How You Can Build a Boglehead 3-Fund Portfolio
When it comes to investing, many people are looking for a simple, low-cost approach that will help them achieve their financial goals. This is where the Boglehead 3 Fund Portfolio comes in. This investment strategy, developed by the Bogleheads community, involves investing in three low-cost index funds to achieve a diversified portfolio with a balance of stocks and bonds.
The popularity of the Boglehead 3 Fund Portfolio has grown significantly in recent years as investors seek to minimize fees and maximize returns. In this article, we will take a closer look at the Boglehead 3 Fund Portfolio and provide you with everything you need to know to get started with this popular investment strategy.
What is a Boglehead Lazy Portfolio?
If you're new to investing or don't have the time or expertise to manage a complex investment portfolio, a "lazy portfolio" might be a good option for you. A lazy portfolio is a simple, low-maintenance investment strategy that consists of just a few funds. The idea behind a lazy portfolio is that by investing in a diversified mix of low-cost index funds, you can achieve good returns over the long term with minimal effort.
What is the Boglehead Three-Fund Portfolio?
The Boglehead 3-Fund Portfolio is a popular example of a lazy portfolio. It consists of just three funds: a U.S. total stock market index fund, an international total stock market index fund, and a total bond market index fund. This approach is based on the principles of John Bogle, the founder of Vanguard Group and a pioneer of index investing.
One of the key advantages of a lazy portfolio like the Boglehead 3-Fund Portfolio is its simplicity. By investing in just three funds, you can achieve broad diversification across a range of asset classes, including stocks and bonds. This can help reduce risk and volatility in your portfolio while providing the potential for strong long-term returns.
Another advantage of the Boglehead 3-Fund Portfolio is its low cost. Investing in low-cost index funds or ETFs can minimize fees and expenses, which can eat into your returns over time. This is especially important when investing for the long term, as even small differences in fees can add to significant amounts over many years.
Bogleheads Three Fund Portfolio Asset Allocation
While there are slight variations you can use to create a Boglehead 3-Fund Portfolio, the general consensus is to allocate 60% into a domestic total stock market fund, 20% in an international stock fund, and 20% in a total bond market fund.
Depending on your risk tolerance and holding period, you may choose to allocate up to 40% to the bond fund to reduce your overall risk. Additionally, you can skip the bond fund and buy bonds on your own rather than purchasing the bond fund.
How to Create a Boglehead 3-Fund Portfolio With ETFs
To create a Boglehead 3 Fund Portfolio using ETFs, a common approach is to allocate 60% to VTI (Vanguard Total Stock Market ETF), 20% to VXUS (Vanguard Total International Stock ETF), and 20% to BND (Vanguard Total Bond Market ETF).
How to Create a Boglehead 3-Fund Portfolio With Index Funds
If you prefer to use index funds, a common approach is to allocate 60% to VTSAX (Vanguard Total Stock Market Index Fund), 20% to VTIAX (Vanguard Total International Stock Index Fund), and 20% to VBTLX (Vanguard Total Bond Market Index Fund).
Bogleheads Three Fund Portfolio vs. S&P 500 Performance
According to backtesting data, the Boglehead 3 Fund Portfolio has a Compound Annual Growth Rate (CAGR) of 8.78% over a long period of time, while the S&P 500 Index has a CAGR of 10.59% in the same period. This suggests that the S&P 500 has outperformed the Boglehead 3 Fund Portfolio in terms of returns over the long term.
However, the S&P 500 is a much riskier investment since there is no bond and international equity exposure. For this reason, it is not a surprise that the S&P 500 outperforms the three-fund portfolio as you take much less risk.
Ultimately, the choice between the Boglehead 3 Fund Portfolio and the S&P 500 Index will depend on the individual investor's goals, preferences, and risk tolerance. By understanding the historical performance of each approach and the advantages and disadvantages of each, investors can make an informed decision that is right for their unique financial situation.
