The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: G-dog on March 10, 2014, 07:31:03 PM
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Thoughts or links to information on allocating index fund investments:
Is one index fund essentially diversified? Or do you select 2 or more index funds?
Any links to general guidelines would be appreciated. I've done some scanning of the forums, but didn't find this addressed.
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it all depends on which index funds you are looking at and what your definition of "diversified" is.
An index fund that tracks the SP500 will have the 500 largest US companies. but even though those US companies have a ton of international exposure (think of how much business Apple, Coke, IBM, Walmart, Exxon etc do outside the US).
There are other index funds that will track smaller companies with more room for growth, like the Russel 2000. Others will do only Asian stock or only tech stocks or only...
Basically, almost all aspects of the stock market have an index fund (or ETF) associated with it nowadays. Some are very diversified, some will be less so (e.g. Nasdaq index funds).
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This is the way I understand it... I'm using Vanguard as the example, although there are equivalent index funds available from other investment houses.
There are total stock market indexes like VTSAX, which is 100% stocks, and covers every company currently traded in the stock market. This is the one that is mostly recommended, since it has some of every single company on there so it about as diversified as a single fund can be.
There are total bond index funds like VBTLX, which hold the bond market, or REIT index fund (VGSLX). There is also a total international index fund: VTIAX. There are many other index funds that have a higher concentration/weight of specific funds like the Vanguard 500 (VFIAX) fund - containing the 500 largest U.S. companies.
If you're looking to have a higher concentration of certain funds, it might make sense to add in other funds that have higher concentrations in the companies you're wanting, but me personally, I think holding several different funds in addition to a total index fund in the same category (like stocks) isn't necessary, since you're basically already holding everything by being in the total stock market (VTSAX).
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There are total stock market indexes like VTSAX, which is 100% stocks, and covers every company currently traded in the stock market. This is the one that is mostly recommended, since it has some of every single company on there so it about as diversified as a single fund can be.
Did you mean to write VTSAX? I just looked at the prospectus and it holds 648 companies. (http://www.crsp.com/files/CRSPLC1%20Quarterly%20Report-Dec2013.pdf) Granted, that's tons of diversification but I don't think it's substantially different from an S&P 500 fund. (such as https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/portfoliodetails?fundId=0094)
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Sorry G-dog, I forgot to add my answer to your question. Basically, each index is plenty diversified for the asset class that it holds. The S&P 500, for example, measures the performance of the 500 largest publicly traded companies in the US. It doesn't however, hold any smaller companies or companies that trade solely in other countries. You can't really go wrong with a single index like the S&P 500, but a lot of people like to add a fund for smaller companies and/or a fund for international companies.
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One domestic (Canadian for me). Also one American, worlds largest economy might have some growth still :).
I'm also a fan of dividend funds, I like the idea of getting regular monthly amounts.
By getting a little diversity it removes some risk, but still has good growth. For example if US tanks and Canada doesn't I won't be totally screwed. The opposite is also true, since some of my investments are out of country I'm safer.