The Vanguard Three-Fund Portfolio
You’ve likely already heard about the three-fund portfolio. Maybe you learned about its benefits and advantages from the Boglehead’s book.
Or perhaps you learned about it from one of our previous articles. Regardless, you’re interested in pursuing a three-fund portfolio.
As you can see from the infographic above, the three-fund portfolio consists of, well, three funds. Your funds will be allocated to US stocks, US bonds, and International stocks.
In this article, the Vanguard Three-Fund Portfolio option will be discussed. Vanguard is one of the many companies that offer three-fund portfolio options.
You might be wondering:
Why Invest in a Three-Fund Portfolio?
In case you’re still on the fence about three-fund portfolios, this should knock you over. Three-fund portfolios are simple, low-cost ways to achieve long term returns that are consistent and have strong diversification. These returns are achieved by investing in index funds.
Index fund investing is advantageous due to its lower fees. The lowered fees add up to a lot of savings over time. That’s something higher-fee investments like actively-managed funds can’t beat.
The founder of Vanguard, John Bogle, popularized the three-fund investing method. While Schwab and Fidelity offer three-fund investment plans, Vanguard is the largest index fund manager in the world.
It gets better:
Vanguard also offers the lowest of the low in terms of investment fees.
Lose the Financial Broker
The simplicity of the three-fund portfolio allows you to ditch your financial broker. In fact, most brokers are simply costing you money. They’re either making bad decisions and losing you money, or they’re offering too many hidden fees.
To put your portfolio together, simply decide how you want to allocate your funds:
How much are you going to invest in US bonds, stock, and in International stock? Perhaps you could use some help. Here are three common ways people determine to allocate their funds:
The 80/20 Three Fund
The 80/20 Three Fund allows you to invest 80% of your funds in stocks. This 80% is comprised of a combination of US and International stocks. Meanwhile, the remaining 20% is invested in bonds.
This option is the riskiest because stocks are highly volatile. However, investing more in stocks also increases your chances for higher potential returns. With high risk, comes high reward.
That’s just how it works.
The Equal Three Fund
This is a slightly less aggressively arranged three-fund portfolio. In this type of fund, you’re investing equally in US stocks, International stocks and US bonds.
You’re still investing two-thirds of your funds in stocks, but the higher bond percentage offers a more conservative approach. Bonds are much more stable than stocks. The more you invest in bonds, the more conservative and stable your portfolio will be.
Which leads us to…
The 20/80 Three Fund
This final version of commonly employed three-fund investment strategies invests 80% of funds into US bonds. The remaining 20% of funds are comprised of US and International stocks.
This is by far the most conservative three-fund portfolio option. As said, bonds are much less volatile than stocks, but they also offer lower potential returns.
Essentially, it’s up to you and your financial situation. If you’re looking to make riskier investments for higher returns, the first or second option best suits your plan.
If you’re comfortable with your net worth and want to slowly (and safely) continue growing it, the third option is ideal. All of this is highly dependent on your situation. Take a look at your financial plans and goals to make the right decision for you.
The Vanguard Index Funds
Here’s a look at the index funds Vanguard offers:
|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, they offer three categories of funds: US stocks, International stocks, and US bonds.
In each category, two different types of shares are offered: admiral shares and investment shares. What’s the difference?
Essentially, admiral shares are more cost-effective than investment shares. The expense ratios for admiral shares are 39% lower than investment shares.
If you were to invest $50,000 in investment shares, you’d pay $90 in fees every year. Admiral shares, on the other hand, would cost around $55 in fees a year. That may not seem much, but every penny counts.
Implementing Your Own Strategy
If you’re not really wanting to follow the three typical strategies listed above, try this out:
- Hold your age in bonds: if you’re 35 years old, you’ll hold 35% in bonds.
- Put 20% equity into International bonds
Therefore, you’ll have a three-fund portfolio that looks like this:
- 53% US Stocks
- 12% International Stocks
- 35% US Bonds
This method listed above was invented by Taylor Larimore, a World War II veteran and investment expert.
What Do You Think?
You’ve learned more about three-fund portfolios and how they work. You also became better informed about Vanguard’s three-fund options.
If you weren’t considering Vanguard as your three-fund provider, you might now. After all, it’s difficult to turn down the largest index fund manager in the world.
They have the lowest fees as well. That’s pretty hard to beat.
You learned about how Vanguard’s Admiral shares could save you even more money. And you’ve also been informed about three of the typical methods used to allocate funds in a three-fund portfolio.
Also, if you weren’t satisfied with those methods, the fourth alternative from Mr. Larimore was provided.
All in all:
Are you considering a Vanguard Three-Fund Portfolio now? Or do you already have one? If so, do you have any tips you’d like to share? How did you allocate the funds for your portfolio?
Let us know below in the comments!