For the experts, how's this looking for Vanguard Index portfolio?

Question

Hi everyone,

I'm 25 and realized how important it is to start investing at a young age...I've heard good things about Vanguard Index funds due to their low costs...I've decided to put my money in the following funds and ETFs accordingly and adding little every month (I have a Vanguard account to avoid commission fees).

VTSMX (Total Stock Market): $3000 - I picked this one over the big VFINX because this one has more diversification (3500 stocks vs 500) plus already has the 500 stocks VFINX has. Same expense at 0.15%.

VGTSX (Total International Stock): $3000 Expense 0.27%

NAESX (Small-Cap): $3000 Expense 0.22%

VGSIX (Real estate investment trusts): $3000 Expense 0.20%

ETFS

Materials (VAW) $1000 Expense 0.22%

Emerging Markets (VWO) $1000 Expense 0.25%

Utilities (VPU) $1000 Expense 0.22%

Energy (VDE) $1000 Expense 0.22%

Some of the ETF related Index funds (i.e. emerging markets) have purchase fees of $750 and for the ETF it's free so I went this way. I think this is pretty diversified. Also, I will be investing some in individual stocks but only after I have mastered the art of individual stock investing. For now, index funds are the best way to go.

Can I get your thoughts on this portfolio? Thanks in advance!! :)

Answer 1

This is a well-diversified portfolio for the long term. Good job!

The only thing missing would be some bonds, which tend to move contrary to stock prices (the target retirement fund includes some bonds, but they are a very small part of your total portfolio). A TIPS ETF or fund might be a good choice.

If you go to Morningstar.com and click on the portfolio tab, there is a pull down tab with a link for "instant x-ray." You can enter your portfolio there and you will get an analysis that tells how your portfolio is allocated by sector and etc. Very interesting, and free.

Answer 2

Since you have your heart set on index funds, certainly these will give you plenty of coverage of the various market segments. Personally, I am not a great believer in index funds in general although I do own one.  They do have two big advantages that mitigate their one disadvantage--low expenses and low distributions.  The disadvantage is that many are capitalization weighted especially the total market one.  What is the real point in having a fund that contains 3500 stocks if the top 100 holdings make up probably better than 60% of the assets of the fund.  The other 3400 stocks are window dressing more or less.  The 10 year average annual return is not anything to brag about either. At a 5.6% annual return I hope you do not plan on retiring with more than the minimum necessities.

I can name several dozen managed mutual funds that have 10 year annual returns of 10% or more with expense ratios of under 1%.  Here are a couple just to prove the point.  T Rowe Price Capital Appreciation fund 11% annual return and expense ratio of 0.7%.  Oakmark Equity and Income fund 12.4% annual return and expense ratio of 0.83%.  Both are twice the returns of the total market index fund.