Short answer
A three-fund portfolio can be simple to describe while still producing a path that changes over time. This example focuses on sequence risk and does not infer the exact stock, bond, or international funds in a user's account.
Illustrative scenario
This page is about the risk math behind a three-fund portfolio, not about selecting funds. Pair it with an overlap and concentration review before treating a portfolio as diversified. The example below uses a starting balance of $1,000,000, a first-year withdrawal of $35,000, 2.0% annual inflation, and 30 annual returns. The figures are illustrative and use no fees or taxes.
| Scenario | Ending balance | Status | Total withdrawn |
|---|---|---|---|
| Bad returns early | $0 | Depletes in year 19 | $792,008 |
| Entered order | $1,613,312 | Survives all 30 modeled years | $1,419,883 |
| Good returns early | $2,873,883 | Survives all 30 modeled years | $1,419,883 |
The bad-first and good-first rows use the same return set. Only the order changes. In this example the ending-balance gap is $2,873,883, which demonstrates why an average return alone does not describe a withdrawal portfolio's path.
First five annual returns in each scenario
| Year | Bad early | Entered order | Good early |
|---|---|---|---|
| 1 | -14.0% | +16.0% | +18.0% |
| 2 | -9.0% | +7.0% | +17.0% |
| 3 | -7.0% | +10.0% | +16.0% |
| 4 | -6.0% | -6.0% | +15.0% |
| 5 | -5.0% | +12.0% | +13.0% |
Withdrawals are applied at the beginning of each year, then increased by inflation for the next year. If a requested withdrawal exceeds the available balance, the scenario is marked as depleted in that year.
Questions about this scenario
Does a three-fund portfolio guarantee diversification?
No. The number of funds does not guarantee a particular exposure. The underlying holdings, weights, correlations, concentration, and return path all matter.
Should I use this with an ETF overlap check?
Yes, the tools answer different questions. Sequence risk studies return order during withdrawals, while ETF overlap checks whether funds share underlying holdings. Both are structural portfolio-risk views.
Run your own sequence
Use the full sequence-of-returns risk calculator to change the balance, withdrawal, inflation, and annual returns. Guardfolio's other tools cover concentration, volatility, rebalancing bands, and ETF overlap.