Jack Bogle often recommends a Two Fund Portfolio of Total Stock Market and Total Bond Market for most investors. He has also recommended a simple Balanced Index fund for investors (choosing to invest for the benefit of his grandchildren with this fund). In addition, Warren Buffett recommends a Two Fund Portfolio of the S&P 500 and Treasury Bonds (Berkshire Hathaway annual Shareholder Letter - 2013 and numerous interviews).
After a lifetime of investing and learning, I am growing more and more convinced that a simple and effective Two Fund Portfolio of Total Stock Market and Total Bond Market, properly allocated, is a very ideal investment portfolio for many investors.
* Avoids wasted time.
* Less complexity.
* No fund manager risk.
* High diversified with thousands of securities.
* Very low expense ratios.
* Less funds = earlier eligibility for lower-cost Admiral shares.
* No style drift.
* No asset bloat.
* Very low (often hidden) turnover costs.
* No tracking error.
* No fund overlap.
* No front-running that reduces sub-index returns.
* Both funds rebalance automatically within the fund.
* No cash drag within the funds.
* No risk of under-performing the market.
* Will out perform many investors.
* Tax efficient.
* No financial adviser risk.
* Very simple account statements.
* Easy to maintain for the owner, spouse, caregivers, and heirs.
* More free time.
Best of all: simplicity!
Jack Bogle: "Simplicity is the master key to financial success"
Morningstar's 15-Year Category performance - updated on January 01, 2019:
TOP 17% = Vanguard Total Stock Market (VTSMX)
TOP 4% = After tax.
TOP 9% = Vanguard Total Bond Market (VBTLX) in last (2008) bear market.
GOLD Analyst Rating: Total Stock Market
SILVER Analyst Rating: Total Bond Market
Fund Placement For Maximum Tax-Efficiency: Place Total Bond Market in tax-advantaged account(s). If tax advantage account(s) are full or bonds need to be held in a taxable account, a tax exempt bond fund may be an option depending on the overall tax impact. Place Total Stock Market in either a tax-advantaged account or taxable account.
Edited: November 23, 2019
Over the past few days and weeks we have arrived at a decision to transition and simplify our portfolio. Ultimately we decided to move towards Jack Bogle's Two Fund Portfolio and Warren Buffett's Two Fund Portfolio approach. We have been on a crusade to simplify both our financial and non-financial lives and it is working and starting to pay dividends.
Our journey as a Boglehead has evolved tremendously over the years. Many years ago we left Vanguard and became individual stock pickers with a belief that we were smarter than the market and would be above average. Put in a couple of hours daily or every few days and one can definitely beat the Gordon Gekko's and Wall Street on the other side of any given trade correct? Of course! After many years of reading individual company reports, listening to conference calls, reading investment newsletters, and achieving some very big wins and also very big losses (which no one ever wants to discuss), we knew there had to be a different (and better) way. We moved back to Vanguard and never looked back.
Once the move to Vanguard was completed, we still did not know any better and began to invest in (or collect) a lot of mutual funds. I believe at one point we held over 15 or 18 different types of funds. Small Cap, Commodities, Inflation bonds, GNMA bonds, International Value, Wellington? Sure add it to the list was often the response.
We continued to evolve over the years to a more total market approach while continuing to increase our investment education by reading Jack Bogle's books, interviews, articles, as well as other investment experts. The path to financial simplicity started.
We focused on Total Stock, Total International, US REIT, and Total Bond. It was not long before International REIT and International Bond were included. While not a bad portfolio in some respects as the four main asset classes were present: stocks, bonds, real estate, and cash. Would one go wrong over the long term? Perhaps not.
All the while, and perhaps not discussed enough on the forum, I was aware my spouse would not respond well to managing that portfolio with six moving parts. In addition, my spouse was never on board with international. She was right, and I should have listened to her, my parents, Mr. Bogle, and Mr. Buffett earlier. Our portfolio would be much larger.
As we continued to build and add money to that total market portfolio, multiple funds were always out of balance from the target asset allocation. There were times other funds would have no additional investments for a year (or more). I started to feel with six different funds, combined with IRA limitations of only $6,000 a year, that we may be splitting hairs. Over the long term that would not move the needle. At the point of retirement with bonds expected to be a higher allocation (and stocks that much of a lower allocation), a few of the funds are going to drop below 5% of the portfolio. We pulled out "The Bogleheads Guide to Investing" from the bookshelf and reviewed the pages where an investor starts simple with a couple of funds, adds additional funds, and ultimately removes them at retirement as the allocation becomes immaterial to the portfolio as a whole. We have a preference of less funds and much bigger balances in each individual fund.
During this journey, international has been nothing short of a complete disappointment. If it is not Brexit, it is Greece, Brazil, Argentina, the challenges in France, Japan's shrinking economy and debt to GDP ratio, and the China trade war and economic slowdown. We could continue. Recently we watched an interview with Jack Bogle about one year ago, where Mr. Bogle noted each of these individual countries and why investors should avoid them.
In some respects and pushing us to simplify even more were quotes and advice from essentially two of the very best investors of all time who know more about investing than any of us ever will: Jack Bogle and Warren Buffett.
We continued to review historical information while being well aware that past performance is no guarantee of future results. More inline with Mr. Bogle's reversion to the mean. We noticed that international stocks are simply challenging. We could understand the increased risk if the increased reward was there. Outside of a few years here or there it simply has never arrived. There is a quote from Jack Bogle that since 1994 the US Markets are up 700% + and the International markets up 270% +. International REITs were dropping harder than international stocks. International bonds performed inline or close to U.S. bonds and are hedged (so why split hairs). US REITs, while showing a benefit at times (and certainly more risk at times), over the long term reverted to the total stock market return.
All the while during this questioning and thinking, we had family who invested in the Two Fund Portfolio for a very long time and were either retired or still in the accumulation years. Everyone was extremely happy with the simplicity and thankful for the results (good as well as bad markets). Their portfolio's were simple and maintenance free and they were enjoying life! They would tell us to "listen to Bogle and Buffett. They know what they are talking about!" I started to think maybe that is a better mousetrap!
Will this be the right decision over the long term? No one knows. I know with certainty that our portfolio will never be below average. Any of us can always complicate our portfolios and add additional funds. Only the beauty of hindsight will determine that. In the interim we investors, and Bogleheads will continue to debate what funds are needed and where. I know this much, we are going to give this a good run and "stay the course".
"Jack Bogle: "Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holding in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S. bond-market index portfolio."
Warren Buffet: "My advice could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."