3 Fund Portfolio: What It Is, Why It Works, and How to Build One
Simple. Cheap. Diversified.
The 3-fund portfolio is a minimalist investing strategy built around broad exposure to U.S. stocks, international stocks, and U.S. bonds.
Using just three low-cost index funds, it aims to deliver average market returns with proper diversification and no added complexity.
The portfolio's roots trace back to John “Jack” Bogle, the founder of Vanguard and a pioneer of index funds, whose philosophy of simplicity and low costs helped usher in the era of passive investing.
While Bogle himself didn't invent the 3-fund portfolio, his followers — known as “Bogleheads” — created the 3-fund portfolio as a direct embodiment of his approach.
Below, I break down how the 3-fund portfolio works, which funds investors typically use, and why it's become such a popular investment strategy.
What is a 3-fund portfolio?
As the name suggests, a 3-fund portfolio is an investment portfolio built with just three funds. It includes:
- A domestic stock fund
- An international stock fund
- A bond fund
With these three investments, you gain broad exposure to the global stock market while using bonds to help manage risk and volatility.
While it's not important which fund provider you use (e.g., Vanguard, Fidelity, or Dreyfus), whether you choose mutual funds or ETFs, or even the exact allocation, a true Boglehead 3-fund portfolio always includes these three components.
Why choose a 3-fund portfolio
There is a seemingly endless amount of investing advice available, much of it unnecessarily complicated. This is especially true when it comes to diversification.
While diversification is one of the most important principles in investing, it's surprisingly easy to achieve if you choose the right funds.
For instance, many investors end up holding multiple overlapping funds like VOO, VTI, and VTSAX, thinking they're meaningfully diversifying when, in reality, they're often buying the same underlying companies again and again.*
Do the same thing with international funds, and a portfolio can easily swell to 15 or more positions — often with little benefit.
*The investor who owns VOO, VTI, and VTSAX has almost the same allocation as the investor who only owns VTI.
This is the core insight behind the 3-fund portfolio: owning 15 or more funds often provides little additional diversification compared to a few carefully chosen ones.
By reducing overlap, the 3-fund portfolio is easier to manage, rebalance, and stick with over the long term.
How to build a 3-fund portfolio
You will need a brokerage account to start investing. We recommend Public, where you can invest in stocks, bonds, ETFs, and more in both regular brokerage and retirement accounts. See our full list of the best brokerages in 2026.
Building a 3-fund portfolio is straightforward and focuses on just a few high-impact, well-trodden decisions.
1. Determine your asset allocation
Asset allocation is the process of deciding how to divide your investments across different asset classes. In the case of the 3-fund portfolio, it refers to how much you allocate to U.S. stocks, international stocks, and bonds.
Asset allocation is the most important decision you'll make when investing. Since it determines how much of your portfolio is invested in stocks versus bonds, it directly affects both risk and long-term returns.
There's no single “correct” mix. As mentioned above, a Boglehead 3-fund portfolio always consists of a domestic stock fund, an international stock fund, and a bond fund, but the exact weighting of each is up to you.
The original 3-fund portfolio holds:
Younger investors and those with a higher appetite for risk may allocate a higher percentage of their portfolios to stocks, while older or more conservative investors may have higher allocations to bonds.
For example:
| Base | More aggressive | More conservative | |
| Domestic stocks | 64% | 70% | 48% |
| International stocks | 16% | 25% | 12% |
| Bonds | 20% | 5% | 40% |
Two common rules of thumb for the 3-fund portfolio are:
- Domestic vs international stock allocation: Total stock allocation x 80% = domestic stock allocation*
- Bond allocation: Your age - 20 = percentage of portfolio in bonds (e.g., a 40-year-old would allocate 20% to bonds)
*An 80% U.S. weighting may be on the high side, given that U.S. stocks make up closer to 50% of the global equity market. Vanguard research suggests 30–50% should be invested in international stocks for full diversification.
2. Choose your funds
Once you've determined your asset allocation, the next step is choosing your funds. There are many low-cost, total-market index funds that work equally well for a 3-fund portfolio.
Below are some of the most commonly used options:
Vanguard
- Domestic stocks: VTI (ETF), VTSAX (mutual fund)
- International stocks: VXUS (ETF), VTIAX (mutual fund)
- Bonds: BND (ETF), VBTLX (mutual fund)
Fidelity/iShares
- Domestic stocks: ITOT (ETF), FSKAX (mutual fund)
- International stocks: IXUS (ETF), FTIHX (mutual fund)
- Bonds: FBND or AGG (ETFs), FXNAX (mutual fund)
Schwab
- Domestic stocks: SCHB (ETF), SWTSX (mutual fund)
- International stocks: SCHF (ETF), SWISX (mutual fund)
- Bonds: SCHZ (ETF), SWAGX (mutual fund)
Whether you use ETFs or mutual funds is largely a matter of preference, and mixing providers is fine. What matters is that each fund offers broad exposure, has a low expense ratio (below 0.10%), and fits cleanly into your target allocation.
There is no "best index fund." Any "total U.S. stock market" index fund will have virtually the same performance as its peers.
3. Rebalance periodically
Over time, market movements may cause your portfolio to drift away from your target allocation.
For example, if international stocks rise 20% while domestic stocks and bonds are flat, your international stock weighting will increase beyond your original target.
Rebalancing once a year helps bring the portfolio back to its intended mix by trimming what's grown too large and adding to what's lagged, resetting the portfolio to your target allocation.
You can also rebalance by investing new contributions in underweight positions.
Note: The estimates and examples outlined in this chapter are based on my experiences and those of other investors, as reported on online forums. They are not intended to be investment advice.
Other considerations
Here are a few other considerations you should keep in mind when building and maintaining a 3-fund portfolio.
Asset location
Asset location refers to which type of account your investments are made in, such as taxable brokerage accounts, IRAs, and 401(k)s.
Most 3-fund portfolio investors are long-term investors who focus on maxing out tax-advantaged accounts first, often holding all three funds inside retirement accounts for as long as possible.
Any additional savings spill into taxable accounts, where stock funds are typically favored because they're more tax-efficient.
Bond fund income is paid out as interest and taxed as ordinary income each year, creating a steady tax drag in taxable accounts.
For this reason, bonds are typically prioritized for tax-advantaged accounts.
Holding stock funds in taxable accounts also opens the door to tax-loss harvesting.
Tax-loss harvesting
Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains or reduce taxable income.
It's often promoted as a powerful way to improve after-tax returns, especially during market downturns. In a 3-fund portfolio, however, its impact is usually limited.
First, tax-loss harvesting only applies to assets held in taxable brokerage accounts, which many long-term investors don't meaningfully use until after maxing out tax-advantaged accounts.
Second, because the portfolio relies on broad, total-market funds, replacing a sold fund without triggering the wash sale rule can be difficult without materially changing your allocation.
As a result, tax-loss harvesting typically does not mix well with a 3-fund strategy.
Zero-fee index funds
Zero-fee index funds are index funds that charge no expense ratio. They are typically offered by large brokerages (see Fidelity) as a way to attract and retain customers.
While they sound like a clear upgrade over traditional index funds, expense ratios on index funds are already extremely low, so the difference in long-term returns is usually negligible.
More importantly, many zero-fee funds are proprietary and can't be transferred to another brokerage.
While this usually isn't an issue, holding zero-fee funds in a taxable account could create an issue if you ever need to move brokers, since you may be forced to sell and trigger capital gains taxes.
3-fund portfolio vs target date funds
Target date funds are all-in-one investments that automatically adjust their asset allocation over time, becoming more conservative (higher bond, lower stock) as the target retirement date approaches.
They're even simpler than a 3-fund portfolio since you only need to own a single fund and it handles rebalancing and allocation changes for you.
The tradeoff is less customization and higher expense ratios compared to building a 3-fund portfolio yourself.
For that reason, many investors are willing to do a small amount of extra work in exchange for lower costs and greater control over their allocation.
Pros and cons of a 3-fund portfolio
Pros
- Simple: With just three funds, the portfolio is easy to understand, implement, and maintain, even for hands-off investors. There's little need for monitoring or frequent changes.
- Low cost: The strategy relies on low-cost index funds, keeping expense ratios and trading costs to a minimum. Over long periods, those savings can meaningfully improve net returns.
- Diversified: The 3-fund portfolio covers all the major asset classes, both U.S. and international, resulting in a well-balanced portfolio.
Cons
- Passive strategy: The 3-fund portfolio is a very passive strategy, and leaves no room for stock picking or attempts at market timing. This can make it feel unexciting compared to more active strategies.
- Guarantees average performance: By design, it aims to match the market rather than beat it. You'll never outperform the market, and in every market cycle, there will be some investors, through luck or skill, with better performance.
However, the cons are mostly a matter of opinion and a feature of all passive investing strategies. Simplicity and average performance are exactly what many investors want.
For more information, check out the Bogleheads' Three-Fund Portfolio forum and the Three-Fund Portfolio wiki.
The takeaway
The appeal of the 3-fund portfolio is not that it is complex or optimized for edge cases, but that it eliminates most opportunities to make avoidable investing mistakes.
It keeps the focus on the key drivers of long-term wealth building: diversification and patience.
For investors who value simplicity and are already convinced of the long-term merits of passive investing, the 3-fund portfolio is one of the most practical investing strategies ever created.
