2 Vanguard ETFs to Buy With $2,000 and Hold Forever

Key Points

• Vanguard has a collection of ETFs that range from highly focused to highly esoteric.

• If you like to keep things simple, there are two Vanguard ETFs that will pair well together for most investors.

• These two ETFs can create and maintain a diversified portfolio for virtually no cost, at least by Wall Street standards.

• 10 stocks we like better than Vanguard S&P 500 ETF ›

Some people find investing to be an enjoyable experience. Others think about investing and cringe. If you're in the latter category, or just want to simplify your investing life, you need to get to know these two Vanguard exchange-traded funds (ETFs). With $2,000 or $20,000, you can make two trades and have a well-diversified and low-cost portfolio that is super easy to maintain. Here's how to get started.

Why use exchange-traded funds?

The first thing to address here is the ETF structure. These are, basically, pooled investment vehicles, like a mutual fund, but they trade all day long, like a stock. Thus, exchange-traded funds provide you with liquidity and simplicity at the same time. Mutual funds can only be bought and sold at the end of a trading day. If you go with a broad-based index ETF, which is what these two Vanguard offerings happen to be, you also get a diversified investment.

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One added benefit is that ETFs tend to have very low expenses relative to mutual funds. They are most certainly less expensive than paying a person, like a financial planner, to manage money on your behalf. Vanguard is particularly well known for its low expense ratios, with each of these ETFs having a super-skinny expense ratio of 0.03%. That's practically free by Wall Street standards.

Two Vanguard ETFs, one simple portfolio

Investments are generally broken down into two broad segments, stocks and bonds. When you put both in your portfolio, it's usually called a balanced approach. There's a whole category of mutual funds that do this, but you can do the same for less if you pair up the Vanguard S&P 500 ETF (NYSEMKT: VOO) and Vanguard Intermediate-Term Bond ETF (NYSEMKT: BIV).

The Vanguard S&P 500 ETF is fairly simple to understand. It tracks the S&P 500 (SNPINDEX: ^GSPC), which is largely considered the preeminent market barometer. The stocks in the index are hand-picked by a committee to be representative of the broader U.S. economy. Generally speaking, they are the largest and most important U.S. stocks, weighted by market cap. You could get fancy with your stock picking, but even world-famous investor Warren Buffett has long advised investors to just buy the S&P 500 and be done with it.

The Vanguard Intermediate-Term Bond ETF is likely to be a bit more obscure for investors. It buys high-quality bonds with around five to 10 years left before they mature. Technically, the index it tracks is the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index. But the important takeaway is that it focuses on a diversified portfolio of intermediate bonds. This tends to be a yield-versus-volatility sweet spot in the fixed income arena. Essentially, you get a more attractive yield than you would get from a short-term bond, but without having to take on materially more risk, as you would if you owned long-term bonds.

All you need to do from here is decide what your stock/bond mix is going to be. The Wall Street rule of thumb is 60% stocks and 40% bonds. However, if you are more aggressive, and likely younger, you might go 80/20. If you are more conservative, and likely older, you might go 40/60. You have to find the breakdown that feels best for you, but once you have it, that will be your target number until you choose to change it.

So, when you start the portfolio off, say with $2,000, a 60/40 portfolio would leave you owning around $1,200 worth of the Vanguard S&P 500 ETF and $800 of the Vanguard Intermediate-Term Bond ETF. You can then forget about the portfolio for roughly a year. When you go back to check in, the percentage of the portfolio in each ETF will probably be different. Just sell some of one and buy the other until the portfolio is back in the 60/40 balance that you started out with. That's all you need to do each year for the rest of your life.

There's a little more to think about

On one level, the Vanguard S&P 500 ETF and Vanguard Intermediate-Term Bond ETF are all you need -- and you only need to make two trades a year. What is likely to change is the percentage breakdown you assign to each ETF. As alluded to earlier, your risk preferences will dictate how much of your savings you'll want in each ETF. That will probably change over time, with a higher equity focus when you're younger and a greater focus on bonds when you're older.

In other words, after setting this two-Vanguard-ETF portfolio up, the big thing you need to pay attention to is your capacity to take on risk. But that's something you probably only need to think about deeply every five years or so.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Intermediate-Term Bond ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.