In today’s economy, we are all scrambling to ensure that our investments are making as much money as possible. We expect fluctuation in the market but need to make wise choices when deciding what we should have in our portfolios. Historically, for twenty years up to December 31, 2021, the S&P 500 Index averaged 9.5% per year, but the average equity fund investor earned a return of only 3.9%. Investors are always trying to beat the market and to time the market, and they continue to lose. Index fund investing has proven over time to be the most successful way to win in the market. I’m here to give you some advice about the top five index funds that you may want to consider for your investment portfolio. Keep in mind that the number of stocks in each fund as well as the top stocks fluctuate along with the market. Therefore, the information used in this blog may not be exact at the moment you are reading this blog. I encourage to check the latest data for each fund to see the changes.
Top Five Index Funds:
I work with Vanguard; they are the one with whom I have my investments and are my top picks. Please note that if you already have investments with Charles Schwab or Fidelity, you can buy equivalent funds to the ones I am suggesting, but I would not recommend buying the Vanguard funds I am recommending through another broker due to the fees you would incur. Reach out to me individually if you are working with a different broker and need help figuring out what the equivalent to the Vanguard funds I am discussing here or download my free investment fund cheat sheet here.
#1 – Vanguard Total Stock Market Index Fund (VTSAX) –
Vanguard Total Stock Market Index Fund is an index fund that tracks the entire United State equity market, thus providing investors with exposure to virtually the entire United States stock market which includes a variety of 4,076 small-cap, mid-cap, and large-cap stocks according to Vanguard as of July 31, 2022. The fund’s top five stocks reported by Vanguard as of July 31, 2022 are Apple, Amazon, Google Class A, Google Class C, and Microsoft Corp. Since the United States makes up 50% of the global market, this is a very attractive fund. In addition, it has an expense ratio of 0.04% which means you only pay $4.00 for every $10,000.00 invested. My guideline on a personal level in this regard is that I never go above 0.20% or twenty basis points. Basically you can invest in this stock for almost no cost. My portfolio consists of 73% VTSAX.
#2 – Vanguard 500 Index Fund (VFIAX) –
Similar to my #1 pick, the Vanguard 500 Index Fund is also an index tracking fund and it also has an expense ratio of four basis points. One big difference is that this fund covers the top 500 United States companies, so you get the majority of the domestic market with this fund. While it is labeled as Vanguard 500, there are really 503 holdings due to parent companies such as Alphabet which is actually Google’s parent company, dividing out class A and class C shares according to Vanguard as of July 31, 2022. Another difference between Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and this fund is that you only get the large-cap exposure. The top five stocks in VFIAX, like with VTSAX, are Apple, Microsoft, Amazon, Tesla and Google as noted by Vanguard’s latest data. VTSAX has 4,076 stocks while VFIAX only holds 503 stocks, but the S&P makes up 80% of the United States market. Because of the vast similarities of the two, however, I would choose one or the other, and my preference as noted above is VTSAX.
#3 – Vanguard Total International Stock Index Fund (VTIAX) –
My third preference is the Vanguard Total International Stock Index Fund which is an index fund that provides investors the luxury of investing in developing as well as emerging international economies. Despite the fact that the United States makes up 50% of the global economy, there are many thriving international companies. This fund has a higher expense ratio than the first two picks with eleven basis points which is still below my guideline and is good considering that you will only pay $11.00 for every $10,000.00 invested. According to the latest data by Vanguard dated 7/31/22, there are 7, 819 stocks in this fund from Europe, the Pacific, the Middle East, emerging markets, and even some from North America. Vanguard has noted the top five stocks included in this fund are Taiwan Semiconductor Manufacturing Co. Ltd., Toyota Motor Corp., Shell plc., Tencent Holdings Ltd.and Samsung Electronics Co. Ltd. Just as the number of stocks in the fund changes, so do the stocks within the fund. The beauty of this fund is that it helps round out your portfolio which as a global investor I think is important. However, be aware that since this fund invests in stocks that are from around the globe, including those that are in developed as well as from emerging markets, this fund can have more volatility than you may see in a domestic fund along with political risks and currency risks. You may want to assess your financial personality and level of risk to see if this fits your investing tolerance profile before including it in your portfolio. For me, I think excluding the other 50% of the world seems shortsighted, especially taking into account that the United States and other countries have historically and continue to vie for the top financial spots. For that reason, 19% of my portfolio consists of this fund.
Following is a chart that indicates how often international stocks have outperformed United States stocks and solidifies why it makes sense to me to invest some of my money in these stocks.
#4 – Vanguard Emerging Markets Stock Index Fund (VEMAX) –
My fourth pick is similar in some regards to my third choice, but it only focuses on emerging markets around the world. It is a great index fund because it offers investors a low cost way to gain exposure to markets such as China, Taiwan, India, Brazil, and Saudi Arabia to name just the top five in areas such as technology, basic materials, real estate, and energy among a wide variety of others. The total number of stocks included in this fund according to Vanguard as noted according to their published data as of July 31, 2022 is 5,412, and the top five stocks among many include China Construction Bank Corp. Class H, Taiwan Semiconductor Manufacturing Co. Ltd, Alibaba Group Holding Ltd, Tencent Holdings Ltd, and Meituan Dianping Class B. This fund is a bit more expensive than the other three but is still under my twenty basis points, with an expense ratio of fourteen basis points. Therefore, you would only pay $14.00 for every $10,000.00 you invested in VEMAX. As I pointed out with VTIAX, this fund consists of stocks from emerging market companies which can cause it to be more volatile than those with stocks in developed countries as well as having political risks and currency risks. Despite their potential for volatility, over time they tend to outperform other funds. I consider this fund to be a great one to consider for long-term, risk tolerant investors who want to diversify their portfolios, including in them international stocks. I also think this fund is important to consider because of where we are historically. Some of the most brilliant investors including Ray Dalio, founder of Bridgewater Associates which is reportedly the world’s largest hedge fund and who is worth 22 billion dollars as according to Forbes, love emerging markets. Also, even though global economies are now more connected than ever, there are still diversification benefits to investing in emerging markets. According to the International Monetary Fund, the World Economic Outlook forecasts average annual GDP growth of 5.5% for emerging markets from 2021 to 2023 compared with 3.5% for advanced economies. Looking at all of the data and considering possible volatility, my portfolio consists of 4% of VEMAX.
#5 – Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) –
My last pick is an index fund that is rather all-encompassing of the other funds I have previously outlined. This fund allows investors to be exposed to stock markets around the world from emerging markets and developed foreign markets and includes the United States. The fund is made up of 9,435 stocks including but not limited to Apple Inc., Amazon Inc., Microsoft Corp., Alphabet Inc. Class A (Google), and Alphabet Inc. Class C (Google) as noted by Vanguard as of July 31, 2022. It has an expense ratio of ten basis points meaning you would only pay $10.00 for every $10,000.00 you invested. One of the things that I love the most about this fund is its weighted exposure which is very similar to the way I model my portfolio. Vanguard Total World Stock Index Fund is about 60% United States, 30% international, and 10% emerging markets which looks like this:
My portfolio is currently 73% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), 19% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), 4% Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX), 2% Meta stock, and 2% crypto currency OR 73% United States, 15% international excluding emerging markets, 8% emerging markets, 2% Meta, and 2% crypto currency. This also may fluctuate throughout the year, so I rebalance as needed. My model meets my current long term goals and risk profile. The allocations will change as my needs and goals change, but my strategy will remain the same. Also, by utilizing the power of three index funds (versus solely using VTWAX), I lowered the overall expense ratio by approximately three basis points and am able to retain more control of my allocations at any given point in time.
As noted, index fund investing historically is a way to be successful in the market. This is one of the best ways for you to invest in low-cost index funds. My model works for me, and if you are looking for a way to structure your portfolio, it may work for you too. You will want to look at your own goals and needs, risk factors, and investing tolerance profile to help you structure your portfolio. Whatever you do, don’t buy into hype, try to beat the market, or time the market; just set your portfolio and allow your money to grow.
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