Investing 101 Question

[cnn]

I've been looking at some Vanguard funds like VFINX(S&P 500) and VTSAX(Total Stock Market).  It seems like these funds are pretty well diversified.  Is it a terrible strategy to throw all your excess income at these two funds and nothing else?  Why or Why not?  I'm obviously very new to investing and would appreciate some feedback. 

Thanks!

[MacGyverIt]

Or you could throw it into one fund that is diversified and branch out from there. Here is one option:

Vanguard Balanced Index Fund Investor Shares (VBINX)

Expense ratio as of 04/26/2012    --- 0.24%

This index fund offers investors an easy, low-cost way to gain exposure to stocks and bonds. The fund invests roughly 60% in stocks and 40% in bonds by tracking two indexes that represent broad barometers for the U.S. equity and U.S. taxable bond markets. The fund’s broad diversification is important, because one or two holdings should not have a sizeable impact on the fund. Investors with a long-term time horizon who want growth and some income—and who are willing to accept stock and bond market volatility—may wish to consider this as a core holding in their portfolio.

[capital]

I've been looking at some Vanguard funds like VFINX(S&P 500) and VTSAX(Total Stock Market).  It seems like these funds are pretty well diversified.  Is it a terrible strategy to throw all your excess income at these two funds and nothing else?  Why or Why not?  I'm obviously very new to investing and would appreciate some feedback. 

Thanks!

I've been starting out tossing everything to VFIFX, a target retirement date 2050 fund with a blend of US & international stocks and bonds that auto-adjusts to more bonds closer to & beyond the target retirement date. I might move to something more active as I save more money, have more definite life plans, or learn more, but the Vanguard target retirement date funds seem like a good fire-and-forget option to start out with. VFIFX has a .19% expense ratio.

I know Vanguard has "Admiral Shares" with lower expenses for higher minimum investments, which I should look at moving to now that I have more money saved.

[grantmeaname]

I'm all in on VTSAX. My target asset allocation is something like 95/5 stocks/bonds, so it's a much closer match than something like VBINX would be.

Your intuition is correct here: it's not just the number of funds but also the number of holdings within those funds that matters. Figure out your asset allocation (do you need anything in REITs or bonds?) and then try and find an option as high-quality as VTSAX for each of them and buy them in the correct proportions and you'll be set!

[chucklesmcgee]

I've been looking at some Vanguard funds like VFINX(S&P 500) and VTSAX(Total Stock Market).  It seems like these funds are pretty well diversified.  Is it a terrible strategy to throw all your excess income at these two funds and nothing else?  Why or Why not?  I'm obviously very new to investing and would appreciate some feedback. 

Thanks!

It's not terrible, especially if you don't need the money for some time. Plus if you get over $10k you can usually qualify for Vanguard Admiral versions of the funds, which tend to have even lower expense ratios. These funds are already diversified in the American markets, so it's not as though they will all go to zero (if they do, we've got bigger problems than just the markets). As you approach retirement, you may wish to switch to some more-stable but lower-return bond funds if you don't have other forms of secure income and a few years of recession would substantially impact your quality of living in retirement. Most of the people who say you need to be in a dozen mutual funds and rebalance all the time are also the ones who are selling high priced funds with high transaction costs.

[michaelrecycles]

I've been looking at some Vanguard funds like VFINX(S&P 500) and VTSAX(Total Stock Market).  It seems like these funds are pretty well diversified.  Is it a terrible strategy to throw all your excess income at these two funds and nothing else?  Why or Why not?  I'm obviously very new to investing and would appreciate some feedback. 

Thanks!

VFINX is the granddaddy index fund and is more concentrated in the big boys. I started off with that, until I learned about VTSAX, which is more diversified. They are both fine choices, but I would only pick one or the other.

For any fund you consider, take a dip into the prospectus and make sure you feel comfortable with its goals and strategies.

[Marjimmy]

I'd say it depends on what you want your asset allocation to be and when you plan to retire.  I have my funds locked up in a Life Strategy right now. The equivalent to a Retirement plan however they won't fluxate with time. It all depends what you're looking for.