Two-fund portfolio – 2019 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 2019 the two-fund portfolio produced the following returns:

YearTotal worldTotal bond80/2060/4040/6020/80
201926.91%8.71%23.2719.63%15.99%12.35%

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.

YearEmerging MarketsEuropeMiddle EastNorth AmericaPacificOtherTotal
20199.80%18.40%0.20%58.60%12.80%0.20%100.00%
20189.40%18.60%0.20%58.50%13.30%100.00%
20179.50%20.90%0.20%55.10%14.30%100.00%
20168.80%19.50%0.20%57.40%14.10%100.00%
20158.10%21.80%0.20%56.00%13.90%100.00%
20149.20%21.90%0.20%54.80%13.90%100.00%
20139.30%23.90%0.20%51.80%14.80%100.00%
201213.60%23.30%0.20%50.90%12.00%100.00%
201114.50%24.90%0.30%47.20%13.10%100.00%
201015.50%26.70%0.30%44.00%13.50%100.00%
200914.00%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.

YearNo. of stocks fundNo. of stocks benchmark index
201982328923
201881107870
201779557781
201676237703
201573917728
201466327538
201351787253
201238727240
201129262883
201027842771
200927412751

Expenses

The Vanguard Total World Index fund, as a relatively new fund, had higher expense ratios than Vanguard’s older and larger US and international index funds. However, in 2019, the Total World fund will provide lower cost admiral shares, which will reduce portfolio expenses comparable to three fund and four fund portfolios.

Returns

The Vanguard Total World Stock fund has a short history.

  1. Over the 2009 – 2019 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 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

YearTotal worldTotal bond80/2060/4040/6020/80
201926.91%8.71%23.27%19.63%15.99%12.35%
2018-9.73%-0.03%-7.79%-5.85%-3.91%-1.97%
201724.06%3.46%19.94%15.82%11.70%7.58%
20168.67%2.50%7.44%6.20%4.97%3.73%
2015-2.02%0.30%-1.56%-1.09%-0.63%-0.16%
20143.92%5.76%4.29%4.66%5.02%5.39%
201322.79%-2.26%17.73%12.77%7.76%2.75%
201217.15%4.05%14.53%11.91%9.29%6.67%
2011-7.88%7.56%-4.79%-1.70%1.38%4.47%
201012.87%6.42%11.58%10.29%9.00%7.71%
200933.30%5.93%22.83%22.35%16.88%11.40%

Compound returns

Three year returns

 80/2060/4040/6020/80
3yr CAGR10.88%9.27%7.58%5.82%
3yr Std dev17.05%13.74%10.47%7.29%
Sharpe ratio0.600.600.600.61

Five year returns

 80/2060/4040/6020/80
5yr CAGR7.59%6.50%5.36%4.18%
5yr Std dev13.38%10.82%8.29%5.81%
Sharpe ratio0.550.560.570.60

Ten year returns

 80/2060/4040/6020/80
10yr CAGR7.98%6.97%5.68%4.78%
10yr Std dev10.77%8.28%5.76%4.12%
Sharpe ratio0.750.820.941.07

Refer to Two fund portfolio, google drive spreadsheet.

About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog. In addition I serve as an administrator of finiki, the Canadian financial wiki, as an administrator of la Wiki Bogleheads® España, and as an administrator of the John C. Bogle Center for Financial Literacy site.

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