Vanguard has established a business model centered on the long-term investor, treating fund participants not merely as clients but as co-owners. This unique structure allows Vanguard to offer some of the industry's lowest fees, as profits are reinvested to benefit investors through reduced fund expenses. The Vanguard Total Stock Market ETF and the Vanguard Total Bond Market ETF represent an ideal pairing, providing comprehensive coverage of the primary asset classes: equities and fixed income. By allocating investments in a 60/40 ratio between these two ETFs—60% into the stock market fund and 40% into the bond market fund for every $100 invested—investors can construct a straightforward, long-term portfolio designed for stability and growth.
This article explores the advantages of combining these two Vanguard ETFs to create a balanced portfolio. It highlights how integrating the broad exposure of the U.S. stock market with the stability and income generation of the U.S. dollar bond market can lead to a robust investment strategy. Such a combination is particularly appealing for those seeking a 'set-and-forget' investment approach, emphasizing diversification, reduced risk, and consistent returns over time, all while benefiting from Vanguard's commitment to low fees.
The Strategic Balance of a 60/40 Portfolio
For investors aiming for long-term wealth accumulation, investing in equities is a crucial component. However, the inherent fluctuations of the stock market necessitate a balanced approach to manage risk. Financial professionals frequently advise incorporating bonds into an investment portfolio to enhance diversification and mitigate volatility. This dual-asset strategy acknowledges the growth potential of stocks while leveraging the stabilizing influence of bonds. An examination of historical data reveals a consistent trend: increasing the proportion of bonds in a portfolio correlates with a reduced likelihood of experiencing significant annual losses.
Historically, the 60/40 asset allocation has proven to be a highly effective equilibrium. This configuration delivers an appealing average annual return of 8.8% while substantially diminishing the overall volatility and risk exposure of the investment. This balance allows investors to capture a significant portion of market upside through equity investments, concurrently benefiting from the protective and income-generating qualities of fixed-income assets. The strategic allocation provides a resilient framework against market downturns, supporting sustained growth over extended periods.
Comprehensive Market Coverage: Equities and Bonds
The Vanguard Total Stock Market ETF offers a straightforward avenue for broad participation in the equity markets. This fund tracks the CRSP US Total Market Index, encompassing the performance of all listed stocks on major U.S. exchanges, and currently includes over 3,500 individual companies. Its design ensures comprehensive exposure to the entire U.S. stock landscape, with allocations weighted towards the largest companies by market capitalization, providing greater emphasis on dominant market players. Historically, this ETF has mirrored its benchmark's performance due to its exceptionally low expense ratio of 0.03%, meaning an annual management fee of approximately $0.02 for every $60 invested.
Complementing this, the Vanguard Total Bond Market ETF provides extensive exposure to the taxable, investment-grade, U.S. dollar-denominated bond market. It comprises nearly 11,400 bonds from diverse issuers, including U.S. Treasury securities, government-backed mortgages, corporations, and foreign entities, excluding tax-exempt and non-investment-grade instruments. Bonds serve multiple functions, offering fixed income through interest payments (with BND currently yielding over 4%) and acting as a diversifier to reduce portfolio risk. While bond returns are generally lower than those of stocks, particularly in recent decades marked by declining interest rates, BND’s ultra-low 0.03% expense ratio ensures that investors retain a larger share of the interest income generated, effectively tracking its benchmark’s returns.
