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Portfolio: Three Funds

TARGET-DATE RETIREMENT FUNDS, which we discussed in the previous section, are a great solution for many folks. But what if you want to build your own balanced portfolio? You could do it with as few as three mutual funds:

  • U.S. stocks: 30%
  • Foreign stocks: 30%
  • U.S. bonds: 40%

Because you’re buying one fund for each of these three key market sectors, you should avoid funds that are too specialized in their focus. For instance, for your lone U.S. stock fund, you might look for a fund that buys large and small companies and doesn’t tilt strongly toward growth or value stocks. That’s the sort of mix you get with a total stock market index fund, which seeks to replicate the performance of a broad U.S. stock market index. Examples include Fidelity Total Market Index Fund, Fidelity ZERO Total Market Index Fund, iShares Core S&P Total U.S. Stock Market ETFSchwab Total Stock Market Index Fund, SPDR Portfolio Total Stock Market ETF and Vanguard Total Stock Market Index Fund.

Like U.S. total stock market index funds, you can find total international stock index funds. The latter invest in both developed foreign markets and emerging markets. Examples include Fidelity Global ex U.S. Index Fund, Fidelity ZERO International Index FundiShares Core MSCI Total International Stock ETF, Vanguard FTSE All-World ex-U.S. Index Fund and Vanguard Total International Stock Index Fund.

What should you do for bond exposure? You might purchase a bond fund that focuses on higher-quality U.S. bonds, which is what you get with total bond market index funds like Fidelity U.S. Bond Index Fund, iShares Core U.S. Aggregate Bond ETFSchwab U.S. Aggregate Bond Index Fund and Vanguard Total Bond Market Index Fund.

Many index-fund aficionados use the three funds above—a total U.S. stock market index fund, a total international stock index fund and a total U.S. bond market index fund—as their core holdings. Indeed, some stick solely with these three funds and don’t bother with any other investments.  One possible tweak to the above strategy: Play it safe with bonds, by sticking exclusively with short-term securities, and compensate for the lost yield by investing somewhat more heavily in stocks.

Next: Portfolio: Eight Funds

Previous: Portfolio: One Fund

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