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three fund portfolio
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In this article, I really want to walk you guys through a super simple and effective strategy for investing that’s really solid for beginners, because one, you don’t have to do much. So the three fund portfolio investing is really good for someone that’s lazy like me, and two, you don’t have to dedicate hours every week, or every day to researching what to invest in.

If you’re someone that’s new to investing that just wants a solid investing strategy that’s mathematically proven to outperform the market over a long period of time, then this strategy which is the three-fund portfolio is the strategy for you. It’s what I personally use, and I’m going to go share with you in this article what a three-fund portfolio is exactly comprised of, how you’re going to set one up, and why it’s one of the best investing strategies out there for the long term, and why it’s so simple.

At the end of this article, we’ll go over some of the frequently asked questions that people ask about the three-fund portfolio.

About The Three Fund Portfolio Strategy

This strategy isn’t going to get you rich quickly overnight, but it is a really good strategy to get you rich over a long period of time. Let’s say 10, 20 years down the line.

The Three Fund Portfolio

Basically what we’re going to be doing is buying three different types of vanguard index funds in a three-fund portfolio. One for the domestic US stock market, one for the international stock market, and one which is the bond fund. The ticker symbols that most people buy for their three-fund portfolios are VTSAX which stands for vanguard total stock market index fund, VTIAX which stands for vanguard total international stock index fund, and the last one is VBTLX which stands for vanguard total bond market index fund.

If you’ve read my other articles, you’ll know what an index fund is but basically, a quick overview is that an index fund is a type of security that you buy, and if you buy that one index fund you actually own a small percentage of everything that it actually owns in the index fond itself.

In the case of VTSAX, by buying VTSAX they actually own 3531 US stocks that you can buy into just by buying that index fund. So, in a little bit, I’m going to explain how to buy these index funds, and if you don’t have access to these certain index funds, you can just buy the alternative ETFs that are mostly available at every brokerage.

We’ll also talk about how much money you should allocate towards each index fund depending on how aggressive or not aggressive you want to be, and how much risk tolerance you actually have. But for now, let’s discuss why the three-fund portfolio reigns supreme, and why I think it is the best choice for beginners and actually for a lot of people. Not even just beginners, but for a lot of people that just want to have a solid investing strategy for a long period of time.

What I Think Of Investing

When it comes to investing, I like to think about what gives me the best opportunity for the least amount of risk, or what is the best type of value in terms of the investing that I can do for the risk that I am going to take. And this is why it’s such a great investment strategy, one, it’s simple, two, it’s really well-diversified because you’re buying index funds, you’re buying a lot of underlying assets, so it’s well-diversified by nature by buying the index funds. Three, it is low fees, vanguard index funds typically have the lowest fees of any other index fund or any other type of mutual fund or ETF security on the market. And four, that just means there’s a good risk-to-reward ratio.

Another thing I want to point out when it comes to this strategy is that there’s no such thing as manager risk. When you’re buying an index fund, it’s passively managed, but when you buy a mutual fund for example, you’ll have a professional manager of that fund which typically means higher fees. Two, you’re subject to human error, and the last reason why I think that you should actually own a three-fund portfolio is that it offers pretty good returns.

On average, it beats the market over a long period of time for a very little amount of work. You literally just buy three funds, you kind of set it, and you forget it.

This kind of leads me into my next talking point here which is,

How do we Actually Allocate Our Three Fund Portfolio

When it comes to allocating our money in the three-fund portfolio, there are a bunch of different strategies that you can pursue. Typically, if you’re more aggressive, you want to choose a portfolio that is heavily weighted in stocks. And then, if you’re less aggressive, you’re going to choose a portfolio that has a higher percentage of bonds.

A bond is basically an IOU from one borrower to another in exchange for interest. If you are the borrower, you’re actually just collecting interest on your bond. Bonds are typically issued by the government or large corporations, so they are considered very safe investments and investments that are very predictable.

The reason why you would include a bond fund in your three-fund portfolio is to kind of lower the overall volatility of your portfolio, and to provide some sort of conservative strategy in addition to the more aggressive strategy that you are going to be pursuing, with the total US stock market index funds, and the international stock market index funds.

Quick Modification

These days, however, I would offer a slight modification, which is to have a very small percentage of your portfolio actually in bonds. The reason is that interest rates are so low in the united states right now, and bonds are not paying a high return. I don’t know how long interest rates are going to be this low, but the time you typically want to have a bond is when interest rates are a little higher. The fact that interest rates are really low right now means that the bond fund in your portfolio is going to be less attractive.

The US and International Stocks Allocation

In terms of how much of a US stock and international stock allocation you’re going to want to have in the three-fund portfolio, first, we got to decide how risky we want to be. I would say if you are someone that is younger like under the age of 30 or under the age of 25, you can actually afford to be riskier because you have a lot more time left before you actually retire.

You might not need the money right away, so when you’re younger, you can afford to take more risks to get higher returns early on. And as you get older, you can shift your investment strategy more towards a conservative model because as you get older, and you’re closer to retirement, you might need that money sooner rather than later.

An aggressive three-fund portfolio right now looks like 60% US stocks, 30% international stocks, and 10% in bonds. When I say 60, 30, 10, I just mean if you have $10,000 to invest, you’re going to put 60% of it into US stocks, that would be $6,000. In terms of how much money you want to allocate towards US stock versus international stock, that’s totally up to you. It totally depends on how much you think the US stock markets couldn’t grow versus international stocks.

I personally like to weigh a little bit heavier in US stocks just because I know the US market really well, and I’m more familiar with it. And I think that over time, I know that the return of the US stock market over a longer period of time, let’s say 30 years is going to be around 8% or a little higher.

Historical Return

Let’s look at the historical returns by year of vanguard index funds in a three-fund portfolio with different allocations.

This table starts from 2019 all the way down to 1997, and we’ll get to see year by year how each one does. In 2019 an 80/20 portfolio which means 80% stocks, and 20% bonds returned 24.15%. In 2018, it actually was down 6.36%, in 2017 it was up 19.05%, and so on and so forth.

As you can see, as you scroll down, you can see the different types of breakdowns of percentage returns by year, depending on the portfolio allocation. And you can see that not every year is an up year, but the majority of them are and that’s what you’re going to see with a three-phone portfolio. That’s what you’re going to see with this investing strategy, that as long as most of the years are in the green, and they’re making up for the years that you are actually in the red, it’s going to be better overall in the long term.

You can see that when a portfolio is 20% stocks, and 80% bonds the volatility is not very high in the portfolio itself. Typically the returns are between 0 and 10%. You can see that some years it’s down 3%, down 1% here and there, but in general, it’s pretty stable which is pretty cool.


Alright, let’s answer some quick faqs on the three-fund portfolios, and the first question is

1. What are the ETF equivalents?

This is important because vanguard index funds are only available at Vanguard, Fidelity, or TD Ameritrade. The ETF versions of VTSAX, VTIAX, and VBTLX are VTI, VXUS, and BND respectively. I also want to note that an index fund typically has a minimum investment required, it’s typically I think $2,000 to $3,000. An ETF equivalent is a cheaper way to get into this three-fund portfolio.

2. The market’s really high right now, when should I actually buy into the market because I don’t really want to buy it when it’s at its all-time high?

I definitely understand this, I definitely can understand that you don’t want to buy into something and then all of a sudden see it drop the next day. But the old adage is that time in the market beats timing the market, and I absolutely think this is true. Basically, the market today, relative to what the market is actually going to be like in 30 years is relatively low. So as long as you buy and hold for a long period of time, I think that is probably the best strategy here.

If you really want, you can dollar cost average into the market over a longer period of time. Dollar-cost averaging just means that you spread out your fund purchases in regular intervals and equal amounts, so that you basically smooth out the price that you pay for the funds that you’re buying.

3. Should I buy these in a Roth IRA or an IRA?

I would say yes, it’s always good to put your retirement investments into a Roth or a Traditional IRA. However, if you don’t have that ability, or you already maxed out your IRA or your Roth IRA, you can always just buy it in a brokerage account.

4. How consistent should I be?

Personally, I would just say if you can be as consistent as possible with your savings and your investments, you’re going to be better off in the long.

5. Which brokerage should I use if I don’t have vanguard?

Well, if you don’t have vanguard you can try Fidelity or TD Ameritrade as I said before to get access to those vanguard index funds. If you just want an easy beginner platform to start with, you can download Robinhood. Robinhood is a really easy brokerage to use it has a really easy user interface and makes it really simple for anybody that’s really new to investing.

If you’re not from America and you want to invest in three-fund portfolios like what we discussed in this article, you can look for good brokerages in your country and invest. There’s basically no barrier.

Hope that you got some value out of this article, make sure to leave me a comment if you have any questions. Subscribe to my mail list to get notified of new updates. If you like, you can share this article, this way it gets to reach more people that might find this content useful. Peace and Happy Hustling!

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