Investors like Chuck Mason are crying out for simple solutions to their investment goals. The 38-year-old husband and father is a Delta Air Lines pilot who spends days on end away from home. When he returns, family time trumps financial hour every time. "You've got 90 minutes a day to do everything," says Mason. "Investing never gets to the top of the list -- not even remotely." When Mason did finally get a chance to visit the Vanguard Group Web site to investigate its index funds, he was confronted by page after page of choices. Says Mason: "That's where my plan broke down."
There's a little of Chuck Mason in everyone. You're more likely to carry through with a plan when you don't have to jump through so many hoops. And you're more likely to remember why you made a particular investment.
So if, like Mason, you'd like to handle your own investments without sacrificing priceless family time or subjecting yourself to mental gymnastics, consider the virtues of these five simple investment plans. They can form the core of your portfolio -- or maybe even all of it.
SIMPLE OPTION 1 | Follow the market
Index funds are the oldest and, as Chuck Mason found, the broadest category of simple investments. Basically unmanaged baskets of securities, index funds are meant to track a market benchmark -- say, Standard & Poor's 500-stock index, a yardstick of large-company performance, or the Russell 2000, a small-company index. With an index fund, you should do as well as the benchmark over time (minus the expenses of running the fund).
And that can turn out to be a top-notch return. The granddaddy of all index funds, Vanguard 500 Index, boasts a record that puts it in the top 20% of all diversified U.S. stock funds over the past 20 years. During that period, it returned an annualized 13% (to August 2), nearly two percentage points per year ahead of its rivals. Over the past five years, however, the fund failed to keep pace, losing 2% per year compounded, while diversified U.S. stock funds gained 1% annually, on average. Vanguard 500 lagged mainly because most funds own a greater proportion of small-company stocks, and the little guys have outpaced big-company stocks the past few years.
Compared with their actively managed peers, the main advantage of index funds is low fees. Compare the 0.18% of assets you'll pay for Vanguard 500 to the 1.5% average for actively managed, diversified U.S. stock funds. And because index funds generally trade stocks only when the index changes, trading costs are kept to a minimum.
But back to Chuck Mason's quandary: Which index to choose? The answer depends largely on the degree of simplicity you crave. You could put the stock portion of your portfolio -- and for someone like Chuck, we'd suggest 80% of long-term savings -- into Vanguard's Total Stock Market Index and, voilà, you're done. The fund, which charges just 0.2% a year in fees, mirrors the Wilshire 5000 index, a proxy for the entire U.S. stock market. "Total Market's a no-brainer," says Sheldon Jacobs, editor of The No-Load Fund Investor. "Once you get into small, large, growth or value, you're making judgments -- why do it?"
Mason could round out his holdings with a bond fund, such as Vanguard Intermediate-Term Tax-Exempt, or with a fund that invests in other bond funds (more on the latter later).
Without complicating matters too much, you could even diversify a little more. Since Total Market is tilted toward large companies, you can give the small fry their due by dividing your stock assets 50-50 between Vanguard 500 and Vanguard Small-Cap Index, which tracks a Morgan Stanley gauge of 1,750 small companies. If you're set on a still broader mix, place 10% to 20% of your stock investments in a wide-ranging overseas index fund, such as Vanguard Total International, which gives you the world for annual expenses of just 0.36%.
Vanguard's index funds tend to be the cheapest, and they track their indexes closely. But other companies' no-load offerings are fine, too. Consider Schwab's 1000 index, which tracks 1,000 large companies, and Fidelity's Spartan index line, which includes International Index and Extended Market for small and midsize firms. Just don't pay more than 0.5% to buy in to an unmanaged basket of stocks.
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