Beginner investors can create a complete investment portfolio with these low-cost funds.
It can be easy for new do-it-yourself investors to get overwhelmed when it comes to fund selection. With both the mutual fund and exchange-traded fund, or ETF, industry growing larger by the day, picking the right fund can be a time-consuming and challenging task. Fortunately, a great place for beginner investors to start is with the Vanguard Group. Founded in 1975 by John “Jack” Bogle, Vanguard spearheaded numerous improvements in the investment industry. Its accolades include launching the world’s first commercially viable index fund and continually lowering expense ratios. For beginner investors, Vanguard offers a suite of transparent, inexpensive and passively managed funds tracking stock and bond markets from around the world. Here is a list of the seven best Vanguard funds for beginner investors.
Vanguard Target Retirement 2060 Fund (ticker: VTTSX)
Beginner investors looking for the most passive way to automate their portfolio can invest in a Vanguard target-date mutual fund. Target-date funds hold a set allocation of stocks and bonds and will automatically adjust over time to become more conservative, a trajectory called a “glide path.” A great target-date fund for young investors is VTTSX, suitable for those wishing to retire between 2058 and 2062. Currently, VTTSX is roughly 90% global stocks, 9% global bonds and 1% cash. As time goes on, VTTSX will gradually decrease its stock allocation and increase its bond and cash allocations to reduce risk. Currently, VTTSX costs a 0.08% expense ratio, or $8 a year per $10,000 invested, and requires a $1,000 minimum investment.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
New investors with a high risk tolerance and a bullish outlook on the U.S. market can opt for funds that track the S&P 500. The S&P 500 is a market-cap-weighted index of about 500 large-cap U.S. companies selected by an S&P committee to be representative of the overall market’s performance. It is commonly used as a benchmark for professional fund managers given its reputation for being hard to beat over time. A great mutual fund for tracking the S&P 500 cheaply is VFIAX. This fund has been around since November 2000 and has returned an annualized 12.5% over the last 10 years. VFIAX charges an expense ratio of 0.04% and requires a minimum investment of $3,000.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
Not all beginner investors have the risk tolerance for a heavy equity allocation. While holding more bonds tends to lower expected returns, it also dampens volatility substantially. A lower-risk, balanced portfolio such as the classic 60/40 stocks/bonds setup can help investors stay the course and avoid panic selling during market downturns. A great way to implement the 60/40 portfolio is via VBIAX. This fund tracks both the Dow Jones U.S. Total Stock Market Index and the Bloomberg Aggregate Bond Index in a 60/40 allocation. Compared to a target-date fund, VBIAX has no international stocks and will always be rebalanced back to a static 60/40 allocation, even as investors age. VBIAX requires a $3,000 minimum investment and charges a 0.07% expense ratio.
Vanguard S&P 500 ETF (VOO)
VOO is the ETF equivalent of VFIAX. Compared to VFIAX, VOO’s minimum investment requirement is simply the price of a single share, which is currently around $350. Because VOO is an ETF, its price is updated throughout the trading day, as opposed to mutual funds which only calculate their value at the end of the day. Investors can trade shares of VOO through most brokerage apps like regular stocks. Otherwise, VOO tracks the same S&P 500 index and holds the same stocks as VFIAX does. However, the ETF does charge a slightly lower expense ratio of 0.03%.
Vanguard Total Stock Market ETF (VTI)
A great tax-loss harvesting partner for VOO is VTI, which tracks the CRSP Total Market Index. VTI is as close as investors can get to owning the entire U.S. stock market at the moment. A great way to visualize VTI is as VOO, but with the addition of 3,500 more mid-, small- and micro-cap stocks. However, because VTI is market-cap weighted, over 80% of the ETF is still dominated by the large-cap stocks from the S&P 500. Therefore, VOO and VTI have similar historical performance, despite tracking different indexes. As noted earlier, this makes VTI an ideal tax-loss harvesting partner for VOO. VTI also costs an expense ratio of 0.03%.
Vanguard Total International Stock ETF (VXUS)
A common practice for many U.S. investors is to overweight domestic stocks, a tendency known as “home country bias.” While this approach can help with tax efficiency, it can also lead to a loss of diversification. While the U.S. market has outperformed in recent years, it has also lagged in others. A great example is the “lost decade” between 2000 and 2009, when U.S. stocks posted flat performance after losses during the dot-com bubble and the Great Recession. To mitigate this, investors can consider an allocation to international stocks. A great way to buy international stocks is via VXUS, which tracks the Global All Cap ex U.S. Index. VXUS holds more than 7,900 stocks from all around the world weighted by market cap and costs an expense ratio of 0.07%.
Vanguard Total World Stock ETF (VT)
The easiest way to invest in the world’s stock market is via an ETF like VT. This ETF tracks the FTSE Global All Cap Index, which holds more than 9,000 stocks from U.S., international-developed and international-emerging markets. The composition of VT is dynamic and designed to match the world market’s composition at any given time. Right now, VT is around 60% U.S. holdings, but this can change in the future. If it does, the ETF will rebalance accordingly. Investors who buy VT can therefore index a portfolio of global equities via a single ticker. It’s a simple, yet elegant way of ensuring your portfolio matches the return of the world’s stock market at any given time. VT costs a 0.07% expense ratio.
7 best Vanguard funds for beginner investors:
— Vanguard Target Retirement 2060 Fund (VTTSX)
— Vanguard 500 Index Fund Admiral Shares (VFIAX)
— Vanguard Balanced Index Fund Admiral Shares (VBIAX)
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total Stock Market ETF (VTI)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Total World Stock ETF (VT)
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Update 01/04/23: This story was previously published at an earlier date and has been updated with new information.