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The Best Mutual Funds and ETFs for New Investors

A few weeks ago, I wrote a post about the best places for new investors to open investing accounts. But a complementary decision (and, perhaps, a more important one) isn’t where to invest, but how.

I began to answer that question recently as well, in my review of The Investment Answer. It’s a book that makes, I believe, an airtight case for a simple buy-and-hold investing strategy.

In a nutshell, the book demonstrates that not only do frequent traders fail to beat the overall market long-term, so do most professional mutual fund managers. The authors’ advice? Pick mutual funds or exchange-traded funds (ETFs) that track the overall market and have low expense ratios. Allocate your money based on how long you have to invest, and work with a fee-only advisor now and then.

When you’re starting to invest, I realize you probably don’t want to spend several hundred dollars for a financial planner to help you build your first portfolio (even though it might be money well spent). But if you go it alone, you might yourself overwhelmed investment choices.

In late 2008, there were over 8,000 open-end mutual funds on the market. Add on ETFs and closed-end funds, and you get way more choices than any normal person wants.

So, I built you a short list.

Just because a fund didn’t make this list doesn’t mean it’s not a good choice for a new investor…there are hundreds of good, low-cost funds out there. But these are good bets.

STARTING OUT

If you’re looking for your very first investment…especially if you are only investing enough to buy one fund, consider an ETF that tracks the market and has super-low fees. Otherwise, Dodge & Cox Stock Fund and Fidelity Contrafund are good bets for managed funds providing a mix of domestic and foreign stocks with less than a 1.0% expense ratio. (Here’s a refresher on expense ratios and other mutual fund fees.)

Fund Symbol Objective Expenses Minimum
Vanguard Total Stock Market ETF VTI Entire market index. 0.07% -
iShares 3000 Index ETF IWV Stock index. 0.21 -
SPDR S&P 500 ETF SPY Stock index. 0.09 -
Dodge & Cox Stock DODGX Domestic/foreign stocks. 0.52 $2,500
Fidelity Contrafund FCNTX Domestic/foreign stocks. 0.91 $2,500

MIXING UP YOUR STOCKS

When you have more money to invest and want to start properly diversifying your investment portfolio, you may want to look beyond general index funds and blue chips (stocks of large domestic companies). That’s when funds like these (targeting smaller companies and foreign investments) will come in handy.

Fund Symbol Objective Expenses Minimum
Vanguard FTSE All-Word ex-US ETF VEU Foreign stocks. 0.22% -
Wisdom Tree Small Cap Earnings ETF EES Small cap stocks. 0.38 -
Vanguard Large Cap ETF VV Large cap stocks. 0.22 -
Vanguard Small Cap ETF VB Small cap stocks. 0.12 -
Dodge & Cox International Stock DODFX Foreign stocks. 0.65 $2,500
T. Rowe Price Mid Cap Growth PRSVX Mid cap stocks. 0.83* $2,500
T. Rowe Price Small Cap Value RPMGX Small cap stocks. 0.80 $2,500

BONDS AND BEYOND

As you mature as an investor, it will come time to add bonds or—if you want something more exotic—even commodities or real estate trusts to your portfolio. Start here.

Fund Symbol Objective Expenses Minimum
Vanguard Total Bond Market ETF BND Mid-term bonds. 0.12% -
PowerShares DB Commodity Index Tracking ETF DBC Commodities index. 0.81 -
Vanguard Emerging Markets ETF VWO Foreign stocks. 0.22 -
Harbor Bond Institutional HABDX Mid-term bonds. 0.55 $1,000
Vanguard REIT ETF VNQ Real estate. 0.13 -

*A load (sales charge) may also apply to this fund.

Want to learn more about any of these funds? Check out Morningstar.com where you can get basic fund quotes or create a free account to track sample portfolios and more.

A FINAL NOTE ABOUT ETFS

You’ll notice many of the funds here are exchange-traded funds (ETFs). Because many ETFs have very low expenses and the minimum to invest is simply the price of a single share, often less than $100, they’re attractive to new investors with a long time to invest.

That said, unlike many mutual funds to which you can make regular investments, you traditionally have to pay a trade commission every time you want to pick up more shares of an ETF. That gets expensive. Trade commissions eat returns!

Fortunately, many brokers now offer select ETFs commission-free.

Fidelty has 30 commission-free iShares ETFs. Vanguard gives brokerage clients access to their 46 ETFs commission-free. Scottrade, too, has introduced 15 commission-free Focus Morningstar ETFs which they’re advertising as having lower expenses than even Vanguard ETFs. The Focus Morningstar US Market ETF (FMU), as an example, has an expense ratio of just 0.05%. (Read our review of Scottrade here).

What about you? What are you favorite one or two ETFs or mutual funds for long-term investing?

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. When I decided to start investing, my first investment was in the Vanguard Small Cap ETF (VB). I have a brokerage account with Vanguard, so you can’t beat the commission free trades and low expense ratios on Vanguard’s ETFs.

  2. You have laid out some simple investment portfolios for new investors to get started. In general I think investors should not invest in mutual funds due to high expenses; but you have put some of the very best in your list.
    I do disagree with your position on buy and hold. The last decade has has demonstrated that a tactical value asset allocation can beat buy and hold and with less risk.

    Ken Faulkenberry

    • “The last decade has has demonstrated that a tactical value asset allocation can beat buy and hold and with less risk.”

      That may be true over the last 10 years (but I’m not sold on that yet), but it definitely isn’t true over the last 25, 50, or 100 years.

      • I don’t understand why people use the great average return of the market over the last 50-100 years. Who has held their stock for that long to see that average return? No one.

        I think people should look at 30-40 year ranges and see what the returns are. I think a lot of people will realize that using 8 or 9% estimates for a return is way too high.

        • Because 50-100 years provides a much better statistical sample than 10 years.

          Though if you want to look at 30 year averages, both the Dow and S&P 500 had an average annual return of 12% for the period ending in December 2008 (the latest range I could find quickly, but at least it is after the collapse of the housing industry).

          And I do plan on having some of these funds in 50 years, when I am in my late 70′s

          • David Weliver says:

            What I’ve gathered from reading all the studies over the years is

            a) anybody can slice market data to support their investing theories—with a short or long enough timeline.

            b) in general, the longer you leave money invested, the better your average annual return will be

            c) likewise, the longer you have to invest, the less helpful trading and tweaking will be (though I’d argue it becomes more important as you near retirement).

  3. Nice post.

    I have some of those funds. My main investments are all in vanguard. I have:
    Total Stock index
    Total International Stock index
    REIT index
    And for my short-term money, I have the short-term treasury index.

    Thankfully, I have them built up enough to have the even lower cost Admiral shares with the exception of the treasuries which requires $50,000 instead of $10,000.

  4. Thanks for this list. I didn’t realize that there was a way to access ETFs without paying a trading fee. I’ve wasted so much money on Sharebuilder buying ETFs, but at the least this means I’m investing!

  5. any thoughts on Velocity Target Funds (2050 for example)?. I like the mix of funds of funds which gradually re-allocate for you. Seems like a good choice. Any thoughts?

    • David Weliver says:

      I love simplicity so I don’t have any issue with target date funds…especially if you know you’re the type that’s not going to remember or want to re-balance your portfolio down the road. I would just caution to compare their management fees before investing.

    • I like them as well.

      My 401k (which I always think of separately than my other investments, because the options are limiited) is almost entirely in a target date fund.

      If I had more options, I might pick my own funds, but there is a lot to be said for the “set it and forget it” convenience of them.

      I would echo David’s comment about making sure to pick one with low fees.

  6. Two ‘socially responsible’ funds I have been happy with for several years are PRBLX (Large Cap) and PRFIX (fixed income). They have higher expense ratios than ETFs, but not too bad: 0.99% and 0.76%

  7. I didnt realize you can get ETFs without paying the transaction fee! I might have to jump on that.

    Personally, right now my wife and I use Target Retirement fund from Vanguard and T Rowe Price.

    Are they the absolute best way to go? Probably not. Could I possibly get slightly larger returns with something else? Maybe.

    But I dont plan on getting rich with mutual funds. I’m building a business, so that I can hopefully retire WAY before I’m even able to take out money from my retirement funds!

    Plus, in 2 years of working my wife and I have saved over $40,000 in our retirement accounts, meaning we already have a lot more than most Americans who have been working 10 times as long. I think Im doin okay.

  8. Another great post! I love to invest and consider myself a swing trader. My personal opinion is any trading style works, but it should still be monitored.

    Another cool topic might be great dividend stocks. If done correctly you can buy low and sell high high on stock – while collecting the dividends as you hold the position. This is easier said than done =). Have a good one all

  9. Are Mutual Funds better or are ETF’s better and what is the difference between the two ?

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