Investing Made Easy, Part 2

Here's part 2 of Kiplinger's article titled "Investing Made Easy":

Strategy #2: I want to pick good investments but I'm paralyzed by all the choices.

EASY SOLUTION: Index funds

Over the long-term, few mutual funds perform better than the overall market, so if you don't have the time to decipher different managers' investing philosophies, adopt your own philosophy: If you can't beat 'em join 'em. Invest in index funds that aim to match market results instead.

Index funds are designed to track a market benchmark -- say, Standard & Poor's 500-stock index, a yardstick of large-company performance, or the Russell 2000, a small-company index. With an index fund, you should do as well as the benchmark over time, minus the expenses of running the fund -- which are famously low.

Fidelity's index funds, for example, charge investors between 0.10% and 0.33% of assets each year. By comparison, most actively-managed funds levy more than 1%. What you save on expenses puts more money in your pocket. And because the fund's performance is tied to the market and not to an individual manager's stock picks, you don't have to worry about a successful manager leaving or losing his touch.

So, which index funds? Because you're young and probably have a long time before your goal, you'll want to put most of your money -- if not all of it -- in stock funds, because they'll net you the highest returns over time. Start with the Vanguard Total Stock Market fund (VTSMX), which tracks the entire U.S. stock market. (How's that for diversification?) Then, add Vanguard Total International (VGTSX), which covers the remainder of the globe.

Eventually, your goal is to allocate about 75% of your portfolio to the U.S. index and 25% to the international index. You'll need at least $3,000 to get started with Vanguard -- $1,000 if you're opening an IRA.

If investing entirely in stocks makes you a little queasy, tone down your risk with a good tax-exempt bond fund, such as Fidelity Spartan Intermediate Municipal Income (FLTMX). But if you have more than ten years to your goal, try to limit your bond exposure to no more than 10% of your portfolio.

My thoughts:

1. The key thought of the information above: "Over the long-term, few mutual funds perform better than the overall market, so if you don't have the time to decipher different managers' investing philosophies, adopt your own philosophy: If you can't beat 'em join 'em. Invest in index funds that aim to match market results instead."

2. I believe in the philosophy started above. Hence, of the three strategies presented in this series, this is the one that most closely matches my strategy.

3. I have a significant portion of my portfolio in stock index funds. I use Vanguard primarily for these.

Click here to read part 3 of this series.

Comments

[Angela]

I love Vanguard, but there is one huge misconception about their Index funds that you perpetuate: They do NOT cover Canada at all! And Canada represents something like 6% of the world...! So their International diversification is not at all as complete as it ought to be.

[FMF]

I'nm not perpetuating anything other than the fact that Vanguard's Index funds are cheap, easy, low-time-commitment ways to earn a great return on your money.

[Angela]

Gee, sorry to ruffle your feathers! I was referring to your paragraph above about indexing that concluded with "Then, add Vanguard Total International (VGTSX), which covers the remainder of the globe." Well, Canada is NOT included in that "remainder of the globe." Rather than simply taking offense at my pointing this out, why don't you actually address the issue?

[FMF]

If Canada is not covered, I think covering 94% of the world is fine. You really didn't ruffle my feathers, I think you just missed the basic point (which I was trying to reinforce). Whether or not Canada is included is immaterial to the heart of this issue -- that's all I was saying.