A Two-Fund Portfolio?
Investment guru Charles Ellis says the simpler, the better.
Charles Ellis is a living legend in the investment world. In 1972, he founded Greenwich Associates, one of the most famous global pension and institutional investment advisory businesses, which he ran until 2000.
He’s the author of 15 books, including Winning the Loser’s Game, an elegantly written investment classic that distills timeless wisdom about drawing up a long-term investment policy, how to understand risk, the importance of time in investing and how to construct an efficient portfolio. More than half a million copies of the book have been sold, and it was published in the fifth edition last year.
Now 72, Ellis still advises wealthy families and large institutional investors on how to invest. We asked Ellis, who has taught at Harvard’s and Yale’s business schools, to recommend a retirement portfolio for the individual investor. His response: Put it all in Vanguard Total World Stock (symbol VTWSX) and Vanguard Total Bond Market (VBMFX). For his suggested allocations by age, see below (Ellis, an ardent proponent of indexing, was also a director of Vanguard).

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A portfolio with only two funds? Ellis has an intriguing rationale.
The simplicity of his advice brings to mind a maxim of Albert Einstein’s that Ellis is fond of citing: “Everything should be made as simple as possible -- but no simpler.” For more distilled wisdom on investing and other aspects of personal finance, read The Elements of Investing (John Wiley & Sons, $19.95), which Ellis coauthored with Princeton professor Burton Malkiel, he of A Random Walk Down Wall Street fame. This classic primer provides basic tips, such as establishing investment goals and tailoring your holdings to your tax bracket. You can breeze through the concise volume in two hours. (Malkiel is a former Vanguard director.)
You’ll notice that Ellis’s portfolios are heavily weighted toward stocks. He worries that investors whose portfolios are tilted more toward bonds will come up short of cash in retirement. “The risk of running out of money before you die is larger than you think,” he says. “Most people are underprepared for living as long as they will.”
Nor is Ellis likely to change his view of bonds. In fact, he thinks most investors should be reducing their allocations to bonds. “I have a real reservation about buying bonds now because interest rates are low and the total return to investors in the future doesn’t look attractive to me.”
Ellis himself says he still keeps 100% of his personal retirement portfolio in stock-index funds, and has throughout his career (he holds both U.S. and foreign index funds because his investment program began before the creation of Vanguard Total World Stock). His explanation is that because he’s accumulated sufficient wealth, he’s really running the portfolio now for his wife (who is younger than he is), children and grandchildren.
Note that if you were to purchase Total World, you would be putting more of your money into foreign stocks. The fund’s current allocation is 59% in foreign stocks and 41% in U.S. stocks.
Ellis says that diversifying by nation, market, economy and currency brings tremendous benefits to a portfolio. He’s bullish on potential growth in emerging markets, where, he says, “1.5 billion people have been lifted out of poverty over 30 years.”
Returns from U.S. stocks are unlikely to be as generous as they have been over the long haul, says Ellis. U.S. stocks returned 9.8% annualized from 1926 through 2009, according to Morningstar’s Ibbotson unit. Ellis says to expect closer to 8% annualized in the future. “If I’m wrong,” he says, “it will be less than 8%, not more.” For one thing, he notes, the current dividend yield of 2% is scarcely half the historic average (historically, more than one-third of returns from stocks have come from reinvested dividends). And price-earnings ratios have crept up over the decades.
Finally, Ellis reminds investors to rebalance their portfolios periodically to restore the desired allocations. And don’t get too fancy with your portfolio, he cautions. “A little bit of personal modesty is in order.”
Charles Ellis' suggested portfolios by age
Under 40 years old -- 100% in stocks
40 to 50 years old -- 90% in stocks; 10% in bonds
50 to 60 years old -- 80% in stocks; 20% in bonds
60 to 70 years old -- 60% in stocks; 40% in bonds
70 to 80 years old -- 50% in stocks; 50% in bonds
-
-
Stock Market Today: Stocks Close Flat With Fed Meeting in Focus
A choppy session for stocks turned into a flat finish as investors looked ahead to Wednesday's Fed announcement.
By Karee Venema Published
-
What Are the Types of Mutual Funds?
Answering the question "what are the types of mutual funds" will help you to choose the right options for your specific investing needs and goals.
By Jeff Reeves Published
-
How to Find the Best Vanguard ETFs
Investors looking for the best Vanguard ETFs would be wise to follow the philosophy of the asset manager's founder, John Bogle.
By Jeff Reeves Published
-
Donor-Advised Funds: A Tax-Savvy Way to Rebalance Your Portfolio
Long-term investors who embrace charitable giving can easily save on capital gains taxes by donating shares when it’s time to get their portfolio back in balance.
By Adam Nash Published
-
Choosing Between Look-Alike ETFs and Mutual Funds
If you're trying to choose between ETFs and Mutual Funds, some factors to help you decide are how you trade and the type of account you plan to use.
By Nellie S. Huang Published
-
'A Random Walk Down Wall Street' at 50
Interview 'A Random Walk Down Wall Street': 50 years on Burton Malkiel, author of the investing classic, remains a champion of index investing.
By Kim Clark Published
-
How to Pick the Best Robo Advisor For You
Kiplinger's guide to the best robo advisors to fit your needs.
By Kim Clark Published
-
The 5 Best Actively Managed Fidelity Funds to Buy Now
mutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
By Kent Thune Last updated
-
The 5 Safest Vanguard Funds to Own in a Bear Market
recession The safest Vanguard funds can help prepare investors for continued market tumult, but without high fees.
By Kyle Woodley Last updated
-
The 12 Best Bear Market ETFs to Buy Now
ETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
By Kyle Woodley Published