One of the easiest ways to invest is setting up a 3 fund portfolio.
Whether you have a standard brokerage account or an employee sponsored 401(k), Vanguard offers a wide range of investment options in order to build a vanguard 3 fund portfolio.
As a result, today we will be examining:
- How to set up a Vanguard 3 Fund Portfolio
- Examples of Vanguard 3 Fund Portfolios
- What is the average annual return of a Vanguard 3 Fund Portfolio?
- Vanguard 3 Fund Portfolio vs S&P 500 Performance: How do they compare?
- Should I set up a Vanguard 3 Fund Portfolio or a Fidelity 3 Fund Portfolio?
Let’s dive in.
How to set up a Vanguard 3 Fund Portfolio
As the name implies, a 3 fund portfolio is an investing strategy where one’s portfolio is comprised of only 3 assets.
It doesn’t matter whether these assets are mutual funds or ETFs (that’s a personal preference), what matters most is that these 3 assets are invested into the following 3 broad asset classes:
- U.S. Stocks
- U.S. Bonds
- International Stocks
While not an exhaustive list, below are some popular investment options along with some basic information and links to where you can read more about them:
Category | Name | Invest. Type | Expense Ratio | Avg. Annual Return |
U.S. Stocks | VTSAX | Mutual Fund | 0.04% | +7.71% |
U.S. Stocks | VFIAX | Mutual Fund | 0.04% | +7.38% |
U.S. Stocks | VTI | ETF | 0.03% | +8.11% |
U.S. Stocks | VOO | ETF | 0.03% | +14.32% |
U.S. Bonds | VBTLX | Mutual Fund | 0.05% | +3.50% |
U.S. Bonds | BND | ETF | 0.03% | +3.23% |
Int. Stocks | VTIAX | Mutual Fund | 0.11% | +4.69% |
Int. Stocks | VFWAX | Mutual Fund | 0.11% | +6.07% |
Int. Stocks | VXUS | ETF | 0.07% | +3.96% |
Int. Stocks | VEU | ETF | 0.07% | +3.24% |
If you are new to investing and don’t know what to look for when comparing investment options, I’d recommend checking out how I evaluated the differences between VFWAX vs. VTIAX.
Examples of Vanguard 3 Fund Portfolios
After making our investment choices, the next step is determining our individual asset allocations for our vanguard 3 fund portfolio.
Our asset allocations should be a direct reflection of our own individual risk tolerance.
Let’s take a look at a few examples.
Example 1 – Aggressive Vanguard 3 Fund Portfolio
An aggressive 3 fund portfolio attempts to maximize our returns at the expense of having increased risk and volatility.
While an aggressive portfolio may make more sense for younger investors (due to a greater investment horizon), this type of portfolio would be considered riskier for individuals closer to retirement.
An example of an aggressive vanguard 3 fund portfolio would be something like:
- 70% VTSAX/VTI
- 15% VBTLX/BND
- 15% VTIAX/VXUS
Example 2 – A Moderate Vanguard 3 Fund Portfolio
A moderate 3 fund portfolio balances portfolio growth with our portfolio’s overall risk and volatility profile. Asset conservation becomes more important.
This type of portfolio would be a ‘middle of the road’ approach.
An example of a moderate vanguard 3 fund portfolio would be something like:
- 50% VTSAX/VTI
- 40% VBTLX/BND
- 10% VTIAX/VXUS
Example 3 – A Conservative Vanguard 3 Fund Portfolio
A conservative 3 fund portfolio’s primary goal is focusing less on growth and more on preserving capital. This is usually accomplished via having the majority of assets allocated to U.S. Bonds.
As a result, this type of portfolio would be considered the least riskiest option relative to the other portfolio types we have discussed. This is an excellent option for those nearing retirement or those who don’t have a large appetite for risk and volatility.
An example of a conservative vanguard 3 fund portfolio would be something like:
- 15% VTSAX/VTI
- 80% VBTLX/BND
- 5% VTIAX/VXUS
What is the average annual return of a Vanguard 3 Fund Portfolio?
The average annual return of a vanguard 3 fund portfolio will depend on the portfolio’s investment composition. As an example, a portfolio with 80% U.S. Bonds will perform drastically different than a portfolio comprised of 80% U.S. Stocks.
With that being said, we can backtest the performance of different variations of the 3 fund portfolio over time. Before we run our model, let’s establish the following assumptions:
- Time period: 10 years (2011 – 2021)
- Investment composition: VTSAX, VBTLX, VTIAX
- Investment % composition will mimic the example portfolios we previously discussed (i.e. an aggressive portfolio will be 70% VTSAX, 15% VBTLX, 15% VTIAX, etc.)
- Returns are based on the relative performance of each asset in the portfolio
This results in the following model:
When we aggregate the data from our backtest, we get the following insights:
- The conservative vanguard 3 fund portfolio had an average annual return of 5.32%
- The moderate vanguard 3 fund portfolio had an average annual return of 9.70%
- The aggressive vanguard 3 fund portfolio had an average annual return of 12.28%
Vanguard 3 Fund Portfolio vs S&P 500 Performance: How do they compare?
We just saw how different vanguard 3 fund portfolios stacked up against each other.
However, how does each portfolio’s performance compare relative to the S&P 500?
Using the same assumptions from before, we can model out the relative performance of a $10,000 investment into the different vanguard 3 fund portfolios vs the S&P 500:
And here are the same results summarized in a table:
In this specific backtest, the S&P 500 outperformed the best performing 3 fund portfolio (aggressive) by $13,142 or 38.5%.
However, that doesn’t mean that 3 fund portfolios don’t provide any value.
It’s important to remember that everyone has different goals as well as different individual risk tolerances. And that risk is managed through a diversified portfolio with exposure to different asset classes.
Furthermore, while this is interesting data to digest, it’s important to remember that past performance isn’t indicative of future performance.
Should I set up a Vanguard 3 Fund Portfolio or a Fidelity 3 Fund Portfolio?
Let’s assume that you believe a 3 fund portfolio will meet your investing needs.
A natural follow-up question may be: should I set up a 3 fund portfolio with Vanguard of Fidelity?
While Vanguard & Fidelity offer very similar offerings, there are some key differences between the different investment options available such as different expense ratios.
Furthermore, another consideration to keep in mind is each investment’s inception date. While one fund may have a double digit annual return, when was that fund started? 5 years ago or 30 years ago?
As an example, VTSAX has had an average annual return of +7.71% and VOO has an average annual return of +14.32%. However, VTSAX has been around since 11/13/2000 whereas VOO has only been around since since 09/07/2010.
It’s important to make sure that we are comparing apples to apples.
If you want to learn more about the most popular 3 fund portfolio options for Fidelity, I recommend checking out the investment list I created on how to set up a fidelity 3 fund portfolio.
Final Thoughts
The 3 fund portfolio remains a popular investing strategy due it’s simplicity, passiveness & diversification.
And it’s even better with Vanguard automatic investing 🙂
What are your thoughts on the 3 fund portfolio strategy? Do implement a 3 fund portfolio strategy? If so, what do your allocations look like and how has that changed over the years?
Thank you for reading! 🙂
_
Full Disclosure: Nothing on this site should ever be considered advice, research or an invitation to buy or sell securities, please see my ‘Terms & Conditions’ page for a full disclaimer.