There is a stigma associated with investing that it is complicated and fraught with risks. Those who have never been taught how stocks and bonds work can be intimated by the process of putting their money in the market for fear of making a mistake. For as we all know, a mistake in investing is measured in real dollars lost.
Investing should actually be a very simple and methodical endeavor. It doesn’t matter if you just opened up your first Roth IRA, rolled over your nest egg from a 401(k), or broke up with a long-term advisor. The process remains the same and can be accomplished with ease if you start slow and learn the playing field.
Decisions like choosing the right fund, knowing when to buy, and how much money to put into each basket may be difficult at first. However, these choices become easier with time and experience. It’s getting started on the right foot that is critical to your long-term success.
To aid in this effort, I have identified four funds that are perfect for investors who are just getting their feet wet in the stock and bond markets.
Vanguard Wellington Fund Investor Shares (VWELX)
If you are looking for an all-around fund to use as a core holding, you can’t go wrong with VWELX. This mutual fund is one of the oldest balanced funds in nation and has stood the test of time based on several attractive characteristics.
The strategy for this fund is to invest two-thirds of the portfolio (60-70%) in stocks with the remaining one-third (30-40%) in bonds. This approach creates a very diverse portfolio of assets spread across nearly all sectors of the economy.
The stocks in the VWELX portfolio are primarily large-cap U.S. value companies such as Wells Fargo & Co (WFC) and Microsoft Corp (MSFT). This is supplemented by a broad array of investment grade bonds to help smooth out volatility and add income.
The mandates of the fund allow the investment manager some leeway to shift the asset allocation and underlying holdings to reflect opportunities or risks in the market.
Furthermore, as a Vanguard product, it should come as no surprise that the expenses of this fund are very low. VWELX charges a net expense ratio of 0.26% and currently has $92.3 billion in assets under management.
Lastly, the performance of this balanced fund has been near the top of its class for quite a while now. It lands in the top 5% of all comparable funds over the previous 10-year time period. Morningstar ranks this fund as 5-stars with a gold rating – one of its most prestigious acknowledgements.
Vanguard Total Stock Market ETF (VTI)
Choosing individual stocks, sectors, or market capitalizations can be a difficult journey filled with minefields of hits and misses. An easier solution is to simply own every stock in the U.S. in a single, low-cost investment vehicle.
That is the simple concept behind VTI, an exchange-traded fund that owns more than 3,600 publicly traded U.S. companies. A fund like VTI gives you maximum diversification across the entire domestic stock market for a total annual expense of 0.05%. That’s just $5 for every $10,000 invested.
You get exposure to every segment of the economy and the capability to stay correlated with the price movement in both large and small stocks. This fund is often touted as one of the simplest and most convenient methods to gain stock exposure as a core holding. It is transparent, liquid, and highly tax-efficient as well.
Keep in mind that exchange-traded funds are bought and sold using individual shares, similar to a stock. To calculate the number of shares you need to purchase, divide the total dollar amount you wish to commit by the current share price.
Vanguard Total International Stock ETF (VXUS)
Accessing a portfolio of U.S. stocks is likely to be a higher priority and larger position size than international stocks. However, there may also be a desire to enhance your diversification in foreign companies as well.
One simple vehicle to accomplish this task is VXUS. Using a similar concept as VTI, this fund owns a conglomeration of over 6,000 stocks outside the United States in both developed and emerging market nations. Japan, the United Kingdom, Canada, France, and Germany make up the top country allocations.
This ETF would be suitable to use in conjunction with VTI to encompass virtually every publicly traded company in the world. It also charges a very meager expense ratio of just 0.13%.
Investors who consider foreign stock exposure should note that these indexes have historically shown a higher degree of risk and volatility than their domestic counterparts. Nevertheless, that may also work to your advantage in accessing opportunities and capital markets with appealing growth potential.
VXUS is also an exchange-traded fund that will need to be purchased in whole shares rather than specific dollar amounts.
DoubleLine Core Fixed Income Fund (DLFNX)
Choosing a single diversified bond fund from the thousands of available offerings is no easy task. However, in my opinion, a core fixed-income allocation should include a wide range of sectors and proven track record of success.
DLFNX is managed by Jeffrey Gundlach of DoubleLine Funds and seeks to outperform a traditional aggregate bond index through superior research, security selection, and risk management.
This fund incorporates U.S. government, mortgage, corporate, and emerging market debt into a single investment vehicle. The fund manager has the flexibility to shift allocations within each sleeve of the portfolio to sidestep risks or capitalize on relative opportunities.
DLFNX charges an expense ratio of 0.75%, which is on the high side compared to the other funds on this list. However, its superior track record and positioning has earned that premium fee over its lifetime. The fund currently sports a 5-star rating by Morningstar and is in the upper echelons of its peers over the last five-year time period.
In my opinion, actively managed bond funds such as DLFNX have a distinct advantage over low-cost, passively managed counterparts. Historically low Treasury yields will likely favor those managers who take less interest rate risk and can navigate their way through a tricky credit market. Gundlach has shown to be an experienced and reliable manager
Until next time,
David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.