MoneyUnder30.com

5 Mutual Funds to Get You Started


What is a mutual fund? This simple diagram explains what mutual funds do.Let’s proceed carefully.

Although I’ve done it once or twice before, I try to avoid recommending individual stocks or funds. Such “picks” are a dime a dozen on other blogs, in major financial magazines or on Jim Cramer’s TV shows.

At best, investing in stocks and funds featured in the media won’t hurt you. The problem is, it could.

This is why I recommend beginning investors invest solely in one or two index funds that track the entire stock and bond markets. Often times, the entire market will beat most mutual funds anyway. But most importantly, when you invest this way, it’s a lot harder to make mistakes.

If you get to the point in your investing that you feel you need more specific investment recommendations, it’s time to hire a fee-only financial advisor who can evaluate your situation and provide some unbiased recommendations. In my opinion, you probably need at least $100k invested before you consider this, and you’d probably be OK waiting until you have $200k or so in play.

For the rest of us, simple index funds do the trick.

If you are investing in your employer’s 401(k) or similar plan, you will have to choose your investments from among a limited list of investments. That’s why these general guidelines on how to pick a mutual fund—choose an index fund with less than 1.0%—are more useful than individual picks.

If you must know, however, here are a couple of example mutual funds that meet these criteria.

STOCK MARKET MUTUAL FUNDS

Vanguard Total Stock Market Index Fund (VTSMX)
Expenses: 0.18%
Turnover: 5%
Min. Investment: $3,000*

If I were going to pick only two funds in which to invest, it would be a mix of this one and the Vanguard Total Bond Market Fund (below). Providing total exposure to the stock market and extremely low fees, this fund is the perfect incarnation of low-cost index investing.

TIAA-Cref Equity Index (TINRX)
Expenses: 0.29%
Turnover: 11%
Min. Investment: $2,500

Although Vanguard’s mutual funds are synonymous with simple, low-cost investing, this TIAA-Cref fund is proof that good, low-cost index mutual funds exist elsewhere. This fund holds a portfolio that closely tracks the U.S. equities market.

Vanguard Total International Stock Index Fund (VGTSX)
Expenses: 0.29%
Turnover: 11%
Min. Investment: $3,000*

This fund invests in both developed and emerging markets around the globe, excluding the United States. That makes it an ideal compliment to a US Stock index fund. Investing in foreign stocks is thought of as riskier in the short run but provides the possibility of bigger long-term returns, making it a good option for young investors with a long time to stay invested.

Dodge & Cox Stock Fund (DODGX)
Expenses: 0.52%
Turnover: 12%
Min. Investment: $2,500

Unlike the other funds listed here, DODGX is actively-managed; it’s not an index. But with low turnover and modest expenses, the Dodge & Cox Stock Fund is a solid bet for someone looking to keep things simple with one fund providing exposure to both domestic and international markets.

BOND MARKET MUTUAL FUNDS

Vanguard Total Bond Market Index (VBMFX)
Expenses: 0.26%
Turnover: 75%
Min. Investment: $3,000*

Every portfolio should have some bonds in it for diversification and stability. (Bonds are less volatile than stocks, but also don’t provide the growth potential that stocks offer). For many investors, you don’t have to look further than this Vanguard fund to grab some exposure to bonds.

*You can avoid the minimum investment by purchasing these funds as ETFs. Also, if you have $10,000 to invest, the Admiral’s Shares versions have even lower expenses.

Do you have other favorite low-cost index funds you would recommend to new investors? Share them in a comment.

###

Get access to our best money hacks:

Join over 11,000 other young professionals and learn how to get out of debt by 30, increase your income this year and invest for financial freedom.




100% free! I will NOT spam you and I will NOT share your email.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I also really like the Vanguard REIT Index for those who already have the stock and bond indexes and want to get some exposure to real estate.

    Investor shares VGSIX ($3,000 minimum; 0.26% expense; 12% turnover)
    Admiral shares VGSLX ($10,000 minimum; 0.12% expense; 12% turnover)

    • Forgot to caution the REIT index does have a 1% redemption fee if the shares have been held for less than a year.

    • David Weliver says:

      Good idea, Brian. The REIT index is a great addition if you want to diversify beyond stocks and bonds. Also, the Vanguard International Stock Index (VGTSX) mentioned in the pos also has a redemption fee if held for less than two months. I forgot to mention that too and it’s important, although it should go without saying that these suggestions are best for long-term buy-and-hold scenarios.

  2. These are good funds for everyday investors looking to dollar cost average. Low cost, and geared toward mid to long term retirement investors. Keep diversity in mind and be sure to maintain a plan. Good piece.

  3. Any sugestions for sort term investments. Around 1-10 years. Im thinking I will just go with a market index fund or somesort of bond type. I like using companys like Trowe Price as it makes investing for me simple.

    • David Weliver says:

      I’m going to do a post on short-term investing soon; it’s a challenge for everybody these days (including me), to figure out something that’s better than a 0.5% savings account and without all the risk of stocks. As a quick answer, I like Vanguard’s life strategy funds (I imagine others like TRowe have similar options) and also Betterment, a new platform that lets you simply pick your desired allocation of stocks and bonds for different goals and it invests in index funds for you accordingly.