Forget the stark mad, screaming pundits on financial TV shows squawking about the hottest gainers of the moment. Forget chasing the latest headline capturing investment trend — I’m looking at you Bitcoin. Think your going to make millions playing Rocket League? Forget even the fantasy of cashing in that winning Powerball ticket or inheriting millions from the rich uncle you didn’t know you had.
For everyday folks, the ones who go to work and receive a paycheck – saving, investing and retirement are inextricably connected. Setting aside money to grow over the long term is the means to achieve the end goal of having enough money to live comfortably after your working days are over.
And while 401(k)s and IRAs, whether employer-provided or personally managed, are critical investment vehicles for long-term investment growth, investors may seek other promising assets in which to place their money. Such is the space where stock index funds thrive.
Simply defined, index funds are a type of passive mutual fund or ETF in which the money in the fund is diversely invested across a list, the index, of stocks that represent a whole market or market segment. Some index funds are constructed to mirror the performance of well-known indices like the Dow Jones Industrial Average or S&P 500 Index. Others may focus on stocks in industries such technology or pharmaceuticals.
Investors are provided two distinct benefits by the diversified nature of index funds: widespread market exposure to optimize the capture of bull runs (stock market returns historically outstrip other investment returns such as bonds) and significantly less vulnerability to single stock selloffs.
This approach is appealing to an increasing number of investors. By late 2016, it’s estimated that more than $1 out of every $5 invested in U.S. equity markets was via an index fund. But there are a lot of index funds out there. Where should the savvy investor, who doesn’t want use free time picking individual stocks, place their money?
The short answer is ETF’s – and you don’t need to buy many of them. Choosing index funds from Vanguard, a pioneer in the development and offering of these funds is a great place to get started. In fact, personal finance news organization Kiplinger recently recommended holding just two Vanguard 500 Index funds in your retirement portfolio.
One suggestion was Vanguard Total World Stock ETF (symbol: VT). The VT tracks the FTSE Global All Cap Index and invests in a staggering 7,900 stocks from around the world while carrying a modest 0.11 percent annual fee. The current investment composition of this fund is 52 percent in U.S. stocks, 47 percent in foreign stocks, and 1 percent in cash. The value of VT shares has climbed 55 percent over the past five years.
Another great pick to consider is Vanguard Total Stock Market ETF (symbol: VTI), which mimics the performance of the entire U.S. stock market by tracking the CRSP U.S. Total Market Index of 3,800 stocks. With an annual fee of 0.05 percent, VTI shares are up 88 percent over the last five years.
Or if you’re with Schwab, a fantastic discount broker, you have access to their commission free, low fee ETFs, like Schwab U.S. Broad Market ETF (symbol: SCHB). With an annual fee of only 0.03% it’s cheapest you’ll find. SCHB is up roughly 89 percent over the last five years.
But since I understand the importance of my investments generating cash through dividends, I would likely pick one of the three options below.
Schwab’s U.S. Dividend ETF (symbol: SCHD) isn’t a bad place to start. It caries a modest expense ratio of 0.07% and a decent yield of 2.7%. Or, Vanguard’s High Dividend ETF (symbol: VYM) with an also small expense ratio of 0.08% and slightly higher yield of 2.84%. Both should see some good dividend growth over the years.
However, if I felt the market was getting away from itself (hint, hint) I would likely choose a slightly higher yielding ETF with a greater percentage of defensive holdings. iShare Core High Dividend ETF (symbol: HDV) fits that job nicely. While HDV’s expense ratio is inline at 0.08% it’s yield is a whopping 3.28%.
While it’s possible in the digital age to reach a millionaire status by becoming a skilled gamer, don’t bank on it for your retirement plan. Strongly consider the long-term wealth growth and low fees associated with quality ETFs, reinvest those dividends and buy more shares over time. Once retired, you will be glad you did.