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Three Fund Portfolio: Did Awesomeness Find Trinity?

3-fund-portfolios

The three-fund portfolio is a hallmark of the Bogleheads forum. At its core, the strategy slices your portfolio into three parts:

  1. U.S. stocks
  2. International stocks
  3. Bonds

That’s it. Simple. Effective. Elegant.

Three Fund Portfolio: Did Awesomeness Find Trinity?

What is the Three Fund portfolio?

The Three Fund portfolio is a portfolio consisting of three asset classes.

  • Total US Market
  • International Developed
  • U.S. Total Bond Market

The portfolio makes room for rebalancing to work its magic while maintaining a simple exposure to almost all of the world’s investable assets.

The portfolio varies in that the allocation to the three asset classes changes depending on your risk tolerance and objective.

Taylor Larrimore of the Bogleheads forum is a strong advocate of the portfolio and has a book coming out: (It’s out!)

The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk

 

Performance for the Three Fund Portfolio Including Three Fund ESG Portfolios

NameYear to dateReturn in 201910 year returnCAGR since 1989CAGR since 2017Draw downDraw down since 2017Risk levelExpense ratioYield
3 Fund Portfolio 80/20-17.32%24.299.78%8.6111.43%-29.59%-6.37%40.04%2.13%
3 Fund Portfolio 60/40-12.49%20.398.34%8.159.67%-20.90%-4.78%30.04%2.13%
3 Fund Portfolio 40/60-7.66%16.56.84%7.567.85%-12.22%-3.20%10.04%2.13%
3 Fund Portfolio 20/80-2.83%12.615.29%6.855.96%-3.54%-1.61%10.04%2.13%
3 Fund Portfolio Equal Weight-14.58%20.637.88%7.639.70%-24.50%-6.54%30.04%2.29%
3 Fund Portfolio 80/20 ESG25.04%N/A11.86%-2.60%
3 Fund Portfolio 60/40 ESG20.95%N/A9.97%-3.63%
3 Fund Portfolio 40/60 ESG16.87%N/A8.03%-4.14%
3 Fund Portfolio 20/80 ESG12.78%N/A6.04%-4.66%
3 Fund Portfolio Equal Weight ESG21.28%N/A10.01%-8.95%

 

From portfoliovisualizer.com

 

Building the portfolio

Below you can see the asset allocations for the portfolio. You can also see if the portfolio has a socially responsible investing (ESG) variant portfolio. You can read more about socially responsible investing (ESG) investment portfolios in this post.
To build the portfolio yourself, go to our best in class ETF page to see which ETF you should choose for a particular asset class. There you can also see which socially responsible investing ESG ETFs you should select.

Portfolio allocation for the Three Fund portfolio

NameESG portfolio available?Total US MarketInternational DevelopedTotal Bond Market
3 Fund Portfolio 80/20Yes56.00%24.00%20.00%
3 Fund Portfolio 60/40Yes42.00%18.00%40.00%
3 Fund Portfolio 40/60Yes28.00%12.00%60.00%
3 Fund Portfolio 20/80Yes14.00%6.00%80.00%
3 Fund Portfolio Equal WeightYes34.00%33.00%33.00%

How we select the right ETFs

There are a lot of ETFs out there. Most of them can be discarded because:

  • They are too expensive
  • They hold too few assets and are therefore too illiquid
  • They do not meet the criteria for representing the asset class they are supposed to mirror.

We have carefully selected an ETF for each asset class that the portfolios on portfolioeinstein.com use. If you want to read more about our selection process and see what we consider the best ETFs please visit our article What Is The Best ETF?

As of 2020 we also track socially responsible investing ESG portfolios. Socially responsible investing (ESG) portfolios prioritize investing that puts an emphasis on environmental, social and corporate governance issues.

You can find the socially responsible investing ESG ETFs in the same article.

Advantages and disadvantages of  the Three-fund portfolio

Advantages

  • Simple to understand.
  • Flexible. You can change the allocation as your goals change.
  • Rebalancing is very easy.
  • Great returns.
  • Very cheap to maintain.
  • Good diversification. You own a slice of all the world’s assets.
  • It is John Bogle approved!  

Disadvantages

  • It is not very sexy, and you won’t be bragging about it at parties.
  • It has not beaten the S&P 500 in the past.
  • It may be too simple for some.
  • It may not have enough asset classes to fully make use of the power of rebalancing.

Resources

 

Also, make sure you read the Bogleheads (Taylor Larimore) analysis of the portfolio!

Suggestions for your next steps

Finding the correct portfolio is hard. Maintaining your portfolio is also daunting. If you are still in doubt about which portfolio to choose, we suggest you read our article How To Invest Money: 5 Simple Steps That Work For Anyone

If you have already committed to a portfolio – good for you! If you need help maintaining the portfolio you will find our rebalance worksheet useful. Rebalancing your portfolio lowers your risk and may even provide higher returns in the long run.

You can find the rebalance worksheet in our article Here Is The Most Easy To Use Portfolio Rebalance Tool

Summary

The Three-fund is simple, effective, and elegant. You get broad diversification with a portfolio that is easy to maintain and cheap to hold. You may not beat the market or be able to brag about at parties, but you will be able to reach your financial goals. Oh, and did I mention that John Bogle approves? 😉

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