Bogleheads 3 Fund Portfolio

Bogleheads 3 Fund Portfolio: It’s Simple and Effective

Bogleheads 3 Fund Portfolio

Lazy retirement portfolios simplify life for busy workers without time to invest actively. The lazy portfolios are excellent options for 401(k) and IRA retirement accounts. Workers can just set your asset allocation and forget about it except to review one per year or every six months. You can rebalance your retirement portfolio if you want to once your asset allocation deviates significantly from your planned one.

In some cases, a target date fund is appropriate. But another option is pre-planned asset allocations comprising a few passive index funds. For instance, the Coffeehouse Investor Portfolio was popularized during the dot-com crash. Another famous and easy choice is the Warren Buffet Two-Fund Portfolio.

Yet another well-known lazy portfolio is the Bogleheads 3 Fund Portfolio.


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History of the Bogleheads 3 Fund Portfolio

For those who don’t know, the Bogleheads are a group of investors who follow the investing principles espoused by the father of passive index funds and founder of Vanguard, John Bogle. He generally advocated indexing, diversifying investments, minimizing taxes, keeping it simple, and staying the course. As Jack Bogle so eloquently put it,

“In investing, the winning technique is to own the whole stock market via an index fund and then do nothing.”

Taylor Larimore, a Boglehead, initially advocated the Bogleheads 3 Fund Portfolio. The portfolio contains three total market index funds: a U.S. stock market fund, an international stock market fund, and a U.S. taxable investment-grade bond market fund. In 1997, the Bogleheads 3 Fund Portfolio could finally be implemented when a total international index fund was introduced to investors by Vanguard.

As a historical note, there was also a money market fund in the initial idea for four total funds in the old Vanguard Diehards forum on the Morningstar discussion boards around 1999. This initial idea seemingly developed into the Bogleheads 3 Fund Portfolio.

What is the Bogleheads 3 Fund Portfolio?

The Bogleheads 3 Fund Portfolio is a strategy that uses three low-cost index funds to emphasize simplicity and tax efficiency. It also reduces the risk of style drift, tracking error, overlap, asset bloat, and other problems. The Boglehead 3 Fund Portfolio also reduces the risk of fund manager changes. This risk is real as new fund managers can underperform their predecessors. Does anyone recall Robert Stansky or Jeffery Voinik at the Fidelity Magellan Fund after they followed Peter Lynch?

The main idea is to own the most essential asset classes: U.S. stocks, international stocks, and U.S. bonds. The main task that investors now have is to decide on asset allocation. The basic idea is to invest in uncorrelated assets using passive index funds to capture as much market return as possible with adequate diversification and lower volatility. These ideas should be everyone’s goal for their retirement fund.


The table below outlines the Bogleheads 3-Fund Portfolio assuming an overall 60% stock / 40% bond asset allocation. Historically, in retirement plans, the three-fund portfolio has been the Vanguard Total Stock Market Index Fund (VTSAX), the Vanguard Total Bond Market Index Fund (VBTLX), and the Vanguard Total International Stock Market Index Fund (VGTSX). Some people prefer the Vanguard 500 Index Fund (VFINX) over the Vanguard Total Stock Market Index Fund.

WeightingAsset ClassVanguard Index Fund
40%Total Stock Market Index FundVTSAX
20%Total International Stock Market Index FundVGTSX
40%Total Bond Market Index FundVBTLX

A person investing in Admiral shares will have a lower expense ratio than investor shares. Alternatively,  Vanguard’s ETFs can be used for a taxable account. Although we focus on Vanguard funds, most asset managers offer passive index funds or ETFs.

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Pros and Cons

There are several pros and cons to the Bogleheads 3 Fund Portfolio. Under pros, index funds are low-cost, diversified, and tax-efficient. In addition, the portfolio is simple to understand and implement and will usually outperform most active fund portfolios over time. 

It is well known that low-cost index funds outperform active funds over time minus expense ratio differences and trading costs. Furthermore, investing in index funds removes the short-term trading mentality and other things investors should not care about.

We now outline several cons, but these are minimal. Limited control exists; the portfolio will only match market returns and be overweight mega-cap stocks. Little control is a minimal disadvantage, but some people desire control. Instead, set the asset allocation and look at it every six months to one year. Second, some people like to beat the market, but studies have shown that most cannot do so in retirement plans. So, matching market returns is decent. The last item is a real risk. Mega-cap stocks, especially tech stocks, are increasingly dominating the market.

Boglehead 3 Fund Portfolio Returns from January 2000 – July 2021.

We perform an evaluation using Vanguard funds to assess further the performance and volatility of the Bogleheads three-fund portfolio. How does the Bogleheads 3 Fund Portfolio do over 20 years in a retirement plan assuming a buy-and-hold strategy? We examine the period from January 2020 to July 2021 because it encompasses both bull markets and recession with bear markets.

In this comparison, we examine Vanguard Total Stock Market Index (VITSX), Vanguard Total International Stock Index (VGTSX), and Vanguard Total Bond Market Index (VBTIX). We evaluate the following percentages: Portfolio 1 – 40% / 20% / 40% (blue line), Portfolio 2 – 60% / 20% / 20% (red line), and Portfolio 3 – 60% / 0% / 40% (orange line). 

Our assumption is the portfolios are rebalanced annually. We discuss the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers.

The results vary for CAGR and volatility. But clearly, including a higher percentage of stocks (Portfolio 2) increases returns slightly but simultaneously causes volatility to rise. Removing international stocks and increasing U.S. bonds (Portfolio 3) increases returns slightly but significantly reduces volatility. It also causes the Sharpe Ratio, a measure of risk-adjusted relative returns, to climb.

Bogleheads 3 Fund Portfolio Returns
Source: Portfolio Visualizer

The growth of portfolio 3 is greater than that of portfolio 1 or 2 because U.S. equities have performed better than bonds and international stocks during this period. Large-cap U.S. tech stocks have driven the stock market, while low-interest rates kept bond returns low. Moreover, global equities have performed poorly on a relative basis.

Max Drawdowns

The max drawdowns are worse for portfolio 2 due to a lower percentage of bonds and a higher percentage of stocks. Furthermore, the drawdowns were more extended for portfolio 2, meaning this asset allocation took longer to recover. Both portfolios 1 and 3 produce more tolerable drawdowns of shorter duration. But of the two, portfolio 3 is better for those seeking lower volatility and higher risk-adjusted returns.

Bogleheads 3 Fund Portfolio Max Drawdowns
Source: Portfolio Visualizer

Final Thoughts on the Bogleheads 3 Fund Portfolio

Most retirement plans have a combination of passive index funds and active funds. The Bogleheads 3 Fund Portfolio is one possible strategy, assuming all asset classes are available as index funds in your retirement plan. Due to their advantages, employing passive index funds for retirement portfolios in 401(k) plans or even IRAs takes little effort. You will capture much of the market return with good diversification, minimize costs, and avoid many cons. 

Interestingly, there is no significant penalty for excluding international stocks, but volatility is much lower, and total returns are higher. As a result, investors may want to think twice about their international stock exposure.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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