Two funds are better than one (2024)

Paul Merriman is one of my favorite financial educators. I love him for three reasons: First, he gives gentle Money Santa vibes (and who doesn’t love that?). Second, his advice is backed by data. And third, he takes financial advice a step further than the usual maxim of “Just buy the Total (US) Stock Market and call it a day!”

Merriman’s original philosophy was known in investing circles as the “Ultimate Buy and Hold” portfolio. With a dozen different holdings and lots of rebalancing, though, people didn’t really stick to it—it was too much for an individual investor to casually manage.

With the help of friend Chris Pederson, Merriman refined the approach into the “Two Funds for Life” portfolio. The strategy is exactly what you’d expect: only two funds. How can you get the diversification you need with only two funds, you ask? According to our expert duo, it’s simple: You make one of those funds a Target Date Fund.

Target Date Funds get a bad rap from some investors for somewhat elevated fees (convenience comes at a cost) and a not-aggressive-enough stance. Yet they’re a quite efficient way to get domestic, international, and bond exposure in one fell swoop. For example, the Vanguard Target Retirement 2060 Fund, or VTTSX, offers 54% Total US Stock Market, 36% International Stock Index, 7% Total Bond Market, and 3% International Bonds, for a 0.08% fee. Not bad.

Like its target date peers, the Vanguard fund will get less aggressive (fewer stocks, more bonds) over time as you approach its target year. “But Katie, I want to be aggressive,” I hear you cry.

That’s where the other fund—a riskier, rewardier fund called Small Cap Value—comes into play. Small Cap Value historically outperforms the S&P 500 by a few percentage points each year when returns are annualized; the S&P 500 averages 10% before inflation and Small Cap Value averages 14%, which blows my mind.

The “Two Funds for Life” portfolio suggests 90% Target Date Funds (picked for your time horizon) and 10% Small Cap Value. That’s a strategy that delivers two things all investors should value: simplicity and low-cost diversification.

Two funds are better than one (2024)
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