Blog Invest Is a 3 Fund Portfolio the Right Choice for You?

Is a 3 Fund Portfolio the Right Choice for You?

date October 28, 2021 time 5 min read 1455 views

Know that you need to start investing but tired of trying to figure out the gazillion different investment opportunities all promising the best returns? A 3 fund portfolio could be the perfect solution. If you’d like to learn more about this simple, low-risk choice, keep reading.

If you’re overwhelmed with the seeming complexity of investing, a 3 fund portfolio could be the perfect solution. This simplified fund offers a way to build your savings over the long term by striking a balance between diversification and manageability—and it will only take you a few minutes to get to grips with.

Given the name, it shouldn’t be a shocker that this type of portfolio focuses on 3 funds ( usually a combination of stocks and bonds). Want to learn more? We’ll outline what a 3 fund portfolio is, how it works, and whether it could be the right choice for you.

Are three funds better than one? Advocates of 3 fund portfolios would say the answer is yes.
Are three funds better than one? Advocates of 3 fund portfolios would say the answer is yes. (Source: Pixabay)

Defining three fund portfolios

As we’ve seen already, 3 fund portfolios are unique because they consist of, well, three funds. These are typically:

  1. A domestic total market index fund 
  2. An international total market index fund 
  3. A bond total market index fund

You don’t necessarily have to choose the three outlined above—the only hard rule is that they shouldn’t be cash.

As for the allocation, anything goes, although the domestic market index fund will make up the greatest proportion for most people. However, the less risk you’re willing to take on, the more you should invest in the bond total market index fund. We’ll get to why shortly.

Why 3 fund portfolios are safe

A total market index fund gets its name because it tracks a whole index, such as the S&P 500. This can come in the form of either an exchange-traded fund (traded live within market hours) or a mutual fund  (traded outside of market hours). 

Because a total market fund tracks the whole market, it’s already a whole lot safer than trying to pick a select few companies, but investing in all three of the above funds protects you even more. 

Why? If the domestic market goes down, there’s probably a country elsewhere in the world that hasn’t gone down, so an international total market index fund will bolster the portfolio.

Then there’s the bonds. Although bond and stock prices are correlated, bonds generally fluctuate less in value than stocks. This means they don’t perform as well as stocks do when the market is doing well; but during downtimes, they protect your fund from falling too far.

Investing will never be 100% safe—but as far as things goes, this is definitely on the safer end of the spectrum.

Three fund portfolio performance 

What we’ve seen so far seems positive, but you probably want to know more about three fund portfolio performance before you decide to jump in and commit. 

This is tricky to answer since the returns you can expect vary wildly depending on the exact funds you choose to invest in (and your allocation). However, we can give some rough estimates of what to expect from typical funds that fall into each of the three categories we’ve seen. 

Three fund portfolio performance might not be the best in the game, but their stability still makes them a great investment option.
Three fund portfolio performance might not be the best in the game, but their stability still makes them a great investment option. (Source: Pixabay)

In terms of a domestic fund (for the US), the S&P 500 has an annual return of 10%. It’s a little more complicated to work out the annual returns for a total market fund, but let’s use the example of the Vanguard Total International Stock Index Fund Investor Shares—it enjoyed a return of 7.17% over the last ten years.

Meanwhile, you can expect a lower return from bonds, with 2% being a standard return for Treasury notes (although it can be far lower).

Overall, your investment should earn enough to be protected against inflation, and in many cases it will do far better.

Is it the right choice for you?

Investing decisions are all about tradeoffs—weighing up potential types of investment risks, comparing them with returns, and deciding what matters the most to you.

Based on what we’ve said so far, it shouldn’t come as a huge surprise that 3 fund portfolios are a good option for anyone who wants to take a safe approach to investing. No more losing sleep at night—rest assured that the statistics are in your favor, and short of an unprecedented calamity, you’ve engineered the investing process to maximize your chances of growing your money.

Yet the approach also isn’t so overly cautious that you won’t make returns. Unless you go for an extremely conservative allocation, chances are that you’ll beat inflation comfortably each year.

Above all, the biggest advantage of this method is its simplicity. You might decide to follow a portfolio rebalancing strategy over the years, especially as you near retirement—but for the most part, you can just sit back and let your money grow. No need to worry about following the financial news frantically to figure out what you should buy or sell.

Potential drawbacks to 3 fund portfolios

While 3 fund portfolios minimize risks, they might not be suitable for short-term investors who need to access their money within the next five years (the markets are often volatile over shorter timeframes). They’re also not the only low-risk way to invest—you could consider other options, such as certificates of deposit. 

3 fund portfolios are a solid investment option, but they’re not right for everyone. The decision is yours.
3 fund portfolios are a solid investment option, but they’re not right for everyone. The decision is yours. (Source: Pixabay)

Plus, we shouldn’t pretend that 3 fund portfolios offer perfect diversification. They offer no exposure to markets other than bonds and stocks—what about commodities, real estate, and cryptocurrencies?

Of course, this isn’t just a binary choice of putting all your savings into a 3 fund portfolio or shunning the idea entirely. Depending on your risk tolerance, you might decide to invest the largest portion of your net worth into something like a 3 fund portfolio and allocate a smaller amount into something riskier. For example, 80% into a 3 fund portfolio, 10% in cryptocurrencies, and 10% in gold.

With that in mind, you might be interested in exploring alternatives.

Investing with MyConstant

As we’ve said already, 3 fund portfolios aren’t your only option for simplified, low-risk investing. If you’re a beginner investor looking for an easy-to-use, relatively low risk platform, MyConstant could be the way to go. We have a proud record of no investor losing their initial investment to date.

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Benefits include:

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  • Minimum investment just $10
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George Schooling

George Schooling

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