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 enough? ›
The three-fund portfolio is lazy investing at its best. It's simple, it's proven to have a better long-term track record of gains than picking single stocks and trying to time the market, and it lets you generally "set it and forget it" when it comes to saving for retirement.
What is the 3 portfolio rule? ›
The three-fund portfolio consists of a total stock market index fund, a total international stock index fund, and a total bond market fund. Asset allocation between those three funds is up to the investor based on their age and risk tolerance.
Why do many investors like mutual funds in their portfolios? ›
One of the primary benefits is diversification, which reduces the risk of loss by spreading investments across a wide range of assets. Mutual funds also provide professional management, allowing you to leverage the expertise of fund managers who make investment decisions based on their research and analysis.
What 3 factors affect an investment portfolio? ›
Your risk appetite, investment period, future goals, and personality affect how you grow your portfolio. Irrespective of your portfolio's asset mix, all portfolios must contain some degree of diversification and reflect an investor's tolerance for risk.
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 Lazy 3 fund portfolio? ›
Three-fund lazy portfolios
These usually consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market. While the "% allocation" is different from those listed below, these funds typically make up the core of Vanguard's Target Retirement and Lifestrategy funds.
What is the 3 fund strategy? ›
A three-fund portfolio is a portfolio which uses only basic asset classes — usually a domestic stock "total market" index fund, an international stock "total market" index fund and a bond "total market" index fund.
What are the 3 A's of investing? ›
Remember the 3 A's for retirement saving: amount, account, and asset mix.
How to allocate a 3 fund portfolio? ›
The fund is allotted to these three asset classes in a certain ratio. For instance, it can be 50% in domestic stocks, 30% in domestic bonds, and 20% in international stocks. Moreover, such an investment plan provides freedom of asset allocation to match the investors' long-term financial goals.
One of the most significant benefits of investing in mutual funds is diversification. With mutual funds, you can invest your money in a variety of stocks, bonds, and other assets. This diversification helps in reducing the overall risk of your investment portfolio.
What is the best mutual fund to invest in in 2024? ›
Best-performing U.S. equity mutual funds
| Ticker | Name | 5-year return (%) |
|---|
| SSAQX | State Street US Core Equity Fund | 16.88% |
| PBFDX | Payson Total Return | 16.73% |
| FGRTX | Fidelity Mega Cap Stock | 16.52% |
| STSEX | BlackRock Exchange BlackRock | 16.27% |
3 more rowsMar 29, 2024
Mutual funds are popular in part because they offer investors the opportunity to diversify, and therefore spread out their risk over a number of investments. Mutual funds appeal to people because they give average investors the opportunity to invest in professionally managed funds.
What makes a portfolio high-risk? ›
High-risk investments typically offer lower levels of liquidity than mainstream investments, so, particularly if something's gone wrong and performance hasn't met expectations, getting access to your money when you want may not be as easy.
What are 3 high-risk investments? ›
While it's important to do your research and evaluate different investment options before you buy, some of the best high-risk investments include things like initial public offerings, venture capital, real estate investment trusts and more. Here's what to know about each.
What 3 factors should you think about before investing? ›
To help better prepare you and potentially reduce your risk, here are some things to consider before investing.
- Set clear financial goals. Before investing, consider creating a plan. ...
- Review your timeframe and comfort with risk. ...
- Research the market. ...
- Check your emotions. ...
- Consider where to invest your money.
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
What is the average return of a three fund portfolio? ›
As of Apr 27, 2024, the Bogleheads Three-fund Portfolio returned 3.45% Year-To-Date and 7.81% of annualized return in the last 10 years.
Is 3% a good investment return? ›
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.
Is 3 percent return on investment good? ›
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.
