The BogleHeads two fund ETF portfolio

Why the two-fund portfolio?

Despite all the fancy actively managed funds out there, it’s worth going back to basics sometimes and sticking to low-cost index funds. The reasons for this are numerous. For instance, studies have found that net of fees, stock and bond index funds consistently outperform actively managed funds both on a total return and after-tax total return basis. 

Passive index investing also beats most stock-pickers. Stock picking is notoriously hard, with just a handful of stocks (86 in total) accounting for half of the total stock market's return in the last 90 years. 96% of stocks actually underperformed risk-free Treasury bills. The probability of an investor, however skilled, selecting more than one of these stocks is remote. 

So, investors who accept this reality can choose to match the stock market's average return over long periods of time. As Bogle noted in The Little Book of Common Sense Investing: 

“Gunning for average is your best shot at finishing above average…Owning the stock market over the long term is a winner's game, but attempting to beat the market is a loser's game.”

Using Bogle's approach of "buying the haystack" also helps investors take the emotion and confusion out of investing. With this approach, investors no longer need to worry about which stocks to pick, which market caps to overweight, which sectors to focus on, what length of bonds to hold, etc. 

This tends to mitigate many of the poor behaviors that cause the average investor's dollar-weighted returns to underperform the time-weighted returns of their selected funds: chasing past performance, attempting to time the market, panic-selling, etc. 

It also keeps two easily controllable yet commonly overlooked risk factors low: high expense ratios and under-diversification. Excessive investment fees eat into future returns, while poor diversification exacerbates volatility and drawdowns. This can easily be mitigated by selecting low-cost index funds.

How to create the two-fund portfolio

As noted earlier, creating the two-fund portfolio means selecting low-cost, broadly diversified, passively managed index ETFs. We're going to use Vanguard ETFs here to keep with the spirit of Bogleheads, but iShares ETFs can work as well, and make for great tax-loss harvesting pairs. 

For the stock allocation, Bogle suggested the total U.S. stock market. Vanguard's flagship ETF for this is the Vanguard Total Stock Market ETF (

), which costs a very low expense ratio of just 0.03%, or $3 for a $10,000 investment. This is as cheap as it gets in the ETF industry.

VTI holds over 4,000 small, mid, and large-cap U.S. stocks across all 11 GICS market sectors. 82% of the ETF is still large-cap, given that the fund's underlying index is market-capitalization weighted. In terms of style, the fund is fairly even weighted between growth and value stocks (blend). 

For the bond allocation, Bogle suggested the total U.S. bond market. Vanguard's flagship ETF for this is the Vanguard Total Bond Market ETF (

) which also costs a very low expense ratio of just 0.03%. This ETF tracks Barclay's Capital U.S. Aggregate Float Adjusted Bond Index.

BND is split roughly 67/33 between U.S. Treasury/agency bonds and investment-grade corporate bonds. It holds every type of bond except TIPS. Bonds of all maturities are included with a weighted average duration of 6.7 years, giving the ETF moderate interest rate sensitivity. 

The final step is to combine the two funds. The exact allocation depends on an investor's risk tolerance and time horizon. Common allocations include 80/20, 60/40, and 40/60, but anything is possible. The key is to make consistent contributions and stay the course. That's the Bogleheads way!

Please note this article is for information purposes only and does not constitute investment advice.