For the experts, how's this looking for a 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

I think you're off to a great start. Investing when you're young is a great idea. One comment about the ETF's and REIT. You say you're not yet quite ready to invest in individual stocks. In a way you are. When you buy an ETF (or an REIT) you're betting on a sector. Nothing wrong with betting on a sector, but that is similar to investing in an individual stock. When you buy a stock or a sector, you need to watch that carefully. Individual stocks and sectors go up and down there are times when you should buy or sell. And when those times come, you need to react or get burned. With an actively managed fund you have fund managers and their research groups making decisions for you when to buy or sell a sector or a stock. With an index fund the diversification protects you. Are you up to following the sectors to know when to buy and sell your ETF's. By saying you're not yet ready to trade individual stocks you're implying you're not. When I buy a mutual fund, I like to let it run. I'd rather not buy and sell. I trust the fund managers to make the buy/sell decisions within the fund. Just my thoughts.  

Answer 2

Interesting portfolio, and overall looks good. If it were mine, I'd "tweak" a few items.

First, Vanguard is great. I have one retirement account at Vanguard and another at Fidelity. But don't get too hung up on the low expenses. Yes, Vanguard is outstanding, but I'd rather have a fund returning 12% with a 0.9% expense ratio than one returning 4% with a 0.3% ratio.

As for specifics: Understand: I'm not a financial advisor or planner. These are just my personal observations.

I like your investments in International and Emerging Markets. I think there will be a lot of growth there. I also think the weakening American dollar will push up the value of foreign stocks, just due to the exchange rates. Just double-check the major holdings to make sure they don't overlap too much. (They probably don't.)

I like your investment in Energy. I, too, have some of my money in some energy funds (with Fidelity). To prevent an overweighting in Energy, though, check the holdings of some of your other funds, such as International. You may find they already have big investments in Canadian or South American energy companies. (I don't know that for sure, but that's Fidelity's pattern.) Still, I'd certainly stick with Energy.

I'd consider trimming back on REITs. I guess you're expecting a real estate rebound. I am, too, but not for a few years. And in a soft economy, REITs holding shopping centers, office buildings, etc., may not perform well.

I'd also consider trimming back on Utilities. Utilities are heavily energy-dependent. And while it's nice diversification to have both Energy and Utilities in your portfolio, I think the odds are a lot greater of energy prices remaining where they are or going up, than of them dropping. And high energy prices will put a squeeze on utilities.

I don't know enough about Small Cap funds--I tend to focus more on sectors. However, it's been my impression that mid-caps have been better performers. So: Do more research on Small Caps. I'm not saying it's a bad choice, just that I don't know enough about that segment.

As I've mentioned above, just check the holdings of the various funds to make sure they don't overlap too much. That also applies to the Target Retirement 2050 Fund, especially as compared with Total Stock Market. I'm sure both are good, but you may find yourself overweighted in certain segments or sectors.

Generally, though, looks very good. Just keep monitoring the funds regularly so that you can respond to changing market conditions.

Hope that helps.