Two-fund portfolio

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A two-fund portfolio is often used by investors seeking a simple asset allocation portfolio. The portfolio consists of one equity index fund and one fixed income fund. The fund selections can vary depending on asset class (global equity or domestic equity; bond type), and asset type (mutual fund, exchange-traded fund (ETF), collective investment trust (CIT)).

Global two-fund portfolios

Rick Ferri has proposed a two-fund portfolio consisting of the following asset classes:

  • A global stock market index fund/ETF
  • A US intermediate term bond index fund/ETF

Ferri suggests a US total market bond index fund/ETF for the fixed income selection. However, investors can substitute a global bond index fund/ETF, a US intermediate-term bond index fund/ETF, a US intermediate-term treasury bond index fund/ETF, or a US municipal bond index fund/ETF for the fixed income allocation. Investors may also find that employer-provided retirement plans will use collective investment trusts as investment vehicles.

The Ferri two-fund portfolio can be adjusted to reflect any stock/bond allocation. The charts below reflect different asset allocations.

Global two-fund portfolio allocations

US only two-fund portfolios

Both John Bogle and Warren Buffett have suggested portfolios for investors who want to invest in US domestic stocks and bonds.

John Bogle two-fund portfolio

John Bogle has often suggested that an investor can invest in a total US stock market index fund and a total US bond index fund.[notes 1] He has also suggested that an intermediate-term bond index fund, or a low-cost intermediate municipal bond fund can be used for fixed income allocations. The portfolio can be allocated in various stock/bond allocations, as the charts below indicate.

John Bogle two-fund portfolio allocations


Warren Buffett two-fund portfolio

Buffett two-fund portfolio

Warren Buffett has suggested a two-fund portfolio consisting of a 90% allocation to an S&P 500 index fund and a 10% allocation to treasury bills. [notes 2]

Treasury bills can be purchased in a brokerage (or Treasury Direct) account, with investors tendering a noncompetitive bid at auction. Investor's can also use a treasury money market fund, or an ETF investing in 1 to 3 month bills for access to the treasury bill market.

However, investors are free to substitute an intermediate bond fund (total bond, intermediate bond, treasury bond, or municipal bond) for the t-bill allocation if they so desire. Note that S&P 500 index funds or collective investment trusts are offered in many employer-provided retirement plans.

Investors can also elect to allocate the Buffett two-fund portfolio to various stock/bond allocations.

One fund balanced funds

The two-fund portfolio can also be attained by investing in a balanced index fund. For example, Vanguard, Fidelity, and Charles Schwab offer target date retirement index funds that provide access to global stocks and intermediate bonds. Vanguard also offers global target risk balanced index funds (the LifeStrategy funds). Vanguard's funds provide access to both global stocks and global bonds. Fidelity and Schwab's target date offerings provide access to global stocks and US bonds.

Vanguard offers investors a US Balanced Index Fund, which consists of a 60/40 stock/bond allocation using a total US stock market index allocation and a total US bond market index allocation.

Due to tax implications, it is often recommended that balanced index funds should be used in tax-deferred and tax-free investment accounts.

Notes

  1. Jack Bogle in The Little Book Of Common Sense Investing, CH.18 wrote: DEEP DOWN, I REMAIN absolutely confident that the vast majority of American families will be well served by owning their equity holdings in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S.bond-market index portfolio. (Investors in high tax brackets, however, would hold a very low-cost quasi-index portfolio of high-grade intermediate-term municipal bonds.)...
  2. Warren Buffett in 2013 BRK Letter to Shareholders wrote: ...What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee 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.-2013 BRK Letter to Shareholders