﻿There are just some things in life where you can’t have one without the other.
You can’t have Bacon without some Eggs. Chandler just wouldn’t be the same without Joey. And my
favorite. Where would Captain Kirk be without Spock? In the same way, in the world of investing,
these two index funds are just inseparable. Vanguard’s Total Stock Market Index Fund. VTSAX.
And Vanguard Total Bond Market Index Fund. VBTLX. Independently, they may be good
funds. But together, they make one of the most powerful wealth building tools in your arsenal.
Hi, if you are new to the channel, my name is Tae from Financial Tortoise. Where we learn to
grow our wealth, slow and steady. Today we are going to deep dive in my personal favorite and
ultimate investment duo. The VTSAX and the VBTLX. And why with just these two simple funds, you can
be well on your way to growing your net worth. This video is broken down into 3 major categories,
so feel free to jump around to sections you’d find most useful. First we’ll deep dive into
Vanguard’s Total Stock Market Index Fund. VTSAX. What it is and why you want it as your core
wealth building tool. Second, we’ll deepdive into Vanguard Total Bond Market Index Fund,
VBTLX. And similarly. What it is and why you want it in your portfolio. And Third, we’ll see the
true power of its combination on your slow and steady path to wealth. Alright. Let’s talk about
Vanguard’s Total Stock Market Index Fund. If VTSAX was a character in Star Trek, it would definitely
be Captain Kirk. Adventurous. Bold and willing to take calculated risks for greater returns.
An ETF equivalent is Vanguard Total Stock Market ETF (VTI). And it has an expense ratio of 0.04%
with a minimum investment of $3,000. Vanguard’s Total Stock Market Index Fund in essence
represents all Publicly Traded Companies in the United States. At the time of this video, there
are approximately 4,000 public companies in the US and this one fund represents pretty much all
of them. Big boy companies like Apple, Amazon and Microsoft. As well as thousands of lesser known
ones. When you purchase VTSAX, you are essentially buying a piece of every one of these companies.
And buying stocks is one of the best ways to tap into the growth of the greater American economy
and thus grow your net worth. However, buying individual stocks is risky. Because, to be honest,
unless you are a professional investor like Warren Buffet or Peter Lynch, we never know what stocks
will do well or not do well. Thus the importance of this concept called “diversification” when it
comes to investing. Not putting all your eggs in one basket, but spreading it around so you are
well diversified. And when you invest in a fund like Vanguard’s Total Stock Market Index Fund,
you automatically get this diversification across thousands of publicly traded companies.
On top of that, another great aspect of investing in VTSAX is the fact that the fund is
self-cleaning. What does this mean? It means that the fund automatically recycles bankrupt companies
while at the same time retaining those that are continuously creating value for its customer. No
person, aka fund manager is doing this. This is just a natural byproduct of holding all publicly
traded companies based on market capitalization. And stocks have unlimited potential to go up.
Just look at a company like Apple. In the last 40 years, since 1982, the stock increased in value
by 230,000%. However, how many of us can honestly say that if we were looking at Apple 40 years ago,
we’d know it would have become the company that it is today. Not many of us. But when you hold
onto Vanguard’s Total Stock Market Index Fund, you naturally get the upside of growing companies like
Apple. And on the downside, you are protected because the lowest a company can go is $0. It
can’t fall any further. When a company fails, it will go bankrupt and disappear essentially making
its stock price $0. But there are always hundreds of new companies coming in to take the reign.
Young companies that could also one day be the new Apple. And though at the time of this video,
the market looks a bit shaky. When you step back and look at the bigger picture. 10, 20,
30 years, the market, thus the index normally goes up. In the last 10 years, VTSAX has had an
average return of almost 15% annually. That means that if you had invested $1,000 ten years ago,
it would have grown to over $4,000 from just the compounding growth alone. 4x your original
investment and you did nothing except invest in VTSAX. If you want to really grow your net worth,
invest in Vanguard’s Total Stock Market Index Fund and hold it for life. However,
you can’t go through life alone. And that is the same with our investment friends. Captain
Kirk always had Spock at his side. Providing him the calm rationale voice in times of many crises.
In the same way, if Vanguard’s Total Stock Market Index Fund is our Captain Kirk,
Vanguard Total Bond Market Index Fund, VBTLX, is our Spock. Calm. Steady. And to be honest,
a little boring. At a high level, a good way to think about bonds in comparison to stocks
is to consider them as investments that will smooth out our volatile stock investment ride.
Stocks are great wealth building tools for the long run, however in the short-term,
they can be quite volatile. Moving up and down constantly at the whim of slightest threatening
news. Bonds, on the other hand, might not have the big long-term returns, but it doesn’t have
all that volatility that comes with stocks. And in my opinion Vanguard Total Bond Market Index Fund,
VBTLX is the one and only Bond Fund you need in your portfolio to help smooth out your investment
ride. An ETF equivalent is Vanguard Total Bond Market ETF (BND). It has an expense ratio of 0.05%
with a minimum investment of $3,000. VBTLX is made up of over 10,000 individual bonds within its fund
with varying credit ratings, issuers and maturity dates. And this wide diversification of VBTLX
makes it one of the best choices when it comes to investing in bonds because it minimizes all the
risks that come with holding individual bonds. Let’s talk about these risks. The first risk
that I want to discuss is default risk that comes with holding bonds. Bonds are essentially loans
to the government or corporations. And responsible organizations, like responsible individuals,
ensure they meet their debt obligations. Paying back you, the lender, regularly and on time.
However, what happens if the organization is struggling to make its payments and defaults.
You as the bond holder won’t get your money back. So in order to help investors evaluate
the risks of any company or government bond they are thinking about purchasing.
Various rating agencies, like the Standard & Poor, evaluate their creditworthiness and give a grade;
ranging from AAA to D. Just like school grades, lower the rating, the higher the risk of default.
Higher risk bonds, like double BB and lower, offer higher interest because people are less willing to
buy these higher risk investments. So as a buyer of bonds, if you are willing to accept this higher
risk, higher the interest rate you’ll receive. Vanguard's Total Bond Index Fund, VBTLX mitigates
against this default risk by holding only investment grade bonds. There is no bond within
VBTLX rated lower than BBB. Vanguard wants to provide you good returns, but not at the expense
of unnecessary risks. Another risk that comes with owning a bond is the Interest Rate risk. This only
comes into play if you decide to sell your bond before the maturity date at the end of its term,
but it’s a factor you want to consider. Let’s say that you are looking to sell your bond before the
maturity date. If the going interest rate has changed since your purchase, the value of the
bond will change as well. For example, if the interest rate has gone up since your purchase,
the value of your bond will have decreased. Why? Because when the market interest rate is higher,
new bonds may be issued with that higher interest rate, thus making the original bond with a lower
interest rate less attractive. If you as a bond holder want to sell it, you will need to offer it
at a discount in order to make it attractive in comparison to new bonds that are being
issued with the higher interest rate. If you are holding onto a few specific bonds with these lower
interest rates, you could be at a world’s hurt whenever the interest rate changes. But again,
when you hold onto VBTLX, because its holding bonds of widely differing maturity dates,
your interest rate risk is mitigated. The third risk is Inflation Risk that comes with bonds.
Inflation occurs when the cost of goods is rising. If you watch any news lately, it seems like
everyone is talking about inflation given how high it is right now. Bond interest rate is set by the
anticipated inflation rate. Generally, short-term bonds pay less interest because it's associated
with less risk - it's a shorter time horizon and your money is tied up for a shorter period of
time. And long-term bonds pay more in interest because of higher associated risk. I know,
it can be a bit confusing, but the bottom line is that if you decide to purchase individual bonds,
you’ll need to effectively manage this inflation risk. Anticipating what inflation will do in
the future and making your corresponding bond purchases. Again, this is where VBTLX shines
because when you purchase VBTLX, the fund already holds various bonds across a broad range of terms;
short-term, mid-term and long-term. Effectively reducing inflation risk.
No need to try to predict the future with a magic ball - because honestly, none of us can.
The bottom line is that when it comes to bonds, Vanguard’s Total Bond Index Fund,
the VBTLX is really the only fund you need to hold in order to gain all the benefits
that comes with holding bonds while mitigating all the risks like default, interest and inflation
risks. And when you combine Vanguard’s Total Bond Index Fund and Vanguard's Total Stock Market Index
Fund you really get the ultimate investment duo that is second to none. VTSAX acts as our core
wealth building tool, providing us strong returns over a long period of time. VBTLX acts as our less
volatile partner that smooths out all the volatile ups and downs in our wealth building ride.
Let’s take a look at how this looks in action. If you were to compare the total stock market trends,
VTSAX vs. total bond market index, VBTLX the past 20 years - VBTLX has smaller overall gains,
but has much less volatility than the VTSAX. What having bonds in your portfolio will do for you,
is that durings times of market crash, where your stock investments can dip by 20-30%,
your bond investments will hold your portfolio steady. Like a good anchor. Now
if you are in your 20s and 30s and don’t plan on dipping into your investments anytime soon,
having the majority of your investments in stocks is a better move. You have time on your side to
ride out the ups and downs of the stock market. However, if you are nearing retirement and want
to tap into your nest egg soon, you want bonds in your portfolio. You don’t want to be caught in a
situation where you need to pull your money from the stock market when it’s 20-30% down. Another
power of having these two funds in your portfolio is that you are essentially protecting yourself
from both inflation and deflation risks. Inflation and deflation are two big macro risks that impact
our portfolio. And they can really hurt us if we aren’t adequately prepared. However,
when you have stocks like Vanguard’s Total Stock Index Fund. It naturally provides you
with an inflation hedge because stock in general rises with value with inflation. And bonds like
Vanguard’s Total Stock Index Fund provide you with a good deflation hedge. Because when the money the
bond lent is paid back, you have more purchasing power due to the decrease in price that deflation
caused. Deflation occurs when the price of stuff falls. We are currently in an inflation period,
but the market has its own ebbs and flows so we won’t know when we will enter a deflation
period. Being invested in VTSAX provides us a good hedge against inflation, but we want to be
prepared for periods of deflation as well with VBTLX. Remember, we are long term investors,
not market timers. Thank you guys for watching, and if you want to deep dive even more into each
of these specific funds, check out a few of my videos here. Until next time, all the best.