Two-fund portfolio – 2017 update

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. Sample two-fund allocations are indicated below. (click image to enlarge)

 

 

In 2017 the two-fund portfolio produced the following returns:

Year Total world Total bond 80/20 60/40 40/60 20/80
2017 24.06% 3.46% 19.94% 15.82% 11.70% 7.58%

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 40% 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 52% of the portfolio allocation.

 

Year Emerging Markets Europe Middle East North America Pacific Total
2017 9.50% 20.90% 0.20% 55.10% 14.30% 100.00%
2016 8.80% 19.50% 0.20% 57.40% 14.10% 100.00%
2015 8.10% 21.80% 0.20% 56.00% 13.90% 100.00%
2014 9.20% 21.90% 0.20% 54.80% 13.90% 100.00%
2013 9.30% 23.90% 0.20% 51.80% 14.80% 100.00%
2012 13.60% 23.30% 0.20% 50.90% 12.00% 100.00%
2011 14.50% 24.90% 0.30% 47.20% 13.10% 100.00%
2010 15.50% 26.70% 0.30% 44.00% 13.50% 100.00%
2009 14.00% 28.30% 0.00% 43.90% 13.80% 100.00%

In December 2011, 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 have increased, the fund now essentially replicates the 7700 plus stocks in the tracking index.

Year No. of stocks fund No. of stocks benchmark index
2017 7955 7781
2016 7623 7703
2015 7391 7728
2014 6632 7538
2013 5178 7253
2012 3872 7240
2011 2926 2883
2010 2784 2771
2009 2741 2751
Expenses

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 0.16% to 0.18% depending on the stock/bond allocation. This compares to a 0.15% expense for the investor share 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 0.06% to 0.09% for the Total World portfolios, compared to 0.05% to 0.06% 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 0.19% 0.10% Total Market 0.14% 0.04%
Total Bond 0.15% 0.05% Total International 0.17% 0.11%
Total Bond 0.15% 0.05%
Returns

The Vanguard Total World Stock fund has a short history.

  1. Over the 2009 – 2017 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 have slightly outperformed the two-fund portfolio over the period.

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
2017 24.06% 3.46% 19.94% 15.82% 11.70% 7.58%
2016 8.67% 2.50% 7.44% 6.20% 4.97% 3.73%
2015 -2.02% 0.30% -1.56% -1.09% -0.63% -0.16%
2014 3.92% 5.76% 4.29% 4.66% 5.02% 5.39%
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
3yr CAGR 8.43% 6.88% 5.31% 3.71%
3yr Std dev 10.41% 8.19% 5.98% 3.78%
80/20 60/40 40/60 20/80
5yr CAGR 10.17% 8.18% 6.14% 4.05%
5yr Std dev 9.29% 6.82% 4.52% 2.84%
80/20 60/40 40/60 20/80
9yr CAGR 11.15% 9.37% 7.54% 5.65%
8yr Std dev 9.96% 7.41% 5.02% 3.20%

Refer to Two fund portfolio, google drive spreadsheet.

About

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

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January 2018
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