3-Fund Portfolio
Discover the power of a 3-fund portfolio
By: Loot Lasso / Last Edited: 3/12/2025
3-Fund Portfolio
A three-fund portfolio is a simple yet effective investment strategy consisting of just three funds: a broad market U.S. stock fund, a broad market international stock fund, and a broad market U.S. bond fund. These funds typically track well-known indices, which are collections of stocks, bonds, or other investment instruments used to gauge market performance. Indices can represent a specific sector or the entire U.S. stock market. A three-fund portfolio follows indices that encompass 500+ stocks or bonds, ensuring broad diversification.
Origins of the Three-Fund Portfolio
The concept of a three-fund portfolio is largely credited to Jack Bogle, the founder of Vanguard and a strong advocate for index fund investing. His followers, known as “Bogleheads,” continue to promote this strategy as a simple, low-cost way to invest.
Key Benefits of a Three-Fund Portfolio
Investors favor a three-fund portfolio for three main reasons:
- Low fees
- Strong Performance
- Diversification
Low Fees
Major fund providers such as Vanguard, BlackRock, Schwab, and Fidelity offer low-cost ETFs and mutual funds that fit well into a three-fund portfolio. For example, a Vanguard-based three-fund portfolio consists of:
- BND (U.S. Bond Market ETF) – Expense ratio: 0.03%
- VTI (U.S. Stock Market ETF) – Expense ratio: 0.03%
- VXUS (International Stock Market ETF) – Expense ratio: 0.07%
For comparison, actively managed ETFs have an average expense ratio of 0.70%, according to ETF.com. While the difference may seem small, higher fees reduce the amount of money that can compound over time, significantly impacting long-term returns.
Here is a chart of 3-fund portfolio options offered at major fund providers:
Strong Performance
Just because something is inexpensive, doesn’t mean it represents good value. The question becomes, does the passive broad index perform as well as an actively managed fund? Historical data suggests that passive index funds often outperform their actively managed counterparts. According to SPIVA, a scorecard released by S&P, the S&P 500 has outperformed over 93% of actively managed funds from 2007 to 2022.
Diversification
Additionally, the Persistence Scorecard Report by S&P Dow Jones Indices (Year-End 2023) found that actively managed funds rarely maintain superior performance over time. None of the top-performing funds from 2018 remained in the top quartile for the following four years, reinforcing the difficulty of consistently picking winners.
A three-fund portfolio provides instant diversification across:
- Company size: Large-cap, mid-cap, and small-cap stocks
- Industries: Technology, healthcare, finance, consumer goods, and more
- Regions: U.S. and international markets
- Asset types: Stocks and bonds
Since broad market funds automatically spread investments across a variety of assets, investors don’t need to manually select individual stocks or sector-specific funds to build a balanced portfolio. The tracked indices handle diversification efficiently and at a minimal cost.
Managing Your Three-Fund Portfolio
To maintain an optimal asset allocation, periodic rebalancing is essential. Use our Portfolio Rebalancing Calculator to ensure your three-fund portfolio stays aligned with your financial goals.
Final Thoughts
The three-fund portfolio is an excellent choice for investors seeking simplicity, low costs, and strong long-term performance. By sticking to a diversified, passive investing strategy, you can build wealth with minimal effort while avoiding the pitfalls of high-fee, actively managed funds.
