How to Calculate Three-Fund Portfolio Returns and Costs (With Real Numbers)

The Three-Fund Portfolio: What You Are Actually Measuring

A three-fund portfolio holds three index funds: a US total market fund, an international total market fund, and a US bond fund. The most common implementation uses Vanguard, Fidelity, or Schwab funds, all of which carry expense ratios below 0.10%. The structure is simple. The math behind evaluating it precisely is not.

You need four numbers to fully evaluate a three-fund portfolio each year:

1. The blended portfolio return
2. The blended expense ratio
3. The after-cost real return (adjusted for inflation)
4. The rebalancing cost or tax drag if you hold funds in a taxable account

Each calculation is independent. Running them in order gives you a complete picture.

How to Calculate Your Blended Portfolio Return

Your portfolio return equals the sum of each fund's return multiplied by its weight in the portfolio. Weight each fund by its dollar value, not by the number of shares.

Formula: Portfolio Return = (Weight of Fund A x Return of Fund A) + (Weight of Fund B x Return of Fund B) + (Weight of Fund C x Return of Fund C)

Worked Example 1: Standard 60/20/20 Allocation

Assume a $250,000 portfolio with this structure:

• US Total Market Fund (e.g., VTSAX): $150,000, weight 60.0%, annual return 14.2%
• International Total Market Fund (e.g., VXUS): $50,000, weight 20.0%, annual return 8.7%
• US Bond Fund (e.g., VBTLX): $50,000, weight 20.0%, annual return 4.1%

Blended return = (0.60 x 14.2%) + (0.20 x 8.7%) + (0.20 x 4.1%) Blended return = 8.52% + 1.74% + 0.82% Blended return = 11.08%

Dollar gain = $250,000 x 0.1108 = $27,700

An investor who simply averaged the three fund returns without weighting them would calculate (14.2 + 8.7 + 4.1) / 3 = 9.0%. That 2.08 percentage point error misrepresents annual performance by $5,200 on a $250,000 portfolio.

How to Calculate Your Blended Expense Ratio

Your blended expense ratio uses the same weight-times-rate formula as your return calculation. The result tells you exactly what you pay in fund fees each year, expressed as a percentage of assets.

Formula: Blended Expense Ratio = (Weight of Fund A x ER of Fund A) + (Weight of Fund B x ER of Fund B) + (Weight of Fund C x ER of Fund C)

Worked Example 2: Expense Ratio Comparison Across Two Brokerages

Consider two investors with identical $500,000 portfolios at a 60/20/20 split. Investor A uses Fidelity ZERO funds. Investor B uses an actively managed equivalent.

Investor A (Fidelity ZERO funds):

• FZROX (US): 0.00% ER, weight 60%
• FZILX (International): 0.00% ER, weight 20%
• FXNAX (Bonds): 0.025% ER, weight 20%

Blended ER = (0.60 x 0.00%) + (0.20 x 0.00%) + (0.20 x 0.025%) = 0.005% Annual cost = $500,000 x 0.00005 = $25

Investor B (actively managed funds at average 0.60% ER): Blended ER = 0.60% across all three Annual cost = $500,000 x 0.006 = $3,000

Over 20 years, assuming 7% annual growth and reinvested savings, Investor A accumulates approximately $114,000 more than Investor B from expense ratio differences alone. The compound cost of a 0.595% annual fee gap at $500,000 growing at 7% for 20 years equals roughly $114,000 in lost terminal wealth.

How to Adjust for Inflation: The Real Return

A nominal return of 11.08% means nothing without an inflation adjustment. The real return tells you how much purchasing power you actually gained.

Formula: Real Return = ((1 + Nominal Return) / (1 + Inflation Rate)) - 1

Using a 3.2% inflation rate and the 11.08% blended nominal return from Worked Example 1:

Real Return = (1.1108 / 1.032) - 1 = 1.0763 - 1 = 7.63%

Your $250,000 portfolio gained $27,700 in nominal terms. It gained approximately $19,075 in real purchasing power.

Rebalancing Costs: When and How Much They Matter

Rebalancing a three-fund portfolio inside a Roth IRA or traditional IRA at Vanguard, Fidelity, or Schwab carries no transaction cost and no tax event. Rebalancing a taxable brokerage account generates capital gains tax on any appreciated fund you sell.

Annual rebalancing of a taxable account with 20% drift triggers short-term gains (taxed at ordinary income rates up to 37%) if you sell within 12 months. Long-term gains (taxed at 0%, 15%, or 20% depending on income) apply after 12 months.

On a $250,000 taxable portfolio where you sell $15,000 of appreciated VTSAX to rebalance, a 15% long-term capital gains rate produces a $2,250 tax bill that year. Redirecting new contributions to underweight funds instead of selling avoids that cost entirely.

Putting the Four Numbers Together

A complete annual review of a three-fund portfolio produces four outputs:

1. Blended nominal return (weight-times-return sum)
2. Blended expense ratio (weight-times-ER sum)
3. After-fee, after-inflation real return
4. Rebalancing cost in dollars (zero if held in tax-advantaged accounts)

Only after calculating all four do you have enough information to compare your portfolio's actual performance against a benchmark, evaluate whether your current fund selection is optimal, or decide whether a tax-loss harvesting event makes sense.

Run Your Exact Numbers With the CalcMoney Investment Calculator

The calculations above scale directly with your portfolio size. A $1,000,000 portfolio with a 0.50% expense ratio bleed costs $5,000 per year. At 7% compounding, that expense difference over 25 years represents more than $270,000 in terminal value.

The CalcMoney Investment Calculator handles the blended return math, applies your actual expense ratios, and shows the compounding effect of cost differences over any time horizon you choose. Enter your three fund allocations, current balances, and expected returns to get an output you can act on.

Calculate your three-fund portfolio's real performance now →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.