An Introduction to the Three Fund Portfolio

Brandon Wang
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Money is confusing. When I was just a kid, money was something that I needed so I could buy candy or a pack of Pokémon trading cards. Now, I work for a salary so that I can continue to keep a roof over my head and feed myself. Money, which started as such a simple and innocent concept, quickly transformed into a much more convoluted and complicated of a problem.

The American educational system is severely lacking in many important topics such as how to invest or saving for retirement. Schools will teach us step by step how to solve differential functions or test us on each event during World War I, but you’ll be hard-pressed to find a class that prepares students to invest for retirement. I know for sure classes never taught me what to do with my money and after I graduated from college I felt like everyone just expected me to know everything about personal finance. If you feel this way, don’t stress too much about it. You’re not alone.

“Invest your money! Let your money work for you.”

I kept hearing the same thing over and over from friends and family. I knew that I should be saving my money and investing it but the stock market terrified me. There were so many things I didn’t know about it and the horror stories of companies going bankrupt or seeing their stock prices plummet kept me petrified.

In the beginning, I didn’t want to pay the hefty fees of full-service financial advisors so I tried the DIY method. I started researching different companies and invested in a few individual stocks myself. I made some gains and had some losses but in reality, what I was doing was not any different from gambling. There was simply too much information out there and I never had the time to complete my due diligence on the stocks I was blindly investing into. Before I knew it, I had essentially just turned the stock market into my own personal casino.

This entirely changed once I stumbled upon an investment methodology popularized by the legendary founder of Vanguard, Jack Bogle, called the Three Fund Portfolio. It was simply the perfect investment strategy for people that don’t want to spend days and weeks agonizing over researching the stock market or for those just starting to get into investing. So if you fit into this group, keep on reading!

The Three Fund Portfolio

The Three Fund Portfolio is essentially an investment portfolio that consists of only three different investments which are normally low-cost index funds or ETF’s. The three funds can be categorized as U.S. stocks, U.S. bonds, and international stocks. Since each category is composed of an index fund or ETF you don’t need to invest in individual stocks but instead, your money will be spread across the entire asset class whether that be U.S. stocks, U.S. bonds, or international stocks. This way you can avoid a large part of the volatility of individual stocks and achieve a consistent average market return(better returns than the vast majority of actively managed portfolios and professionals).

Setting up your portfolio like this allows for a very hands-off, low-cost, and low-risk approach to investing. It will also allow you to be completely diversified across the entire US stock and bond market as well as international markets.

The most difficult decision you will need to make when setting up the Three Fund Portfolio is solely how to allocate your investments into the three different categories. This can be most accurately chosen by considering a few things. Most importantly, how risk-averse or risk-tolerant you may be as an individual. For some of you that may be just starting in your careers, it may be easier to take on a more aggressive strategy whereas later on in life it may be smarter to play it more conservatively as more responsibilities tend to pile up.

In general, stocks will always be more volatile than bonds but produce higher expected rates of return. With this in mind, if you would like a more aggressive portfolio and have a greater appetite for risk, a heavier allocation in stocks might be exactly what you’re looking for. One commonly used method for determining the allocation between stocks and bonds is to take your age and subtract it from 100. This will be your percentage allocation towards stocks(ex. If you are 25 years old then 100–25 = 75% allocated towards stocks). Once you decide on the proper allocation of stocks to bonds, then you can decide how to split that between the U.S. and international equities. There is no common rule for this and can be left to your discretion.

Common Three Fund Portfolio Allocations

  • Aggressive — 65% U.S. stocks, 20% U.S. bonds, 15% international stocks
  • Moderate — 33% U.S. stocks, 33% U.S. bonds, 33% international stocks
  • Conservative — 20% U.S. stocks, 75% U.S. bonds, 5% international stocks

Examples of stock and bond index funds

US stocks

FSKAX — Fidelity Total Market Index Fund

FXAIX — Fidelity 500 Index Fund

VTSAX — Vanguard Total Stock Market Fund

VFAIX — Vanguard 500 Index Fund

US bonds

FXNAX — Fidelity U.S. Bond Index Fund

VBTLX — Vanguard Total Bond Market Index Fund

International Stocks

FZILX — Fidelity ZERO International Index Fund

VTIAX — Vanguard Total International Stock Index Fund

After deciding how to allocate your Three Fund Portfolio, the only step left is to start investing. As is commonly heard, time in the market is much more impactful than trying to time the market. The Three Fund Portfolio takes advantage of time to compound returns and grow wealth.

Lastly, this strategy is not a one size fit all for every single investor out there. Although this strategy is ideal for individuals that want to passively grow their wealth without much maintenance, it may be the wrong option for those that are looking to aggressively manage their portfolios or avoid diversification in search of greater returns. Overall, the Three Fund Portfolio is a simple investment strategy that focuses on three asset groups that are all vastly different and span across many different markets. With all investment strategies, there are advantages and disadvantages to the Three Fund Portfolio, but if it fits your style, there’s no easier way to invest and consistently increase your wealth in the long term.

Happy investing!

This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.

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