Getting Crafty with Two-Fund Portfolios

After the recent article explaining that, yes, my wife and I still use Vanguard’s LifeStrategy Growth fund for our retirement savings, and, yes, we’re happy with it, a number of readers wrote in to ask about other ways to build a simple portfolio or to share their own methods of doing so.

Two-Fund Portfolios Using Total World Stock ETF

Several readers wrote in to say that they like the idea of a simple portfolio, but are not especially enamored with the Total Bond Market Index Fund that is included in Vanguard’s funds-of-funds. One reader wanted to shift toward corporate bonds in order to get the slightly higher yields. Another wanted to shift in precisely the opposite direction, using exclusively Treasury bonds. Still other readers said they wanted to stick to short-duration bonds in order to minimize interest rate risk.

Any of these desired allocations could be satisfied while still keeping things very simple by crafting a two-fund portfolio consisting of Vanguard’s Total World Stock ETF and the bond fund of your choosing. (While I don’t usually have a strong opinion on the mutual-fund-vs-ETF question, I think with Vanguard’s Total World Stock fund it makes sense to use the ETF, given that there is no Admiral Shares version of the traditional index fund.)

LifeStrategy Plus Tilt

A few readers wrote in to say that they like to keep things simple, but they also like the idea of tilting toward a specific category of stocks (either REITs or small-cap/value stocks), so they’ve created two-fund portfolios consisting of a LifeStrategy fund plus Vanguard’s Small-Cap Value Index Fund or a LifeStrategy fund combined with Vanguard’s REIT Index Fund.

Personally, I think it’s very neat that so many different diversified portfolios can be created using just two mutual funds. That said, as usual, a list of caveats applies:

• Funds-of-funds (such as the LifeStrategy funds) are tax-inefficient, which is relevant if some of your assets are in taxable brokerage accounts.
• Even Vanguard’s funds-of-funds have slightly higher expense ratios than the expense ratios you could have if you built a portfolio using the underlying funds.
• Depending on how happy you are spending time in Excel, once you’ve moved beyond a portfolio that automatically rebalances itself, two funds might not be a heck of a lot easier than three, four, or even more funds.