The 3 Fund Portfolio is a simple investment portfolio that only contains 3 assets, which are typically equity (stocks) and fixed income (bonds) mutual funds. A three fund portfolio is considered a ‘lazy portfolio’ because it requires very little maintenance. This investment strategy is also simple to implement and is viewed favorably by the investment community which often recommends them as a solid introduction to long term investing.
If you’ve read our guide on asset allocation then you might recognize the phrase 3 Fund Portfolio.
This investment strategy may seem simple, but the underlying principles are solid. It helps you easily create a well-diversified portfolio with low fees (expense ratio).
Let’s jump into what the 3 Fund Portfolio actually is, how it works, and how you can make your own. But first, let’s make sure we are all on the same page.
What’s an investment portfolio anyway? Your portfolio is the collection of assets that you own. If you have all of your investments at Vanguard, then that’s where you’d go to see your portfolio. Yours might even be spread amongst a few different financial institutions.
This is pretty common if you have a 401K from work with one brokerage and your IRA with another one. In that case, you’d want to take a step back and look at your overall investments to see your entire investment portfolio.
Why Investors Love 3 Fund Portfolios
The beauty of the Three Fund Portfolio lies in its simplicity and efficiency. The typical 3 Fund Portfolio contains a U.S. ‘total market’ index fund, an international ‘total market’ index fund, and a bond ‘total market’ index fund.
Investors don’t need to necessarily use mutual funds to construct their portfolio either, as an ETF portfolio offers the same benefits. As a result, the asset classes included in these portfolios are…
Photo by Pirate Alice