Use a simple index fund investing strategy to with these five Vanguard Funds
Crazy as it may seem, not everyone wants to ‘beat the market'. In fact, against the average investor return of just 4.6% annually, just getting that market average return around 10% a year sounds pretty darn great!
If you want a stress-free investing strategy, stick around because I’m going to show you how to use just five Vanguard Index Funds for everything you'll need.
I’ll reveal the dangers in index funds and how to get the return to beat your goals.
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Stress-Free Investing with Vanguard Index Funds
This is a widely requested video and I know there are a lot of index fund investors out there. The idea of index fund investing is intuitive, you buy a couple of funds that hold hundreds of stocks in each. You don’t have to worry about picking stocks or the stress of trying to beat the market.
So I’m going to show you how to use just five Vanguard index funds to create your entire portfolio. We’re not talking about just stocks here. I’ll reveal the five index funds you can use to get exposure to bonds, real estate, international companies as well as stocks.
This is going to be a complete portfolio you can use to beat your investing goals and never have to worry about stocks again.
After we look at the five Vanguard index funds, I’ll also show you a strategy to have the best of both worlds. How to get that stress-free index fund investing but still get the opportunity for higher returns in a handful of stocks so stick around for that strategy.
Why Invest Across a Portfolio of Index Funds
First, I do want to point out one disadvantage of index funds that most investors don’t know about. A lot of investors ask me why I don’t invest in a broad market index fund like the S&P 500, why I invest in the individual sector funds instead of just one fund for the whole market.
The answer is in what you get in that broad market index fund. If you’re buying the entire S&P 500 in one fund, you’re getting more than a quarter of that in technology stocks.
In fact, you’d have more than two-thirds of your money in just the four largest sectors of IT, health care, financials and consumer discretionary. Three of those four stock sectors are highly cyclical, falling fast in a recession, so you’re pretty much at the mercy of the market when it comes to a stock market crash.
Even worse is that the size of the sectors in the market fund have changed over the years, making it even harder to manage your investment risk. Here we see that the size of those largest sectors have increased while some of the safety sectors like consumer staples has become a smaller part of the market. Shares of utilities companies, some great dividend paying names, are less than 3% of the fund.
So there is a risk to index fund investing. In the five-fund portfolio I’m going to share, some of that risk is reduced because we’ll have different assets. I’ll also show you how to limit the risk even more in that special strategy after I reveal the five funds.
How to Start a Vanguard Index Fund Investing Strategy
I’m going to be using the Vanguard index funds here because the company offers some of the lowest cost funds available. The funds we’ll use here charge an expense ratio of between 0.07% to 0.12% which means you’ll pay less than $10 a year on a portfolio of $10,000 to get exposure to thousands of stocks, bonds and real estate companies.
I’ve got no affiliation with Vanguard and I get no commissions from recommending them. I’ve invested in the funds myself and recommended them to private wealth clients throughout my career.
The first Vanguard index fund in our portfolio is the Dividend Appreciation ETF, ticker VIG. The fund holds shares of 182 companies across sectors, some of the largest companies in the market like Microsoft, Walmart and McDonalds.
The fund pays a 2% dividend yield which is only a little above the market but is balanced by solid price growth. Over the last decade, the fund has produced an 11.2% annual return which is one of the highest among the Vanguard funds. The fund also gives you better exposure to some of those safety sectors like consumer goods and services so it’s not nearly as overweight in tech or the other sectors you usually find in a growth fund.
Our next fund is going to compliment the dividend fund so we get a little more growth. Here we have the Vanguard Mega Cap Growth ETF, ticker MGK. This fund holds shares of 120 companies and has produced a 13.7% annual return over the last decade.
The dividend yield here is only 1.4% because the focus is really on stocks that grow faster rather than returning cash to shareholders. The sectors here are weighted to growth, so you’ve got more in technology and financials and health care compared to the dividend fund.
I really like the combination here from the two Vanguard funds because you get solid dividends and price growth. Investing in the two funds gives you a more balanced investment across sectors versus just investing in the broader market index funds.
Global Exposure with Vanguard International Funds
Now a lot of investors avoid international stocks and think they get all the exposure they need from those large U.S. companies. They’re missing out on a huge opportunity for higher dividends and less risk though.
Investing directly in international companies takes a lot of the risk from the U.S. dollar and other economic problems. Any company based in the U.S. is going to be exposed to these even if it has a lot of foreign cash flow so you really need to have at least one international stock fund in your portfolio.
For that, I’m going to suggest the Vanguard International High Dividend Yield ETF, ticker VYMI. The fund holds shares in over 900 international companies and pays a healthy 4% dividend yield.
What I like about the fund, besides the solid dividend and average 9.7% annual return since inception, is the ability to get exposure to fast-growing emerging markets as well as developed markets around the world. The fund has half its exposure to relatively safe companies in Europe but also 20% in EM stocks and Asian growth.
Just those three Vanguard funds will give you all the stock exposure you need. Now how much you have in these is going to depend on things like your age and investing goals. Most people will want between half to 65% of their portfolio in stocks but don’t neglect the bonds and real estate funds we’ll get to next.
Diversifying Your Vanguard Fund Portfolio
These two funds for bonds and real estate are going to smooth out your risk in stocks, provide some great cash flow and even give you the opportunity to take advantage of lower prices when the next stock market crash does hit.
For the bond part of our portfolio, we have the Vanguard Long-term Bond ETF or ticker BLV. Now bonds have gotten absolutely smashed this year on the increase in interest rates but that means it could be the best time to be adding to your portfolio.
Even that 6% loss the fund has taken over the last year is nothing compared to the 10% plunge stocks made in the month of October alone or the potential for a 50% drop in a market crash. After dividends, this fund protected your money completely over the year to March 2009 and would have been a great opportunity to get stocks at bargain prices.
The fund pays a 4% dividend and has 42% of more than 2,000 bonds held in U.S. government debt. All the bonds are investment grade so extremely safe credit ratings.
Our real estate fund here is my favorite, the Vanguard Real Estate ETF, ticker VNQ. Real estate is another sector that’s been hit on rising rates this year but the fund has held up and pays a 4.4% dividend yield.
There’s no better asset than real estate for creating wealth. We’ve got another video on the channel covering the seven real estate strategies I used after getting out of the Marine Corps to get started with no money down.
The problem is that even without having to come up with tens of thousands down, property investing can still be a lot of time and work. REITs are a great opportunity to get that growth and cash flow without all the work.
The Vanguard real estate fund has produced an 8.4% annual return since its inception in 2004 and holds shares of 184 real estate companies. This is a must-own fund for its diversification in every property type and in every region.
Vanguard Index Fund Investing vs Picking Stocks
You can create a complete investment portfolio with just these five Vanguard index funds. That’s everything you need from growth to dividends, international stocks, bonds and real estate. Now I want to show you a special strategy you can use to get a little higher returns but still the safety of that diversified portfolio.
The strategy is called core-satellite. It’s the strategy used by most wealth managers and the strategy I use to invest my money.
In the core-satellite strategy, you use the majority of your money, around 75% to invest in these index funds we talked about. That gives you exposure to thousands of stocks and bonds for stable returns. With the rest of your money, you invest in a handful of individual stocks.
The fact that you’re investing a much smaller amount means you can only invest in the best picks you find and no individual company is going to be a big part of your portfolio. That means you get the opportunity for an extra return on picking a few winning stocks but none are going to tear down your portfolio if it crashes.
There’s nothing that says you need the core-satellite strategy. You can go with these five Vanguard index funds for that index fund investing strategy and still beat your goals. Both strategies are going to give you stable returns and cash flows without the huge risks in a market crash or the stress of constantly trying to pick stocks.