How To Invest

The Bogleheads way: Building wealth with just three funds

In the ever-evolving landscape of personal finance and investment strategies, simplicity often takes a backseat to complexity. The three-fund portfolio stands out as a beacon of simplicity and effectiveness in the labyrinth of financial strategies and investment options. Named after Vanguard founder John C. Bogle, the ‘Bogleheads’ approach preaches a minimalist philosophy, encouraging investors to build wealth through a diversified portfolio of just three key funds.

The Bogleheads philosophy emphasises the virtues of low-cost investing, broad diversification, and a long-term perspective. At the core of this philosophy lies the three-fund portfolio, a strategic combination of three key index funds consisting of a 1) local index, 2) an international index and 3) a bond index fund designed to expose investors to the entire global market while maintaining a balanced risk profile.

Let’s break down the three components of this portfolio:

1. Vanguard Total Stock Market Index Fund ETF (VTI)

In the Bogleheads portfolio, a local stock index refers to the U.S. stock market as the three-fund portfolio was written in context for American investors. While some investors may opt for a local ETF based on their residence, I still suggest considering an ETF like the Vanguard Total Stock Market Index Fund ETF (VTI) instead. VTI represents the entirety of the U.S. stock market and encompasses shares from thousands of U.S. companies, providing extensive exposure to U.S. equities.

Opting for VTI over a local market ETF allows you to tap into the vastness of the U.S. stock market. Historically, the U.S. market has displayed resilience and consistent long-term growth, positioning it as an economic powerhouse. Investing in VTI opens the door to the innovation and dynamism of American businesses, providing a unique avenue for growth and diversification.

2. Vanguard Total International Stock Index Fund (VXUS)

The Vanguard Total International Stock Index Fund (VXUS) is comprises non-U.S. equities from both developed and emerging markets, providing your portfolio with a rich diversity in geographical exposure. VXUS plays a role in introducing global exposure to the three-fund portfolio which allows you to tap into the growth of international markets beyond the U.S. and hedge against any single country’s economic fluctuations.

At the same time, there are risks and considerations when incorporating VXUS into your portfolio. While international diversification reduces the risk associated with any single country or market, it also introduces foreign currency exposure, geopolitical uncertainties, and market variations. Understanding these risks is important if you plan to build and hold onto your three-fund portfolio over the long term.

3. Vanguard Total Bond Market Index Fund (BND)

Completing the portfolio is the Total Bond Market ETF (BND). BND introduces a fixed-income component to your three-fund portfolio by providing stability through a diverse range of U.S. bonds including government, corporate, municipal bonds, mortgage-backed, and asset-backed securities all with maturities of more than one year.

Bonds play a key role in balancing the dynamics of your portfolio. Typically, bonds will act as a counterbalance to provide stability when equities face volatility. Beyond their stabilising effect, BND also offers a consistent income stream through monthly distributions. This dual function serves as a valuable anchor, especially during market downturns, boosting your three-fund portfolio’s overall stability and resilience.

Key considerations

In the formulation of the three-fund portfolio, asset allocation and rebalancing play a key role in aligning your investment strategy with your financial goals and risk tolerance. These aspects serve as the backbone of a well-rounded approach, ensuring that your portfolio not only reflects your investment objectives but also remains resilient in the face of market dynamics.

a. International stock asset allocation

Consideration: Tailoring your international stock allocation requires consideration of your risk tolerance and outlook on global market dynamics. A diversified exposure to international markets broadens your investment horizons and adds a layer of resilience to your overall portfolio.

Guideline: A common rule of thumb for international stock allocation is to mirror the proportion of the Total Stock Market ETF (VTI) and the Total International Stock Index Fund (VXUS). For instance, if you allocate 60% of your portfolio to equities, consider dividing that allocation equally between VTI (30%) and VXUS (30%). This balanced approach ensures that your portfolio captures the growth potential of both domestic and international markets equally.

b. Bond allocation

Consideration: Bonds are often seen as a stabilising component in a portfolio. The proportion of bonds you hold should align with your risk tolerance and investment horizon. As you age, the focus often shifts towards capital preservation and income generation.

Guideline: A common guideline is to follow an age-based rule of thumb to align your bond allocation with your age. For instance, if you’re 30 years old, a 30% allocation to bonds might be appropriate. This guideline recognises the desire for a more conservative approach as you approach retirement age.

c. Rebalancing and monitoring

Consideration: Determining how often to rebalance your portfolio is a balance between maintaining your desired asset allocation and minimising unnecessary transaction costs.

Guideline: A common guideline suggests reviewing and potentially rebalancing your portfolio semi-annually. This approach allows you to realign your investments with your target allocation without succumbing to the temptation of excessive tinkering that might incur additional fees. However, more frequent rebalancing can be warranted in the face of significant market shifts or major life events. Striking the right balance between maintaining your portfolio’s allocation and avoiding unnecessary costs is key to ensuring that your investment strategy remains disciplined and cost-effective over the long term.

The fifth perspective

In the realm of personal finance and investment, the three-fund portfolio, inspired by the Bogleheads philosophy, stands out as a beacon of simplicity and effectiveness. Rooted in principles such as low-cost investing, broad diversification, and a long-term perspective, this strategic approach encapsulates the essence of sound financial management.

The core components—VTI, VXUS, and BND—create a well-balanced portfolio, providing exposure to the U.S. stock market, global equities, and the stability of bonds. While offering a unique blend of growth and stability, the success of the three-fund portfolio hinges on careful considerations such as tailoring international stock allocation, aligning bond holdings with risk tolerance, and adopting a disciplined approach to rebalancing. The portfolio’s emphasis on simplicity, diversification, and discipline positions it as a robust and enduring strategy for those seeking a reliable path to long-term financial success.

Wang Choon Leo, CFA

Choon Leo is a growth-focused investor with an interest in innovative platform businesses that can connect users and fix market inefficiencies. He believes that companies with the most competitive business models will compound in value over the long term. Choon Leo is a CFA charterholder.


  1. For the small investor who doesn’t want to spend a lot of time managing their portfolio this is actually a great approach. Much better than getting milked for fees by various intermediaries (especially unit trusts and insurance companies).

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