The minimum purchase for the funds we’ll be looking at is $3,000 each. I recommend having $20,000 before investing like this, otherwise my beginner investing article might be more appropriate.
Novice Stock Investing
To invest at a slightly more advanced level means we’ll have many more options, which really means more crap we have to filter out. With a larger bankroll, we’ll also get lower expense ratios. Simplicity is still a virtue, but with more confidence and understanding, we can put a higher emphasis on value and precision.
Vanguard is the brokerage that specializes in long-term investing, as reflected by their philosophy, advice, and superior fund selection.* Vanguard's expense ratios are rock bottom and they won't hesitate to tell you that every chance they get. Their customer service is excellent too. Most Vanguard funds have a $3,000 minimum, and can be converted to Admiral shares at $10,000, which are the same funds at a significantly lower expense ratio.
First, swing over to Vanguard’s Core Funds take a look at the stock funds at the bottom. These are considered core funds because they are inexpensive and cover a broad market.
Let’s look at their core domestic fund:
The overview tells you what you need to know, and there are no surprises on their Holdings and Management page.
The additional information is not useful to us, it’s just for curiosity’s sake.
Vanguard Total Stock Market Index Fund (VTSMX) has a .17% expense ratio and $3,000 minimum investment. The admiral version, VTSAX has a .05% expense ratio and $10,000 minimum. The admiral discount for this fund is much larger than others. Buy this if you think the US isn't done growing.
Now look at their core international fund.
Investing in just these two stocks alone will give you a balanced exposure to all the necessary stocks. While it is definitely a smart idea to diversify internationally (Vanguard says at least 25% of your stocks should be international), the case for tilting your portfolio towards other specific categories of stocks such as small-cap or growth is far more dubious.
A Practice Exercise
Let's familiarize ourselves with Vanguard. Click the Compare button and compare the core international fund to VFWIX. If you read my article on stock asset allocation, you should be able to guess what VFWIX is about just from the name. Check your guess with the fund overview.
What differences do you notice between VFWIX and VGTSX?
The first difference you should notice is that VGTSX is much cheaper (lower expense ratio).
Now, find the admiral versions of both funds and compare them. Notice anything strange?
The difference in price is reversed! I have no explanation for this, it’s inconsistent.
Bonus Problem: VFWIX used to exclude Canadian stocks. Can you figure out when this changed?**
Get Your Hands Dirty
Now head on over to Vanguard’s full list of mutual funds. Under Management, uncheck Active, and sort the funds by ascending expense ratio. There are quite a bit to choose from, though I have yet to see a fund for eco-friendly fair-trade companies that exclusively employ militant feminists. Until that day comes, we are not free of this phallocentric tyranny, my sistren.
A Lazier Alternative-
Simplicity is a virtue and if you have better things to do, head over to Vanguard’s All-in-one funds page. You’re probably going to want to look at their Lifestrategy funds. These are basically combinations of Vanguard’s core funds at 80/20, 60/40, 40/60, and 20/80 ratios of stocks and bonds. The expense ratio is .15% and there are no admiral versions.
The fund manager who inspired me to start writing this ( he got sued and shut down his blog) had a lengthy debate with a founder of Betterment, Jon Stein I believe, over Lifestrategy funds vs Betterment. It was a nice back and forth, and in the end they agreed to disagree over which one was better.
I think Life strategy funds are too rigid and tax-inefficient for my taste. You could do a lot worse, which isn’t saying much when it comes to investing.
In the next article, I will probably discuss bond funds in deeper detail. Haven’t decided yet. Have fun investing!
*John Bogle founded Vanguard and the first index fund ever. Those who follow his philosophy are known as Bogleheads. The Bogleheads forum is probably the most useful resource for investors of any level, along with the Bogleheads wiki. I'm not affiliated with them in any way.
**Hint: Compare the graphs.