Three Fund Boglehead Portfolio

One of the more popular balanced Boglehead portfolios is the three-fund portfolio. It provides a good deal of diversification without being overly complicated. Part of the purpose behind these holdings is to reduce volatility. Its beauty is that it’s largely a set and forget it approach to investing. Sure, you’ll have to adjust asset allocations occasionally; however, little time is required to manage the boglehead three fund portfolio.

Article Contents:

  1. Components of the 3 fund portfolio
  2. Fund options from Fidelity and Vanguard
    1. Pros of the 3 fund portfolio
    2. Disadvantages
    3. Three Fund Performance
  3. Closing Thoughts

Components of a Three Fund Portfolio

  • Total Market Fund
  • Total International Fund
  • Total Bond Fund

Total Market Fund

A total market fund consists of US equities exposure made up not only of large-cap stocks, but small and mid-cap stocks as well. As I talked about in prior posts, the total stock market gives you exposure to the size premium factor. A total market ETF is different than only purchasing something tracking the S&P 500 index. You get exposure to over 3000 stocks in a total market ETF or mutual fund.

Why an International Fund?

The international or global stock market has had episodes of outperforming US equities, such as 1986-88, 1993, 1999, and more. If that happened in the past, then you expect at some point in the future it will happen again. The whole point of a portfolio like this is it doesn’t try to predict the future. There is a lot of controversy over whether John Bogle would have recommended International Stocks. That’s not a fight I’m willing to pick on this site!

Total Bond Fund

A Boglehead approach to investing doesn’t try to predict the future or what will outperform. There are times bonds will underperform and times they will out perform. The point of bonds is to reduce the volatility of your portfolio and give you exposure to another asset class outside of stocks. The Total Bond Fund is made of corporate, government bonds, and more. Some investors choose to replace a Total Bond Fund with only Treasuries Bond Funds (That’s closer to the approach I take with my investing!).


What are the Fund Options from Vanguard and Fidelity

Here are some options from Vanguard, Fidelity, and Ishares for each portion of the portfolio. All of these funds carry very small expense ratios (some even have zero expense ratios!). On the other hand, some like VTSAX have a minimum purchase amount. I include both Mutual Funds and ETFs. While I own mostly ETFs, I’m actually a big fan of Mutual Funds for passive/hands-off investing. They’re great for auto-investing and you can purchase partial shares.

Total Stock Market FundTotal Bond FundsTotal International Funds
VTSAX (Mutual Funds)VTIAXVBTLX
VTIVXUSBND
FZROXFZILXFXNK
FSKAX (Mutual Funds)FTIHX
ITOTIXUSAGG

Fidelity has zero expense ratio ETF’s like FZROX and FZILX.

I hold ITOT and VTSAX in my personal accounts. I don’t own any of the other funds mentioned.

Flexibility with Asset Allocation

With the three fund portfolio, there isn’t a set asset allocation given to the investor. There are some common rules, but it’s up to the investor to decide. One common percentage breakdown is 50% Total Market, 30% Total International, and 20% Total Bonds. This seems reasonable for a forty year old investor. A common equation for bonds is (age-20)= Bonds %. Some investors are more comfortable with less international, that is okay.

Pros of the 3 fund Portfolio

  • Very Diversified
  • Low fees
  • Sleep Well Portfolio
  • Little time investment to manage

It’s a low expense ratio approach. It’s certainly less than an active fund; however, not as cheap as a 100% Total Stock Market Fund approach. I call this a sleep well portfolio. You probably aren’t going to walk the floor over this portfolio. If the stock market crashes, it’s diversified enough it will eventually recover or we have MAJOR problems Houston . I believe the worst draw down has been 45% with the worst year being -26.6%. About all you’ll have to do is consistently invest and re-balance once a year to maintain your asset allocations.

Disadvantages of the Boglehead Three Fund Portfolio

  • May underperform
  • Must rebalance to maintain allocation
  • Bond Price Decline risks

As you’re about to see, the 3 fund portfolio can underperform the market. In addition, you do have to occasionally spend time readjusting your asset allocation. In a target fund, this is done for you. Lastly, there are times occasionally where both stock prices and bond prices decline (as they did earlier this year). In this case, the 3 fund portfolio will fare pretty bad.


Performance of 3 Fund Portfolio vs. VTSAX vs. 60/40 Portfolio

I will go ahead and tell you this is not an approach where you have high odds of beating the market. You are getting market returns with less volatility. Let’s look at it versus 100% US Equities and the ever-popular 60/40 approach.

source-Portfolio Visualizer

From 2011 until now we see that 100% VTSAX has the highest CAGR at 12.55%. However, it also has the highest max drawdown of -21.36%. The 60/40 portfolio beats out the Three Fund Portfolio with a CAGR of 8.64%. So, over the last decade, the 3 fund portfolio has unperformed not only 100% US Equities, but the 60/40 fund as well.

On the other hand, if you go back to the 90’s, you’ll see that International gets ahead of US Equities a few times. The race is closer. I’d almost argue, any time you see US Equities getting so much further ahead of international equities, you see a pull back. International MAY have its day in the sun at some point within the next ten years.

Lastly, I’d argue, the older you get, the less it becomes about beating the market and more about maintaining the wealth you have with fewer risks. Some people see having all of their equity exposure in the U.S as greater risk.

Disclaimer-I personally do not hold any International ETF’s other than IPAC (A Pacific ETF made up of stocks from Australia and Japan).

Closing Thoughts on the Three Fund Portfolio

I think the 3 Fund Portfolio makes a good choice that’s easy to manage. It’s well suited for those that feel that international might one day begin outperforming again. Or you are simply the person that doesn’t care if it outperforms and you want to get more diversification than only US equities. The fund is probably not for you if your only goal in life is to outperform everyone else and totally crush the competition 🙂

Wishing you the best on the Investing Journey!

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