Short version: try something like Vanguard's online recommendation, or check out Wealthfront or Betterment. Probably you'll just end up buying VTSMX.

Long version: The basic argument for index funds over individual stocks is that you think that a is going to outperform a because of general economic growth and reduced risk through pooling. So if you apply the same logic to index funds, what that argues is that you should find the index fund that covers the largest possible pool.

But it also becomes obvious that this logic only stretches so far--one might think that meta-indexing requires having a stock index fund and a bond index fund that are both held in proportion to the total value of stocks and bonds. So let's start looking at the factors that push in the opposite direction.

First, historically stocks have returned more than bonds long-term, with higher variability. It makes sense to balance your holdings based on your time and risk preferences, rather than the total market's time and risk preferences. (If you're young, preferentially own stocks.)

As well, you might live in the US, for example, and find it more legally convenient to own US stocks than international stocks. The corresponding fund is VTSMX, for the total US stock market. If you want the global fund, it's VTWSX.

You might have beliefs about small caps and large caps, or sectors, and so on and so on. One mistake to avoid here is saying "well, I have three options, so clearly I should put a third of my money into each option," especially because many of these options contain each other--the global fund mentioned earlier is also a US fund, because the US is part of the globe.

Asset allocation (what portion of your money is in stocks and bonds) is very important, depends on your age, and will get out of whack unless you rebalance. So use a Vanguard Target Retirement Date fund.

Open thread, Nov. 23 - Nov. 29, 2015

by MrMind 1 min read23rd Nov 2015258 comments


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