In today’s financial world, where there are a lot of choices, many of you might be confused about where to invest and where not to. The core concern of the investors is which portfolio will provide them with the maximum benefits with less risk.
Well, as per my analysis, there are many places for you to bet your money, but lazy portfolios are one of the best. You must be wondering, how?
The very first thing about a lazy portfolio that I want to share is its stability. Unlike many other funds, the lazy portfolio performs splendidly in most market situations. A lazy portfolio is not just safe for your long-term investment, but it is also easy to manage. As there is no active management required, you will be just fine with it.
I have analyzed various lazy portfolios, and Bogleheads 3 Fund Portfolio is one of the best. How? It is a simple portfolio that has three asset classes that are pretty broad. These assets or funds are:
- US total stock market index fund
- Total international stock market index fund
- Total bond market index fund
If they seem a bit odd to you, don’t worry I will explain that in this article further.
- It is a collection of low-cost index funds.
- The best way to allocate money to the three funds depends on the age of the individual.
- Investing in international funds is equally important as the country-specific (US) funds.
- The Boglehead 3 fund portfolio witnessed a 9.88% of annualized return in the last 10 years.
- The expenses ratio of the fund at the time of writing is 0.04%.
- The current Sharpe ratio of the Boglehead 3 fund portfolio is 0.54.
Bogleheads 3 Fund Portfolio: Asset Allocations
Before we move on to the asset allocation of the Boglehead 3 fund, we need to completely understand what the portfolio is.
Let me brief you on it. The Bogleheads 3 Fund Portfolio is a collection of three investment-grade funds where you can invest as per your preference but with proper knowledge. It is a strategy that helps you invest properly and prepare for retirement.
The core idea behind the use of the Boglehead 3 fund portfolio is to invest in some uncorrelated funds to cover the maximum market while keeping diversity and low volatility in mind. Further holding uncorrelated funds also reduces drawdowns, shields you against black swan events, and maximizes the risk-adjusted returns.
John Bogle, the father of passive index funds, was the first to adopt the portfolio principles. Moreover, Taylor Larimore was the first person to advocate the portfolio.
Now, let’s discuss the asset allocation of the three fund portfolio.
If I tell you ideally, there is no single way of asset allocation in these funds. As the portfolio tends to cover the maximum market, it acts as a roadmap for you to build a portfolio that works as per your needs.
The Bogleheads 3 Fund Portfolio consists of 3 asset classes:
Total Stock Market Index Fund
If you are one of the keen investors who have a long-term plan to get a better yield from your investment, the Bogleheads 3 fund would be a great option. Being an investor in the USA, you get the opportunity to invest a maximum amount in the Total Stock Market Fund.
You can choose from the total US stock market, the Russell 1000 index, or the S&P 500 index that tracks the performance of the US stock market.
If you want to go as per my opinion, choose the total US stock market fund. It will help you analyze the performance of small, mid, and large-cap stocks for a better investment decision.
Total International Stock Market Index Fund
After the US stocks, the next investment fund where you can allocate some part of your investment is the Total International Stock Market Index Fund. This fund offers you exposure to diversified holdings outside of the US. The best thing here is that you can invest in both developed and emerging markets.
Total Bond Market Index Fund
The third unit of the Bogleheads three fund portfolio is the Total Bond Market Index Fund. The bond index fund is centered around US bonds. It has a perfect blend of short, intermediate, and long-term bonds. So, to get the maximum benefit out of your investment, you need to allocate some part of your investment to this.
As the investment in US bonds can be tricky, I suggest you invest in intermediate treasury bonds. The intermediate treasury bonds are a suitable investment for all investors. They are neither volatile as long-term bonds nor are they conservative as short-term bonds.
Is diversification important?
If you are a newbie, it is necessary for me to tell you that diversification is really necessary, especially when you are investing in multiple bonds, stocks, or index funds.
The best thing about diversifying your investment is that you are safe from volatility. Consider this if you are investing in three assets and all of them are individual stocks or bonds. There will be no certainty of profit as all of them are individual assets, even if they are three.
On the other hand, the asset allocation in Bogleheads three fund portfolios is diverse. As each of the three index funds has thousands of stocks and bonds, you are investing in all of them by allocating your money in the fund. Thus, diversifying your portfolio.
Why include international stocks?
If you are investing in Boglehead three fund portfolios, there is no way that you shouldn’t allocate money to international stocks. Some of you may argue why to invest outside of the US when there is a stock market fund dedicated to the US. Let me brief this in detail to you:
- The global stock market has only half of the US stocks. Moreover, the international stocks market does not work the way the US stock market does. Therefore, if you have not invested in international stocks, you might miss out on the growth if US stocks decline.
- Investing dedicatedly in US stocks will greatly impact the growth of your money. With the country’s changing economic and political conditions, your stocks will lose their value. But, if you have dedicated some money to the Total International Stock Market Index Fund, the effect of these changes will be less.
- As per the historical analysis, the stocks outside of the US performed better as compared to those dedicated to the US companies. The period from 1970 to 2008 serves as a perfect example of this. A portfolio of 80% US stocks and 20% international stocks fetched better returns than 100% US stocks in the mentioned period.
So, I believe that this is enough to make you invest in both domestic and international stocks.
Consider These Upsides and Downsides of Bogleheads 3 Fund Portfolio
Every investment portfolio comes with its set of pros and cons. And so does the Bogleheads three fund portfolio. Let me throw some light on those benefits.
One of the key pros of Bogleheads three fund portfolio is diversification. Yes, by the number of funds, that is three, you might be a little worried, but you don’t have to. If you see closely, these funds have countless assets in them.
The Bogleheads three fund portfolio has over 10,000 securities. Therefore, when you are putting your precious money in it, it is surefire that the returns will be great. The best part of the diversification is that if some assets perform badly, the other funds that perform better can cover it up. Thus, reducing the volatility and losses.
The Bogleheads three fund portfolio follows the approach of passive investing. A passive investment strategy deals with reducing risks for the investors by following the goal of gradual wealth growth. Index funds like three fund portfolios have less overall expenses but better returns in the long run.
A piece of cake
Consider this; if you are a beginner in investing, it can be pretty overwhelming to shortlist thousands of stocks and bonds to invest in. However, the Bogleheads three fund portfolio takes this hassle from you. As the index fund has thousands of stocks of various companies, there is no need for shortlisting. You just need to focus on forming an asset allocation strategy, and you are done. Don’t worry, we will explain how to do stock allocation and bond allocation in the coming sections.
The Bogleheads three fund portfolio has some drawbacks that you need to be aware of.
Below average market returns
There must be countless of you who would be ready to take a risk and earn more returns than the average market value. If you belong to the group of those investors, this portfolio is not for you. If you want to beat the market and earn above-average returns, you need to take a look at some other portfolio. The Bogleheads three fund portfolio only mirrors or matches the market, it is not for beating it.
No specific control
When you invest in a three fund portfolio, you are investing in a fund with collective assets. Therefore, you lose the liberty to choose where specifically your investment should go. In a scenario like this, when the vote of the shareholder is asked for, your fund manager invests on your behalf.
The scope of alternatives is not that wide
If you are investing in small-cap stocks, real estate, and cryptocurrency apart from the international stocks, the purpose of the three fund portfolio gets defeated. With Bogleheads three fund portfolio, you are just limited to three funds. So, the scope is limited.
However, there is a way out if you want to invest in real estate and other small-cap stocks. You can get a five fund portfolio that includes US stocks, international stocks, real estate, and small-cap stocks.
How to Choose the Assets of the Bogleheads 3 Fund Portfolio?
As I have mentioned above, the Bogleheads 3 fund portfolio has three asset categories, and you can choose to allocate any amount to each. These assets or funds can be of the same family, such as Vanguard. In contrast to this, they can also belong to various diverse mutual funds firms.
If you are planning to invest in Vanguard index funds, here is a breakdown of the asset allocations:
- Vanguard Total Bond Market Fund (VBTLX) – 20%
- Vanguard Total International Stock Index Fund (VTIAX) – 20%
- Vanguard Total Stock Market Index Fund (VTSAX) – 60%
If you want to know how this breakdown is made, consider your retirement age. It will be close to 60. If you start investing in index funds, the earliest you can begin is at 20. So, the general rule is to allot 20% of your investment to the total bond market index fund. The remaining 80% can be split equally between the remaining two funds. Moreover, if required, you can also go and allot more to the US stocks and less to international stocks or vice-versa.
If you are more inclined toward domestic funds and want to invest in ETFs, you can allocate your investment like 70, 10, and 20.
- 70% in the US ETFs
- 10% in the international ETFs, and
- 20% in the bond ETFs
You can choose all of these ETFs from one family like Vanguard, or you can also opt for different families. Some of the best fund families are:
- Charles Schwab
- American Funds
How to effectively build a Bogleheads three fund portfolio?
As I have given you the idea of how to allocate funds, here are some more critical factors that you need to consider.
The assets the funds invest in
One of the key things that you need to check before investing is the assets that the funds have. As there are three funds, and one of them is the total stock market index fund, the exposure will be more. It is good to stay away from funds that invest in a limited number of assets.
There are 4 best total market index funds that you can invest in to get maximum benefits. These funds are
- Vanguard Total Stock Market Index Admiral Shares
- Schwab Total Stock Market Index Fund
- iShares Russell 3000
- Wilshire 5000 Index Investment Fund
- S&P 500
The more assets the fund has, the more will be your exposure to the market. Consider the type of companies that the fund has stocks and ETFs of. Most of the mentioned funds have over 25% technology companies, 10% financial service companies, over 12% healthcare companies, and more.
Costs of the funds
Let’s discuss the most critical aspect, the cost of funds. When choosing a fund to put your money on, you have to check what the cost of it is. Some investors may see the diversity of the portfolio but might not check the cost. The prime concern of almost every investor is the balance between cost and diversity.
The cost of the fund is clear from the expense ratio and the minimum investment required. Here is a breakdown of the expense ratio and initial minimum investment required for various funds.
|Fund||Expense Ratio||Minimum Investment Required|
|Vanguard Total Stock Market Index||0.04%||$3000|
|Schwab Total Stock Market Index||0.03%||None|
|iShares Russell 3000 ETF||0.2%||None|
|Wilshire 5000 Index Investment Fund||0.52%||$1000|
Carefully analyze the expense ratio. If it is high, check out its returns and past performance to safeguard your investment.
Historical Performance of Bogleheads 3 Fund Portfolio
As you will be putting your hard-earned money in the Bogleheads three fund portfolio, it is necessary to analyze its performance. Let’s take a look at the key performance indicators.
High returns are what make a fund worth investing in. As per the latest data (at the time of writing), the year-to-date return of Bogleheads three fund portfolio was -5.21%. Don’t get demotivated; the fund has an annualized return of 9.71% in the last 10 years. Moreover, the 30-year compound annual returns of the three fund portfolios are 8.39%.
Currently, the Sharpe ratio of the Bogleheads three fund portfolio is 0.54. This number is considered suboptimal as it lies between 0 and 1. If the number goes over 1, your fund can deliver better risk-adjusted-performance.
The drawdown shows the portfolio losses. One of the worst drawdowns of Bogleheads three fund portfolios was in March 2020. The portfolio fell by 28.12%.
Volatility can be considered as the risk involved in the invested asset. The higher the volatility of an asset, the riskier it will be. Currently, the volatility is medium if you invest in Bogleheads three fund portfolios. It is 17.67%.
The expense ratio is also a key indicator of the portfolio. It informs you about the expenses involved in buying and management of the asset. The expense ratio of the portfolio at the time of writing is 0.04%.
Dividend yield defines the yearly return that you get on your investments. Fortunately, the dividend yield of the three fund portfolio is around 2.03%.
|Returns||9.71% (10 years)|
|Sharpe Chart Ratio||0.54|
Based on the current and past values, if you had invested $10,000 in the portfolio, they would have been worth $30,668 today.
Is It Possible to Duplicate Bogleheads 3 Fund Portfolio?
Yes, if you don’t want to allocate your investment in an international asset and want to put it somewhere domestic, the three fund portfolios can be duplicated. How? Well, let me explain it with a great example.
Usually, when you invest in a three fund portfolio, there are three funds. One domestic, one international, and one bond. You can duplicate your portfolio by going for any domestic fund like a small-cap fund or real estate asset.
Let’s take Vanguard as an example.
Usually, an investor would invest in Vanguard Total International Stock Index Fund, Vanguard Total Bond Market Index Fund, and Vanguard Total Stock Market Fund for better yields.
But, when duplicating the portfolio, they can change this arrangement in two ways, such as:
- You can invest in Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, and Vanguard Small-Cap Index Fund. The expense ratio of the Vanguard Small-Cap Index Fund is 0.05%.
- Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, and Vanguard Real Estate ETF. The expense ratio of Vanguard Real Estate ETF is 0.12%.
The probability of returns from the small-cap assets is more as compared to real estate assets. As the expense ratio in real estate assets is more, the risk is high too.
Why Use the Bogleheads 3 Fund Portfolio?
Well, there are some aspects that make the Bogleheads three fund portfolio desirable. Here are some of them.
- No hassle of picking and managing the stocks: With the Three fund portfolio, you don’t have to worry about any stock-picking or managing. The fund managers do the job for you. Though it may seem like a minor con, most investors tend to leave this job to fund managers.
- Long-term market average returns: If you are one of those who love to play as an alpha, this three fund portfolio strategy is not for you. The three fund portfolio is meant to mirror the market rather than beat it. So, if you aim to get higher returns by taking high risks, refrain from this strategy.
Bogleheads 3 Fund Portfolio vs. S&P 500: Head to Head Historical Performance
There are many of you who might argue that the Bogleheads three fund portfolio does not have better returns. It is true if we compare it with the S&P 500. But, there are other aspects to analyze.
Let’s begin with the volatility.
The volatility of the prestigious S&P 500 portfolio is around 21.75%, and that of the Bogleheads three fund portfolio is 17.67%. As high volatility represents high risks, the 3 fund portfolio will be less risky.
Here is a tabular representation of some key KPIs.
|KPI||Bogleheads 3 Fund Portfolio||S&P 500|
|Returns||+0.05% (6 months)||5.71% (6 months)|
The above aspects clear that if you are looking for higher returns at a higher risk, the S&P 500 is ideal for you. But, if you are looking for something stable with fewer risks, go for Bogleheads 3 fund portfolio.
Should You Include International Bonds?
To be honest, it depends. If you want to get some additional benefits, such as:
- Low volatility
- More diversification
- Less fees
- Low currency risk
You can include international bonds in your portfolio. However, if you don’t want to include them, you don’t have to, as it will not make any significant difference to your portfolio.
Tips to Get Maximum Benefits of Bogleheads 3 Fund Portfolio
If you have made up your mind to invest in the Bogleheads 3 fund portfolio, here are some tips that I want to offer you:
- Keep your priorities clear, as it is a long-term investment fund, make sure you keep your priorities clear about where to invest.
- Always keep some part of your investment in foreign stocks. These funds work differently than the local market.
- Check out the index fund and its stocks closely before investing. You may get an idea about which stocks would be more worthy in the future.
- Analyze the risks and long-term expenses closely as only you are entitled to pay them.
- It is possible that you may feel lost sometimes. During that time, it is best to seek help from a professional financial advisor. This becomes necessary if you are new to the investing world.
To conclude, I want to add that the Three fund portfolio is not for those who want faster returns. It is usually chosen by those who need to plan for their retirement. The fund aims to mirror the market rather than beat it. One of the key advantages of the portfolio is diversification. The portfolio targets to keep your investments at low risk by investing in hundreds and thousands of stocks at once. As the investments are handled by fund managers, you don’t have to worry about any shortlisting or adjustment of your stock investment.