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Tae Kim

Tae Kim

5 Best Vanguard Funds to Buy & Hold Forever

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I believe that for everyday people like us, index funds are one of the best ways to grow our net worth and achieve financial security, and ultimately financial independence.

And the longer you can hold onto them, the greater the probability that these amazing assets can turn you into a millionaire or even a multimillionaire.

1) Vanguard Target Retirement Funds

Number one on our list is actually not a specific Vanguard fund, but a type of fund.

And more specifically, “Fund of funds” called the Vanguard Target Retirement Funds.

If you are just getting started in investing and not sure where to start, I believe these are excellent choices for beginners.

I get more into the details of Target Retirement Funds in this post, but in a nutshell target retirement funds are simple funds that automatically diversify and allocate your investments for you, based on when you plan to retire.

In the world of investing, you hear these terms often – diversification and asset allocation.

They essentially refer to the importance of spreading your money around as much as possible so you are managing your risks effectively.

Think of it like a healthy well balanced diet. You don’t want to just eat only protein for your meals. Or only carbs. Your diet would be completely unbalanced.

In a similar way, by well diversifying your investments within an asset class and across different asset classes, you are ensuring your money doesn’t depend on one company or one type of investment to grow.

Many people who enjoy learning about the stock market and investments like to manage their own risk by constructing their own portfolio. But if you are looking for a simple, 85% solution to your investment, Vanguard Target Retirement Funds are a great option.

When you goto Vanguard’s target retirement fund website, you’ll find 12 different funds there. You just need to select the one based on your estimated retirement year; let’s say age 65.

For me that would be Target retirement 2045, VTIVX.

The expense ratio on these funds range from 0.12% to 0.15%. Slightly higher than other Vanguard funds, but still pretty good nonetheless compared to actively managed funds that could charge you anywhere from 0.5% to 2.0%. And with the extra expense ratio, they take care of the work of asset allocation for you.

There is a minimum of $1,000 but unlike other funds we will review here in a bit, there is no ETF equivalent.

This is a set it and forget it type of option so it makes sense that there is no ETF equivalent. Since someone investing in Target Retirement Funds are likely not looking for the flexibility that ETFs provide and would want to automate their investments.

If you want to make good investment decisions but want to spend the least amount of time as possible on it, I highly recommend Vanguard’s Target Retirement Fund. You can literally set it up once in your life and check it when you are ready to retire. It’s that easy.

2) VTSAX – Vanguard Total Stock Market Index Fund

Number 2 on our list is the Vanguard Total Stock Market Index Fund, VTSAX.

An ETF equivalent is Vanguard Total Stock Market ETF (VTI).

If you want to learn more about the difference between Index Funds and ETFs, check out my post here where I go in more depth. There is no wrong choice here – just one that works best for you based on your priorities.

VTSAX has an expense ratio of 0.04% and a minimum investment of $3,000.

It’s actually my personal favorite fund for equities holding because it holds every publicly traded company in the United States.

At the time of this post, there are approximately 4,000 companies being represented in this fund. When you hold onto VTSAX, you are essentially purchasing a share of every publicly traded company in the US. Companies like – Apple, Tesla and JP Morgan.

And when you invest in a fund like the VTSAX, you are believing that US companies will continue to create value to its customers in the upcoming years.

No-one has a magic ball to predict the future, but if you were to just take a look at the past 10 years, VTSAX had an amazing return of 16.3% annually. Given the compounding of these returns, if you had put in $10,000 10 years ago into VTSAX, it would have grown to $45,000 today.

Not bad for just buying and holding.

Another great benefit of investing in a fund like VTSAX is the fact that the fund is self-cleaning.

What do I mean by this?

There are approximately 4,000 companies in this fund, and throughout our lifetime, many will go bankrupt and disappear. However, new companies will come and take its place in the fund.

And here is the upside of this mechanism. While the worst possible performance a stock can deliver is 0, when they go bankrupt and disappear from your VTSAX, the upward potential is limitless. The best performance a company can deliver isn’t 100%, it can be 1,000%, 10,000% or more.

Take a look at Tesla. Take a look at it’s growth in the last 10 years. 24,000%!

If you hold onto VTSAX, you get the unlimited upside of companies like Tesla. During these 10 years, there have been many other electric car companies that have faded away and disappeared. VTSAX automatically replaced these dead and dying from its fund with new and upcoming companies with great potential – this is what is called self-cleansing and why it’s so awesome.

If you are ready to graduate from Target Retirement Funds, I highly recommend holding VTSAX as your core wealth building fund to grow your net worth.

3) VBTLX – Vanguard Total Bond Market Index Fund

Number 3 on our list is Vanguard Total Bond Market Index Fund, VBTLX.

An ETF equivalent is Vanguard Total Bond Market ETF (BND).

VBTLX has an expense ratio of 0.05% and a minimum investment requirement of $3,000.

If VTSAX is your ambitious, risk taking inner self, VBTLX is the calm, steady inner voice.

To be successful in life, you need a bit of both.

VTSAX will build wealth, but VBTLX will help smooth the ride so you aren’t having a heart attack everytime the market takes a dip.

You might be asking, what the heck is a bond anyways and how are they different from stocks?

Simply, bonds are loans. When you are buying bonds, you are essentially loaning money to a company or a government agency.

In contrast, when you are buying stocks, you are buying a part ownership in a company.

And unlike stocks, they are much less volatile which makes them good additions to our portfolio to smooth out the rides.

In addition Bonds most often move in opposite directions to stocks. So they can act as your counterweight to stocks depending on how the market is doing.

When holding bonds, holding VBTLX in my opinion is really your best option given that you minimize the risks of individual bonds. Risks such as default, interest rate and inflation risks.

With VBTLX, you are essentially holding 10,000 individual bonds within this one fund.

Start adding them to your portfolio as you get closer to your retirement age.

Or if you want to taper back some of your total portfolio risk, you can start adding them sooner.

The percentage of your total portfolio will be based on your risk tolerance but you can also check out my post on asset allocation here to get some real world examples.

4) VTIAX – Vanguard Total International Stock Index Fund

Alright – Number 4 on our list is Vanguard Total International Stock Index Fund, VTIAX.

An ETF equivalent is Vanguard Total International Stock ETF (VXUS).

VTIAX has an expense ratio of 0.11% and like many other Vanguard funds, has a minimum investment requirement of $3,000.

What VTIAX will do is provide you exposure to the international market outside of US companies. Companies like Taiwan Semiconductor, Samsung and Alibaba. In total approximately 8,000 companies.

That said, in today’s global economy, countries and companies are more integrated today than ever before. Big companies don’t operate in isolation from the rest of the world.

Just look back to the recession of 2008. It’s most often referred to as the “Global Financial Crisis.” Not just a US crisis. What happened with the US housing market had a ripple effect across the globe because our markets and companies are all now so tightly integrated.

US companies are no longer exclusively US companies. They are international corporations. For most of them, a good chunk of their profits are actually generated outside the United States.

Just look at Apple. The biggest US company based on market capitalization. As of the second quarter of fiscal year 2021, 67% of Apple’s total revenue was generated from outside the United States.

What this means is that when you hold onto a Total Stock Market Index Fund like VTSAX, you are already getting quite a good exposure to the international markets.

Growth in countries like China and South Korea is already being reflected in US companies like Apple who are selling their latest iPhones overseas.

That said, if you would still like additional exposure to the international market by investing non-US companies, VTIAX is a great fund to hold.

Vanguard already makes them automatic in their target retirement funds which shows that they believe additional exposure to the international companies is a smart option.

I personally wouldn’t make it a core holding in your portfolio but a minor percentage is a good option.

It also sounds really cool to say that you are invested in international companies like Alibaba and Samsung when you are talking to your friends.

5) 3-in-1: VFIAX / VSMAX / VIMAX

For our number 5 on the list, I’m going to cheat a bit and group three funds together.

  • Vanguard 500 Index Fund, VFIAX
  • Vanguard Mid-Cap Index Fund, VIMAX
  • Vanguard Small-Cap Index Fund, VSMAX

All three have a minimum investment requirement of $3,000. VFIAX has an expense ratio of 0.04% while VIMAX and VSMAX have expense ratios of 0.05%.

VFIAX represents the 500 largest publicly traded companies in the US. VIMAX has 374, what finance people call mid-cap companies. I’ll explain more in a bit. VSMAX has close to 1,600 small-cap companies.

And all three have ETF equivalents – Vanguard S&P 500 ETF (VOO), Vanguard Mid-Cap ETF (VO), Vanguard Small-Cap ETF (VB).

These three funds combined are a great alternative to the Total Stock Market Index Fund, the VTSAX if you like even more control over your asset allocation.

In the finance world, companies get categorized based on the size of their market value:

  • Large Cap
  • Mid Cap
  • Small Cap

Large cap companies are companies valued more than $10 billion. Mid-cap are companies valued between $2 billion and $10 billion. And small cap companies are valued between $300 million and $2 billion.

As you can imagine, different sized companies operate differently and therefore likely affect their future performance.

A big company might not have the aggressive growth trajectory like a small up and coming startup. Though this is hard to predict given many of the large companies these days are technology companies, and they move at their own pace regardless of their size.

Nonetheless, when you hold VTSAX, you are holding onto all three different categories of companies. However, because of market capitalization, the percentage of small-cap to mid-cap company representation is pretty limited. No more than 10-15% total.

So if you like to hold more small-cap to mid-cap companies in your portfolio, these three fund combos can give you that flexibility. VIFAX can represent your large cap holdings, VIMAX your mid cap and VSMAX your small cap.

Or you can have it the other way around. If you want more large cap companies compared to what VTSAX provides, focus more on VFIAX and less on small to mid-cap company funds.

If you’d like to learn more specifically the difference between VTSAX and VFIAX, the total market vs. S&P 500, check out my post here.

Thank you again and I’ll see you in my next post.


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