If you’re looking to grow your money without having to watch the markets daily or spending too much time researching individual companies, the 3 fund portfolio might just be for you.
This guide explains what a 3 fund portfolio is, help you decide if its a suitable portfolio for you and show you how to create one. We’ll also provide tips on how to optimize your portfolio for growth. So if you’re ready to get started, let’s get into it!
What is a 3 fund portfolio?
A three fund portfolio is a way to simplify investing for good returns, often associated with Vanguard’s founder, John Bogle and lazy portfolios.
It is a simple strategy for lazy ETF investors, all you need to do is to pick three types of ETFs that give you exposure to:
- Total Stock Market Index Fund
- Total International Stock Index Fund
- Total Bond Market Fund
Together, these funds give investors a good mix of stocks and bonds which is designed to provide broad market exposure and stability. The three funds can be invested in different proportions to reflect an individual’s risk tolerance and investment goals.
The idea of a 3 fund portfolio is to balance between simplicity, control and tax efficiency.
The FIRE community seems to like this strategy as it allows them to grow their money with better tax efficiency. The most common allocations for ETF investors consist of the following ETFs:
- S&P 500 ETF
- Global Bond ETF
- International Stocks ETF
What are the benefits of building a 3 fund portfolio?
3 fund portfolios are usually built using index funds or Exchange Traded Funds (ETFs) and offer the following benefits for investors:
1) Low cost
The use to ETFs and low cost index funds allow investors to maximize their capital for growth and performance.
2) Diversify your portfolio with little effort
By investing in markets rather than picking individual stocks, the 3 fund portfolio provides a diversified portfolio with little effort. And, it comes with lower risks and volatility.
3) Easy to rebalance and maintain
Another benefit of a three fund portfolio is that it can be easily rebalanced. This means that the mix of assets can be kept in line with an investor’s original goals and risk tolerance. For example, if the stock market has a prolonged period of gains, the portfolio can be rebalanced to sell some of the stocks and buy more bonds. This will help to maintain the desired asset allocation and provide some downside protection if the markets eventually turn lower.
Imagine the headache of trying to do this if you own a portfolio of more than 10 stocks.
Overall, a three fund portfolio can be a simple and effective way to invest in a wide range of assets. It can offer diversification, low costs, and the ability to rebalance.
What type of investors should consider building a 3 fund portfolio?
The 3 fund portfolio is a popular choice for many investors. It is especially useful for:
- Beginners: aspiring investors who are new to the market,
- Lazy or hands-off investors: those who do not wish to spend time picking their own stocks
FIRE practitioners who are new to investing also tend to start off with a 3 fund portfolio that lets them grow their money at a better rate than merely saving it in a bank account.
How to Build a Three-Fund Portfolio?
A typical 3 fund portfolio is made up of index funds or exchange-traded funds (ETFs) that track major market benchmarks. It usually includes the following asset classes:
- Domestic stocks (eg. S&P 500 index fund)
- International stocks (eg. Total International Fund)
- Bonds (eg. US Bond Index Fund)
Although its just three funds, there are many different ways to construct a 3 fund portfolio. Let’s dive into the details:
Which Fund or ETF should you use for your 3 fund portfolio?
There are many options out there and you might feel overwhelmed. So, here’re compilations of popular funds and ETFs to help you narrow down your choices:
If you’re building a US based 3 fund portfolio:
Best Funds/ETFs to build a 3 fund portfolio
| Asset Class | Name | Ticker | Type | Expense Ratio | AUM (USD) | Provider |
| International Stocks | Vanguard Total International Stock Index Fund | VTIAX | Mutual Fund | 0.11% | $54.6B | Vanguard |
| International Stocks | Vanguard Total International Stock ETF | VXUS | ETF | 0.07% | $55.8B | Vanguard |
| International Stocks | iShares Core MSCI Total International Stock ETF | IXUS | ETF | 0.07% | $31.2B | Blackrock |
| Stocks | Vanguard Total Stock Market Index Fund | VTSAX | Mutual Fund | 0.04% | $1110B | Vanguard |
| Stocks | Vanguard Total Stock Market ETF | VTI | ETF | 0.03% | $1110B | Vanguard |
| Bonds | Vanguard Total Bond Market Index Fund | VBTLX | Mutual Fund | 0.05% | $281.6B | Vanguard |
| Bonds | Vanguard Total Bond Market ETF | BND | ETF | 0.03% | $281.6B | Vanguard |
| Bonds | iShares Core U.S. Aggregate Bond ETF | AGG | ETF | 0.04% | $77.8B | Blackrock |
If you’re building a SG based 3 fund portfolio, you could consider the following:
- Domestic stocks: SPDR STI ETF (ES3), Nikko AM STI ETF (G3B) or iShares MSCI Singapore ETF (NYSEARCA: EWS)
- Bonds: ABF Singapore bond fund (ABF) or United Singapore Bond Fund
- International stocks: All world ETFs (since there ain’t ETFs that includes international stocks without Singapore exposure, just go for all world ETFs)
Now that you have an idea of which fund or ETF you wish to invest in, its time to decide:
How to allocate your capital in a 3 fund portfolio?
Over the years, investors have come up with different variations of the 3 fund portfolio, tweaking the weightage of each component to suit their risk profile and investment objectives.
Here’re some popular variations:
i) Equal Weightage Portfolio
33% domestic stocks, 33% international stocks and 33% bonds
The no-frills and most balanced portfolio with moderate risk, the equal weightage portfolio is a simple way to start building a 3 fund portfolio. All you need to do is to divide your capital into 3 equal parts and invest accordingly.
Of course, you are free to tweak your allocation based on your needs:
ii) Others
- 60/40 portfolio: 48% domestic stocks, 12% international stocks and 40% bonds
- 40/60 portfolio: 32% domestic stocks, 8% international stocks and 60% bonds
- 80/20 portfolio: 64% domestic stocks, 16% international stocks and 20% bonds
- 20/80 portfolio: 48% domestic stocks, 12% international stocks and 80% bonds
Typically, if you prefer a more conservative 3 fund portfolio, you’ll want to reduce your exposure to stocks and increase your exposure to bonds.
Once you have your 3 fund portfolio going, you’ll need to maintain it on a regular basis; once a year is good enough.
Here’s how to maintain your 3 fund portfolio for better performance:
How to rebalance a 3 fund portfolio?
Rebalancing a portfolio involves selling the overweighed components and buying underweighted ones to bring your portfolio back to your ideal allocation breakdown.
Since simplicity is key to implementing the 3 fund portfolio, you shouldn’t try to over optimize your portfolio allocation. Instead, simply do a rebalancing on an annual basis.
A good day to rebalance your portfolio is on your birthday, since its the day you’ll rarely forget.
Conclusion
A 3 fund portfolio is a simple, easy to use investment strategy. It allows you to start growing your money with relatively lower cost and risk, while providing diversity and without the need to spend too much time studying the markets.
There are many different ways to set up your 3 fund portfolio, so it’s important to find the allocation that suits your risk profile and investment objectives.
Here’re some frequently asked questions, leave yours in the comments below.
Frequently Asked Questions about the 3 Fund Portfolio
What is the average return of a three-fund portfolio?
Returns of a 3 fund portfolio varies depending on your choice of Fund / ETF as well as your asset allocation per asset class.
Here’s a sample from PortfolioLabs based off a 3 fund portfolio with the following breakdown:
- 50% Domestic Stocks, using Vanguard Total Stock Market ETF (VTI)
- 30% International Stocks, using Vanguard FTSE Developed Markets ETF (VEA)
- 20% Bonds, using Vanguards Total Bond Market ETF(BND)
The average return over the past 10 years was ~8.7%.
How much should I contribute to my 3 fund portfolio yearly?
This depends on your saving rate and investing goals.
The simple rule of time is that the more you invest earlier, the more time you’ll have for your money to grow.
How much cash do I need to setup my 3 fund portfolio?
With ETFs, these days you can start building a 3 fund portfolio with less than $1,000.
However, do take note of your brokerage fees as you do not want the fees to eat into your returns!
A good starting point would be a bigger sum like $15,000. You can start with $5,000 in each asset class, the cost of purchase should be less than 1% of your capital.
Which bond fund should I use for a 3 fund portfolio?
See table above.
What is John Bogle’s 3 fund portfolio allocation?
John Bogle‘s recommended 3 fund portfolio allocation is 60% domestic stocks, 20% bonds, and 20% international stocks. This is designed to provide broad market exposure and stability, and can be easily rebalanced.
That said, if your risk appetite is low, this may be a little uncomfortable for your as 80% of your portfolio will be in stocks. If the stock market is down (like the current bear market), you’ll see a bigger drawdown. The opposite is true in a bull market.
