Three-fund portfolio

A three-fund portfolio is a simple, low-cost way to invest using just three broad index funds:

a domestic (home-country) total stock market fund,
an international total stock market fund, and
a total bond market fund.

It's popular with the "Bogleheads", followers of Vanguard founder John Bogle, for what Bogle called "the majesty of simplicity". There's nothing magic about the number three; it's shorthand for keeping things simple.

This page explains a general approach. It isn't personal financial advice.

Why people like it

Advocates (such as Taylor Larimore, co-author of The Bogleheads' Guide to Investing) point to:

Diversification: thousands of companies and bonds worldwide, every size and style.
Very low cost and tax efficiency.
No manager risk: it tracks the market rather than relying on a stock-picker.
Low turnover and no overlap between funds.
Easy to rebalance.
It will never underperform the market, and by definition beats most investors who pay higher fees.

Setting it up

1. Choose your stock/bond split

This is the most important decision, and only you can make it, based on your goals, timeline and how much volatility you can stomach. A traditional, fairly conservative rule of thumb is "your age in bonds" (e.g. 30% bonds at 30). Many target-date funds hold more stock than that.

2. Split stocks between home and international

Less critical, since both have broadly similar long-term risk and return. Suggestions range from about 20–40% of stocks in international, up to matching global market weights (which, for a US investor, means more than half international).

3. Decide which account holds what

If you have both tax-advantaged (retirement) and ordinary taxable accounts, put the least tax-efficient funds (usually bonds) in the tax-advantaged accounts. International stocks often suit taxable accounts.

4. Pick low-cost funds

Choose cheap index funds or ETFs that cover whole markets. Examples (US-listed, as of the early 2010s):

Provider	Home stocks	International stocks	Bonds
Vanguard (funds)	Total Stock Market (VTSMX)	Total International Stock (VGTSX)	Total Bond Market (VBMFX)
Vanguard (ETFs)	VTI	VXUS	BND
iShares (ETFs)	ITOT	IXUS	AGG
Schwab (ETFs)	SCHB	SCHF	SCHZ
Fidelity (funds)	Total Market Index	Global ex US Index	US Bond Index

Check current fund names, costs and minimums yourself; they change. Watch out especially for high fees on bond funds.

Example mixes

42% home stocks / 18% international / 40% bonds (a 60/40 portfolio)
One-third each in all three (a popular "lazy portfolio")
More aggressive: 56 / 24 / 20. More conservative: 28 / 12 / 60.

Keeping it going

Rebalance about once a year to return to your chosen percentages, since different assets grow at different rates.
Ignore the noise. There's always a story about why simple investing "doesn't work any more".

Variations

Two funds: a total world stock fund plus a bond fund.
Four funds: add an international bond fund (as Vanguard's Target Retirement and LifeStrategy funds do).
All-in-one funds (target-date or balanced funds) are even simpler, but give you less control over allocation and tax placement.
Core and satellite: use the three funds as the core, with a small "play money" slice or a tilt toward an area that interests you.
Some investors use bank CDs or savings instead of a bond fund, especially when rates are low.

History

Columnist Scott Burns popularised a "couch potato" portfolio of just two funds in 1991.
Taylor Larimore argued in 1999 that a handful of total-market funds could replace large, complicated portfolios.