The Vanguard Three Fund Portfolio – How To Simply Your Investing Using Only Three Funds

It’s funny how I run across ideas to write about. During our summer Adventures by Disney vacation to beautiful Yellowstone, good ole dad decided to venture out on a hike by himself while Mrs. DFD and kids went horseback riding. Little did I know, while braving the outdoors, I’d come across information for one of the easiest ways to simplify investing…the Vanguard Three Fund Portfolio.


The hike started off with nice weather, but that changed after an hour into it. If you’ve ever visited Montana, then you know that the weather can go from 70 degrees, beautiful and sunny, to 50 degrees windy and stormy in the blink of an eye. That’s basically what happened about halfway into my hike.

After a few minutes of thunder & severe lightning, I knew it was time to head back to camp. Luckily, I was able to make it down the mountain to some unoccupied cabins before the bottom fell out.

hail-stormThat day, I experienced one of the worst hail storms while sitting on the porch of that cabin. During that twenty minutes, I decided to kill some time on my smart (dumb) phone and came across a review The White Coat Investor did for the book, The Bogleheads’ Guide To The Three Fund Portfolio by Taylor Larimore. After reading it, I decided to buy myself a copy and was glad I did.

As an investor, you have a choice: you can be like the gamblers who try to beat the casino or you can be the casino by investing in total market index funds. It’s an easy choice, once your understand the odds.” -Taylor Larimore

What Is The Three Fund Portfolio?

It seems that many times, doctors and other high-income professionals try to make investing too hard. I live by the KISS rule (keep it simple stupid). Why makes things hard if you don’t have to?

Maybe it’s because we are constantly getting “pitched” investment advice and products from financial planners and insurance sales people? I’m not sure, but one thing I do know is… it doesn’t have to be difficult.

Larimore describes the Three Fund Portfolio as….drum roll please….nothing more than a combination of three of the largest mutual funds in the world, all low-cost index mutual funds:

Vanguard Index Funds

Fund Name Investments Fund Ticker
Vanguard Total Stock Market Index Fund U.S. Stocks VTSMX
Vanguard Total Stock Market Index Fund – Admiral* U.S. Stocks VTSAX
Vanguard Total International Stock Index Fund International Stocks VGTSX
Vanguard Total International Stock Index Fund – Admiral* International Stocks VTIAX
Vanguard Total Bond Market Index Fund U.S. Bonds VBMFX
Vanguard Total Bond Market Index Fund – Admiral* U.S. Bonds VBTLX

As you can see from the table, you have two types of funds from three different investment categories to choose from:

  • Admiral shares
  • Investment shares

Admiral shares have a lower expense ratio vs investor.

Here’s Vanguard’s explanation:


Why A Three Fund Portfolio?

The three fund portfolio is a simple, low-cost way to achieve strong diversification and solid long-term returns by investing in index funds. Index fund investing is something the majority of actively managed funds (higher fees) can’t typically beat.

John Bogle, the founder of Vanguard, made this method of investing popular and there’s actually a forum inspired by him called the Bogleheads forum.

Actually, you can use any company like Vanguard, Schwab or Fidelity to make up your own low-cost three fund portfolio.

I personally use Vanguard as they are the largest index fund manager in the world and have very low investment fees.

For The DIY Person

If you’d rather put a three fund portfolio together yourself, then choose three funds that invest in the following asset classes.

  • US Stocks
  • US Bonds
  • International Stocks


What’s All This About Index Funds?

Most financial advisers typically don’t recommend index funds and instead use actively managed funds.

They make the bulk of their money from:

  • commissions
  • fees
  • miscellaneous investment expenses

Let’s see what Rick Ferri, a retired financial advisor and author of eight financial books, says why this hurts the average investor:

“Let’s face it: Most investment companies are in business to make money from you, not for you. Every dollar you save in commissions and fee expenses goes right to your bottom line.”

In Ferri’s book, “The Power of Passive Investing: More Wealth With Less Work” it cites several detailed studies that show the majority of actively managed funds fail to outperform index funds.

Here’s what Mr. Larimore says about why the financial services industry tends to hate index funds:

“Many in the financial services industry hate indexing because it is difficult for them to make money selling low-cost index funds. The industry spends billions of dollars attempting to convince us that they can help us beat the market by choosing winning individual stocks, bonds and mutual funds for us. (Fact: They cannot)”

Now we know that the majority of fund managers can’t beat the market and index funds are the best way to minimize investment fees with maximum diversification.

Advantages of a Three Fund Portfolio

1) Diversification – instead of holding funds in one specific sector (i.e. technology) index funds in the Three Fund Portfolio track thousands of stocks. For instance, in Vanguard’s Total Stock Market Index fund, it holds over 3,600 U.S. stocks. Top holdings include:

  • Microsoft
  • Apple
  • Facebook
  • JP Morgan Chase
  • Berkshire Hathaway

2) Low cost – The portfolio contains index funds with some of the lowest fees available. For example, The Vanguard Total Stock Market Index Admiral fund has an expense ratio of .04%. This means that an investor can invest $10,000 at a cost of only $4 per year.

3) Simplicity – The older I get, the more simple I try to make things for myself. Investing does not have to be difficult! The Three Fund Portfolio makes it is easy to understand, implement, and monitor.

How To Implement

We now know that investing does NOT have to be difficult. Unfortunately, there are some advisors that try to confuse people giving multiple investing strategies.

Using the Vanguard Three Fund Portfolio, we’re able to spread out our investment portfolio into:

  • US Stocks
  • US Bonds
  • International Stocks

Now that we’ve learned what mutual funds to invest in, there are some that need help with asset allocation. Mr. Larimore not only tells you which three funds to use, but he tells you how much to put in each of them.

He states:

  • Hold your age in bonds – a 30 year-old would have a portfolio in 30% bonds.
  • Put 20% of equity into international stocks

So that same 30-year-old would have the following portfolio:

  • 56% Total Stock Market Index Fund
  • 14% Total International Stock Market Index Fund
  • 30% Total Bond Market Index Fund

His portfolio recommendations for a 60-year-old would be:

  • 32% Total Stock Market Index Fund
  • 8% Total International Stock Market Index Fund
  • 60% Total Bond Market Index Fund

Final Thoughts on the 3 Fund Portfolio

I’m an active participant on The White Coat Investor’s Facebook Forum. It amazes me how complicated the doctors and other high income professionals try to make investing. It’s really not that hard!

Many try to pick individual stocks, real estate and other risky investments for their retirement. It’s hard to beat the performance of the Three Fund Portfolio.

Remember, only investing in these three funds, you are able to:

  • gain broad diversification
  • cut down on fees
  • outperform even most professional money managers

You can do all this with a strategy that takes no more than a few minutes to set up, and roughly the same amount of time to review once-a-year.

Speaking of reviewing investments, Personal Capital’s free portfolio tracker is a pretty cool tool that allows you to track your allocation and make sure your portfolio stays on track.

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