Three-Fund Portfolio
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The three-fund portfolio is favored by many experts for its simplicity, low cost, and powerful diversification. It is built on three pillars: US stocks, international stocks, and bonds.
Each of these pillars serves a distinct purpose in your portfolio:
- US stocks represent ownership in American companies, offering growth potential and historically strong returns;
- International stocks provide exposure to companies outside the US, which helps you diversify away from a single country's economic risks;
- Bonds are included to reduce volatility and provide a more stable source of income, as their performance often differs from stocks.
When combined, these three pillars work together to balance risk and reward, helping you weather market ups and downs while still aiming for long-term growth.
To find low-cost funds for each pillar, look for index funds or ETFs with low expense ratios that track broad market benchmarks. For US stocks, consider funds tracking the S&P 500 or Total US Stock Market. For international stocks, seek funds tracking global or developed markets excluding the US. For bonds, look for total bond market funds or those tracking broad US bond indexes.
Suppose you have $10,000 to invest and want to build a three-fund portfolio. A common allocation might be 50% US stocks, 30% international stocks, and 20% bonds. This means you would invest 5,000 in a US stock fund, 3,000 in an international stock fund, and 2,000 in a bond fund. This allocation gives you broad exposure to global equities while maintaining a cushion with bonds to help manage risk.
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