Let’s talk about the Three Fund Portfolio. For the beginner investor, there is no better way to start investing and diversifying than by assembling your three fund portfolio. 

What is it?

Our three fund portfolios are inspired by the Boglehead investing philosophy. Bogleheads are (pretty die-hard) fans of Jack Bogle, the founder of Vanguard and the father of the almighty Index Fund. Jack Bogle figured that in the long term, the average investor, yes, even the most savvy among you 😉, would never beat the returns of the overall market. In other words, keeping it simple means greater reward over time. Bogleheads favor simple and passive investment strategies over the long-term. Buy, hold, never sell.

What do you mean by three funds?

Remember that we mentioned Bogleheads favor simplicity. A three fund portfolio is the best bet for investors who want a bit more tax efficiency than the simplest-of-them-all Target Date Index Fund, but who also want easy diversification at the click of exactly three buttons. A Boglehead-approved three fund portfolio will use only basic asset classes — typically a domestic stock "total market" index fund, an international stock "total market" index fund and a bond "total market" index fund. Because you are literally buying “the market,” you’ll never have to worry about your portfolio underperforming, you’ll always be right on target. Together, these three funds give you broad exposure to the market without overlap and a low maintenance strategy for long term, stress-free investing.

I’m in. How do I start?

You can dive in with 2 easy steps. First: Choose Your Allocation. Decide how you want to divvy up your investments across the three funds. Because it is contingent on your age, income, and personal financial situation, only you can choose the right allocation for you. Stocks are more risky, bonds are usually considered less risky (though they still carry quite a bit of risk). The younger you are, the more aggressive you can be (we currently hold almost 90% stocks!) As you get closer to your retirement date, you’ll want to rebalance and shift your allocation to become less risky. A more conservative rule tends to be “100 - Your Age = Percentage of Stocks” (i.e. you are 20, that would make your portfolio 80% Stocks and 20% Bonds). Every time you contribute more money to your investment account you have the chance to adjust your risk tolerance. Second: Decide on your Index Funds (or ETFs). Usually you make this choice based on where you invest. If you have an account at Fidelity, it might make sense to choose FSKAX as your Total Market Index Fund, or if you’re at Vanguard, VTSAX. 

The most important thing to know about the three fund portfolio is that it is a long-term, passive investment strategy. Once you buy these funds, hold them and never sell (no really, never sell). The market is volatile but in the long-term it ALWAYS GOES UP. With a three fund portfolio you can be prepared to weather the ebbs and flows of the market knowing that you are mathematically certain to out-perform most investors with this simple strategy. Investing now contributing regularly is the easiest way to financial independence!