The Bogleheads' Guide to the Three-Fund Portfolio

CHAPTER FIVE Getting Started

For many years after Jack Bogle introduced his three total market index funds, Vanguard was the only mutual fund company where total market index funds were available. However, as word spread, Schwab, Fidelity, and a few other companies each introduced total market index funds with similar low costs. Investors are now able to construct The Three-Fund Portfolio with whichever company they prefer.

Your first step when getting started is to decide which funds best suit your needs and wants. I hope you are convinced that three low-cost total market index funds are ideal and usually all you need. It is permissible to add more funds, but recognize that adding funds to your Three-Fund Portfolio will add cost and complexity.

Your second step in designing your Three-Fund Portfolio is to decide your most suitable asset allocation. This is your most important investment decision because, with the exception of the amount you are saving and investing, your asset allocation (i.e., your stock/bond ratio) determines your expected return and expected risk. (Remember that expected risk and expected return go hand in hand: The higher the expected return, the higher the expected risk. The Vanguard table shows the average annual return and the worst single-year return of various stock and bond allocations from 1926 to 2015:

Stock/Bond Percentage	Average Annual Return	Worst Single-Year Return
0% Stocks / 100% Bonds	5.4%	-8.1%
20% Stocks / 80% Bonds	6.7%	-10.1% ...