Building a Three-Fund Portfolio with Charles Schwab: A Comprehensive Guide to Using Schwab Index Funds and Schwab ETFs

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Creating a three-fund portfolio is an effective strategy for achieving a diversified and cost-efficient investment. This guide will walk you through the process of building a three-fund portfolio with Charles Schwab, using both Index Funds and ETFs.

Key Points

  1. What is a Three-Fund Portfolio: A simplified, yet diversified investment strategy using three funds. Allows for asset allocation in stocks and bonds, offering benefits like low expense ratios and ease of tracking.
  2. Choosing Between Index Funds and ETFs: Index Funds allow automatic investment, while ETFs might have some advantages in flexibility. Your choice depends on your preference for automatic investing or specific investment control.
  3. Determining Asset Allocation: Through Charles Schwab’s investor profile questionnaire, you can determine the right balance of stocks and bonds for your risk tolerance and investment goals.
  4. Selecting the Funds: Charles Schwab offers specific index funds and ETFs for domestic stocks, international stocks, and bonds. It’s essential to understand the differences, especially in emerging market exposure.
  5. Visualizing the Portfolio: By viewing your investments as a pie chart, you can easily understand the division between domestic stocks, international stocks, and bonds.

Step-by-Step Process

Determine Your Asset Allocation

  1. Take the Charles Schwab Questionnaire: This will help you understand your risk profile and suggest an asset allocation.
  2. Combine Fixed Income and Cash: Link cash and fixed income into an aggregate bond portfolio.
  3. Separate Large Cap and Small Cap Stocks: Combine these into an aggregate stock portfolio for domestic stocks.
  4. Add International Stocks: Determine the percentage for international exposure.

Select the Right Funds

  1. Domestic Stocks: Choose between SWTSX (Index Fund) or SCHB (ETF) for domestic exposure.
  2. International Stocks: Decide on SWISX (Index Fund) or SCHF (ETF), understanding the difference in developing markets exposure.
  3. Bonds: Opt for SWAGX (Index Fund) or SCHZ (ETF) for the aggregate bond portfolio.

Visualize and Implement

  1. Create a Pie Chart: Understand your allocation visually.
  2. Invest Accordingly: Apply your investment decisions with Charles Schwab.

Resources Mentioned

  1. Schwab Total Stock Market Index Fund (SWTSX): Broad exposure to the U.S. stock market with an expense ratio of 0.03%.
  2. Schwab International Index Fund (SWISX): International exposure to developed markets with an expense ratio of 0.06%.
  3. Schwab Aggregate Bond Index (SWAGX): Aggregate bond portfolio with an expense ratio of 0.04%.
  4. Schwab ETFs (SCHB, SCHF, SCHZ): ETF equivalents for the above funds with similar expense ratios.


Creating a Schwab three-fund portfolio allows you to achieve diversification and cost efficiency in your investments. By understanding the fundamentals of asset allocation and choosing the right funds, you can tailor a portfolio that fits your investment needs and risk tolerance.

Don’t forget to consult with a financial professional if you need personalized advice, and hit the like button if this guide has helped you in building your three-fund portfolio with Charles Schwab!

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