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How many funds do you need for good diversification? Many experts will tell you just one.
If you want more control, then you can have a pretty good amount with just 3 or 4. For most of us,
juggling dozens of individual stocks and funds can lead to more work and confusion than success. We’ll consider some of these simpler options here.
One-fund Approach
As stated above, a single fund can provide exposure to a wide array of stocks and bonds, enough
to be the only fund in a portfolio. Examples of such funds are
balanced funds and
target-date funds.
Balanced funds normally have a set allocation to stocks, bonds and sometimes cash. For example, the Vanguard
Balanced index fund (VBAIX)
maintains 60% stock (tracking the CRSP U.S. total market index) and 40% bonds
(tracking the Bloomberg Barclays U.S. aggregate float adjusted index).
Target-date funds, however, evolve their allocations over time.
The intent is to move towards more conservative allocations (e.g. more bonds) as the target date nears.
The target date is when investors expect to start selling the fund. For example, the Vanguard target-date
2040 fund (VFORX) is
intended for an investor that will start selling the fund around the year 2040.
This fund holds about 85 percent stocks (15 percent bonds) at the time of this writing but will likely increase
bond and decrease stock holdings in the upcoming 20 years.
Two-fund Approach
If you want control over your allocations to stocks Vs. bonds, then holding a single, diversified
stock market fund along with a single diversified bond market fund is a reasonable option.
We’d recommend something like VTI for stocks and BND for bonds.
One significant decision in this approach is how diversified you want to be in your stock market fund: S&P 500
only (e.g. VOO), US market only
(e.g. VTI),
developed markets only (e.g. VEA) or
total world diversification
(e.g. VT). As of early 2020 more experts are recommending global diversification.
If you want more control on the
extent of your global diversification, you can always try a three-fund approach with one US and one ex-US stock market fund.
Three-fund Approach
For a three-fund approach, we agree with the Bogleheads on holding two index
funds for stocks (US and ex-US, e.g. VTI and VXUS) along with a diversified bond fund like BND.
Four-fund approach
Vanguard recommends a four-fund portfolio consisting of a U.S. stock index fund (VTI), an ex-US stock index fund (VXUS), a U.S. bond market fund (BND) and an ex-US
bond fund (BNDX).
These funds access more than 25,000 U.S. and international stocks and bonds and have best in class expense ratios of just 0.03, 0.09, 0.035 and 0.09 percent respectively.
Vanguard provides a tool to help you determine allocations to each of these funds suitable to your goals.
The tool is entitled "Get a recommendation to fit your goals"; you can navigate to it by way of Vanguard.com, Go to personal investors' site,
What we offer: Mutual Funds, Get a Recommendation.
Alternate Funds
All example funds mentioned above were Vanguard products.
We do not receive any compensation for recommending Vanguard.
For those that prefer not to use Vanguard, we list analogous funds below, provided by other companies.
- Schwab Total Stock Market Index (SWTSX)
- Schwab International Index (SWISX)
- Schwab U.S. Aggregate Bond Index Fund (SWAGX)
- S&P 500 Basic Index (DSPIX)
- International Index (DIPSX)
- Bond Index Basic (DBIRX)
- Fidelity Total Market Index Fund (FSKAX)
- Fidelity Total International Index Fund (FTIHX)
- Fidelity U. S. Bond Index Fund (FXNAX)
- TIAA Equity Index (TINRX)
- TIAA Emerging Markets Stock Index (TEQKX)
- TIAA Bond Index Fund (TBILX)
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