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Bogleheads 3-Fund Portfolio – Guide to Asset Allocations, Pros & Cons


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Because investing is seldom taught in schools or talked about openly in social circles in the United States, most beginner investors are left to their own devices to learn how to pick individual stocks and bonds from articles and videos across the web and by making their own mistakes. But those mistakes can be quite costly.

Today, there are investment-grade funds that take much of the learning curve out of the equation. These index funds, mutual funds, and exchange-traded funds (ETFs) offer diversified groups of stocks chosen by some of Wall Street’s most well-respected experts.

Moreover, there have been several prebuilt portfolios designed to give investors, even beginners, the ability to invest successfully with little research. One of the most popular of these portfolios is known as the Bogleheads Three-Fund Portfolio.

What Is the Bogleheads Three-Fund Portfolio?

The Bogleheads Three-Fund Portfolio is one of the laziest among the so-called “lazy portfolio” category. As its name suggests, the portfolio is made up of only three investment-grade funds, making it one of the simplest portfolios you’ll ever come across in terms of setup and maintenance.

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The concept is that by investing in three heavily diversified low-cost index funds — one focused on U.S. stocks, one focused on international stocks, and one focused on U.S. bonds — you’ll be able to build a portfolio that’s protected from volatility and gives you exposure to the returns the overall stock market has to provide.

The investment portfolio was developed by John C. Bogle, who goes by Jack Bogle. He’s the fund manager who became famous as the founder of Vanguard, an investment management company with more than $7 trillion in assets under management.

Bogle is also the founder of the popular investing forum, where investors discuss the principles Jack follows when making investment decisions. The forum is also where the three-fund portfolio first appeared.

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Portfolio Asset Allocation

This is one of the few prebuilt portfolios that doesn’t have an asset allocation set in stone. Instead, it’s more of a roadmap to building a portfolio that fits your unique needs. The portfolio consists of three key asset classes:

  • U.S. Stocks. For investors with a longer time horizon, the lion’s share of the portfolio is allocated to an index fund that’s centered around widespread exposure to the U.S. stock market. This could be a fund focused on the S&P 500 index, the Russell 3000 index, or any other index designed to track the performance of the U.S. stock market as a whole.
  • International Stocks. The next portion of your asset allocation will be to international stocks. To gain exposure to these assets, you’ll want to invest in a total international index fund with diversified holdings in both developed and emerging markets outside of the United States.
  • U.S. Bonds. Finally, the portfolio includes an investment in an index fund centered around U.S. bonds. This bond index fund should include a good mix of short-term, intermediate-term, and long-term bonds.

When it comes to how much money you should allocate to each of these assets, the decision is yours, but Jack Bogle suggests using your investing time horizon to guide you.

The best way to do this is to use your age, with your current age representing your allocation to bonds and splitting the remainder between domestic and international stocks.

For example, if you’re 25 years old, you might put 25% of your portfolio into U.S. bonds and split the remaining assets evenly between U.S. stocks (37.5%) and international stocks (37.5%).

Isn’t Diversification Important?

Absolutely! Diversification helps you protect your investments from volatility. If this was a portfolio consisting of individual stocks and bonds, three assets wouldn’t be enough to properly diversify.

However, the portfolio is made up of three highly diversified index funds, each with hundreds or even thousands of stocks inside, which means that even with just three investment-grade funds, you’ll maintain a heavily diversified portfolio.

The Investment Thesis Behind the Portfolio

The idea behind the three-fund portfolio is to bring simplicity to the investing process while providing exposure to the wealth-building power of both the U.S. and the international stock market. Moreover, by mixing in a good helping of bonds into the equation, you’ll enjoy less risk.

As author of “The King of Bogleheads” and co-author of “The Bogleheads’ Guide to Investing” and “The Bogleheads’ Guide to the Three-Fund Portfolio,” Taylor Larimore points out that, although the portfolio is simple to set up and maintain, the thesis behind it is actually quite complex.

Larimore explains that when you use total market index funds, you’ll end up with a portfolio that includes more than 10,000 worldwide securities ranging in market caps and sectors. Moreover, due to the nature of the portfolio, it offers very low costs, both in terms of fees and tax efficiency.

Because this portfolio is based on broad-market index investing, there’s no style drift or overlap. This means there’s little risk of your investments drifting away from your intended investing strategy or overlapping other assets in your portfolio. And, with few funds to keep track of, it’s easy to rebalance.

Ultimately, the investment thesis is to take the most simplistic approach to significant diversification and asset exposure by essentially becoming the market.

Pros and Cons of the Three-Fund Portfolio

As with any other investment portfolio, there are benefits and drawbacks to following the three-fund portfolio. Here are the pros and cons you should consider before investing based on this strategy:

Three-Fund Portfolio Pros

There are several advantages to the three-fund portfolio. The most significant of these include:

1. Heavy Diversification

Although there are only three funds included in the portfolio, all of these funds are heavily diversified, meaning your portfolio will include a wide variety of assets.

That’s a huge advantage because the more diversified your portfolio is, the less exposure you have to volatility and significant losses should one or more asset classes perform poorly.

2. Low Cost

The portfolio is centered around investing in low-cost index funds like those offered by Vanguard, a fund manager that’s known for charging lower-than-average expenses on investments.

Although investing will always come with a cost, by keeping the expenses low, you’ll be able to hold onto more of your returns, which makes a huge difference in long-term portfolios.

3. A Simple Approach

This portfolio is a perfect option for investors of all levels of expertise. After all, the approach to investing used in this strategy is just about as simple as it gets.

That makes it a great option for beginners who don’t quite know their way around the stock market yet or for seasoned investors who simply don’t have the time or inclination to follow more complex strategies.

Three-Fund Portfolio Cons

While there are plenty of reasons to consider investing with the three-fund portfolio, there are some drawbacks you should consider before you start. The most significant of these include:

1. A Lack of Control

The portfolio involves nesting your money in three index funds. This takes the control over what specific assets you hold completely out of your hands, leaving it up to the fund managers to decide what your money will be invested in and to make decisions on your behalf when shareholder votes arise.

2. No Chance of Beating the Market

Many investors are willing to take moderate or higher levels of risk for the potential to beat average market returns. The three-fund portfolio strategy simply won’t scratch that itch. The portfolio is designed to mirror overall market returns, meaning your chances of beating the market are slim to none.

3. One-for-the-Other Diversification

While the portfolio gives you heavy diversification, if you want to invest in all three among international stocks, small-cap stocks, and real estate, you would be straying too far away from the basics of this portfolio to call it a three-fund investment.

Nonetheless, the basic principles can still be used to modify the strategy a bit for your needs. For example, instead of splitting your stock allocation between U.S. and international stocks, you could create a five-fund portfolio in which your stock allocation is split between U.S. and international stocks as well as small-cap investments and real estate.

Who Should Use the Bogleheads Three-Fund Portfolio?

There are few investment portfolios that are designed for everyone, but the three-fund portfolio model is just about as close as it gets, largely because the decisions of which funds to choose and how much money to allocate to each are left for you.

In fact, it’s easier to tell you who shouldn’t use this strategy than to give you the long list of people who should.

If the following descriptions don’t sound like you, maybe this portfolio isn’t for you. Otherwise, you’ll be in good hands following the strategy outlined by the three-fund approach.

No Need to Beat the Market

This portfolio isn’t designed to beat the market. Instead, it’s designed to provide such widespread exposure that your portfolio mirrors overall market returns.

If you’re a risk-tolerant investor who’s willing to take a few chances in the pursuit of alpha, this isn’t the strategy you’ll want to follow.

But if you’re happy to accept the long-term market average return in exchange for less volatility and broad diversification, the three-fund portfolio has you covered.

No Desire to Pick or Manage Individual Investments

If you want to be in control of every move made within your investment portfolio, this strategy — or any other strategy that’s based on investing in funds — isn’t a strategy you should consider.

Any time you invest in a fund, you’re giving control to the fund managers, not just in terms of which stocks you’ll be investing in, but in terms of voting rights based on share ownership.

Many investors, however, are happy to leave the stock picking to others and have no interest in voting on corporate policies the way individual shareholders can.

How to Duplicate the Bogleheads Three-Fund Portfolio

Because it consists of only three broad-market index funds, the Bogleheads Three-Fund Portfolio is easy to replicate in your own brokerage account using low-cost ETFs.

Keep in mind that the assets suggested below are not set in stone. The strategy calls for diversification in U.S. stocks, international stocks, and bonds, but the exact funds you decide to invest in are your choice.

For the purpose of this example, the portfolios outlined below are the most diversified options with total stock market index assets.

Moreover, as with any portfolio, the three-fund portfolio can be customized to fit your needs. You’ll find examples of the portfolio below both for investors who like to invest in international assets, which is the traditional way to build this portfolio, and for those who prefer to keep their investments domestic.

The Traditional Three-Fund Portfolio

The traditional Bogleheads Three-Fund Portfolio is relatively straightforward and can be built using the following funds:

  • Vanguard Total Stock Market Index Fund (VTSAX). The VTSAX was designed to provide exposure to the U.S. market as a whole. It’s made up of thousands of domestic stocks ranging in market caps and sectors. Moreover, you’ll gain access to both growth and value stocks through this fund, with an expense ratio of just 0.04%, which is among the lowest in the industry.
  • Vanguard Total International Stock Index Fund (VTIAX). The VTIAX is a diversified investment in stocks outside of the United States. It also invests in both value and growth stocks ranging in market caps and sectors. However, these stocks all represent international companies in both developed and emerging economies. With an expense ratio of 0.11%, the fees for the fund are slightly higher than what you’ll pay on the VTSAX fund, but they are still well below the industry average.
  • Vanguard Total Bond Market Index Fund (VBTLX). Finally, the traditional portfolio includes a bond fund like VBTLX, a diversified portfolio containing U.S. debt instruments including Treasury investments, mortgage-backed securities, and other bonds. Not only are the types of bonds heavily diversified, but maturities are too, ranging from short-term to long-term.

Pro tip: You don’t have to build the portfolio yourself. You can use expert pies in your M1 Finance brokerage account to mirror the prebuilt portfolios of some of Wall Street’s greatest minds. Check out the Bogleheads Three-Fund Portfolio pie at M1 Finance to get started immediately.

Domestic-Only Investors — Modified Three-Fund Portfolios

If you would rather focus on domestic-only investment portfolios, the three-fund portfolio can be modified to fit your needs.

There are two compelling options when it comes to changing the international asset allocation in the portfolio to something domestic that offers a similar risk-reward profile. These include small-cap and real estate assets.

Option #1: Small-Cap Stocks

To take advantage of the portfolio with the small-cap approach, you’ll still want to invest in VTSAX and VBTLX, as in the traditional portfolio. However, instead of investing in VTIAX for international stocks, you would invest in the Vanguard Small-Cap Index Fund (VSMAX).

This fund is designed to give you widespread exposure to a wide range of small-cap stocks that represent U.S. companies in various sectors. The fund comes with an expense ratio of just 0.05%, which is well below the industry average.

Domestic small-cap stocks have a strong history of performing well compared to their large-cap counterparts because these smaller companies have plenty of room to grow within unsaturated markets, similar to many international stocks.

On the other hand, the risk profile is also increased because these companies don’t have proven track records of performance, giving them a similar risk-versus-reward profile to international options.

Option #2: Real Estate Investment Trust (REITs)

If you’d like to take the real estate approach, you could fill the void left by removing international investments with the Vanguard Real Estate ETF (VNQ). This fund invests in real estate investment trusts (REITs) as well as companies that purchase office buildings, hotels, and other real estate.

The expense ratio on the fund is 0.12%. While that’s the highest cost of any fund mentioned here, it is still well below the industry average of 0.44%.

REITs have been stellar return producers for some time now, but they also come with increased risk. After all, these trusts only make money when their real estate investments result in rental income. This is yet another area where the risk-versus-reward profile is quite similar to international stocks.

Maintain Balance in Your Portfolio

No matter how simple or complex your investment portfolio is, it’s important to maintain balance. After all, an investment strategy is only worth using if you follow it.

As a lazy portfolio, you don’t have to rebalance your investments weekly or even monthly when investing in the three-fund portfolio, but it is a good idea to go through and adjust your allocation on a quarterly basis.

When doing so, look at the three funds within your portfolio and make sure that the amounts of money allocated to each of them still fit with your strategy.

For example, if you’re 25 years old and you find that stocks have grown tremendously and bonds have lagged — leaving you with 42% U.S. stocks, 40% international stocks, and only 18% bonds — you might sell some U.S. stocks and international stocks and allocate those profits into more bonds.

This would help to maintain the protection against volatility the portfolio was designed to provide.

Final Word

All told, the three-fund portfolio is one of the most popular among beginner and intermediate investors alike, and for good reason. The portfolio provides a balance of risk and reward based on your time horizon while giving you exposure to the market as a whole.

While the portfolio is highly customizable and a great fit for most investors, it’s not a one-size-fits-all approach to investing. Moreover, before following the strategy, it’s best to do your research to decide which funds are best suited to meet your investment objectives.


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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.