Fidelity U.S. Bond Index Fund U.S. Bonds FBIDX

Charles Schwab Index Funds

Fund Name Investments Fund Ticker
Schwab Total Stock Market Index Fund U.S. Stocks SWTSX
Schwab International Index Fund International Stocks SWISX
Schwab U.S. Aggregate Bond Index Fund U.S. Bonds SWAGX

ETFs In The Three Fund Portfolio

Vanguard ETFs

Fund Name Investments Fund Ticker
Vanguard Total Stock ETF U.S. Stocks VTI
Vanguard Total International Stock ETF International Stocks VXUS
Vanguard Total Bond Market ETF U.S. Bonds BND

Blackrock iShares ETFs

Fund Name Investments Fund Ticker
iShares Core S&P Total Market ETF U.S. Stocks ITOT
iShares Core MSCI Total International Stock ETF International Stocks IXUS
iShares Core Total U.S. Bond Market ETF U.S. Bonds AGG

Charles Schwab ETFs

Fund Name Investments Fund Ticker
US Broad Market ETF U.S. Stocks SCHB
International Equity Index ETF (SCHF) International Stocks SCHF
U.S. Aggregate Bond Index ETF U.S. Bonds SCHZ

Is The Three Fund 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 Three 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. Most Vanguard Funds have a minimum of $3,000 (or $10,000 for their Admiral class), which means you’d need at least $9,000 to invest in order to start with a three month portfolio there. You can always just use ETFs if you don’t have enough yet since those don’t have minimums.

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.

Do You Already Use A Three Fund Portfolio Or Plan To Do So? Comment Below!

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