4/10/2013 8:45 PM ET|
7 funds you can own forever
A strategy of buying and holding just a few index-based investments may look boring. But if it delivers solid long-term returns, boring is good.
You've heard it all before: You can't time the market. Diversification is a winning strategy. Keep your costs low, and one of the best ways of doing that is to invest in index funds, which beat most actively managed funds over time.
You've probably ignored some of these truisms. Maybe you've ignored them all. You've probably made other mistakes. But what you want to do now is choose solid investments -- and get on with the rest of your life.
If that description fits you, you'll appreciate what follows: a portfolio of exchange-traded index funds that you can buy and hold virtually forever. I'll even suggest what percentages to hold in each fund and how to gear down as you approach and live in retirement.
Because all of my picks are index funds, you'll never own a fund that tops the performance charts. You'll give up the chance of beating the indexes. You'll have little to talk about at the office water cooler. But you're practically guaranteed to beat roughly two-thirds of actively managed fund portfolios. Not bad.
All the ETFs in this article are Vanguard ETFs because Vanguard is the industry's low-cost provider and because ETFs tend to be even more tax-efficient than ordinary index funds. But you can accomplish the same goals with ishares ETFs or with Vanguard's regular mutual funds.
One big caveat: This portfolio isn't designed with today's market in mind. It's a long-term portfolio, not one that will require adjustments every year or two. For example, I'm including an index fund that tracks small-company stocks, even though small caps, by most measures, look overvalued today. Why? Because over the long term, small caps will do just fine.
7 funds to consider
Following are the exchange-traded funds to use and the percentage of your stock holdings to put in each (I'll add bond funds later):
Vanguard Total Stock Market (VTI), 40%. This ETF, which for years has tracked the MSCI US Broad Market Index, is switching over to the CRSP U.S. Total Market Index. But the change will be invisible to investors. Vanguard is changing the index provider on 22 funds because -- you guessed it -- it will lower costs. Total Stock Market invests in virtually every U.S. stock with a market value of at least $10 million. All told, it owns more than 3,200 stocks, but they're weighted by market value. The largest holding, at last report, was Apple, at 3.2% of assets. The fund charges a mere 0.06% of assets annually.
Vanguard Total International Stock (VXUS), 20%. Most of this fund is in stocks of large companies in developed nations. But it has 20% in small and midsize companies in developed markets and 20% in emerging-markets stocks. With about 6,200 holdings, the fund is even more diversified than Vanguard Total Stock Market. It's transitioning from tracking the MSCI All Country World ex US Investable Market Index to following the FTSE Global All Cap ex US Index. The fund charges 0.16% annually.
Vanguard FTSE Emerging Markets (VWO), 10%. I don't think the long-term trend toward globalization will run out of steam in the coming years, and over time, many emerging nations should mature into developed economies. But new entrants will take their places. This fund is changing over to the FTSE Emerging Markets Index, which, unlike the MSCI index it is replacing, classifies South Korea as a developed country and thus excludes it from the fund. Emerging-markets stocks will remain volatile but should deliver superior results over the long term. This fund charges 0.18% a year.
Vanguard Dividend Appreciation (VIG), 10%. This fund seeks to mirror the obscure Nasdaq US Dividend Achievers Select Index. A strategy of investing in blue-chip companies that consistently increase their dividends has paid off over the long haul. This index consists only of companies that have raised their dividends in each of the past ten years and that pass other tests of financial strength. This is not a high-dividend fund; it yields 2.2%, about the same as the overall U.S. stock market. But its holdings are of the highest quality. The fund's expense ratio is 0.13%.
Vanguard Extended Market (VXF), 10%. This fund diversifies your U.S. holdings. It has all but 6% of assets in small and midsize companies. Small-caps and midcaps are riskier than stocks of large companies, but over time they have produced higher returns. The ETF tracks something called the S&P Completion Index, which includes virtually all U.S. stocks outside Standard & Poor's 500-stock index. The expense ratio is 0.14%.
Vanguard Small-Cap Value (VBR), 10%. Last but not least is this small-company value fund, which is switching from tracking the MSCI US Small Cap Value Index to mimicking the CRSP US Small Cap Value Index. The average market value of its holdings is about $1.4 billion. This fund is far more volatile than Vanguard Extended Market, but, over time, stocks of small, beaten-down companies have, on average, beaten stocks of larger, pricier companies. The expense ratio is 0.21%.
All you need now is a bond fund. In the area of low-cost index funds, the default choice is Vanguard Total Bond Market (BND) ETF. But because we've already had a 30-year-plus bull market in bonds and the risks of owning bonds are high, I instead recommend Vanguard Short-Term Corporate Bond (VCSH) ETF. It yields only 1.2% (compared with 1.7% for Total Bond Market), but Short-Term will lose a lot less than Total Bond when interest rates rise, as they inevitably will. Expenses are just 0.12%. (If you're investing in a taxable account, you'll probably be better off investing in a tax-free municipal-bond fund. But there are no good index funds in this area, so I suggest one of two actively managed funds, Vanguard Intermediate Term Tax-Exempt (VWITX) or Fidelity Intermediate Municipal Income (FLTMX).
How to split your money between stock and bond funds? If you have an average tolerance for the markets' inevitable belly flops, are investing for retirement and are at least ten years from your goal, put about 70% in stock funds. Subtract five or ten percentage points if you're a worrier, and add five points if selloffs don't give you the sweats. Cut your stock funds by five points when you're less than ten years from retirement.
Once you retire, you should cut your stock holdings to 60% of assets. If you have enough money and are a skittish investor, consider investing as little as 50% in stocks. And once you've launched your program, just add new money that comes your way in the same proportions as your initial investments. In other words, don't change a thing.
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The keys are:
1. Buy funds with long term track records - at least 10 years.
2. Stay in the market and don't make knee jerk decisions - the market is up and the market is down - invest more during down markets
3. There are load and no load funds that long term are good investments
4. Buy a large cap growth fund, a large cap growth and income fund, an international broad based fund and maybe a small cap and mid cap fund.
5. Stay away from international single country funds, commodities, precious metals, etc
6. Start investing at an early age and be consistent in your investing every year.
7. Make sure you have a good cash reserve rainy day account first - this is not an investment, but a cash account - don't look for a return for this account as there is not one presently. This is money you can get to without selling an investment or incurring a penalty.
8. MOST IMPORTANTLY - DO NOT BUY INTO AN INVESTMENT YOU DO NOT UNDERSTAND AND DO NOT LET AN INVESTMENT ADVISER "CHURN YOUR ACCOUNT". Churning is where the investment adviser or broker is regularly selling investments and reinvesting into new investments to make fees for him and or herself at your expense. Ask your adviser if he/she has the investment they are trying to get you to invest in.
FINALLY - READ ALL YOU CAN TO BE AN INFORMED INVESTOR!!!
If you are not able or willing to actively manage your own stock investments then you deserve what you get.
Seriously, who do you think is going to have your best interest at heart? It's not rocket science, as much as they would like you believe. If you want your money to work for you, you have to work for it a little bit.
Average Annual Total Return For periods ended March 31, 2013
1 Year 3 Years 5 Years 10 Years 20 Years
Combined Index (Stocks and bonds) 9.95% 10.10% 6.14% 7.41% 7.87%
*Vanguard Wellington fund (closed) 12.04% 10.22% 6.53% 9.31% N/A
* Dodge and Cox Balanced Fund 16.16% 10.42% 5.68% 8.06% 9.49%
*Dodge & Cox Stock Fund 20.34% 11.64% 4.64% 9.09% 10.87%
S&P 500 Index 13.95% 12.68% 5.81% 8.53% 8.53%
How well have your investments done for the same periods? Long term investing for retirement will last a lifetime. 40 years working and making contributions and 40 years drawing from them, if you live to be 100, to live on. I retired 11 years ago at age 55 with the above funds * in my Pensions and IRAs.
What an interesting collection of misinformation here.
If anyone reads the morningstar research reports that compare Vanguard and T Rowe and 6700 other funds (you do know that there are other funds besides these mentioned here...don't you?)
I like Edward Dijjeau who actually posts numbers that confront that misinformation.
You should search for the "fantastic 46" and read the research which will give you a different opinion...Edwards funds are mentioned in the report.
Now if you can buy and hold good management and make short term adjustments in your portfolio would it not be prudent to own the best long term provider...even if you paid a fee to own your shares that neted out a better return?..."I" think so!
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Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
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