So you finally got around to opening that Roth IRA or taxable brokerage account and have made your first deposit. You may be wondering, “now what?”
Choosing investments for a diversified portfolio does not have to be complicated. You don’t need to spend hours trading stocks, researching the best funds, or managing your investments like another full-time job.
The solution? The 3 fund portfolio!
Often called “the lazy portfolio,” the 3 fund portfolio is a super simple way to make sure your money is invested in a diverisified, low cost way.
Buy the same 3 index funds over and over and over, and watch your money grow over decades! It’s really that simple.
This post will explain the basics & benefits of a 3 fund portfolio and give you some examples of funds to use in a 3 fund portfolio at the most popular brokerages.
You’ll be armed with the knowledge to build your own 3 fund portfolio in minutes to start building wealth!
Now for the disclaimer: this article is to be used for education only, not financial advice. I am not a licensed financial advisor. Always do your own research before investing your money!
What is a 3 Fund Portfolio?
We can all thank Jack Bogle, founder of Vanguard and creator of the index fund, for the popularity of the 3 fund portfolio. It’s one of the most popular portfolio recommendations by Bogleheads (die-hard fans of Vanguard, super nerdy, I know).
A 3 fund portfolio consists of diverisfying your investments across 3 broad asset classes:
- US Stocks
- US Bonds
- International Stocks
In order to build your own 3 fund portfolio, you simply pick a US stock index fund, a US bond index fund, and an international index fund. You decide what percentage you want to allocate to each fund.
And then you keep pouring money into these 3 funds over decades until you’re a millionaire!
What are the Benefits of a 3 Fund Portfolio?
3 fund portfolios are great for all investors because they offer great diversification at a super low cost, are really simple to put together, and you can automate them.
Diversification
A 3 fund portfolio is a super simple way to diversify your investments. You don’t want all of your investments in just a few companies, because if one goes bankrupt, you’re SOL.
And the cool thing about stock market indexes is that companies can move in and out of the index as new companies emerge and outdated ones fail.
A total US stock fund has over 3700 stocks and a total international (not including the US) fund has about 2200 stocks. Add some bonds in there if you wish as a more conservative, wealth-preservation measure so when the stock market dips, your portfolio won’t be down as much.
And you can get all of this #diversification with just 3 low-cost funds!
So one company going bankrupt won’t bankrupt you and your nest egg. It would be impossible for entire stock market indexes to fail because every company within the index would have to fail at the same time.
And we would have much bigger problems to worry about than our 401k’s going to zero!
Low Cost
When we talk about index funds, we mean that you buy a basket of stocks and/or bonds who’s primary goal is to match the market index (like the S&P500 or NASDAQ). You can buy index funds in the form of an ETF or mutual fund.
There isn’t a single person sitting behind a computer trading stocks in and out of the fund every day like an actively managed fund trying to beat the market returns.
Because of this, the fees on an index fund are much lower than an actively managed one. And high fees will eat into your overall return.
And we know that almost 80% of active fund managers can’t beat their market indexes. So buying actively managed funds means that you’ll pay more in fees to statistically do worse than the market!
This is why I love index funds so much! Buy index funds for literal pennies on every $1000 you have invested, make the market returns, and leave the fund managers in the dust.
Simple & Automated
3 fund portfolios are simple.
Set up an automatic transfer once a month to your investment account, and have that money divert into your 3 funds at your chosen percentages.
Wealth building on autopilot, I love it!
Related: 5 Signs You’re Ready to Start Investing
This post may contain affiliate links, which means I get a small commission should you choose to purchase or sign up through one of my links, at no extra cost to you. I only recommend products that I personally use and believe in. You can read more about this in my disclaimer.
How to Build a 3 Fund Portfolio
Now you may be wondering how to build your own 3 fund portfolio.
First, you’ll need to open an account with a brokerage firm and transfer money, if you haven’t already. I recommend Vanguard, Fidelity, or TD Ameritrade/Charles Schwab.
It really doesn’t matter which firm you choose, they are all great low-cost options!
Next, you’ll want to decide your asset allocation (what percentage to put into US stocks, US bonds, and international stocks, the next section will explain this in more detail).
Find a good, low-cost index fund for each asset class. Choose funds that match your brokerage to avoid paying a transaction fee each time you buy.
If your account is with Vanguard, buy Vanguard funds.
If your account is with Fidelity, buy Fidelity funds.
If your account is with TD Ameritrade or Charles Schwab, buy Schwab funds.
Each brokerage will have their version of the same fund, you might need to do some googling to find the ticker symbol.
How to Choose Your 3 Fund Portfolio Asset Allocation
You’ve got your brokerage firm picked out, the account open, and now you need to decide the percentages to allocate to each of the 3 funds. You might be wondering:
- How much should I put into US stocks vs international stocks?
- What percentages should I allocate to bonds?
- Which funds should I buy?
The percentages are up to you and will be determined by your risk tolerance.
Typically, I see a heavier weight toward US stocks over international (it’s hard to beat American innovation and capitalism overseas, plus most large American companies operate globally so you get some international exposure there).
Bonds are a more conservative asset class, so you’ll want to move more of your money there as you move from the wealth accumulation phase to the wealth preservation phase over time.
A general rule of thumb to figure out a stock percentage allocation is to take 120 minus your age. So a 25-year-old would want 95% of their portfolio in stocks and 5% in bonds.
Out of that 95% stock allocation, they would decide the split of US vs international. A 25-year-old’s 3 fund portfolio could look like this:
- 70% US stocks
- 25% International Stocks
- 5% US Bonds
Since a young person has so much time for compound interest to do it’s thing, they can afford to be more aggressive with their portfolio to ride out the ups and downs of the stock market.
Personally, I don’t have any bonds in my portfolio as a 27-year-old. About 80% of my portfolio is in US stocks because I truly believe in American innovation and have biased my portfolio accordingly (again, not financial advice- just sharing my experience!).
You have to assess your own risk tolerance and capacity when investing. If you are investing for retirement and won’t need this money for decades (here’s an entire post about how to get started investing for retirement), you can afford to be more aggressive and go heavy on the stocks.
If you want to go more in depth with the 3 fund portfolio strategy, I highly recommend Personal Finance Club’s index fund investing course. Jeremy is a self-made millionaire who became financially independent at 36, so he knows what he’s doing!
The course covers way more than I can in a single blog post and teaches you everything you need to know about the stock market, index funds, types of investment accounts, etc. It’s affordable and 20% of every sale is donated to charity! And there’s a 100% money back guarantee if you change your mind.
Check out the course here.
Vanguard 3 Fund Portfolio Example
Here’s an example of a Vanguard 3 fund portfolio:
| Asset Class | Fund Ticker Symbol | Aggressive Allocation % | Conservative Allocation % |
| US Stocks | VTSAX | 70% | 40% |
| International Stocks | VTIAX | 25% | 20% |
| US Bonds | VBTLX | 5% | 40% |
Fidelity 3 Fund Portfolio Example
Here’s an example of what a Fidelity 3 fund portfolio could look like:
| Asset Class | Fund Ticker Symbol | Aggressive Allocation % | Conservative Allocation % |
| US Stocks | FXIAX | 80% | 35% |
| International Stocks | FZILX | 15% | 15% |
| US Bonds | FXNAX | 5% | 50% |
Schwab 3 Fund Portfolio Example
A Schwab 3 fund portfolio could look like this:
| Asset Class | Fund Ticker Symbol | Aggressive Allocation % | Conservative Allocation % |
| US Stocks | SWPPX | 65% | 50% |
| International Stocks | SWISX | 25% | 20% |
| US Bonds | SWAGX | 10% | 30% |
3 Fund Portfolio vs Target Date Funds
Did you know that target date funds actually are 3 fund porfolios? They’re just packaged up into one fund with a “target date” retirement year.
You pick your target retirement year (usually 30 or 40 years away if you’re just getting started) and the fund will automatically rebalance itself over time.
With a DIY 3 fund portfolio, you will have to rebalance your portfolio at times to get back to your target asset allocation. Even though you’ll be contributing to the same 3 funds at your target allocation, the overall balances could change due to differing rates of return.
Let’s say you want to maintain a 70% US stock position in your portfolio. Maybe US stocks have really taken off over the last 5 years, so now your portfolio is 80% US stocks. You might want to consider selling some of your US stock funds and purchasing US bonds and/or international stocks to get back to your target allocation.
You don’t have to do this super often, but set a calendar reminder once a quarter to check in on your portfolio!
If you prefer being totally hands-off with your investing, consider a target-date retirement fund. Target date funds employ the same 3 fund portfolio strategy, but they will automatically rebalance as you age.
The only downside here is that the fees are typically a bit higher than DIY-ing your own portfolio!
The TLDR- if you don’t mind being a little more hands-on with your investing, choose a 3 fund portfolio with lower fees. If you want to completely set-it-and-forget-it, choose a target date fund.
Key Takeaways
A 3 fund portfolio is a great low-cost way to diversify and simplify your investments. You can utilize this strategy in any self-directed investing account (like a Roth IRA or taxable brokerage account).
Choose a mix of US stocks, international stocks, and US bonds that match your age and risk tolerance, set up automatic transfers (if you wish), and watch your money grow over the years!
And if you want a more hands-off approach, go with an index target date retirement fund.
Do you plan to use the 3 fund portfolio strategy with your investments? Why or why not? Let me know in the comments below!
-Megan
Read Next:
- 7 Limiting Beliefs About Money That are Preventing You From Building Wealth
- 5 Reasons a Roth IRA is Better Than a 401k for Investing Beyond Your Employer Match
Megan is an automotive engineer, newlywed, and personal finance blogger from the midwest. She found her passion for personal finance after starting her first “real job” after graduating college. Now, she helps other young professionals become more intentional with their money in order to build wealth for financial freedom. In her free time, she loves to travel, hike, and play euchre with her family. Read more about her story here.