Many people find investing daunting, and for good reason. Selecting individual investments can be a confusing, time-consuming, and stressful task. There's always a fear that you might be "wrong" even though everyone is wrong sometimes.
Don't let that put you off. There's a simple way to get started, and all you need are two Vanguard exchange-traded funds (ETFs)!
Don't get caught up on individual securities
Broadly speaking, most investors will only ever be interested in two types of securities: stocks and bonds. Stocks are "riskier" and offer higher returns; bonds are "safer" and have lower returns.
These are generalizations, but they are fairly accurate overall. The key for investors is to decide how much risk versus reward you are willing to take on. An old Wall Street maxim is that most investors will do well with a portfolio that is 60% stocks and 40% bonds.
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If you are younger, you might want to go up to, say, 80% stocks. If you are older, you might want to take the bond component as high as 80%. You'll always want to have some stock exposure so the growth-oriented portion of the portfolio can help you keep up with inflation. And you always want to have some bond exposure because you don't want to take the risk that a catastrophic loss wipes you out.
This is basically what's known as a balanced portfolio. But there's only one problem: What stocks and what bonds do you buy? The answer is actually much easier than you think, because you can just buy all the stocks and all the bonds.
Using Vanguard's two big ETFs
Believe it or not, the hard part of a simple, balanced portfolio is deciding on the percentages you want in stocks and bonds. This is because exchange-traded funds now allow you to buy lots of stocks and bonds cost-effectively, with little to no effort. Vanguard has two of the best options if you want to keep your life simple.
Vanguard Total Stock Market Index Fund ETF (VTI -1.08%) owns all the U.S. stocks that can be easily purchased. It has a huge 3,700 stocks in its portfolio. It is market cap-weighted, so the largest stocks will have the most impact on performance. And the expense ratio is a minuscule 0.03%. With this one ETF, you'll never have to worry about underperforming the market because you, almost literally, own the market.
The story is similar with Vanguard Total Bond Market Index Fund ETF (BND -0.21%). This fixed-income ETF owns all the U.S. bonds that can be easily purchased. There are nearly 12,000 holdings in the portfolio. It, too, has an expense ratio of just 0.03%. You won't underperform the bond sector either, because you effectively own the bond sector.
You can set up a balanced portfolio with these two funds with just two trades. The only thing you really need to do after that is to rebalance the portfolio once a year to bring the percentages in stocks and bonds back in line with your target numbers. That, too, will only require two trades. You could use this simple two ETF portfolio for the rest of your life, spending little more than a few minutes a year to keep it up to date.
More flexible than you think
But here's the really exciting thing: If you want to do more, you can by simply buying a few individual stocks on top of this portfolio. That way, you have a solid foundation and can take your time learning or, just as important, only be as active with your portfolio as you are comfortable being.
In the end, Vanguard Total Stock Market Index Fund ETF and Vanguard Total Bond Market ETF are all you need to get yourself started as an investor and without the need to try to cherry-pick individual investments. What are you waiting for? Take the first step toward financial freedom today.
