Financial Advice for Joe - Part IV (cont)
Eighty percent of your money should go into the Vanguard 500 Index Fund (VFINX).
Twenty percent of your money should go into the Vanguard Total Bond Market Index Fund (VBMFX).
Here is my reasoning. First, I am assuming that you are in your 20s or 30s and that you have enough time before retirement to recover from the cyclical nature of the market. Second, I always tend to go with Index funds. Why index funds? I’m glad you asked. Index Funds are defined as: passive investing. The primary advantages to such a strategy is the lower management expense ratios on index funds. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500. More simply, an index fund purchases a number of stocks that are based off an index.
The S&P 500 index tracks the largest 500 companies in the United States. So, when you purchase one hundred dollars of the Vanguard 500 index fund, you are theoretically purchasing a tiny portion of each of the 500 companies. What is particularly enticing about an index fund is that is minimizes the human element at the fund. I suppose that you’ve heard that each year, a Wall Street firm has a monkey throw darts at a board to pick stock and then competes with their best stock wizard (the monkey has won consistently). This is because stock picking is akin to gambling. An index fund spreads the risk among many companies and minimizes your risk. You also get more stock for your money.
Why the 80/20 split? Well, it is to further minimize your risk. 80% in stock is plenty and you maintain the 20% as insurance against a downturn in the market. Not convinced? I maintain that my recommendation is relatively safe. Vanguard has a questionnaire that you can answer to better determine your personal risk aversion.
I’ll mention again that I’m not an expert by any stretch of the imagination. All I’m hoping to do is to walk you through a simple purchase so that you can see that it isn’t difficult or impossible. Go ahead Joe, give it a try. I actually purchased these funds today for the following prices: Vanguard 500 = $113.00/share and Total Bond Market = $10.09/share. Each weekend I will update with the new price. Remember, that you receive monthly dividend from the bond fund and quarterly dividend from the 500 index… and assuming that you chose to reinvest those dividends, will see your money really start to roll.
Is any of this helpful? Has anyone chosen to explore these funds? Please let me know what you find helpful, terrible, dangerous… or if you have specific questions. Next installment? The Individual Retirement Account.