The two easiest and most commonly recommended portfolios for investors and newbies are the two and three fund portfolios. These are among the lowest cost and simplest broad market portfolios that you could own. The two-fund portfolio is by far the easiest (it could even be one fund depending upon your age). While the three fund is slightly more complicated but still extremely easy to implement.

These two portfolio suggestions are for people who either don’t have time to manage their own investments or have no desire to do so. These are typically seen as “lazy” portfolios and are good for saving for retirement as they will generally gain slow and steady over the years.

What is a three-fund portfolio?

A 3-fund portfolio typically consists of only three assets. These are pretty generally the three following – VTI (Total stock market index, this is the entire American Stock Market), VXUS (Total international stock market – excluding America, this is everything outside of the American market), and finally a bond fund – typically BNDW as it has both American and international bonds or you could opt for the American only bond fund – BND.

What is a two-fund portfolio?

A two-fund portfolio, much like the three-fund portfolio, consists of only two assets. These are almost always a globally diversified Bond fund and a similarly globally diversified equities fund. The two most common picks are VT (Vanguard Total World Stock Index Fund) and BNDW (Vanguard Total World Bond ETF) – Some people may choose to substitute out BNDW with just BND because they wish to avoid the negative bond yields in international markets.

The benefits of a three-fund portfolio

One of the easiest investing options there is. However, the three-fund portfolio typically allows slightly better tax benefits as there’s a foreign tax credit with VXUS when held in taxable accounts – you don’t get the foreign tax credits investing in VT because international is less than half of the fund. Next, Tax loss harvesting works slightly better because you have more volatility with two funds. Third, you can allocate funds more efficiently between taxable and tax advantaged accounts (for example putting VXUS in a taxable account vs in a tax advantaged account). Fourth, the expense ratio for VXUS is .08% while the expense ratio for VTI is .03%. Overall, this results in a slightly lower expense ratio because VT is .08%. The final benefit of a three-fund portfolio is that it offers investors a choice of choosing how much international/American stock you wish to have. Many investors will choose to have something other than a market weighted ratio of international to American stocks in their portfolio, opting choosing more American stock than international – could be for many reasons like Home Country Bias or Recency Bias.

The benefits of a two-fund portfolio?

The main reason to use a two-fund portfolio (or could be one fund depending upon if you want bonds or not) is that it’s ridiculously easy to implement. You can turn on an auto invest feature and have money withdrawn from your checking monthly and forget about it. Not only that, VT with BNDW is just about the most diversified you can get. Both of those funds follow Vanguard’s recommendation of having strictly marketed weighted portions of US/International stocks. And frankly, given American stocks have been supported by the federal reserve for years since the 2008 financial crisis, it may be smart to allocate slightly more towards international and away from pricey American stock. But if you’re looking for simplicity, nothing beats VT and BNDW.

Comparison of returns:

Three fund with 10 percent in bonds:

Portfolio one is 75% VTI, 15% VXUS, 10% BND

Portfolio two is 65% VTI, 25% VXUS, 10% BND

Portfolio three is 50% VTI, 40% VXUS, 10% BND

Thanks for portfolio visualizer for making these graphs quick and easy

Two fund return with 10 percent in bonds:

VT and BND (I substituted BNDW for BND because Vanguard only released BNDW in 2018)

Below is 90% VT and 10% BND (note because VT has been around longer than VXUS, our graph goes back longer)

The Verdict:

The two fund and three fund portfolios are very good options. The two-fund option gives you all the equity and all the bonds in the entire world, it’s very well diversified and that is a good thing for risk reduction. The three-fund portfolio requires a bit more maintenance but also offers more freedom and choice than the two-fund portfolio. These are two investment portfolios for different people and each will appeal to a different type of personality.

Both of these portfolio choices are extremely easy to make with M1 Finance, it’s an app that is meant for long term investment choices, which is what the two and three fund portfolios are. But regardless of the investment platform you choose, getting started investing today is the most important thing to building wealth and retiring comfortable. But if you’re looking for ways to further enhance your returns, check out our high risk and ultra-high risk newsletter .

Note: the m1 referral link gives the reader $10 extra dollars to invest with if they choose to fund a taxable with $100 dollars within 30 days of opening the account or fund an IRA with $500 within 30 days of opening an account. The author of this article will receive a $10 dollar compensation as a result of the reader opening an account. The compensation for both parties occurs 30 days after the deposit occurs and assumes the full amount is retained in the account until the end of 30 days from the deposit day. YNAB offers a free month of use this will be given to both the author and reader if the reader subscribes after the free trail period and buys a month of subscription. The author uses and endorses both YNAB and M1 Finance and both links are affiliate links.

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