Given the few results of my reading and a few responses from another thread of mine, I’ve decided to put money into a Vanguard index fund.
However, I was quickly reminded that even in that category, there are a lot of different types, even within a single company. How do I choose which one(s) to invest in? What factors do I need to think of, and how do I choose based on those factors? I’m over 20 years away from retirement and I’ll probably put in around $10-12K.
Thanks in advance.
Put it in an S&P 500 Index fund. That’s sort of the default answer (and where I have the bulk of my investment money).
J.
And after you’ve opened an S&P 500 index fund, open a Total International Stock index fund, and an intermediate or long-term indexed bond fund. That pretty much covers all of your investing bases.
Or you can do something like VTSMX (which includes the S&P) instead of S&P - but either way is probably ok. The idea is to replicate the market as closely as possible with as few fees as possible. But even just doing the S&P will give you most of those benefits.
Also second advice on using an international fund as well.
What artemis said.
After researching this subject for a week and running 5 year Excel comparisons with my existing 401k against Fidelity and Vanguard index funds, I am about to take the leap into the “Three Fund Portfolio” described here.
If you have $10k for each fund, the Admiral funds have a slight edge - VTSAX, VTIAX and VBTLX.
(fwiw, my 401k is buy and hold - 95% equities, very aggressive and very volatile, if I had put it in the funds above in 2008 with 70% equities, I would have done 98% as well as of today, but my 2008 losses would have been one third less)
Substitute the last with a short-term FI managed fund, and I would agree.
Sadly, no - $10-12K total.
I’m sure that makes a difference.
(Which reminds me: if I do invest in multiple funds, how do I determine how to allocate the money amongst them? Just go equal portions, or…?)
It depends on your risk tolerance - first I would decide how much if any you want to put in bonds. Personally I have very little - a generally rule of thumb is your own age in bonds. I think this is too much - and others will suggest 40%.
Second how much to put in international - I think no more than a third of what you are allocating to stocks. So if you are putting it all in stocks - 66% US - the rest international.
Just my opinion - but somewhat based off some analysis.
Check out figure five here for a general idea:
The more risky you are - the farther to the right you should go. If you have a short time horizon - probably the farther to the left you should go.
That is a good site for ideas BTW - but don’t let it overwhelm you - you don’t need all those funds.
From the other thread, it looks like you have an IRA going, and this is just for general investing, correct?
There really is no “right” answer to this, but the obvious goal is to maximize return while minimizing risk. The risk inherent in high-return funds is typically offset by choosing a diversity of funds.
Sounds like a lot of homework, and it is, but fortunately other people have already taken it on. I, personally like to refer to the Lazy Portfolios to help me with my investment strategy. Since you’re starting with $10, you’ll only be able to purchase up to three funds (unless you get the Vanguard STAR fund or ETFs) so I recommend one of the 3-fund portfolios in that Lazy Portfolio link, then maybe consider further diversification as your investments grow. This page gives 1, 3, 5, and 10 year returns for many of the aforementioned Lazy Portfolios.
All that being said, my financial guy (actually, my company’s 401k rep), really likes Wellesley (60% bonds, 40% stocks) and Wellington (40% bonds, 60% stocks) for their return/risk ratio. I recently switched over to 1/3 Wellington, 1/3 Wellesley, and 1/3 Intermediate-Term Bond Index for my general investing. My IRA has several more funds, and a bit more risk (but hopefully long-term reward) than that.
Also, don’t forget to rebalance. Each year or so, move the money around between funds to make sure the percent allocations are where you intend them to be. This further incorporates the “by low, sell high” strategy.
The last time I checked (which I admit was a long time ago), Vanguard required $3000 to open an account with one of their index funds. So that makes it simple: divide your $10,000 into thirds, and you’ll have just enough to meet the minimum investment requirement for a total US stock fund, a total international stock fund, and a bond fund. You can worry about ratios between the three funds later, when you’re ready to invest more money.
Once you hit $10k in a fund, you can swap it for the Admiral equivalent. For now, VTSMX, VGTSX and VBMFX should cover the bases for you.
The link in my first reply covers allocation, but don’t get hung up on it. Splitting into thirds for now is fine, as you read up on things you can get fancier. (Although I would probably do 5k, 3k and 4k - in US stocks, Intl stocks and bonds).
First off, let me recommend The Bogleheads Wiki for all sorts of helpful advice. In particular, several Lazy Portfolios detail the sort of questions you’re asking here about asset allocation.
Also, make sure you’re aware of how to reblance once a year. As an example, if you’ve decided you want to be 80/20 in stocks to bonds and stocks have a very good year, you’ll find yourself at, perhaps, 86/14. Once a year, you sell from your higher performers and buy up lower performing funds such that you get back to your desired ratio. The effect is that you’re always selling high and buying low. You’ll be buying when things are undervalued and selling when they’re overvalued.
Sorry to bump this, but I’m looking at the list of index funds Vanguard offers (here), and I’m having trouble matching them with some of the suggestions here. For example, I can’t find an S&P 500 index fund listed. Can those who were kind enough to reply point out what I’m missing?
Also, how do I judge how tolerant I should be of risk?
The 500 Index Admiral Shares (VFIAX) is the S&P 500 Index for Vanguard.
Try Googling Risk Tolerance Assessment to find a questionaire that might help you determine what level of risk you’re comfortable with. They’re usually very short.
I’m going to jump in here, if you don’t mind. I don’t want to make another thread.
Once I get my 401k sorted out I’m going to start a Roth IRA. I was thinking using Vanguard and getting one of those lifecycle funds. Being completely honest with myself I probably won’t do a good job researching index funds or modifying each year. Sound like a solid plan? I hope I’m not missing something.
eta: Also, let’s say that my 401K is set up, as is my Roth IRA and I have some spare money that I could play around with. Would that be the point where I just buy a few Index funds and see where they go?
One more thing: Where do people store their medium and long-term savings? I’m assuming short-term is in just a savings account. What about down payment on a car or down payment on a house levels?
I’m not a huge fan of those target date funds, to be honest. They tend to have a lot of fees built in, and the performance is often mediocre.
I’ve been investing for 30 years, and to be honest, I’ve never understood why people invest in bonds.
Especially right now, when bond yields are so low, it seems like the absolute WORST time to be buying bond funds. (Bond fund returns are inversely proportional to interest rates. As interest rates go up, bond fund values go down. With interest rates at rock-bottom, historically low values, you’re virtually guaranteed to lose money on bond funds as interest rates return to more “normal” levels.)
Getting back to why I don’t invest in bonds. The rationale for bonds is that they lower your risk and “smooth out” your returns. But what they actually seem to do is lower your returns. Any money you invest should be “long term” money – money that you expect to leave in the investment for at least 5 years, but more likely much longer. So you can weather value swings in the investment.
Bond returns historically don’t beat inflation. Stock returns do. Any money that’s going to be invested for 10, 15, 20 years, etc. will produce a better return in a stock index fund than in a bond fund.
And even if you are close to retirement, MOST of your money is still going to be invested for 10, 15, 20 or more years. So the old adage about increasing your bond holdings as you get older doesn’t make any sense. All it’s going to do is reduce your return on your portfolio.
So, to the OP. I already advised to put the money in a low-cost S&P 500 fund. I don’t think you need to get any fancier than that. Splitting your money between an S&P 500 fund, international fund, and bond fund is needless complexity that won’t improve your returns, and will probably reduce them.
I’ve already mentioned my objections to the bond funds. An international fund really isn’t needed either, since the companies in the S&P 500 fund get a significant portion of its revenue and profits from international sources.
Keep it simple. Put it in a Vanguard S&P 500 fund, and be done with it.
J.
Thanks for the thoughts! One question:
This got me wondering: is there any circumstance that would badly hit a stock fund in would NOT also hit a bond fund similarly badly (especially if it happened late into the investment’s life)? If you’re right, that’s the only instance I can think of where diversification would be a good idea.
I ask because you address the “lowered risk” part of the rationale (and indeed, that’s the main reason why everyone recommends diversifying, if I’m understanding them right), which led me to think of circumstances in which you COULDN’T “weather value swings in the investment”. I couldn’t think of many.
First, you need to know if you plan on putting this in a regular taxable account, or an IRA. If you don’t have a Roth IRA and this money is intended for retirement, then I suggest that you consider a Roth IRA for these funds.
The suggestions for S&P 500 and international funds are good. But I also agree with those that question the bond fund. Instead, rather than bonds consider a small cap fund, which have been outperforming the S&P 500 lately. In my retirement accounts, I’m about 50% S&P 500, 25% international funds, and 25% small cap funds. I’m also about 20 years away from retirement, and I’m comfortable with this mix for now.
As an aside, I took the first test Google gave me, and it assessed that I have a moderate risk tolerance. I assume that resulted because I was much more willing to take “risks” with investments than I am with cash, since as I said, I’m over two decades away from retirement, and I recognize that it’s something I’d have to do to get a reasonable shot at a good income then.
Also, if I do go into the Vanguard S&P fund, I won’t have a lot left for anything else because of the minimum, so what I might do is put it all there as suggested now, then perhaps diversify with future funds as they become available.