Two-Fund Portfolio

The 2008 inception of the  Vanguard Total World Stock Index fund  makes it easy  for investors to invest in a simple two-fund portfolio, using  a combination of the total world stock index fund with a total US bond index fund. (Rick Ferri suggested this portfolio  in Three Simple Index Fund Portfolios).

Sample two-fund allocations (click image to enlarge)

However, investors face a number of considerations in deciding whether to adopt  this two fund portfolio over other popular simple portfolios (examples include three-fund or core four portfolios as well as using a single balanced fund.)

Regional stock allocation

The total world stock market index fund, based on the FTSE Global All Cap Index, provides market capitalization exposure to the global stock market. If holding the market portfolio is your goal, this fund will more than suffice.

However, some investors may not want to hold the market weighting of global stock markets, since for US investors, a significant allocation to international investments introduces more exposure to currency and country risk.

For example, John Bogle has counseled that investors limit international stock allocations to 20% of the equity allocation. The Vanguard target date and life strategy funds allocate 30% of equity to international stocks.

The  table below illustrates the shifting range of regional allocations over the short life of the fund. Over this period, the US allocation has ranged between  40% to 47% of the portfolio allocation.

2009 2010 2011 2012 2013
Emerging Markets 14.0% 15.5% 14.5% 13.6% 9.3%
Europe 28.3% 26.7% 24.9% 23.3% 23.9%
Middle East 0.0% 0.3% 0.3% 0.2% 0.2%
Pacific 13.8% 13.5% 13.1% 12.0% 14.8%
North America 43.9% 44.0% 47.2% 50.9% 51.8%

In 2010, the fund changed index tracking, moving from the FTSE All-World Index to the FTSE Global All Cap Index. This change added international small cap stocks to the portfolio allocation and greatly increased the number of stock holdings in the fund. As fund assets increase, the fund should essentially replicate the 7200 plus stocks in the tracking index.

Year No. of stocks fund No. of stocks benchmark index
2013 5178 7253
2012 3872 7240
2011 2926 2883
2010 2784 2771
2009 2741 2751

The Vanguard Total World Index fund, as a relatively new fund, has higher expense ratios than Vanguard’s older and larger US and international index funds. However, as the Total World fund has increased in net assets, its expenses have fallen. The table below shows the comparative expenses between the two-fund portfolio and the three-fund portfolio.

For investor share holdings, the two-fund portfolio can be held at an expense of 0.28% to 0.22% depending on the stock/bond allocation. This compares to a 0.20% expense for the three-fund portfolios.

The Total World fund does not offer admiral shares; however it does offer a lower-cost ETF share class. Using lower cost admiral shares/EFT shares produces expenses ranging from 0.17% to 0.12% for the Total World portfolios, compared to 0.10% for the three-fund portfolios.

Expense ratios

Two fund portfolio Investor shares Admiral/ETF shares Three fund portfolio Investor shares Admiral/ETF shares
Total World 0.30% 0.19% Total Market 0.17% 0.05%
Total Bond 0.20% 0.10% Total International 0.22% 0.14%
Total Bond 0.20% 0.10%

The Vanguard Total World Stock fund has a short history.

  1. Over the 2009 – 2013 period, stock market investments outperformed fixed income investments. Portfolios with higher percentage allocations to stocks produced higher returns than portfolios with higher bond allocations.
  2.  Over this period US stocks outperformed non-US stocks. Portfolios holding higher allocations to US stocks outperformed the global equity market index.
  3. Three-fund portfolios (investor shares) holding 40% US stock allocations virtually matched the two-fund portfolio.

Keep in mind that past performance does not guarantee future performance.

Two-fund portfolio annual returns

Year Total world Total bond 80/20 60/40 40/60 20/80
2013 22.79% -2.26% 17.73% 12.77% 7.76% 2.75%
2012 17.15% 4.05% 14.53% 11.91% 9.29% 6.67%
2011 -7.88% 7.56% -4.79% -1.70% 1.38% 4.47%
2010 12.87% 6.42% 11.58% 10.29% 9.00% 7.71%
2009 33.30% 5.93% 22.83% 22.35% 16.88% 11.40%

Compound returns

80/20 60/40 40/60 20/80
5yr CAGR 12.87% 10.85% 8.75% 6.56%
5yr Std dev 11.86% 8.85% 5.51% 3.30%


Refer to Two fund portfolio, google drive spreadsheet for computations.


Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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September 2014
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