Visualize the 3-Fund Portfolio Across the Taxable Account Types

Visualize the 3-Fund Portfolio Across Different Account Types

3-Fund Portfolio in Different Accounts


Folks like the simplicity of a 3-fund portfolio. The US and International equity funds and a bond fund all wrapped up in a pre-determined asset allocation. When you have different account types with different tax treatments, however, you add a layer of complexity.

How can we visualize the 3-fund portfolio across the different account types?

When we add in tax optimization, that is, asset location, you need to consider in which accounts you place your three different investments. Where are the most tax-efficient places for equity and bond funds to land? 


What is the Three Fund Portfolio?

Bogleheads popularized the 3-fund portfolio, a simple mix of total US and total International equity ETFs and some fixed-income (usually a total bond ETF). These three funds comprise your overall asset allocation (equities + bonds=100%).

I have demonstrated 3-fund portfolios before when exploring a 50/50 Asset Allocation Portfolio.

Once you know which ETFs you want, where do you own them?

What are the Three Taxable Account Types?

Tax diversification!

Tax diversification is why you want to own different ETFs in different account types. If you have tax diversification, you can Use Your Tax Planning Window to Control Your Income during retirement.

As different types of investments are taxed differently, and account types vary in their tax treatment, it pays to pay attention.  

Tax treatment of account types

Figure 1 (Tax treatment of account types)

As seen above in figure 1, many different types of assets or accounts exist. These are taxed differently.

To simplify, there are only three crucial account types to consider when considering tax diversification.



Lower-income folks can often Contribute to a Roth IRA and get some retirement money in the TAX-FREE bucket. Tax-Free means you paid taxes once (now), and all future growth and withdrawals are tax-free. Roth money is precious; gather it whenever you can. 

How can higher-income folks get money in Roth accounts? The most common are partial Roth Conversions, Backdoor Roth Contributions, and Mega Backdoor 401k to Roth IRA Rollovers.



Often called a taxable investment account, a brokerage account invests after-tax money.

Worry about TAX-DRAG with these accounts. Tax drag happens when you pay capital gains tax on dividends and ordinary income on interest from investments in these accounts. You can avoid tax drag using non-deductible IRAs or a 529 as a Bonus Retirement Account. Neither are great ideas, though.

If you are well to do and want to retire, you will need to have some after-tax money invested in a brokerage account. Just do so efficiently: a primary subject below.



Pre-tax accounts are often called retirement accounts. You get a tax break when you put money in pre-tax accounts. Growth is tax-deferred. Eventually, when you withdraw from these accounts, ordinary taxes are due.

The government wants its taxes paid!

Tax Arbitrage (deferring income tax during peak income years and recognizing it later when you have low income) is necessary to understand.


So, there are three main account types: Roth, Brokerage accounts, and Pre-tax accounLet’set’s visualize how a 3-fund portfolio fits into them.


Visualize the 3-Fund Portfolio Across the different Account Types

Here is my grade 3 drawing of how a 3-fund portfolio sits on top of your different accounts.


How a 3-Fund Portfolio fits Across the different types of accounts

Figure 2 (How a 3-Fund Portfolio fits Across the different types of accounts)

Above in figure 2, you can see the three account types: Pre-tax, Taxable, and Roth. Note that 50% of the portfolio is in Pre-tax and 50% in Taxable (40) and Roth (10). This distribution is typical for high-income folks who sock away lots of money pre-tax and have little opportunity to fund Roths. 

On the left are the three funds: US Equity, International Equity, and Bonds.

In the Pre-tax account, you have 60% invested in the US and 40% in Bonds. The little numbers in parentheses are the percentage times the 50% (which is the size of your pre-tax compared to your whole portfolio).

In taxable, you are 50/50 US and international (which, in parentheses, is 20% of your total).

Finally, in the Roth, you have 100% in the US (10% of your portfolio).

Add them up on the right, and you have 60% in the US (which is a part of all three account types), 20% in international (which is just in your brokerage account to take advantage of the foreign tax credit), and 20% in bonds (held only in pre-tax to be tax-efficient).

Ta-Dah! You now see an example of the three-fund portfolio visualized across the three account types!

Why did I slice and dice the accounts that way? First, understand what the overall asset allocation is.

Asset Allocation Visualized in the 3-Fund Portfolio.

So, what is your asset allocation? You are 80/20! US (60) plus International (20) equals 80%, and the rest are bonds. 80/20.

Asset allocation is the second most important decision you make (the first is deciding to invest). Asset allocation has to do with risk tolerance. It is a bit more complicated than that, but it is the second most important question!

Now, what about asset location?


Asset Location Visualized in the 3-Fund Portfolio

What is asset location?


Note: you want your assets with the highest expected returns in your Roth because you have already paid taxes on investments in this account. Any future growth is tax-free!

Understand, however, that you are taking more risk (in terms of market volatility) to get higher expected returns.

Suppose you want to tilt or juice your portfolio (whisn’tsn’t the point of a 3-fund portfolio!). In that case, a Roth is where you put REITs, Small Cap Value, Emerging Markets, or other asset classes with higher future expected returns (and more volatility).


And in your pre-tax account, think about this for a second; you actually don’t own the whole thing. The government owns part of the account. You (or your heirs) will pay taxes on the income when recognized. You owe ordinary income taxes on any withdrawals from pre-tax accounts. So, if you take a lot of risk in your pre-tax accounts, the government takes that risk with you.

But the point of pre-tax accounts: put your tax-inefficient funds in there, so don’ton’t suffer from tax drag. Equities have dividends that, when qualified, are taxed at the Capital Gains Rate. Bonds (and cash), on the other hand, pay interest which is taxed at ordinary rates. Thus, having bonds in your pre-tax account means you don’t owe ordinary income taxes on the interest. Sweet!


Finally, in your brokerage account, place the most tax-efficient funds. This includes US equities that don’t pay out large dividends (low churn or turnover) and international equities where you get a tax break due to the foreign tax credit. Ideally, in the 3-fund portfolio, international should be held in the taxable.

I cover everything I know about asset location in Tax-Efficient Investing and Portfolio Optimization.


Conclusion: Visualize the 3-Fund Portfolio Across the different Account Types


There you have it. You have an asset allocation efficiently located among the different accounts.

Believe it or not, that is 90% of what you need to know to invest. If you can visualize the 3-fund portfolio across the account types, you will likely beat 99% of the investors in the world.

Now go out and learn how chaos theory changes the models you use in the market and how you can be an excellent DIY physician investor.

Finally, know that behavioral investing is more important to your nest egg than any other aspect of investing.

Do you believe that?


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  1. Love your down-to-earth explanations. You have a knack for simplifying complex information!

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