The Bogleheads approach and the three-fund portfolio

Where the approach comes from

John C. “Jack” Bogle founded the fund company Vanguard in 1975 and, the next year, launched one of the first index mutual funds open to ordinary investors. His argument was simple: investors as a group earn the market’s return before costs, so the investors who pay the least in costs keep the most of it.

People who gathered online to discuss his ideas began calling themselves Bogleheads. Their forum and wiki live at Bogleheads.org, and the name is a trademark of the John C. Bogle Center for Financial Literacy, a nonprofit. This guide summarizes the philosophy as the community describes it; the Bogleheads wiki, listed under Sources, is the place to read it in full. Wenlo isn’t affiliated with the Center or the community.

The core ideas

The Bogleheads wiki sets the philosophy out as a short list of principles. In plain terms, they come down to this:

• Have a plan. Know what you are saving for, spend less than you earn, and write down how you will invest.
• Start early and keep going. Regular contributions over many years do much of the work.
• Take the right amount of risk. Not so much that you would sell in a crash, not so little that your money can’t grow.
• Diversify broadly. Own a small slice of thousands of companies and bonds rather than a handful of picks.
• Use index funds when you can. An index fund holds a whole market, costs little and doesn’t depend on a manager guessing right.
• Keep costs and taxes low. Every dollar not paid in fees or avoidable taxes stays invested.
• Keep it simple, and don’t try to time the market. Guessing when to get in and out is hard to get right twice.
• Stay the course. Stick with the plan through good markets and bad ones.

The three-fund portfolio

The best-known way to put those ideas into practice is the three-fund portfolio, popularized on the forum by Taylor Larimore. It uses three broad index funds:

1. A total US stock market index fund: thousands of US companies, large and small, in one fund.
2. A total international stock market index fund: companies in developed and emerging markets outside the US.
3. A total US bond market index fund: thousands of government and high-quality corporate bonds. Bonds are loans to governments and companies; they usually move less than stocks and have cushioned many stock market falls, though not all.

Together they hold almost every publicly traded stock in the world plus a broad slice of US bonds, at a low cost. Fund names differ by provider, and each can be an ETF or a mutual fund; ETFs vs mutual funds vs index funds explains the difference. Some investors add a fourth fund, such as international bonds, or use a single all-in-one fund that holds a similar mix.

Choosing a stock and bond mix

The split between stocks and bonds, your asset allocation, is the biggest decision in this approach. More stocks has historically meant more growth and deeper falls; more bonds means a smoother ride and usually less growth.

Bogleheads usually start from two questions: when will you need the money, and how big a drop could you sit through without selling? A rule of thumb often attributed to Bogle is to hold roughly your age in bonds, so a 40-year-old would hold about 40% bonds. Many people adjust it, for example to their age minus 10 or minus 20, for more stocks. It is a starting point, not a formula: a pension, a steady job or a large emergency fund can let someone take more risk, and a short time horizon calls for less.

A useful test: imagine your stocks falling by half, as US stocks did between 2007 and 2009, and ask honestly whether you would sell. If the answer is yes, the mix may hold more stock than you can live with.

On Wenlo, the Allocation card on Portfolio shows how your holdings split by type, sector and account, a quick way to compare the mix you have with the one you planned.

Keeping costs and taxes low

Costs come straight out of returns. In an example on Investor.gov, the SEC’s site for investors, $100,000 growing 4% a year for 20 years ends at about $208,000 with a 0.25% yearly fee and about $198,000 with a 0.50% fee: a quarter of a percentage point costs about $10,000 (SEC, Investor.gov). Broad index funds are often among the cheapest funds available.

Taxes are the other drag the approach tries to limit: using tax-advantaged accounts such as a 401(k) or an IRA where you can, favoring tax-efficient funds in taxable accounts, and holding for the long term. Which account holds which fund, called asset location, can matter too; the Bogleheads wiki has a detailed guide. This is general information, not tax advice.

Rebalancing and staying the course

Markets pull your mix away from its target over time, as in the example. Rebalancing brings it back: selling some of what grew and buying what lagged, or simply sending new money to whatever is underweight. Common approaches are to check once a year, or to act only when a fund drifts more than a set amount from its target. Inside retirement accounts this has no immediate tax cost; in a taxable account selling can create a taxable gain, which is one reason people prefer to rebalance with new contributions.

Staying the course is often the hardest part. The approach expects stocks to fall sharply from time to time and asks you to hold on, keep contributing and rebalance, rather than sell after a drop. Selling after falls and buying after rises tends to lock in losses.

Trade-offs and criticisms

• You get the market, not more. Index funds aim to match the market minus a small fee, including all the way down in a crash.
• The largest companies dominate. A total market fund weights companies by size, so the biggest few make up a large share of it.
• The international share is debated. Some investors hold the world in proportion to its market value; others prefer mostly their home market. Each has had long stretches when it looked wrong.
• Bonds can fall too. In 2022, US stocks and bonds both fell, so the cushion didn’t work as many expected.
• Simple isn’t the same as easy. The plan only works if you stick with it, and that is a matter of behavior, not math.

Key takeaways

• The Bogleheads approach favors broad, low-cost index funds, a written plan and patience.
• The three-fund portfolio covers US stocks, international stocks and US bonds in three funds.
• Your stock and bond split is the main decision; base it on your time horizon and how much of a fall you can sit through.
• Keep costs and taxes low, rebalance now and then, and stay the course.

The figures in this guide are hypothetical. Your own mix depends on your goals, your time horizon and your comfort with risk, and none of this is a recommendation to buy any particular fund.