There are so many investment choices. All of these choices can add complexity and confusion to the investing process. But this does not have to be the case; it is possible to build wealth with only a few funds.

If you're looking for a way to build a simple, low-cost core portfolio, then the three-fund portfolio concept can be a straightforward way to grow wealth over time.

Three-Fund Portfolio

A three-fund portfolio involves just three index mutual funds or exchange-traded funds that an investor can use to build a diversified, low-cost portfolio that’s easy to manage. This type of investing strategy is often referred to as “Lazy Portfolio” investing. “Lazy” meaning that the investor can maintain the same asset allocation for an extended period of time with little to no maintenance.

There are many Lazy Portfolios but the three-fund portfolio is one of the most popular and all that a future millionaire needs. As its name suggests, it consists of three asset classes:

- U.S. Stocks
- International Stocks
- U.S. Bonds

Performance

Over time the returns on a three-fund portfolio have outperformed actively managed funds. Active funds try to beat market returns with investments hand-picked by professional money managers. Evidence is difficult to find that proves actively managed funds can consistently outperform their relevant index. In "A Case for Index Fund Portfolios" the author’s completed an extensive study comparing the performance of index fund investing to actively managed mutual funds. A portfolio holding index funds is difficult to beat in both the short and long term.

Examples

There are a number of popular preassembled three-fund lazy portfolios, such as the "Bogleheads 3 Fund Portfolio" and the "Second Grader's Starter Portfolio".

Portfolios can be customized to investor’s risk tolerance by allocating more assets toward equities or bonds. The proper asset allocation is different for everyone. There is no “correct” asset allocation.

Consider the following three-fund asset allocation strategies:

The 80/20 Portfolio
64% U.S Stocks
16% International Stocks
20% Bonds

The 60/40 Portfolio
40% U.S Stocks
20% International Stocks
40% Bonds

The Equal Three Portfolio
33% U.S Stocks
33% International Stocks
33% Bonds

Conclusion

Leveraging a three-fund portfolio is a simple and effective way to build long-term wealth. In my opinion, it should constitute the core of any portfolio.

* Be sure to do your research and understand any fees, and plan to invest over the long term. All investment and financial opinions expressed on this site are based on personal research and experience of the owner of the site - it is not investment advice.