How to Create a 3 Fund Portfolio: A Beginner’s Guide

How to Create a 3 Fund Portfolio: A Beginner’s Guide

Investing can seem complicated, with countless options and strategies to choose from. But a simple 3-fund portfolio may be one of the best places to start for beginner investors looking for a straightforward, low-cost approach.

Investing can seem daunting for beginners with so many potential assets to choose from and strategies to research. But starting with a simple, low-cost three-fund portfolio can provide an excellent foundation for long-term returns while minimizing complexity.

A 3 fund portfolio contains just three broad index funds selected to provide diversified exposure across the global stock and bond markets. By thoughtfully selecting your funds and allocation between stocks and bonds, you can put your investing on auto-pilot with a mostly hands-off, optimized portfolio.

In this beginner’s guide, we’ll walk through exactly how to create your own three-fund portfolio step-by-step, including:

  • What a three-fund portfolio is
  • How to choose your asset allocation
  • Selecting which index funds to use
  • Investing in your 3-fund portfolio
  • Managing and rebalancing over time
  • The benefits of a simple, diversified approach

A 3-fund portfolio balances simplicity with diversification to meet the core needs of nearly any investor. Following the steps covered in this guide, you can create a customized portfolio poised for long-term, low-maintenance growth.

What is a 3-Fund Portfolio?

A 3-fund portfolio contains three broad index funds designed to give you diversified global stock and bond market exposure.

The three fund types are:

  • Total U.S. Stock Market Index Fund
  • Total International Stock Market Index Fund
  • Total U.S. Bond Market Index Fund

Combining these three fund-building blocks allows you to create a well-diversified, low-cost portfolio that matches your risk tolerance and investing goals. The simplicity makes it easy to manage while still providing extensive market exposure.

Choosing Your Asset Allocation

When creating a 3-fund portfolio, the most critical decision is choosing your asset allocation – what percentage you allocate to stocks vs. bonds. This will depend on your risk tolerance and investing time horizon.

A younger investor with a high tolerance for risk may choose a stock-heavy allocation like 90% stocks and 10% bonds. An investor nearing retirement may prefer more bonds, like 40% stocks and 60% bonds.

A typical starting point is a 60/40 or 80/20 stock/bond split. You can also divide your stock allocation between US and international exposure. Many investors use a simple 50/30/20 budget:

  • 50% U.S. Stocks
  • 30% International Stocks
  • 20% U.S. Bonds

Selecting Your Funds

Once you’ve decided on your asset allocation, you can select low-cost index funds or ETFs to fulfill your desired stock and bond exposure.

Vanguard, Fidelity, Charles Schwab, and other significant providers offer total US stock market,  international stock, and total US bond market index funds well suited for a 3-fund portfolio.

The key is to stick with broad index funds that track wide market segments. Avoid trying to pick individual stocks or active funds that charge higher expenses. Lower costs maximize your returns over time.

Investing in Your 3-Fund Portfolio

With your asset allocation and fund selections made, it’s time to invest and put your 3-fund portfolio into action.

Most investment platforms allow you to set up your custom allocation and automatically invest in your chosen index funds.

If investing through a regular brokerage account, you can manually buy shares of your selected funds to build your portfolio in the percentages you want. Over time, you may need to rebalance to bring your allocation back to the original targets. Many investors rebalance funds quarterly or annually to lock in gains on outperforming investments and buy the assets that have become cheaper.

Make sure to invest your portfolio within a tax-advantaged retirement account like an IRA whenever possible to maximize tax efficiency. Some 401ks also give access to their preferred index funds.

Managing and Rebalancing a 3-Fund Portfolio

A benefit of the 3-fund approach is simplicity in managing your investments. You can check in annually or quarterly to rebalance your portfolio to your original asset allocation targets.

For example, suppose your 50/30/20 allocation has drifted to 55/25/20 after one year. In that case, you can sell shares of the overweighted assets and buy more underweighted ones to rebalance back to your original portfolio allocation targets.

This helps control risk and maintain your desired asset allocation through changing market conditions. Don’t overcomplicate rebalancing – review periodically and make adjustments as needed.

The Benefits of Simplicity and Diversification

The 3-fund portfolio offers a straightforward approach to investing that dramatically simplifies the process compared to choosing many individual stocks or funds.

At the same time, you still achieve extensive diversification by owning shares in thousands of US and international stocks and bonds. This helps reduce portfolio risk and volatility.

While there are many ways to invest, the principles of broad diversification, low costs, and matched to your risk tolerance make the 3-fund portfolio a great foundational strategy.

Tweaking Your 3-Fund Portfolio Over Time

The simple 3-fund approach can be the core of your investment portfolio for decades. But you can certainly make adjustments over time if desired.

Some options include:

  • Adjusting your stock/bond allocation
  • Adding specialized funds like small-cap value or REITs
  • Changing your domestic vs. international stock mix
  • Moving into a heavier weight of bond allocations as you approach retirement.

Don’t feel compelled to stick to only three funds forever. But do keep your portfolio’s foundations aligned with your goals, risk tolerance, and investing time horizon.

Key Takeaways

  • A 3-fund portfolio contains just three broad index funds to cover the global stock and bond markets in a diversified, low-cost way.
  • The most important decision is determining your allocation between stocks and bonds based on your risk tolerance.
  • Select inexpensive, total market index funds from providers like Vanguard or Fidelity for your portfolio’s funds.
  • Investment platforms make constructing and automatically investing in your 3-fund portfolio simple.
  • Rebalance at least yearly to maintain your original desired asset allocation as markets shift.
  • The simplicity of the 3-fund approach provides extensive diversification and solid returns for most long-term investors over 10 and 20-year periods.


The 3-fund portfolio is simple, capturing broad market exposure and diversification. By focusing on selecting your asset allocation based on your risk tolerance, choosing low-cost index funds, and rebalancing, beginners can put in place a straightforward yet powerful long-term investment plan. While you can undoubtedly evolve your portfolio over time, the principles of diversification, low expenses, and matching to your goals make the 3-fund approach an ideal starting point for nearly any investor.

I hope this overview helps provide a guide to understanding the purpose and process behind constructing a simple, beginner-friendly 3-fund portfolio. Don’t let investing get overly complex – start with the basics and build from there.