New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 9,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

8 Simple Portfolios

I recently came across an interesting question on the Boglehead forum:

If you could only own one fund, what would you own?

That question got me thinking about one aspect of investing that doesn’t often get discussed: desire for simplicity. While some investors don’t mind managing a portfolio of ten different funds, other investors would never consider anything so complex.

Generally speaking, the more asset classes you include in your portfolio, the better diversification you’ll achieve, but it begins to require more work to manage the portfolio. Also, the additional diversification derived from adding each asset class is less than the diversification gained by adding the prior asset class.

I thought it would be fun (and perhaps helpful to investors reworking their portfolios) to put together a list of portfolios sorted by complexity. The following are my recommended one-fund portfolio, two-fund portfolio, and so on (followed by some additional thoughts). Please feel free to share your own suggestions. :)

For each fund, the first ticker is the open-end version of the fund, and the second ticker is the ETF version of the fund.

One-Fund Portfolio

Two-Fund Portfolio

  • 70% Vanguard Total World Stock Index (VTWSX, VT)
  • 30% Vanguard Total Bond Market Index (VBMFX, BND)

Three-Fund Portfolio

  • 35% Vanguard Total Stock Market Index (VTSMX, VTI)
  • 35% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 30% Vanguard Total Bond Market Index (VBMFX, BND)

Four-Fund Portfolio

  • 30% Vanguard Total Stock Market Index (VTSMX, VTI)
  • 10% Vanguard REIT Index Fund (VGSIX, VNQ)
  • 30% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 30% Vanguard Total Bond Market Index (VBMFX, BND)

Five-Fund Portfolio

  • 30% Vanguard Total Stock Market Index (VTSMX, VTI)
  • 10% Vanguard REIT Index Fund (VGSIX, VNQ)
  • 30% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 15% Vanguard Total Bond Market Index (VBMFX, BND)
  • 15% Vanguard Inflation-Protected Securities Fund (VIPSX, TIP*)

Six-Fund Portfolio

  • 20% Vanguard 500 Index (VFINX, VOO)
  • 10% Vanguard Small-Cap Value Index (VISVX, VBR)
  • 10% Vanguard REIT Index (VGSIX, VNQ)
  • 30% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 15% Vanguard Total Bond Market Index (VBMFX, BND)
  • 15% Vanguard Inflation-Protected Securities Fund (VIPSX, TIP*)

Seven-Fund Portfolio

  • 20% Vanguard 500 Index (VFINX, VOO)
  • 10% Vanguard Small-Cap Value Index (VISVX, VBR)
  • 10% Vanguard REIT Index (VGSIX, VNQ)
  • 20% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 10% Vanguard FTSE All-World Ex-US Small-Cap Index (VFSVX, VSS)
  • 15% Vanguard Total Bond Market Index (VBMFX, BND)
  • 15% Vanguard Inflation-Protected Securities Fund (VIPSX, TIP*)

Eight-Fund Portfolio

  • 20% Vanguard 500 Index (VFINX, VOO)
  • 10% Vanguard Small-Cap Value Index (VISVX, VBR)
  • 10% Vanguard REIT Index (VGSIX, VNQ)
  • 10% Vanguard Total International Stock Index (VGTSX, VXUS)
  • 10% Vanguard FTSE All-World Ex-US Small-Cap Index (VFSVX, VSS)
  • 10% Vanguard International Value (VTRIX, n/a)
  • 15% Vanguard Total Bond Market Index (VBMFX, BND)
  • 15% Vanguard Inflation-Protected Securities Fund (VIPSX, TIP*)

*Vanguard’s TIPS fund does not have an ETF version. As such, I’ve included iShares Barclays TIPS Bond Fund (TIP) as the comparable ETF.

Regarding Stock/Bond Allocations

In order to make comparisons easy, each of the above portfolios is built using a 70/30 stock/bond allocation. There’s no particular reason that a 70/30 split was chosen over any other stock/bond split.

Any of the above portfolios can be adjusted to fit your ideal stock/bond allocation. Simply increase (or decrease) the allocation to the bond fund(s) and decrease (or increase) the allocation to each stock fund in proportion to its original allocation.

Regarding U.S. vs. International Allocations

Each of the above portfolios is built using roughly a 50/50 split between U.S. and international stocks. Many investors and investment professionals would view this as too heavy an international allocation. You can see my reasoning here and decide for yourself whether to adjust the international allocations downward.

ETFs or Index Funds?

These portfolios could be implemented at Vanguard via traditional open-end index funds or at an online brokerage of your choice using ETFs. If you do opt to use ETFs, you have an additional motivation to keep things simple: Fewer funds means less commissions paid. (Unless you’re using a brokerage firm that offers commission-free trades, that is.)

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing

Comments

  1. Mike,

    The next logical question is how much of a benefit do you get from the added complexity? I know it’s a tough question to answer- but I know I would manage 8 funds if there were really a benefit over 5. I don’t think there is a lot of historical data for all of the funds, but there must be some data to go on.

    It strikes me that there are minimum practical investments for each portfolio, say you have $1000 to invest if you pay $10/trade buying 8 ETFs would cost you 8% for transaction costs instead of 1% for a single ETF.

    Additionally, I suspect you would have to have several funds to match or beat the target retirement fund since it is a fund of funds and is rebalanced for you. The tradeoff is you get complete control over portfolio.

    I’m curious why you added the value index in the seven fund portfolio but not a growth index? It would seem to me that a logical way to get a slightly larger and more diversified portfolio would be to split a category. For example to get a nine fund portfolio split VB (small cap) into VBR (small cap value) and VBK (small cap growth).

    -Rick Francis

  2. Rick:

    There are indeed minimums for each portfolio. If you go the traditional open-end fund route, the minimum is explicit (as most of the funds have a $3,000 minimum). And, as you mentioned, if you go the ETF route, there is indeed a practical minimum resulting from the commission costs.

    As to including a value fund, the idea was to intentionally overweight value stocks relative to a market portfolio in order to take advantage of the “value premium”.

  3. The irony – I have a book shelf full of investment books. Yet, all I own is a Vanguard 2050 Fund.

    Many investors under rate the importance of simplicity. I believe the simpler the portfolio, the greater chance one has to reach their goals.

  4. Hi RJ.

    With an ER of just 0.19% and absolutely no work involved, I recommend Vanguard’s target date funds to lots of people. If they match your targeted allocation, what’s not to love? :)

  5. Although the underlying funds of Vanguard target funds are index funds, the management style is active–the fund’s management team does the work of rebalancing and reallocating for you–so this is not a pure passive investing approach, unless by passive you mean “I don’t have to do anything.”

  6. I don’t know if you wish to comment on anyone’s individual portfolio, but here goes. I am 61 years old and hope to retire in about 5-6 years. Some years back, a friend convinced me of the value of switching my IRA to Vanguard, buying only index funds, and mainly leaving them alone except for rebalancing each couple of years. Basically, he recommended a number of formulas, of which I settled on this one:

    50% Domestic Stocks. Mostly Total Stock Market, with some holdings in Small Cap and Value because the Total fund is most heavily invested in large-caps, and some REIT.
    10% Total International.
    40% Bonds. Mostly Total Bond, with some holdings in Inflation-protected bonds and GNMAs.

    This comes to eight funds (standard index funds only, not ETFs), and is similar to the 8-fund portfolio Mike has outlined above. My question is: Is this too complicated (mainly in the sense of, is there too much duplication)? RJ Weiss writes, “Many investors underrate the importance of simplicity,” but he does not elaborate on his reasons.

    My friend’s argument was that with more funds, you have more flexibility in rebalancing. On the other hand, Vanguard’s site does not make rebalancing easy, as you have to buy and sell each fund rather than simply typing in a set of new percentages (as you can do with Fidelity, where our company has its 401k). I’ve complained about this to Vanguard in the past, but to no avail. But that’s secondary to my main question, which is whether the 8 funds I have would perform any better than a more limited set, or even just the Vanguard Target 2015. Thanks.

  7. Larry, from what you’ve said, it appears that there is probably little overlap between your funds’ holdings.

    Many investors would argue that you can’t get more diversified (regarding US stocks) than holding a simple Total Stock Market fund. Others (myself included) would argue that you can be better diversified by overweighting small cap and value holdings, as your friend suggested.

    It’s impossible to say ahead of time whether a more “limited set” would perform better than you current holdings. All I can say is that your portfolio appears to be quite well diversified and very low cost. And in my opinion (as long as your current allocation matches your tolerance for volatility), it’s hard to do any better than that.

    As to the difficulty involved in rebalancing, you’re absolutely right that you could cut down on the work involved by switching to a portfolio of fewer funds, but it would likely be at the cost of some (perhaps small) degree of diversification.

  8. Thanks, Mike, for the encouraging news.

  9. Mike,
    Do you have any thoughts on adding a international bond fund such as RPIBX? I would like exposure to this asset class and currently I can’t get it through Vanguard. I currently have an allocation almost identical to the 7 fund portfolio listed above in my ROTH IRA.

  10. Hi Sean.

    That’s a question I ponder myself sometimes. I don’t necessarily think it’d be a bad idea, but I haven’t yet done it myself, and I doubt I will.

    My first reason is that the difference in expense ratios between international bond funds and US bond funds appears to be quite large–larger than the difference in ERs between US stock funds and international stock funds. So you pay more for international bond diversification than you pay for international stock diversification (much more, if we consider expense ratios as a proportion of expected returns for the asset class).

    The second reason has to do with an investor’s goals. Specifically: What is the goal for the bond portion of your portfolio? If the goal is to have a portion of your portfolio that is rather stable, then I’d stick with US bonds, as currency risk will increase volatility.

    If the goal is simply to add a (hopefully) uncorrelated asset class to your portfolio (much like the goal when increasing the number of stock asset classes), then an international bond fund may make sense. However, given that they have high expense ratios and lower long-term expected returns than stock funds, I wouldn’t add one until I’d diversified into every stock asset class I could think of.

  11. Mike, do you see any benefit from getting (in a small way) into commodities or precious metals? I notice Vanguard has now reopened its Precious Metals Fund, and I am wondering if it’s worth putting 2-3%, but no more, of my holdings into that. From what I gather, some people think PMs a good hedge against inflation; others think that even though gold could still keep rising, the volatility risk is too great to bother with. Obviously from all you’ve said in this thread, PMs do not seem like a primary asset class for most portfolios. Thanks.

  12. Hi Larry.

    I would never put very much in gold, but I could see it having a purpose for 2-3% of a portfolio, as you’ve suggested.

    Incidentally, gold’s volatility is the very reason it might merit inclusion. High volatility + low correlation to the rest of the portfolio means that has
    great potential to offer a “rebalancing bonus.” That is, its contribution to the portfolio’s overall return would be greater than its stand-alone return.

    William Bernstein does a much better job of explaining this concept than I do.
    On gold specifically: http://www.efficientfrontier.com/ef/adhoc/gold.htm
    On the “rebalancing bonus” in general: http://www.efficientfrontier.com/ef/996/rebal.htm

  13. Very useful information, thanks.

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2013 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy