The Three-Fund Portfolio - Bogleheads.org (2024)

The Bogleheads' Guide to The Three-Fund Portfolio is now available in hardcover book, audio book and kindle. All royalties are donated directly to The John C. Bogle Center For Financial Literacy.

Bogleheads:

After a lifetime of investing since 1950 trying to "beat the market," I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated, is an ideal portfolio for most investors. The benefits are many (read blue links):

* Avoids wasted time and the possibility of mistakes trying to pick the best of thousands of mutual funds and ETFs.
* No individual stock risk.
* Highest return with lowest risk. Efficient.
* Very diversified with over 20,000 worldwide securities (lower risk).
* Very low expense ratios.
* Very low (hidden) turnover costs.
* Very tax-efficient.
* The many Advantages of Simplicity.
* No adviser risk.
* No fund manager risk.
* No style drift.
* No asset bloat.
* No tracking error to cause abandonment of the strategy.
* No fund overlap.
* No front-running that reduces sub-index returns.
* Automatic rebalancing within each fund.
* No need for a portfolio tracking program.
* Less worry. Never under-performs the market.
* Easy to maintain for the owner, spouse, caregivers and heirs.
* More free time.
* Mathematically certain to outperform most investors.
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Asset Allocation: Use this Investor Questionnaire to help you decide your very important stock/bond allocation. I suggest International stocks = 20% of equity.

Fund Placement For Maximum Tax-Efficiency: Place Total Bond Market in tax-advantaged account(s). If full, use a tax-exempt bond fund in a taxable account. Place Total Stock Market and Total International Stock Market in either a tax-advantaged account (best) or a taxable account.
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Past rate of inflation (CPU) and annual fund returns in The Three-Fund Portfolio:

YEAR--INFLATION--BOND INDEX--S&P 500 INDEX------MSCI EAFE INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9-------------18.4--------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7-------------32.4--------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Highest Stock Return)
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3
2021-------7.0---------(-1.7)---------------25.7-------------------8.6
2022-------6.5--------(-13.2)------------(-19.4)---------------(-16.0) (Lowest Bond Index Return)
2023-------3.4-----------5.7----------------26.2------------------15.5

Sources: Vanguard, U.S. Labor Department (CPI-U), Standard & Poors, Bloomberg Barclays Aggregate Bond Index, and DFTurner

Past performance does not forecast future performance.
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What Nobel Laureate's say:

Douglas Diamond: "Asked what he’ll do with his share of the prize money, Diamond said he’ll probably put it in a total market index fund."

Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Daniel Kahneman: "Investors shouldn't delude themselves about beating the market. They're just not going to do it. It's just not going to happen."

Harry Markowitz: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Merton Miller: "Most people might just as well buy a share of the whole market, which pools all the information, than delude themselves into thinking they know something the market doesn't"

Paul Samuelson: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

William Sharpe: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

Robert Shiller: "A portfolio approximating the market may be the most important portfolio."
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What Other Experts Say:

American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."
Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."
Christine Benz, Morningstar Director of Personal Finance: "The Bogleheads' "Three-Fund Portfolio" is the ultimate in elegant minimalism."
Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."
Jack Bogle, Vanguard founder: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Jonathan Burton, MarketWatch: "There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won't have to think about too much."
Jonathan Clements, author and Wall Street Journal columnist: "Using broad-based index funds to match the market is, I believe, brilliant in its simplicity.
Consumer Reports Money Book: "Simply buy the market as a whole."
Laura Dugu, Ambassador and co-author of The Bogleheads' Guide to Retirement Planning: "With only these three funds in your investment portfolio you can benefit from low costs and broad diversification and still have a portfolio that is easy to manage."
Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."
Kiplinger's Retirement Report: "You'll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index."
Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-market index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."
E.F.Moody, author of No Nonsense Finance: "I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks comprising the market portfolio."
Anna Pryor Wall Street Journal writer: "A simple portfolio of 3 funds. It may sound counter-intuitive, but for the average individual investor, less is actually more."
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Allan Roth, CPA, CFP, AARP columnist, adviser and author of "How a Second Grader Beat Wall Street": "The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlations, Sharpe ratios, and the like. -- Over the years, I’ve benchmarked hundreds of portfolios against the equivalent weighted three-fund portfolio and can count on one hand the number of portfolios I’ve seen that bested this benchmark."
Gus Sauter, former Vanguard chief investment officer: "Most investors will be far better off if they follow Taylor's simple, yet sophisticated (3-fund) strategy."
BIll Schultheis, author of The Coffee House Investor: Only 10% of all managed mutual funds beat the Wilshire 5000 Index in each of the last three, five, and ten-year periods (3-31-99)."
Dan Solin, author of The Smartest Portfolio You'll Ever Own: "You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."
Prof. Meir Statman, author of What Investors Really Want: "It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner."
Stein & DeMuth, authors of The Affluent Investor: "Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios."
Wilshire Research: "The market portfolio offers the best ratio of return to risk."
John Woerth, Vanguard director of public relations: "We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost."
Warren Buffett, famed investor: "There seems to be some perverse human characteristic that likes to make easy things difficult."