Let’s proceed carefully.
Although I’ve done it once or twice before, I try to avoid recommending individual stocks or funds. Such “picks” are a dime a dozen on other blogs, in major financial magazines, and on Jim Cramer’s TV shows.
Best case scenario: investing in stocks and funds featured in the media won’t hurt you. Worst case scenario: it wipes you out.
This is why I recommend that beginning investors invest solely in one or two index funds that track the entire stock and bond markets. Oftentimes, the entire market will beat most mutual funds, anyway. But most importantly, when you invest this way, it’s a lot harder to make mistakes.
If you get to the point in your investing that you feel you need more specific investment recommendations, it’s time to hire a fee-only financial advisor who can evaluate your situation and provide some unbiased recommendations.
In my opinion, you probably need at least $100k invested before you consider this, and you’d probably be OK waiting until you have $200k or so in play.
We’ve partnered with Paladin Registry, an excellent resource that helps you find certified fee-only financial advisors in your area. So if you’ve got enough saved up and you’re looking for a human touch to help you with your financial decisions, check out Paladin.
For the rest of us, simple index funds do the trick.
If you’re investing in your employer’s 401(k) or similar plan, you will likely have limited options. That’s why these general guidelines on how to pick a mutual fund – choose an index fund with less than 1.0% expense ratio – are more useful than individual picks.
If you must know, however, here are a couple of example mutual funds that meet these criteria.
Vanguard Total Stock Market Index Fund (VTSMX)
- Expenses: 0.04%.
- Turnover: 5%.
- Min. Investment: $3,000*.
If I were going to pick just two funds to invest in, it would be a combination of this one and the Vanguard Total Bond Market Fund (below). Providing total exposure to the stock market while charging extremely low fees, this fund is the perfect incarnation of low-cost index investing.
TIAA-Cref Equity Index (TINRX)
- Expenses: 0.33%.
- Turnover: 11%.
- Min. Investment: $2,500.
Although Vanguard’s mutual funds are synonymous with simple, low-cost investing, this TIAA-Cref fund is proof that good, low-cost index mutual funds exist elsewhere. This fund holds a portfolio that closely tracks the US equities market.
Vanguard Total International Stock Index Fund (VGTSX)
- Expenses: 0.18%.
- Turnover: 11%.
- Min. Investment: $3,000*.
This fund invests in both developed and emerging markets around the globe, excluding the United States. That makes it an ideal complement to a US Stock index fund. Investing in foreign stocks is riskier in the short run but provides the possibility of bigger long-term returns, making it a good option for young investors with a long time to stay invested.
Dodge & Cox Stock Fund (DODGX)
- Expenses: 0.52%.
- Turnover: 12%.
- Min. Investment: $2,500.
Unlike the other funds listed here, DODGX is actively-managed—it’s not an index. But with low turnover and modest expenses, the Dodge & Cox Stock Fund is a solid bet for someone looking to keep things simple with a single fund that provides exposure to both domestic and international markets.
Vanguard Total Bond Market Index (VBMFX)
- Expenses: 0.15%.
- Turnover: 61%.
- Min. Investment: $3,000*.
Every portfolio should have some bonds in it for diversification and stability. (Bonds are less volatile than stocks, but also don’t have as much growth potential). For many investors, you don’t have to look further than this Vanguard fund to grab some exposure to bonds.
*You can avoid the minimum investment by purchasing these funds as ETFs. Also, if you have $10,000 to invest, the Admiral’s Shares versions have even lower expenses.
Summary
Beginning investors are better off investing in one or two mutual funds that track a broader market. If you’re new to the investing game and don’t have a ton to invest, these five funds will start you off on the right foot.
You can also check in with a robo-advisor and have them do most of the work for you. I recommend Wealthfront since you can pick from expertly vetted portfolios (or take a DIY approach when you feel confident enough to do so).