A three-fund portfolio is a great way for investors to keep their investments simple, low cost and diversified across both domestic and international markets. While it’s important to make sure that you match your risk tolerance to your percentages of stocks and bonds according to your allocation, having a simplified portfolio in major index funds will ensure that your costs are low and your returns are maximized in the long run.
Introduction to a Three-Fund Portfolio
A three-fund portfolio is basically a portfolio often recommended for and by Bogleheads where you use three asset classes for your investment: US stock index fund, international stock index fund, and bond index fund. By following three-fund portfolios, it makes investment simple and less time-consuming so you can focus more on important stuff in life and spend more time with your loved ones.
A three-fund portfolio is a portfolio that 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. It is often recommended for and by Bogleheads attracted by “the majesty of simplicity”, and for those who want finer control and better tax-efficiency than they would get in an all-in-one fund like a target retirement fund.
How to Implement a Three-Fund Portfolio
First you decide how much of the three basic assets to hold in your portfolio — domestic stocks, international stocks, and bonds. Second, choose where to hold each of these asset classes such as in your 401(k), roth IRA or taxable brokerage accounts. Finally, choose the corresponding mutual fund to use for each asset class.
Here are Vanguard funds that are best for a three-fund portfolio:
- Vanguard Total Stock Market Index Fund (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total Bond Market Fund (VBMFX)
Personally, we follow the three-fund portfolio for our investments. Currently we have 70% in stocks and 30% in bonds. Our stocks are split between US and International. We will review our allocations once per year and we will make adjustments by adding new money to adjust percentages back to targets. Our plan allows for reduction in equity allocation as retirement gets closer and risk tolerance decreases. Rebalance will be done during monthly contributions with net cash inflows to be used to meet the target allocation.