Is The Three Fund Portfolio Right for You?

One of the most challenging aspects of investing is deciding which securities to invest in while meeting your financial goals. If you are looking for simplicity and low maintenance, the Bogleheads’ three-fund portfolio approach may be the solution.

On some level, people know that their money should be invested and working for them in the stock market. The only problem is that most don’t know which mutual fund, stock or ETF to buy. Buzzwords like “diversification” and “expense ratios” are often a convenient excuse to tackle that problem, someday.

Worse, if you end up spending a lot of time on the internet researching investing portfolios, you’re sure to find multiple philosophies on the subject. The results and information can be overwhelming and lead to inaction. Why can’t there be a more simple investment strategy? How can we overcome inaction while we’re learning about investing?

Meet the Bogleheads’ three-fund portfolio strategy. It’s a super simple approach that generates steady market returns over the long-run, which makes it ideal for retirement planning and busy lawyers with a lot of competing demands on their attention.

Developed by Jack Bogle, founder of the Vanguard Group and the creator of index mutual funds, superfans known as ‘Bogleheads,’ popularized this type of investment portfolio. It’s core thesis advocates that investors need only three funds to meet long-term financial goals.

In this article, we examine what you should include in a three-fund portfolio, the philosophy behind it, and how you can begin investing. Let’s start by understanding what the Bogleheads’ three-fund portfolio is:

What is the bogleheads three-fund portfolio?

The Bogleheads’ three-fund portfolio is a simple investment profile composed of three asset classes. These three asset classes are often inexpensive index funds. The industry refers to it as a ‘lazy portfolio’ due to the little maintenance required on your behalf after funding it.

Three total market index funds make up the Bogleheads’ three-fund portfolio, including:

  1. Total Stock Market Index Fund
  2. Total Bond Market Index Fund
  3. Total International Stock Fund

The simplistic structure of the Boghlehead investing philosophy means that you can spend less time monitoring and adjusting your portfolio.

Let’s take a closer look at the methodology and thought process behind it:

How to invest with a three-fund portfolio

The first step to creating a three-fund portfolio is deciding which index funds to purchase. It’s vital to select funds that offer low expense ratios. Doing so allows you to keep your total investing costs relatively inexpensive.

There are many index funds that match three-fund portfolio across all of the major mutual fund companies, so you should have no trouble creating the three-fund portfolio at whichever account makes most sense to you.

Here are a few considerations to keep in the back of your mind when putting together your portfolio:

Asset allocation sounds technical but you can change it over time

Choosing your asset allocation across your funds is the most technical aspect of developing a three-fund portfolio. Earlier we talked about which three asset classes make up the three-fund portfolio, but we didn’t say what proportion you should own of each. This decision must aligns with your personal financial situation, where the most crucial element is your risk tolerance.

Jack Bogle has said that investors with an appetite for risk might want to hold 20 percent in bonds and 80 percent in stocks. This mix works well for someone who is younger and just starting their investing career. As retirement approaches, that allocation may shift to 40 percent or more in bonds to smooth out the volatility of the stocks..

Your preference may be to include more or less. Keep in mind that over the long-run, stocks produce higher returns but carry greater risk while the opposite is true for bonds. You need to take risk to get the appropriate return in the market.

Incorporate index funds for diversification at a low price

In this article, we stress how important it is to choose the right index funds. Focusing on a few characteristics helps you keep your investing costs low while maintaining a broad and diverse profile.

You can keep your investing costs low by selecting funds that offer the lowest expense ratios on the market. A good starting point is finding funds with an expense ratio of 0.10 percent or less. There’s no reason to pay more for a mutual fund that tracks an index of stocks or bonds.

Diversification is automatically built into index funds because you’ll end up owning the whole haystack. There’s no need to buy multiple versions of Total Stock Market from the various mutual fund companies, since you’ll just duplicate ownership and make it harder to track your allocation among the three asset classes.

It’s worth remembering that a diversified portfolio doesn’t indicate losses won’t occur. It just means that you may lose less money than going after individual stock picks.


After establishing a three-fund portfolio, it’s time for maintenance mode. Portfolio maintenance includes potential asset reallocations and regular contributions to grow your accounts. Your only commitment is to ensure your strategy reflects your current financial picture and supports your future goals. If these elements change, update accordingly.

What is the bogleheads’ investing philosophy?

The Boglehead investing philosophy aims to create risk-adjusted returns that are much more profitable than what a traditional investor can produce. Plus, the philosophy gives novice investors the room to adjust to the world of stocks and bonds.

Here are the a few things I’ve gleaned from the Bogleheads over the years:

1. Start by creating a practical financial plan

Start by analyzing your household finances and build a long-term plan around your current situation alongside your future needs. Future needs include things like retirement and healthcare. Sure, you can’t predict what’s going to happen later in life, but it’s nice to know you have assets on hand that you can liquidate or grow as needed.

2. Invest your money early on and then keep it up

Investing early certainly has its advantages over waiting until later in life. For example, if a 27-year old lawyers wants $1 million by the age of 60, he or she must set aside roughly $775 a month to reach his or her goals. Conversely, the same person that begins investing at 35 must contribute $1,400 every month.

3. Don’t take on unnecessary risk

The right asset allocation mix largely depends upon your tolerance to risk. Since the highest returns at the lowest cost is an investor’s primary goal, taking on an appropriate level of exposure can assist in this capacity.

Bogleheads often say that your bond allocation should align with your age. So, as an example, if you are 30, your mix is going to be 30 percent bonds and 70 percent stocks. While this number is an excellent jumping-off point, you can adjust according to your goals, tolerance, and financial position.

4. Avoid trying to time or analyze the market

It’s a bit of a pipe dream to believe that an investor can buy the best stocks, watch them grow, and then sell them at the divergence point of high returns at the best price. Yes, many lawyers make this mistake thinking that they’re “smart” people and so should be able to “beat the market”. This type of  investment activity is a strategy known as ‘timing the market.’

Bogleheads believe that timing the market is not an appropriate choice. Attempting to do so only creates frustration and loss in most cases. Bogleheads’ three-fund-portfolios are genuinely ‘set it and forget it,’ aside from post-funding maintenance.

5. Deploy the use of index funds whenever possible

You can purchase large swaths of the market at a lower cost when using index funds in asset allocation. It’s a simple way to add diversification without having to read the stock market. Bogleheads tend to focus on the Vanguard index fund options (as do I). However, there are alternatives available that offer their own perspective.

Now that you have a solid understanding of the philosophy that powers the Bogleheads’ three-fund approach, it’s time to examine how one can execute a plan to start investing.

Final thoughts and considerations

The Bogleheads’ three-fund portfolio’s hallmark is simplicity. That may be all you need to achieve your financial goals with a steady, predictable rate of return.

In addition to ease-of-investment, the diversity of the portfolio spreads across three of the largest asset classes. Doing so allows you to mitigate your risk to exposure by utilizing different asset allocation levels, mainly as the market fluctuates.

The three-fund portfolio is a marathon, not a race

The Bogleheads’ three-fund portfolio strategies require patience on behalf of the investor. Markets may act with volatility. Therefore, you must have the willingness to weather the storms of its ups and downs. In short, the most passive investors stand to gain the most as fluctuations occur.

Keeping yourself informed concerning market conditions minimizes the potential for emotionally-charged decision-making. Losses on your investment are troubling, but trusting the process can make it easier for you to stay on track.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money. He’s also maxing out tax-advantaged accounts like 529 Plans to minimize his taxable income.

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    One thought on Is The Three Fund Portfolio Right for You?

    1. Two main problems with the Bogleheads 3 fund portfolio concept:

      First, the two stock funds (VTSMX and VGTSX) are extremely top heavy due to cap weighting. They have only about ~5% in small cap companies, but small cap tends to outperform large cap over time. Even among low-cost index funds it’s not hard to find small cap examples that have outperformed VTSAX over time. In the US look at FSSNX, VIEIX, VSMAX and for international look at NAESX.

      Second, bond yields are so low that they barely keeps up with inflation. Recent research shows that 100% stocks is safer than 50/50 bonds/stocks. See “Why Stocks, Not Bonds, Assure Less Risk in Retirement” by Dave S. Gilreath, ABC News dot com, May 20, 2014,

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