What Is A 3 Fund Portfolio? Is It Best For Your Retirement Investment? 

Published on: September 15, 2023

Last Updated on: May 15, 2024

3 Fund Portfolio

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Retirement planning should not be all that hard – especially not that energy-draining. Most working professionals have 401k retirement investment funds provided by their employers. 

But, there, you have only a few mutual funds for your personal retirement investment portfolio. But, if you are securing your retirement using an IRA or Individual Retirement Accounts, thousands of mutual funds are at your disposal.

Yes, it may seem daunting, but you can have the most control over your retirement investments through the 3 fund portfolio. It is a diversified investment plan comprising international, domestic, and domestic bonds. You can ace your retirement investment through the 3 funds portfolio. But how? What is a 3 funds portfolio? 

Go through this article for a clear explanation of 3 fund portfolios and how they work. 

What Is A 3 Fund Portfolio?

“Do not put all your eggs in one basket.” – As per this popular investment advice, you need to keep your assets and investments diversified if you want to grow your investment. 3 fund portfolio ensures that you do so. How? By diversifying your retirement investment portfolio. 

This retirement investment fund ensures that your funds are allocated in two domestic asset classes –

  • Stocks 
  • Bonds 

Thanks to international stock investments, your assets are supposed to grow through your retirement investment. This happens irrespective of the domestic market condition. On the other hand, investment in domestic stocks will ensure a steady return, while the bonds investments will stabilize your investment. 

When your retirement investment fund is allocated through the 3 fund portfolio plan, you can get investment benefits coupled with better tax advantages. 

Through the 3 fund portfolio, 401k investors have better control over their funds. So, if investors sense any risks coming their way, they can easily adjust their funds to avoid troubles. 

According to many investors, a 3 fund portfolio is a passive way of managing retirement funds. This type of fund management system provides better flexibility for asset allocation. Frequent rebalancing of investment assets is necessary for keeping one’s investment in check and making it risk-averse. 

According to the 3 fund portfolio, you must keep your investment fund portfolio simple from the very beginning. Then, you have to keep investing in different index funds that follow the performance of a specific market. 

Despite being theoretically very rewarding, a 3 fund portfolio does not provide as high a reward as another investment vehicle like real estate. But, other investment vehicles are also more risk-prone compared to the 3 fund portfolio. 

How To Create A 3 Fund Portfolio?

If you are planning to create a three-fund portfolio, you need to keep your strategies and your decisions in check. But, if you need helpful steps and plans, then follow the steps mentioned below –

Determine Asset Allocation Ratio

The first step is determination. The investor needs to understand and determine the amount they want to invest in each of the asset class. For this, they have to consider their long-term investment goal and risk-taking capacity. 

Let’s say we are creating a three-fund portfolio for a young investor with fewer financial obligations. They are more potent when it comes to taking risks. So, they can invest 64% of the assets into the domestic stock portfolio. 16% of the stock investment can go to the domestic stock and the rest of the 20% to bonds. 

Select Funds

Each asset class needs specific funds under the asset classes based on the investor’s goals. The best decision in this case would be going for index funds that replicate the performance of a specific market. Investors can also consider ETFs. But, if you have doubts about selecting your funds, try contacting a financial advisor.

Low-cost funds

Investors must opt for stocks and bonds that have low expense ratios. The reason is that an asset’s expense ratio can gravely affect the growth and return of the fund.

Rebalance 3 Fund Portfolio

In the long run, to maintain a 3 fund portfolio, one needs to keep adjusting their low-cost fund. Young investors have a high risk tolerance. So, they can invest more in stocks and less in bonds. But, as the investors grow older, they need to keep moving towards lesser risk-prone investments like bonds. Hence, it is necessary to keep regularizing or rebalancing 3 fund portfolios. 

3 Fund Portfolio: Pros & Cons

Like all the different ways of retirement investments, the 3 fund portfolio also has its pros and cons. Go through the sections below to learn about them –


  • The first benefit is having a widely diversified portfolio with 10,000 different types of securities. 
  • Your fees stay at the minimum rate when you are investing in index funds with a low expense ratio. 
  • The 3 fund portfolio performs well in the long term. Also, the US and international stocks have a high growth potential. The bonds, on the other hand, provide investment stability.
  • You can set up your asset allocation so that it fits your needs. This gives you some control over how your portfolio is set up.
  • Three-fund portfolio building is not a long process. Also, if you know where to allocate your assets, this is the right way for you.


  • 3 fund portfolio does not offer a hands-off approach on your retirement funds like target date funds. Yes, it does not consume too much of the investor’s time to set up. But, it requires regular involvement from the investor. 
  • Investors do not have complete control over their portfolio once they follow the 3 fund portfolio strategy. They can invest in the three different types of portfolios only. Investors do not have any option for picking stocks or investing in crypto or real estate. 
  • Also, too much investment in bonds can also limit an investor’s growth. Investors who want to allocate most of their funds in bonds do not have higher chances of growing or multiplying their money. 

Final Words

The chances of being wrong or mismanaging your finances is less with a 3-fund portfolio. Investors who are able to set up their asset allocation according to their age can take the most benefits out of this plan. It is not entirely an off approach, but a less risky retirement investment approach with significant growth opportunities. 

If you are okay with investing in bonds, stocks, and international stocks at the same time, then this is a good investment approach to secure your retirement.

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Shahnawaz Alam

Shahnawaz is a passionate and professional Content writer. He loves to read, write, draw and share his knowledge in different niches like Technology, Cryptocurrency, Travel,Social Media, Social Media Marketing, and Healthcare.

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