When you are working, the big retirement push is to save up as large a nest egg as you can. That's great, but everything changes when you actually retire. At that point, you have to live off of your savings while you, hopefully, enjoy not having to be in the full-time rat race anymore. If you don't want monitoring your investment portfolio to become your new full-time job, the Vanguard Total Stock Market Index ETF (VTI 0.77%) and Vanguard Total Bond Market Index ETF (BND 0.36%) are two exchange-traded funds (ETFs) you'll want to get to know very well.
What do these Vanguard ETFs do?
Both the Vanguard Total Stock Market Index ETF and Vanguard Total Bond Market Index ETF are index-based exchange-traded funds. That means that they follow an index without any human intervention. This helps to keep costs low, with each offering ultra-low expense ratios of 0.03%. And since neither one strays from the index, the real question for investors is, what indexes are they following?
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The Vanguard Total Stock Market Index ETF follows the CRSP US Total Market Index and the Vanguard Total Bond Market Index ETF tracks the Bloomberg U.S. Aggregate Float Adjusted Index. Normally, you would need to dig into the details of an index to fully understand what an ETF is doing, but in this case, it really isn't necessary. The ETF names do, in fact, tell you all you need to know in this situation. One is designed to provide broad-based exposure to equities and the other broad-based exposure to bonds.
Why would you want to own these ETFs?
This pairing of Vanguard ETFs allows investors to create a very simple balanced portfolio that they can fine tune to their personal needs and risk tolerances. For many investors, the target of 60% stocks and 40% bonds will be a good start. And to achieve that, all you need to do is, at the start of the year, put 60% of your portfolio into the Vanguard Total Stock Market Index ETF, and the remaining 40% into the Vanguard Total Bond Market Index ETF. Simple and done in just two trades.
You can let that portfolio sit, largely unattended, for a year and then buy and sell as needed to get the numbers back to 60/40. Or you can adjust more frequently -- it's up to you. It only takes two trades each time. The key is that the work you need to keep your portfolio in line can be pretty minimal if that's what you want, which will free you up to enjoy other things, like time with family and friends... or golf, if that's your thing.
From a longer-term perspective, however, you have optionality. Your risk tolerance when you are just retired at 65 might be higher than when you turn 80. If that's the case, you can adjust your allocations over time, inching up the money allocated to bonds. You might also decide that 60/40 is too conservative for your taste. No problem, pick the allocation that works for you. After all, you effectively have the entire U.S. stock market and the entire U.S. bond market in your portfolio and shifting things around is as easy as making two trades. And you will never lag the broader stock market or the broader bond market because you own each of them, effectively, in their entirety.
There's also another way to view this portfolio. Maybe you enjoy investing, but you don't want to spend all of your time doing it. In that case, this portfolio could be your foundation. Then you can carve out some percentage of your portfolio to invest in individual stocks and/or bonds, or other ETFs that meet some objective you have in mind (such as more dividend income, or adding exposure to an out-of-favor sector). With a core of just two ETFs, you can build out whatever portfolio you like without having to spend too much time or effort on those two core holdings.
Plenty to work with, but you can do more if you want
Simply put, the Vanguard Total Stock Market Index ETF and the Vanguard Total Bond Market Index ETF give you options. They can be the only two investments you own, setting you up to benefit from the growth of the U.S. economy. Or they can be the core of your portfolio, with you doing only as much "extra" investing as you want. You probably won't brag about these two ETFs at a party, but if you own them, you'll have more time to spend doing other things you can brag about.
