The Three-Fund Portfolio — It’s all we ever need in the stock market.
U.S. Stocks — International Stocks — U.S. Bonds.
Done.
The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
Three simple, super low-cost Index ETFs are all most of us ever need in the market—why haven’t you heard of this? Read on.
**This is the same Three-Fund portfolio that is in the i401k guide here. Haven’t started an i401k? It’s freakin’ magic.
TL;DR
The Three-Fund Portfolio uses three Index ETFs — these are the Vanguard versions:
- U.S. Stocks (VTI)
- International Stocks (VXUS)
-U.S. Bonds (BND)The jokers on Wall Street and market pundits never mention how easy it is to invest over your lifetime using just these three well-respected ETFs. Why? Because they’d be out of a job.
The portfolio will earn 7-9% on average every year over a long period, say 20 to 30 years.
If you invest $1,150/month for 25 years, growing at 8%, you will make around $1,000,000. I’m not kidding. It’s just compounding interest and the market’s long-term upward movement. You just need TIME.
10% of your gross income is a great start. If you earn $100k before tax, put in $10k per year. Don’t delay; start now with whatever you can.
This is not magic; it’s a well-known, common-sense portfolio that millions of investors use.
You can use it inside any retirement account, such as an i401k, Roth IRA, HSA, or a taxable brokerage (share trading) account.
It’s super fucking easy. Get on with your life. Focus on your friends and family. Watch your Three-Fund Portfolio grow in the background.
The Three-Fund Portfolio is a well-known investment strategy that has been around for decades.
I know. All this time, you have been told you must take risks or somehow pick the next Amazon to make money in the market.
Wall Street tries to tell us we need to pay some overpriced investment advisor to make the big bucks, except they won’t. SP Global’s long-running study shows that as of December 2024, 90% of active fund managers do not beat the S&P 1500 index (An index tracking a basket of U.S. stocks). They will do WORSE than our low-cost index ETFs; more info on them below.
These guys are charging hundreds of thousands of dollars over an investor’s lifetime FOR SUCKING!
Meanwhile, Robin Hood has gamified investing, encouraging you to trade like a maniac. Why? They make money from the data collected and sold when you trade. Investing should be a mostly routine affair with a long-term strategy. But it’s still a lot of fun to watch that money grow over the years.
None of the players on Wall Street or some financial advisors (A CFP is different) will tell you how easy it is to invest in the stock market and watch your account grow. There is no money in simplicity for them. They want you to think you need them and pay them their fees. That’s how they make their money: FEES paid by us. They also refer to retail investors like us as the ‘dumb money.’
For most of us, three low-cost index ETFs are all we need to make millions over time. Really, I mean millions. The Three-Fund Portfolio is used by savvy investors around the world, but it needs TIME to work.
Invest $1,150 per month for 25 years, growing at 8%:
You will have $1 million.
Yes. It’s a shit-ton of money, and it’s not rocket science. It just takes time.
Scott Galloway (aka Prof G), Professor of Marketing, NYU Stern on investing:
“The good news is, I know how to get you rich. The bad news is, the answer is slowly.”
Time and the Magic of Compounding Interest
Time investing is the key here. Play around with the compound interest calculator here. Watch what happens as you change the amount invested per month and for how many years. Use an 8% rate for the ‘estimated interest rate.’
8% of $10,000 invested is a gain of $800. So early on in your journey, it’s pretty pedestrian. Later in life, if you have $1 million in your retirement accounts (which is very doable), guess what 8% of that is? An average gain of $80,000 per year. Boo-Yah!
It’s the snowball effect; it gets bigger and bigger the longer it rolls downhill.
There is a but; It’s called volatility
Isn’t there always? It’s life, it bites you the ass when you least expect it.
The market can bounce around like an insane ping-pong ball and drop 30% in one year or go up 30%.
The longer-term average is 7-9% for a Three-Fund Portfolio. The secret is to tune out the noise, ignore the panic, and continue investing. Read The Knowledge post here on what the Stock Market really is.
We are all unsettled when the market crashes. Most people freak out. What’s important to realize is that it’s just a blip in our 20 to 30-year investment lifetime. Have a read of this post about how our caveman brains can fool us.
The arrows on the chart are the 2008-09 subprime mortgage crash and the Covid crash. Scary as shit at the time, but not a big deal over the long term.
WTF is an ETF?
Think of an ETF (Exchange Traded Fund) as a container holding a boatload of stock market-listed companies.
An ETF (Exchange Traded Fund) behaves like a share you buy on the stock exchange, except it has thousands of companies inside it.
It’s very safe. We are buying thousands of companies or bonds inside each ETF. If one company goes bad, we will hardly notice.
Buying individual companies is risky. Remember WeWork? They were the hottest thing and ended up filing for bankruptcy in 2023. Search for ‘Worldcom’ and ‘Enron’ to see examples of huge companies that imploded. Investors lost nearly everything.
How does the ETF get created?
When you buy ETF shares, the provider creates more shares of the ETF and then buys more of the companies that go inside the ETF.*
What’s an Index ETF?
An index is a list of companies created by a financial organization on a stock market exchange. One you may have heard of the S&P 500, which is the largest 500 U.S. companies. Another is the Nasdaq 100, which is the top 100 tech companies on the Nasdaq stock exchange.
*This is a simple explanation. The actual mechanism is a little more complicated. But who cares?
These are the ETFs
We use just three Index ETFs (Exchange Traded Funds) from Schwab or Vanguard. These ETFs are used by millions of investors and retirement funds. Pick one set to buy, either Schwab or Vanguard.
Schwab versions:
SCHB - Total U.S. Stock Market (the top 2,500 companies)
SCHF - International Stocks (1,500 companies)
SCHZ - U.S. Bonds (9,800 companies)
OR
The Vanguard versions:
VTI - Vanguard Total Stock Market (the top 3,600 companies)
VXUS - Vanguard Total International (8,000 companies)
BND - Vanguard Total Bond Market (11,000 bonds)
The Schwab and Vanguard versions have almost identical returns and their fees are about the same.
This is an AI version of you, spending five minutes every month or quarter buying our three ETFs. It’s that easy. You can end up with $1 million+ by contributing regularly.
Wise, ye olde proverb:
The best time to plant a tree was twenty years ago. The next best time is today.
U.S. Stocks — International Stocks — U.S. Bonds
Why these three sectors?
Diversification:
Our eggs are in different baskets. The aim here is to give you a consistently good outcome, not the best and not the worst. That’s why we have the three funds. The portfolio is diversified by including different sectors (tech, utilities, aerospace, pharma, etc) and countries. That helps reduce our risk. If the U.S. is having a bad year, hopefully, International Stocks and Bonds are not.
Low Cost:
The three-fund portfolio uses low-cost index exchange-traded funds (ETFs) or mutual funds. This minimizes investment costs and maximizes how much we make. Our costs are only 0.03 to 0.08% of what we have invested. Have $100,000 invested? That’s only $30 - $80 per year. Compare that to the 1-2% an advisor might charge you, which is $1,000 - $2,000. Yeah, no thanks, buddy. (Getting a plan from a CFP before retirement is different and advisable.)
Simplicity:
Managing a three-fund portfolio is straightforward: You work your day job and have fun with your friends and family while the portfolio works in the background.
You don’t have to stress about what stocks to buy and how they are doing. Our funds match the stock market’s performance. That takes the stress out of trying to figure out which companies will be winners or losers.
Resist messing around with your investment strategy: Investors who look at their portfolio the least and make the fewest changes outperform those who constantly change things and try to outguess the market.
AI version of Mr Wall Wall Street. No thanks, braah, we don't need to pay your fees.
Berkshire Hathaway Investment Manager, Lou Simpson:
“The more decisions you make, the higher the chances are that you will make a poor decision.”
Stocks and Bonds: The Odd Couple —
What’s the deal with these two?
U.S. STOCKS — The long-term average return of U.S. stocks is 10%, but it’s volatile.
A stock ETF that tracks the total U.S. stock market (Vanguard VTI or Schwab SCHB) will have an average return of around 10-11%. Sounds promising, right? But be prepared for the rollercoaster ride that is the US stock market. It can soar 26% in a year (as it did in 2023) or plummet 50% (as it did in 2008-09). This is called volatility. It can be a little pukey, but hang in there when the market drops. It will recover but it could take some time.
INTERNATIONAL STOCKS — They often do well when the U.S. is not performing.
International stocks are also volatile but can have a good year when the U.S. is not. That’s why we buy them. The U.S. has been the performer in the last ten years, but international stocks won for most of 2002-2009. See how they compared over the past 20 years here.
BONDS — With a long-term average return of around 4.3%, bonds offer a stable and less volatile investment option than stocks.
Companies or governments can issue bonds and generally pay a stated interest rate called a dividend. It’s a way for them to raise money. When we buy bonds, we are lending our money to them. Compared to stocks, bonds have a much lower return of around 4.3% (Using Vanguard BND) but don’t bounce around nearly as much. They are less volatile.
How do you split your money up between the three ETFs?
We combine the three ETFs together based on how close we are to retirement and how much volatility (how much they go up and down) we can handle vs the gains they will make.
Put your foot on the gas with stocks when you’re younger, going for the maximum return. Closer to retirement, consider tapping the brakes and switching to more bonds, as we will need to start drawing on the money soon. Why? If the market crashes, a retiree may not be able to wait five years for it to recover. (If you’re five years away from retirement, I suggest chatting with an ‘advice only’ Certified Financial Planner - CFP. You pay a one-time fee for them to create a plan for you).
Take a look at The Knowledge Post on The Stock Market. It’s important to understand the market’s long-term nature and to ignore all the noise so you don’t panic when it crashes. There is a lot of noise (the pundit blabbing on CNBC, or a co-worker) about how they think the market will do this or that — no one knows what the market will do next. No one. But we can have a sensible, diversified portfolio that is proven to work.
Suggested Three-Fund mixes
The aggressive, high-growth mix
U.S. Stocks: 70%
International Stocks: 20%
Bonds: 10%
Portfolio return: Long-term average 7-9% per year.
Under 55 years old? Many investors go for this. It’s a mix with a high return (make the most money) but will be the most volatile. That means it goes up and down the most.
The stock market can drop and sometimes take 2-8 years to recover. This is okay if you are not near retirement, as you don’t need to withdraw any money. The ETFs/Funds have time to go back up, plus we will keep buying our ETFs at discounted prices.
ME: At 51 years old, this is my mix. My return has been closer to 9% since I started my i401k in 2015.
A moderate volatility/growth mix:
All U.S. Market: 45%
International: 15%
Bond: 40%
Portfolio return: Long-term average around 7% per year.
This is a moderate version. The classic 60/40 stocks vs. bonds portfolio is often suggested as a ‘sensible portfolio’. It will go up and down less, but it will have a slightly lower return as you have more money in bonds. For younger investors, this may be too conservative.
A Three-Fund experimental mix:
All U.S. Market: 70%
International: 18%
Bond: 10%
Individual stocks: 2%
Portfolio return: Long-term average 7-9% per year.
This aggressive mix adds an allocation for buying individual stocks like Apple, Tesla, or whatever company you are passionate about.
Take it easy on individual stocks. Many investors suggest keeping them a really small part of your portfolio, at around 2%. Almost no one can outperform an Index ETF. Really, I know it’s fun to buy them, but it can end in tears.
Example time:
Invest $5,000 in a 70/20/10 mix
SCHB — U.S. Broad Market: $3,500 (The math: $5,000 x 0.7)
SCHF — International $1,000 (The math: $5,000 x 0.2)
SCHZ — U.S. Bonds $500 (The math: $5,000 x 0.1)
P.S. Struggle with the math? Don’t worry, I suck at math, but I’m still a good investor.
How often do you buy?
Dollar Cost Averaging: SCHB in 2023. See how buying every quarter gets an average price for the year. We hit the dips and peaks of the market.
Most common is to invest every three months, that’s every quarter. This means we are ‘dollar cost averaging,’ catching some of the market's ups and downs during the year. If you want to, you can invest monthly, that’s fine. Just keep investing in a set timetable throughout the year.
Jan 1 — April 1 — July 1 — Oct. 1 (also known by the Wall Street crowd as Q1, Q2, Q3, Q4).
Buying on a set timetable: It takes our emotions out of the equation. If the market has just crashed 30% (March 2020 during Covid, anyone?), you won’t want to buy. Using set buy dates, you short-circuit that emotion. Keep buying every quarter, no matter what!
Read the post about investor psychology here. Don’t trust your emotions. The primitive side of your brain tells you to run (or, in this case, sell) in the face of danger. We need to ignore it and Hold Fast.
Legendary investor Peter Lynch:
“The real key to making money in stocks is not to get scared out of them.”
Don't sell, keep buying. Ignore the herd running for the exit when the market drops. Stay invested and keep buying at the lower prices.
Rebalancing
Sometimes, you need to re-balance the three-fund portfolio to keep your target allocation. If International has gone way up one year out of its percentage allocation (Say you want International to be 20% of the portfolio, but now it’s 23%). You sell 3% and then use the money to buy US Stocks and Bonds to get the portfolio to the correct mix. This is normal. Here is a nifty calculator to help.
Rebalance once a year. Perhaps make it a New Year’s resolution that you’ll keep? Eh?
Why can’t I go 100% and pick all my stocks?
Read the Knowledge post here to understand why this ends up as a stressful shitshow. It’s the dark side and leads to pain and suffering. Messing up picking a portfolio of individual stocks (and you will) means you’ll be stressed and poorer, and your spouse and dog will leave you.
What accounts can you use a Three-Fund Portfolio in?
This is the great part. You can use the Three-Fund Portfolio in any brokerage-based account. That’s your i401k, Roth IRA, HSA, a 529 for college savings or even your old employer’s 401k if you have one.
The non-retirement brokerage account.
Don’t forget the taxable brokerage account with a broker like Schwab. That’s a regular stock and ETF non-retirement trading account. If you hold a stock or ETF for more than one year, you only pay the Capital Gains Tax rate of 15% instead of your personal tax rate, which is probably around 25-30%.
See why the rich pay less tax than us working schmos? We can play the game too.
Wrapping it all up
The end result is a simple, effective way to invest long-term with less stress. You don’t need to pay attention to what one company is doing because you own thousands.
Buy the three ETFs every three months (that’s every quarter).
Keep buying no matter what the market is doing, going up or crashing. Don’t let your emotions take over. Buying during a crash rocks. You are getting the ETFs on sale.
Once a year, rebalance your ETFs by selling some and buying the others to keep your percentage allocation.
Consider moving more money into the bond ETF as you get closer to retirement. Get advice from a good ‘advice-only’ CFP (Certified Financial Planner) that you pay for a one-time plan.
Now what?
Use the Three-Fund portfolio in your i401k. Haven’t started one? It’s the supercharged tax deduction monster, invest and deduct up to $76,500 per year. It’s just for freelancers and single-person businesses (and your spouse). Read about it here.
Links so you can read more about the Three-Fund Portfolio. Smarter people than me came up with it:
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.forbes.com/advisor/retirement/3-fund-portfolio
https://www.investopedia.com/3-fund-portfolio-401k-5409269