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
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.
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
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.
Following are the stock funds to use and the percentage of your
stock holdings to put in each. I'll add bond funds later.
Vanguard Total Stock Market ETF (symbol
), 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
Vanguard Total International Stock ETF (
), 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 ETF (
), 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 ETF (
), 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 ETF (
), 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
Vanguard Small-Cap Value ETF (
), 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 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 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 (
) or Fidelity Intermediate Municipal Income (
). The latter is a member of
the Kiplinger 25
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.
Steven T. Goldberg
is an investment adviser in the Washington, D.C. area.