Bogleheads : Breaking Down The Three-Fund Portfolio

The market hasn’t been kind to investors for the past couple months. Although growth stocks were the first to feel the pain from impending rate hikes, it now seems that the impact doesn’t stop there. 

If your portfolio is still doing well, then congratulations! It seems that your portfolio is well-positioned to handle volatility. But then, the question would be how many times can you possibly can get it right?

To skip ahead, consider this; does it make sense to focus on individual stock-picking in your portfolio? While concentration does give potentially higher returns, the opposite is also true. 

In times like these, you might realize that managing your downside is equally as important as positioning for the upside.

The Three Fund Portfolio

There have long been schools of thought which advocate investing in ETFs to capture broad market returns, and diversify risk. Among them, the Three Fund Portfolio stands out for it’s stability and market coverage.

This is a simple, low-cost strategy which is popular among bogleheads, who believe in using low-cost ETFs to invest with little to no effort required.

The main elements which make up a Three Fund Portfolio are;

  • A US stock total market index fund which invests in all US stocks in the market
  • A International stock total market index fund which provides broad exposure to non-U.S. stock markets.
  • A total US Bond index fund which provides exposure to the US bond market.

By investing in these three funds or ETFs, you would be vested in both the US as well as International stock markets, with a defensive component in US bonds as well.

The Good

Don’t under-estimate this portfolio setup, as it contains plenty of benefits; 

  • Diversification – Depending on your chosen ETFs, a portfolio could essentially be diversified across nearly 12,000 stocks and 10,000 bond issues. 
  • Low-cost – The Three Fund Portfolio utilizes low-cost ETFs which makes this portfolio super cheap to maintain.
  • Low Volatility – Because these ETFs invest in so many securities, they tend to be very stable, and do not suffer huge declines frequently.
  • No Under-performance – The Three Fund Portfolio would likely out-perform most investors as it simply replicates the market’s return due to it’s coverage.
  • Simplicity – Having just three components in your portfolio makes it so much easier to maintain and re-balance.

When setting up this portfolio, do consider using a broker which allows options trading. This allows you to generate additional income should you wish to do so.

I’m personally using Interactive Brokers for my brokerage.

The Bad

While the Three Fund Portfolio has a lot going for it, it also has it’s drawbacks. Here’s some you should know;

  • Returns are capped – Returns from such a portfolio would be limited to what the market achieves. While historically this would be a solid return, it would unlikely achieve immense growth.
  • Not Concentrated – You would be investing into every sector of the market, meaning that choosing a industry or sector to lean into isn’t an option.
  • USD Reliance – Practically executing this portfolio would require you to be vested mostly in ETFs denominated in US dollars. This carries a degree of currency risk.

How Do I Start?

Asset allocation is key. You’d want to start with an allocation which resonates with your financial goals, time horizon, and risk tolerance. Here are some great examples to begin with.


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The thing with having just three funds is that it’s really easy to adjust it according to your needs. Which is likely to change over the course of your career and lifestyle needs.

Do remember to choose the right broker which offers access to these ETFs, at a low cost. Preferably one which does not charge custodian or account maintenance fees, as these fees would eat into your returns.

Once you’ve decided on your allocation, you then have to choose which ETFs should make up your portfolio. Some suitable candidates listed here;

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Remember: you need to pick ETFs which are really low-cost, and are able to broadly diversify and track the market’s returns. So stay away from those expensive Unit trusts and Mutual funds!

Switching It Up

Of course, the components of this portfolio aren’t set in stone. For more seasoned investors who know what they want, they can switch up it’s parts to get the coverage they prefer.

Bullish on China equities? You can swap the International equity component for a Chinese one instead. 

Not keen on long term bonds? Deploy a US Short Term Bond ETF in it’s place.

You’re basically changing the components while maintaining the concept of low costs, asset allocation, and diversification.

The table below shows some possible substitutes for the portfolio’s components.

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To Conclude

The Three Fund Portfolio can be a really great way to think about investing, by minimizing risk while still achieving a respectable overall return. 

Perhaps it’s greatest draw is just how simple it can be. With little effort involved, one can still enjoy life and make time for the family while staying invested throughout market cycles. 

This makes the Three Fund Portfolio a good bulwark to form the core of your investments. Allowing your spare funds to pursue other, higher risk opportunities.

What are your thoughts about this portfolio? Let us know in the comments section below!


Casey H

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Hi world

Mon Dec 5 , 2022
hi world