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 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 and 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

 

Returns and risk for the Three-fund portfolio

Portfolio NameNumber of asset classes1 year return 2019YTD (incl. December 2019)10 year returnCAGR since 1989DrawdownRisk Level
S&P 500 (Benchmark)
131.25%31.25%12.97%9.84%-37.71%5 - very high risk
3 Fund Portfolio 80/20324.37%24.37%9.65%8.07%-29.65%4 - high risk
3 Fund Portfolio 60/40320.49%20.49%8.15%7.71%-20.97%3 - medium risk
3 Fund Portfolio 40/60316.60%16.60%6.60%7.22%-12.30%2 - low risk
3 Fund Portfolio 20/80312.72%12.72%4.99%6.60%-3.62%1 - very low risk
3 Fund Portfolio Equal Weight320.81%20.81%7.81%7.16%-24.56%3 - medium risk

 

From portfoliovisualizer.com

Building the portfolio

Below you can see which mutual funds or ETFs you can use to build the portfolio. They are the best-in-class funds and ETFs for this purpose. They are low-cost index funds that best capture the asset class. Read here how we selected the best funds.

3 Fund Portfolio 80/20                  

  • 56.00%  US Total Stock Market   (VTI)
  • 24.00%  Int. Developed Blend      (VEA)
  • 20.00%  Total US Bond Market    (BND)

 

3 Fund Portfolio 60/40                  

  • 42.00%  US Total Stock Market   (VTI)
  • 18.00%  Int. Developed Blend      (VEA)
  • 40.00%  Total US Bond Market    (BND)

 

3 Fund Portfolio 40/60                  

  • 28.00%  US Total Stock Market   (VTI)
  • 12.00%  Int. Developed Blend      (VEA)
  • 60.00%  Total US Bond Market    (BND)

 

3 Fund Portfolio 20/80                  

  • 14.00%  US Total Stock Market   (VTI)
  • 6.00%    Int. Developed Blend      (VEA)
  • 80.00%  Total US Bond Market    (BND)

 

3 Fund Portfolio Equal Weight                  

  • 34.00%  US Total Stock Market   (VTI)
  • 33.00%  Int. Developed Blend      (VEA)
  • 33.00%  Total US Bond Market    (BND)

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.
  • Has not beaten the S&P 500 in the past.
  • May be too simple for some.
  • Not enough asset classes to fully make use of the power of rebalancing.

Resources

Go here for a rebalance excel worksheet.

 

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

Summary and your next steps

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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