The Two ETF Portfolio Gets More Diverse
Vanguard launched the broadest based bond ETF on the market a few days ago, the Vanguard Total World Bond ETF (BNDW) which is a fund of funds comprised of the Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond ETF (BNDX). BNDW charges just 0.09%. An investor could pair BNDX with the Vanguard Total World Stock ETF (VT) and have the most globally diverse portfolio possible for almost no fee. The only work here would be choosing the correct asset allocation and then rebalancing occasionally when the mix drifts too far from your desired starting point.
For someone willing to spend more time on their portfolio I don't think a BNDW/VT combo is ideal for quite a few reasons but there is nothing wrong with it, it will absolutely get the job done provided someone with this portfolio doesn't panic and maintains an adequate savings rate.
That bit in the previous sentence about not panicking is one of the drawbacks of a BNDW/VT combo. Anyone doing this will be in for a volatile ride, a possibly panic inducing ride. A standard allocation is 60% equities/40% fixed income. In the last two bear markets the S&P 500 cut in half. Someone using a domestic only version of this portfolio during those two events took a 30% haircut to the overall portfolio by virtue of their equity fund cutting in half which of course is very challenging even if that blow was softened slightly by modest gains from the bond fund.
VT didn't start trading until June of 2008 which was nine months after the S&P 500 peaked. Even with an inception date months after the peak, VT still fell a shade over 50% peak to trough. Owning a BNDW/VT combo as said above, requires rebalancing when the mix strays too far from your target. There are countless ways to rebalance based on percentage deviations or based on the calendar, they can all work but can only work if the investor has the stomach to stick with their plan to rebalance. Not assuming anything as heroic as catching the bottom, but maybe after a 20% decline or on the last day of 2008 or with some other catalyst you would rebalance, presumably. If you don't then the whole plan kind of unravels.
That's not a reason to not own BNDW/VT unless you know you wouldn't be able to stick to your rebalance plan. The above is simply a drawback to understand and be prepared to mitigate and in this case mitigating just means staying disciplined.
So BNDW/VT is going to be a rough ride at certain points in the cycle. I've always been a believer in using gold to help smooth out the ride over the entire stock market cycle. Gold has a tendency to do well when equities are struggling as sometimes, but not always, it's correlation to equities is negative. It works often enough for me to maintain a small position for clients in the SPDR Gold Trust (GLD) which I've held pretty much since it first hit the market, I had a lucky trade selling 1/3 of clients' positions on GLD in late August 2011 when gold got close to $1900. Before that I used a gold mining stock as a proxy for gold.
Michael Batnick had a related post about gold earlier this week that is worth checking out including this chart about the benefit of adding gold over the long term. It smooths out the ride;
I've written hundreds of posts about increasingly, let's call them less simple portfolios using gold and other alternatives which I believe over the full stock market cycle will smooth out the ride along with adding funds that short the market (they go up when stocks go down) when the S&P 500 goes below its 200 day moving average along with a couple of other indicators.
Doing these sorts of things, or other things, beyond a two fund portfolio is usually just a matter of time spent on your investing. It doesn't have to be beyond investors who are willing to put in the time needed. But if you don't want to spend a lot of time on your portfolio (and that's ok) then simply owning a BNDW/VT combo can get the job done.