Taylor Larimore: Three fund portfolio


Taylor Larimore

Author Taylor Larimore is a proponent of using a simple three-fund  portfolio, consisting of  a US total  stock market  index fund; a total market international stock index fund;  and a US total bond market index fund.

The allocation of these three asset classes can be adjusted to an investor’s risk tolerance.  Taylor has expressed his thinking on this subject on the Bogleheads® forum , and in this guest post.

After a lifetime of investing since 1950 trying to “beat the market,” I am convinced that a simple 3-fund (or ETF) portfolio of Total Stock Market, Total International, and Total Bond Market, properly allocated, is an ideal portfolio for most investors. There are many advantages to taking a three fund portfolio approach.

Below are some examples of three fund portfolio allocations (click image to enlarge)

15 Advantages for the three fund portfolio
1. Very tax-efficient
2. The advantages of simplicity
3. No adviser risk
4. No fund manager risk
5. No style drift
6. No “asset bloat” problem
7. No tracking error to cause abandonment of the strategy
8. No overlap
9. No “front running” that reduces sub-index returns
10. On the Efficient Frontier (highest return per unit of risk)
11. Automatic rebalancing within each fund
12. Never underperforms the market (less worry)
13. Easy to maintain for the owner, spouse, caregivers and heirs
14. More time with family and friends
15. Mathematically certain to outperform most investors


Morningstar’s gives all three funds its highest “Analyst Rating” and each fund’s long-term relative performance rankings are included in the table below:

Morningstar’s 15-Year Category Performance updated on January 01, 2014:

Fund Pre-tax performance After-tax performance
Vanguard Total Stock Market (VTSMX) TOP 32% TOP 22%
Vanguard Total International (VGTSX) TOP 49% TOP 39%
Vanguard Total Bond Market (VBMFX) TOP 47% TOP 42%

Implementing a three fund portfolio

Here are a few helpful guidelines for implementing the portfolio:

  • Use this link for developing  an asset allocation that matches your personal situation.
  • Place Total Bond Market in a tax-advantaged account.
  • In taxable accounts (when tax-advantaged accounts are full) high-income investors should substitute a tax-exempt bond fund for Total Bond Market.

You may also find these articles helpful:

What experts say

American Association of Individual Investors:

“It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds.”

Mark Balasa, CPA, CFP:

“That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolios that most people have at brokerage firms. There is a certain elegance in the simplicity of it.”

Christine Benz, Morningstar Director of Personal Finance:

“A single, broadly based index fund can give you exposure to the whole stock or bond market, enabling you to build an entire portfolio with just one or two funds.”

Bill Bernstein, author, adviser:

“Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it.”

Jack Bogle:

“The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. — Owning a share in the entire stock market, or the entire bond market—and then holding it forever—happens to be the surest route to long-term investment success.”

Warren Buffett:

“I’d rather be certain of a good return than hopeful of a great one. — Most investors are better off putting their money in low-cost index funds.”

Scott Burns, columnist, author:

“The odds are really, really poor than any of us will do better than a low-cost broad index fund.”

Jonathan Burton, Market Watch:

“There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won’t have to think about too much.”

Andrew Clarke, author:

“If your stock portfolio looks very different from the broad stock market, you’re assuming additional risk that may, or may not, pay off.”

Jonathan Clements, author and Wall Street Journal columnist:

“If you want a surefire strategy for outpacing most other U.S. stock investors, simply shovel money into an index fund that tracks a broad U.S. market index such as the Wilshire 5000 or the Russell 3000.”

John Cochrane, President American Finance Association:

“The market in aggregate always gets the allocation of capital right.”

Consumer Reports Money Book:

“Simply buy the market as a whole.”

Charles Ellis, author:

“The stock market is clearly too efficient for most of us to do better.”

Nobel Laureate, Eugene Fama:

“Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk…The market portfolio is always efficient…For most people, the market portfolio is the most sensible decision.”

Paul Farrell, CBS:

“Where does Fama invest his retirement money? ‘In index funds. Mostly the Wilshire 5000.’ “

Rick Ferri, Forbes columnist, author, adviser:

“The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It’s simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy.”

Graham/Zweig, authors:

“The single best choice for a lifelong holding is a total stock-market index fund.”

Alan Greenspan, former Chairman of the Federal Reserve:

“Prices in the marketplace are by definition the right price.”

Mark Hebner, author, adviser:

“A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors.”

Hulbert Financial Digest:

“Buying and holding a broad-market index fund remains the best course of action for most investors.”

Sheldon Jacobs, author of No-Load Fund Investing:

“The best index fund for almost everyone is the Total Stock Market Index Fund.–The fund can only go wrong if the market goes down and never comes back again, which is not going to happen.”

Kiplinger’s Retirement Report:

“You’ll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index.”

Lawrence Kudlow, CNBC:

“I like the concept of the Wilshire 5000, which essentially gives you a piece of the rock of all actively traded companies.”

Prof. Burton Malkiel, author of Random Walk Down Wall Street:

“I recommend a total-maket index fund–one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks.”

Bill Miller, famed fund manager:

“With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me.”

E.F. Moody, author, advisor:

“I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks comprising the market portfolio.”

Motley Fools:

“Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index.”

John Norstad, academic:

“For total-market investors, the three disciplines of history, arithmetic, and reason all say that they will succeed in the end.”

Suzy Orman:

“One of my favorite index funds, Vanguard Total Stock Market (VTSAX), has a total expense ratio of 0.06%”

Jane Bryant Quinn, author, syndicated columnist:

“The dependable great investment returns come from index funds which invest in the stock market as a whole.”

Pat Regnier, former Morningstar analyst:

“We should just forget about choosing fund managers and settle for index funds to mimic the market.”

Ron Ross, author:

“Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind.”

Paul Samuelson, Nobel Laureate:

“The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios.”

Gus Sauter, former Vanguard chief investment officer:

“I think a very good way to gain exposure to the stock market is through the Total Stock Market Portfolio on the domestic side.”

Bill Schultheis, author, adviser:

The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market.”

Charles Schwab:

“Only about one out of every four equity funds outperforms the stock market. That’s why I’m a firm believer in the power of indexing.”

Chandan Sengupta, author:

“Use a low-cost, broad-based index fund to passively invest in a little bit of a large number of stocks.”

Prof. Jeremy Siegel, author:

“For most of us, trying to beat the market leads to disastrous results.”

Prof. Meir Statman, author:

“It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner.”

Stein & DeMuth, authors and adviser:

“Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios.”

Robert Stovall, investment manager:

“It’s just not true that you can’t beat the market. Every year about one-third do it. Of course, each year it is a different group.”

Larry Swedroe, author, adviser:

“Over the last 75-years, investors who simply invested passively in the total U.S. stock Market would have doubled their investment approximately every seven years.”

Peter D. Teresa, Morningstar Sr. Analyst:

“My recommendation: a fund that indexes the entire market, such as Vanguard Total Stock Market Index.”

Wilshire Research:

“The market portfolio offers the best ratio of return to risk.”

John Woerth, Vanguard director of public relations:

“We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost.”

Jason Zweig, author and Wall Street Journal columnist:

“I think a total stock market index fund is not only the simplest, but the very best core investment for most people.

Warren Buffett, famed investor:

“There seems to be some perverse human characteristic that likes to make easy things difficult.”

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