Vanguard Index Funds – Are They Worth It?
Investors today want more than stocks and bonds. Mutual funds offer an alternative, but carry higher expense ratios and have high minimum investment requirements. Passive investing in index funds, such as the Vanguard Total Stock Market Index Fund, proves to be more profitable because of their lower fees and potential to increase over time. With more than 3,600 stocks across various sized segments, it’s easy to diversify your risk.
What are Vanguard Index Funds?
Vanguard index funds mimic a market. They may be comprised of securities from multiple companies in the same stock index or specific industries. They may mimic the S&P 500, bond market, or a combination of both.
Investors like the index funds because they offer:
- Diversification which creates a lower risk
- Lower tax liabilities because you trade them less often
- Lower costs
Are Vanguard Index Funds a Good Risk?
Any investment is a risk. However, the passive nature of the Vanguard index funds makes them a less volatile investment. Unlike actively managed funds, you don’t actively trade VTSAX or FXAIX funds. Instead, you let them ride the storm, enjoying their annual rate of return, which usually averages out even in a bearish market after a while.
The benefit of Vanguard index funds is the diversification they provide. You instantly spread out the risk of a total loss by diversifying your investments across low risk and high risk investments. When you leave these investments for the long-term, you’ll typically see capital gains.
How to Buy Vanguard Index Funds
Vanguard categorizes their funds in two categories:
- Admiral shares – These are the most readily available investments for new investors. You can invest with a minimum of $3,000 and choose from 38 index funds.
- Investor shares – These shares are closed to new investors, but when open required a minimum $10,000 investment.
You can purchase the Vanguard Total Stock Market Index Fund or VTSAX, a few ways:
- Open a Vanguard brokerage account
- Open a brokerage account with another broker
- Purchase the funds through your 401K
Choosing the Right Vanguard Index Fund
Vanguard offers a variety of fund options, but a few of the most common include:
- Vanguard Total Stock Market Index Fund – This includes 75% of the stock market in it
- Vanguard Total Bond Market Index fund – This includes investments from both the corporate and U.S. government bond
- Vanguard Growth Index – This includes both stocks and bonds for diversification and growth
Investing in index funds is a great way to diversify your investments as well as invest in investments you may otherwise not be able to choose. You can choose specific markets, the entire stock market, or the entire bond market to invest in. Since it’s not an active investment, the fees are low, but the profits are high especially when you can leave the investment for the long-term. Let the investments ride out the storm through a bearish market and wait for the bull market to make its return.