3-Fund Portfolio: Simple, Effective… Obsolete?

If you’re looking for the most classic lazy portfolio recommendation, look no further than the elegant simplicity of the 3-Fund Portfolio. The idea is straightforward: get exposure to the domestic and international markets, and add some stability with bonds. By combining three broad-based funds, as advocated by Taylor Larimore—a respected figure in the Bogleheads investment community—you’ll potentially do better than most investors out there.

The benefits of this approach are easy to grasp: it’s all about simplicity and diversification.

Simplicity

Anybody can build a 3-Fund Portfolio. Just pay attention to a few key details:

• Low-Cost Funds: Make sure the funds you pick have low expense ratios. Don’t pay more than 0.5% in management fees. Vanguard, a leader in low-cost funds, charges between 0.07% and 0.14%, which can be your benchmark. Over the long term, high fees can really eat into your returns due to compounding costs.

• Adjustable Allocation: You can tweak the actual allocation to suit your preferences, risk tolerance, and investment horizon. Whether it’s 40% domestic stocks, 30% international stocks, and 30% bonds, or a 70/20/10 split, both follow the core principles of the 3-Fund Portfolio.

Diversification

Investing in funds that passively track large, diversified indices minimizes unsystematic risk. This could be an ETF tracking the broad market like Vanguard Total Stock Market ETF (VTI) or even the S&P 500 (VOO), which many investors choose. Going for smaller, more specific niches isn’t the traditional 3-Fund Portfolio approach.

Examples of 3-Fund Portfolio

Let’s look at examples of how you can implement this using Vanguard, BlackRock, and State Street funds:

Asset	Name	Allocation
VTI	Vanguard Total Stock Market ETF	40%
VXUS	Vanguard Total International Stock ETF	30%
BND	Vanguard Total Bond Market ETF	30%

• VTI: Gives you exposure to the entire U.S. stock market.
• VXUS: Covers international stocks in both developed and emerging markets.
• BND: Tracks the U.S. investment-grade bond market.

Asset	Name	Allocation
ITOT	iShares Core S&P Total Market ETF	40%
IXUS	iShares Core MSCI Total International Stock ETF	30%
AGG	iShares Core U.S. Aggregate Bond ETF	30%

• ITOT: Tracks the entire U.S. stock market.
• IXUS: Provides international stock exposure outside the U.S.
• AGG: Represents the total U.S. investment-grade bond market.

Asset	Name	Allocation
SPLG	SPDR Portfolio S&P 500 ETF	40%
SPDW	SPDR Portfolio Developed World ex-US ETF	30%
SPAB	SPDR Portfolio Aggregate Bond ETF	30%

• SPLG: Tracks the S&P 500 Index, representing large-cap U.S. stocks.
• SPDW: Provides exposure to developed international markets excluding the U.S.
• SPAB: Follows the Bloomberg Barclays U.S. Aggregate Bond Index.

As you might notice, in these examples, “domestic” means the U.S. market, which is also followed by many foreign investors since the U.S. stock market is still the biggest and one of the best-performing markets.

3-Fund Portfolio Examples for European Investors

However, if investing in your own domestic market feels more comfortable or aligns with your principles, let’s build similar portfolios for other countries:

Asset	Name	Allocation
EXS1	iShares Core DAX UCITS ETF (DE)	40%
SWDA	iShares Core MSCI World UCITS ETF	30%
BUND	iShares Germany Govt Bond UCITS ETF	30%

• EXS1: Tracks the DAX Index, comprising major German companies.
• SWDA: Provides global developed market exposure.
• BUND: Focuses on German government bonds.

Asset	Name	Allocation
ATX	Lyxor ATX (DR) UCITS ETF	40%
CW8	Amundi MSCI World UCITS ETF	30%
IEGA	iShares Core Euro Govt Bond UCITS ETF	30%

• ATX: Tracks the ATX Index, representing Austrian stocks.
• CW8: Offers exposure to global developed markets.
• IEGA: Invests in Eurozone government bonds.

Asset	Name	Allocation
C40	Amundi ETF CAC 40 UCITS ETF	40%
CW8	Amundi MSCI World UCITS ETF	30%
GFA	Amundi Govt Bond Euro MTS France UCITS ETF	30%

• C40: Tracks the CAC 40 Index, representing major French companies.
• GFA: Focuses on French government bonds.

Asset	Name	Allocation
EX35	iShares IBEX 35® UCITS ETF	40%
IWRD	iShares MSCI World UCITS ETF	30%
SPGB	iShares Spain Govt Bond UCITS ETF	30%

• EX35: Tracks the IBEX 35 Index, covering Spanish stocks.
• SPGB: Invests in Spanish government bonds.

Asset	Name	Allocation
ISF	iShares Core FTSE 100 UCITS ETF	40%
VWRL	Vanguard FTSE All-World UCITS ETF	30%
IGLT	iShares Core UK Gilts UCITS ETF	30%

• ISF: Tracks the FTSE 100 Index, representing large UK companies.
• VWRL: Provides global stock market exposure.
• IGLT: Focuses on UK government bonds (gilts).

If you compare the performance of domestic ETFs for different countries, you’ll notice big differences. This brings us to a key point: in today’s global economy, there might not be a particularly strong reason to prioritize domestic companies or use only your government’s bonds. While holding assets in your local currency can offer some predictability, it may also limit diversification and potential returns.

Investing in a global market fund like the Vanguard Total World Stock ETF (VT) can provide broader exposure and reduce country-specific risks. If you want to be a local patriot, remember that it may come at a price.

Is the 3-Fund Portfolio Still Good? Yes, but…

Good? Absolutely! Combining broad market index funds and bonds is a gold standard of investing. Considering the impact of very low costs, it’s likely better than 90% of financial products on the market.

The Problem with Bonds

Bonds are defensive assets that protect you from market volatility and have an important place in portfolio building, especially as you approach retirement. However, when you’re in the accumulation phase and aiming for FIRE (Financial Independence, Retire Early), relying heavily on bonds can have a high price.

Read more about building FIRE portfolio →

Why?

Because if you’re still adding new money to your investments—like contributing from every paycheck—you’re effective dollar-cost averaging and falling prices are great. Market going down, is an opportunity to buy assets at better price. This is exactly the moment when you want to deploy your capital. What protects you from losing money is investing in broad market funds, while the price volatility is not a big problem froma a long-term perspective.

On the other hand, it’s hard to imagine a scenario where the global stock market is crashing long-term, but your government bonds are doing great and providing strong returns. To protect yourself from various economic scenarios, hard assets like gold and Bitcoin might do the job better than any guarantees issued by the government. And historically they did: after the DOTCOM bubble, 2008 crash, and even recent COVID “drop” in 2020, gold was “saving the day” while even 1% of Bitcoin added to VT fund in the last 10 years, more than doubled returns.

Are bonds just a waste of time? Not at all. Once you stop adding more money to the market and focus on preserving your capital, moving a big part of your assets into bonds makes sense. In the classic 3-Fund Portfolio, bonds play a crucial role in reducing volatility and providing stability.

However, if you’re still accumulating wealth and dreaming about FIRE, bonds just slow you down.

Is the Domestic Market Any Special?

Dividing the market into the U.S. and “the rest of it” is one of those weird American things. There are funds tracking the whole global market, like VT. Why manually weigh between “domestic” and “non-domestic”? Not to mention, that not all “domestic” markets are created equal.

You Can Diversify Better

A portfolio that’s 100% VT is already amazingly diversified. Want to diversify further? Consider adding different asset classes like gold and Bitcoin, which are easy to include and can offer additional protection against various economic scenarios.

Our Verdict

So, how do we pull all this advice together?

If you’re already retired or nearing retirement, the 3-Fund Portfolio is a solid choice. It balances growth and stability, which is exactly what you need at that stage.

However, if you’re still accumulating assets and aiming for FIRE, you might do better in the long run by focusing more on growth assets and diversifying across different asset classes. Here’s an example of a three-asset portfolio:

Asset	Allocation	Rationale
VT	75%	Global stock market exposure for growth
Gold	20%	Hedge against inflation and economic uncertainty
Bitcoin	5%	Potential for high returns and diversification

This alternative portfolio is more neutral and protects you from a wider range of scenarios while keeping all your capital at work.

Are you ready for even more adventurous portfolio following that idea? Read this article →

Conclusion

The 3-Fund Portfolio is a time-tested, simple, and effective investment strategy. It’s particularly suitable for investors who want a straightforward approach to building wealth over the long term. It offers simplicity, low costs, and diversification across major asset classes.

But remember, investment strategies aren’t one-size-fits-all. Depending on your individual circumstances, investment horizon, and financial goals, you might consider adjusting the traditional 3-Fund Portfolio to better suit your needs. During the accumulation phase, focusing more on growth assets and less on bonds can help you reach your FIRE goals faster. Adding alternative assets like gold and Bitcoin can provide further diversification and protection against various economic scenarios.

Ultimately, the best investment strategy is one that aligns with your personal goals, risk tolerance, and investment timeline. Make informed decisions and build a portfolio that works best for you.

—

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing involves risks, including the possible loss of principal. Always conduct your own research before making investment decisions.