ETFs
Buy it all (with just 2 Vanguard ETFs)
Many people find investing intimidating, and for good reason. Selecting individual investments can be a confusing, time-consuming, and stressful task. There’s always the fear of making a mistake, even though everyone is wrong sometimes.
Don’t let that discourage you. There’s an easy way to get started, and all you need are two Vanguard exchange-traded funds (ETFs)!
Don’t get caught up in individual titles
Typically, most investors will only be interested in two types of securities: stocks and bonds. Stocks are “riskier” and offer higher returns; bonds are “safer” and have lower returns.
These are generalizations, but they are pretty accurate overall. The key for investors is to decide how much risk and reward they are willing to take on. There is an old Wall Street maxim that most investors will do well with a portfolio that is 60% stocks and 40% bonds.
Image source: Getty Images.
If you are younger, you can opt for a portfolio that is 80% stocks. If you are older, you can opt for a portfolio that is 80% bonds. You should still have some exposure to stocks so that the growth portion of the portfolio can help you. follow inflation. And you always want to have some exposure to bonds, because you don’t want to take the risk that a catastrophic loss will wipe you out.
This is basically what is called a balanced portfolio. But there’s just one problem: which stocks and bonds to buy? The answer is actually much simpler than you might think, because you can simply buy all the stocks and bonds.
Using Vanguard’s Two Big ETFs
Believe it or not, the hardest part of a simple, balanced portfolio is deciding how much you want to hold in stocks and bonds. That’s because exchange-traded funds now allow you to buy a wide range of stocks and bonds for less, with little to no effort. Vanguard offers two of the best options if you want to simplify your life.
Vanguard Total Stock Index Fund (NYSEMKT: VTI) holds all the U.S. stocks that are easy to buy. Its portfolio consists of 3,700 stocks. It is weighted by market cap, so the largest stocks will have the biggest impact on performance. And the expense ratio is tiny, at 0.03%. With this ETF, you never have to worry about underperforming the market because you are, quite literally, the owner of the market.
The story is similar with Vanguard Total Bond Market Index Fund (NASDAQ: BND). This fixed income ETF holds all the U.S. bonds that can be easily purchased. The portfolio has nearly 12,000 holdings. It also has an expense ratio of just 0.03%. You won’t underperform the bond sector either, because you actually own the bond sector.
The story continues
You can create a balanced portfolio with these two funds in just two trades. The only thing you really need to do after that is rebalance the portfolio once a year to bring the stock and bond percentages back in line with your target numbers. That, too, will only take two trades. You could use this simple two-ETF portfolio for the rest of your life, spending little more than a few minutes a year keeping it up to date.
More flexible than you think
But here’s the really cool thing: If you want to go further, you can do so by simply buying a few individual stocks in addition to this portfolio. That way, you have a solid foundation and can take your time to learn or, just as importantly, be active with your portfolio only to the extent that you want.
Ultimately, the Vanguard Total Stock Market Index Fund ETF and the Vanguard Total Bond Market ETF are all you need to get started as an investor, without having to try to select individual investments. What are you waiting for? Take the first step toward financial freedom today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds – Vanguard Total Bond Market ETF and Vanguard Index Funds – Vanguard Total Stock Market ETF. The Motley Fool has a position in disclosure policy.
Buy it all (with just 2 Vanguard ETFs) was originally published by The Motley Fool