Can I be diversified with only Vanguard Index Funds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Sun Dec 29, 2013 5:22 pm

I am new to investing, and just opened my Vanguard account. I love everything I have read about investing with indexes. I am 29 years old and while I wish I started investing in my retirement a dozen years ago, I think I still have time to build a nice nest egg. I have a Roth and an individual 401k at the moment (my job does not offer one). I do not like Balance funds, as I want to be more in control of my accounts and hope to continue educating myself over the years.
I tried to find all the indexes on the Vanguard website (if I missed any, please tell me what I have missed), and this is what I found they offer:

Total Stock Market Index
Total Bond Market Index
Total International Bond Index
Total International Stock Index
Small Cap Index
500 Index
Mid Cap Index
Short-Term Inflation-protected Securities Index
Emerging Markets Stock Index
Emerging Markets Stock Index

Using only these items above, am I able to diversity my retirement portfolio or am I missing a few key items with limiting myself to those found above? I did read about the "three fund portfolio" theory, though I think again that is a bit limiting and do not mind having things more complex and getting my hands dirty and educating myself about what may be a better, though less simple, way of investing for retirement.

Other indexes I found, with hirer minimums are listed here, if there are any major ones listed here please comment on those as well:
Dividend Appreciation Index Admiral Shares, FTSE Social Index, Growth Index Admiral Shares, High Dividend Yield Index, Large Cap Index, Admiral Shares, Value Index Admiral Shares, Extended Market Index Admiral Shares, Mid Cap Growth Index Admiral, Mid Cap Value Index Admiral, Small Cap Growth Index Admiral, Small Cap Value Index Admiral, Emerging Markets Government Bond Index Admiral Shares, FTSE All-World ex-US Index Admiral, FTSE All-World ex-US Small Cap Index, Global ex-US Real Estate Index Admiral Shares, Pacific Stock Index Admiral Shares, Total World Stock Index, REIT Index Admiral Shares.

thank you in advance to all for your help.

User avatar
mhc
Posts: 3522
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Can I be diversified with only Vanguard Index Funds?

Post by mhc » Sun Dec 29, 2013 8:36 pm

Welcome to the forum.

I do not know all of the index funds at Vanguard, but there are a lot of them. It looks like you found quite a few of them.

Some would argue that the 3-fund portfolio that you read about is all you need to be well diversified. And some would argue that deviations from the 3-fund would result in less diversification. Adding complexity does not necessarily accomplish anything useful. I would not deviate from the 3-fund unless you fully understand why you would do that and that you would have strong convictions so that you can stay the course through the ups and downs of the market.

I would recommend sticking with the 3-fund for a while using the Total Stock Market, Total International Stock Market, and Total Bond Market.

The main thing to do now is to continue learning. Also, your saving rate will probably have the biggest impact on the size of your portfolio.

User avatar
nisiprius
Advisory Board
Posts: 34603
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Can I be diversified with only Vanguard Index Funds?

Post by nisiprius » Sun Dec 29, 2013 8:51 pm

Pardon the language, but hell yes.

How about defining exactly what you mean by "diversified," though, and maybe we can give you a more meaningful answer.

According to one definition, the maximum possible diversification is to own the "market portfolio." Total market index funds are a close approximation of that goal. So, according to one definition, you cannot get any more diversified than a total market index fund. In a sense, that's what's behind the three fund portfolio.

Total Stock Market Index--this is about as diversified, all by itself, as you can get investing in U.S. stocks. It owns 3,613 different stocks. It owns stocks of companies of almost all sizes, except possibly for a very few of the very smallest. It owns stocks in every industry, energy, telecom, finance, consumer, gold mining, whatever. It owns all of the kinds of stocks included in narrower index funds. It owns all of the S&P 500, it owns mid-caps, it owns small-caps, it owns REITs.

Total Bond Market Index--Does for bonds what Total Stock does for stock. Maybe. Sorta. Some people quibble because the index is a traditional index, the Barclays Aggregate (formerly Lehman Brothers' Aggregate) which doesn't actually include very kind of bond, but never mind.

Total International Stock Index--The rest of the world, outside the U.S. By adding it to Total Stock you get a portfolio that is "globally diversified," not just diversified within the U.S. The conventional wisdom is that most investors should be doing this.

Total International Bond Index--The rest of the world, outside the U.S. This fund is controversial within the forum. It's not widely held conventional wisdom that you need international bonds, and Vanguard's case for them isn't terribly convincing. But, yes, it adds diversification to a U.S.-only bond fund.

500 Index--An historical relic. The original Vanguard index fund. The S&P 500 was intended to represent "the stock market," more or less, because before about 1981 nobody thought small-company stocks were very important. It is actually about 80% of the market, which is pretty close, but you don't need it now that there Total Market and it doesn't cost any more.

Small Cap Index
Mid Cap Index
These funds, and some others (Small Cap Value etc.) are LESS diversified than the Total Market and when you add them to Total Market it becomes LESS diversified. There are some very respected theories that say that even though the total market in a sense represents maximum diversification, that doesn't necessarily mean the best possible portfolio, and that it is beneficial to "tilt" toward smaller parts of the market.

Emerging Markets Stock Index--Just as small cap and mid cap are PART OF Total Stock, Emerging Markets is PART OF Total International. International includes almost every country except the United States, and except some countries with very very small, new stock markets. International is made up of "developed markets," which are big U.S.-like markets that have been around for a long time, and "emerging markets," which are younger, newer, and perhaps associated with faster-growing economies. Some people have reasons for thinking that it is good to "overweight" emerging markets within international. Others of course disagree.

Short-Term Inflation-protected Securities Index--well, too hard to describe here...
Last edited by nisiprius on Sun Dec 29, 2013 8:53 pm, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
InvestorNewb
Posts: 1573
Joined: Mon Sep 03, 2012 11:27 am

Re: Can I be diversified with only Vanguard Index Funds?

Post by InvestorNewb » Sun Dec 29, 2013 8:51 pm

I hope you are not planning on holding all of the funds in your original post. There is a lot of overlap between them, especially for a novice investor.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

User avatar
nisiprius
Advisory Board
Posts: 34603
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Can I be diversified with only Vanguard Index Funds?

Post by nisiprius » Sun Dec 29, 2013 8:57 pm

InvestorNewb wrote:I hope you are not planning on holding all of the funds in your original post. There is a lot of overlap between them, especially for a novice investor.
+1

To give you an example, it would be a strange and unusual decision to hold both Total Stock Market Index and 500 Index because these two funds are almost the same. All of the stocks in 500 Index are held in Total Stock Market, and in the same proportions, it's just that only about 80% of Total Stock is 500 Index stocks, and it holds another 20%. Holding these two funds doesn't make you more diversified. Well, it makes you a little more diversified than if you just held 500 Index and a little less diversified than if you just held Total Stock.

Mixing the two is like mixing Coke and Pepsi and expecting to get some exciting new flavor. It doesn't do a thing for you except complicate your life.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Novine
Posts: 1164
Joined: Mon Nov 17, 2008 9:07 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by Novine » Sun Dec 29, 2013 9:07 pm

I think the OP may be confusing complexity with diversification. I think nisiprius has provided sufficient details to illustrate the difference.

invhelpme
Posts: 48
Joined: Sun Apr 04, 2010 12:14 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by invhelpme » Sun Dec 29, 2013 9:32 pm

I agree with the previous posters. I have had many different funds over the past few years in our IRA's and trying to chase performance is pointless. If I had to do it all over again learning the hard way, I would write my IPs, set my Asset Allocation and stick with it forever. You are young and will make many of the same mistakes we all made. Stick with Taylor's three fund portfolio and add to it every month. I have driven myself crazy trying to make investing too complicated when it's not.

niceguy7376
Posts: 1833
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Can I be diversified with only Vanguard Index Funds?

Post by niceguy7376 » Sun Dec 29, 2013 10:31 pm

OP - What does the following mean?
I have a Roth and an individual 401k at the moment (my job does not offer one).

If you are employed by some company that does not offer a 401k, how can you have a individual 401k since you work for someone else?

User avatar
tetractys
Posts: 4596
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Can I be diversified with only Vanguard Index Funds?

Post by tetractys » Sun Dec 29, 2013 10:44 pm

niceguy7376 wrote:OP - What does the following mean?
I have a Roth and an individual 401k at the moment (my job does not offer one).

If you are employed by some company that does not offer a 401k, how can you have a individual 401k since you work for someone else?

From a previous employer? A 401(k) can sit around forever. -- Tet

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Sun Dec 29, 2013 10:59 pm

niceguy7376 wrote:OP - What does the following mean?
I have a Roth and an individual 401k at the moment (my job does not offer one).

If you are employed by some company that does not offer a 401k, how can you have a individual 401k since you work for someone else?


for extra income, i have a small personal side 'self employment' business. did i use the wrong term? i was pretty sure i have an individual 401k but i could be wrong about that.

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Sun Dec 29, 2013 11:00 pm

[quote="mhc"]Welcome to the forum.
[quote]

thanks. and thank you for your comments, i look forward to learning lots here.

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Sun Dec 29, 2013 11:10 pm

nisiprius wrote:Pardon the language, but hell yes.

How about defining exactly what you mean by "diversified," though, and maybe we can give you a more meaningful answer.



thank you so much nisiprius, this information was great!

To answer your question, and to possibly gain even more of the knowledge you are offering, I will say that "diversified" to me would mean making investments in such a way so that risk may be more likely reduced than in a single investment. Though i know there is no way to fully eliminate risk no matter what I do, if i want to also collect interest on my money to beat inflation. I'm not sure if this is the correct (clearly not the only way) to define "diversification" but that was my original reason behind the OP. I hope this answers the question you asked.

User avatar
grabiner
Advisory Board
Posts: 21324
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Can I be diversified with only Vanguard Index Funds?

Post by grabiner » Mon Dec 30, 2013 12:05 am

new2bogle2 wrote:To answer your question, and to possibly gain even more of the knowledge you are offering, I will say that "diversified" to me would mean making investments in such a way so that risk may be more likely reduced than in a single investment. Though i know there is no way to fully eliminate risk no matter what I do, if i want to also collect interest on my money to beat inflation. I'm not sure if this is the correct (clearly not the only way) to define "diversification" but that was my original reason behind the OP. I hope this answers the question you asked.


This is a good definition. You want to hold investments which are likely (although not guaranteed) not to all fall at the same time. The most important way to do this is to hold both stocks and bonds, as there are many times (such as 2007-2009) when all stocks fall at once, and bonds remain steady. A secondary factor is to split between US and foreign stocks, and a third factor is to split within US and foreign. You don't need separate funds to split within US and foreign, as Total Stock Market Index holds essentially every stock in the US market, and Total International holds essentially every stock in most foreign markets, both developed and international. This is the reason for a three-fund portfolio: the appropriate fractions of Total Stock Market, Total International, and Total Bond Market for your risk tolerance give a well-diversified and very simple portfolio.
David Grabiner

Novine
Posts: 1164
Joined: Mon Nov 17, 2008 9:07 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by Novine » Mon Dec 30, 2013 10:05 am

"new2bogle2", are you clear on the point that an index fund like Total Stock Market, while it may be considered a "single" investment, is actually a collection of over 3,000 different stocks, providing you diversification beyond what you could achieve purchasing dozens or even hundreds of individual stocks? The previous comments have explained that point but it was unclear from your recent comment whether that was fully understood.

dbr
Posts: 24768
Joined: Sun Mar 04, 2007 9:50 am

Re: Can I be diversified with only Vanguard Index Funds?

Post by dbr » Mon Dec 30, 2013 10:14 am

new2bogle2 wrote:
nisiprius wrote:Pardon the language, but hell yes.

How about defining exactly what you mean by "diversified," though, and maybe we can give you a more meaningful answer.



thank you so much nisiprius, this information was great!

To answer your question, and to possibly gain even more of the knowledge you are offering, I will say that "diversified" to me would mean making investments in such a way so that risk may be more likely reduced than in a single investment. Though i know there is no way to fully eliminate risk no matter what I do, if i want to also collect interest on my money to beat inflation. I'm not sure if this is the correct (clearly not the only way) to define "diversification" but that was my original reason behind the OP. I hope this answers the question you asked.


You may be confusing diversification with dilution of risk. The conventional situation within which we all invest involves selecting a ratio of stocks that are volatile to bonds that are not so volatile so that the volatility of the whole is targeted to a certain point. Along with this comes a reduction in the "expected" return. Of course, the problem can be done from the opposite point of view, targeting the expected return while having to accept the volatility that comes with it.

User avatar
abuss368
Posts: 12040
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Can I be diversified with only Vanguard Index Funds?

Post by abuss368 » Mon Dec 30, 2013 10:32 am

Of course!

With a few low cost funds or all in one fund, you can build and excellent and well diversified portfolio.

A simple Target Date or Life Strategy fund will do the trick.

Another option is a few funds such as Total Stock, Total International, and Total Bond. An investor can add REITs and TIPS if they want, but really nothing else is needed.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

pingo
Posts: 2579
Joined: Sat Sep 19, 2009 8:24 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by pingo » Tue Dec 31, 2013 12:14 am

nisiprius wrote:So, according to one definition, you cannot get any more diversified than a total market index fund. In a sense, that's what's behind the three fund portfolio.


Nisi,

I'm not sure Harvard's web page on the Costs of Attendance makes your point as well as you were hoping. :wink:

Am I the only who clicked the link? :D
Last edited by pingo on Tue Feb 04, 2014 7:24 am, edited 1 time in total.

User avatar
papito23
Posts: 372
Joined: Fri Jan 06, 2012 6:54 am
Location: midwest

Re: Can I be diversified with only Vanguard Index Funds?

Post by papito23 » Tue Dec 31, 2013 8:25 am

pingo wrote:
nisiprius wrote:So, according to one definition, you cannot get any more diversified than a total market index fund. In a sense, that's what's behind the three fund portfolio.


Nisi,

I'm not sure Harvard's web page on the Costs of Attendance makes your point as well as you were hoping. :wink:

Am I the only who clicked tried the link? :D


Pingo: his point, I'm sure, was that the school and degree you choose have a far greater impact on your financial future than your choice of funds ;)

new2bogle2: Here's the link to the 3-fund portfolio.
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

pingo
Posts: 2579
Joined: Sat Sep 19, 2009 8:24 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by pingo » Tue Dec 31, 2013 2:24 pm

Thanks for adding that link. I suppose I'd have actually been helpful had I done so myself. :oops:

OP might also benefit from Taylor Larimore's great thread by the same name: The Three Fund Portfolio.

There also this thread, which has some interesting input on the matter: New Wiki article: "Three-fund portfolio"

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Wed Jan 01, 2014 11:38 pm

Novine wrote:"new2bogle2", are you clear on the point that an index fund like Total Stock Market, while it may be considered a "single" investment, is actually a collection of over 3,000 different stocks, providing you diversification beyond what you could achieve purchasing dozens or even hundreds of individual stocks? The previous comments have explained that point but it was unclear from your recent comment whether that was fully understood.


I guess the best way to answer this question is that I did read and hear those who wrote this above, but until you took the time to specifically direct me to these words, it did not fully sink in and so yes i do now understand this point, it is clear. my overall question over diversification though would still be to ask how i can diversify outside of the U.S. stock market, so for example, when the U.S. Market is suffering a low point (a down year or even just a very low return for an extended period of time), which other area or areas of investment have historically been higher? are there any correlations like that?

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Wed Jan 01, 2014 11:41 pm

dbr wrote:You may be confusing diversification with dilution of risk. The conventional situation within which we all invest involves selecting a ratio of stocks that are volatile to bonds that are not so volatile so that the volatility of the whole is targeted to a certain point. Along with this comes a reduction in the "expected" return. Of course, the problem can be done from the opposite point of view, targeting the expected return while having to accept the volatility that comes with it.


I may be confusing the two terms.

To achieve this "conventional situation within which we all invest", are your investments split between only the total stock market index fund and the total bond market, both within the US?

User avatar
new2bogle2
Posts: 382
Joined: Sun Dec 29, 2013 12:49 pm

Re: Can I be diversified with only Vanguard Index Funds?

Post by new2bogle2 » Wed Jan 01, 2014 11:43 pm

abuss368 wrote:Of course!

With a few low cost funds or all in one fund, you can build and excellent and well diversified portfolio.

A simple Target Date or Life Strategy fund will do the trick.

Another option is a few funds such as Total Stock, Total International, and Total Bond. An investor can add REITs and TIPS if they want, but really nothing else is needed.


Once I have my money in the Total Stock Market, Total International and Total Bond Index Funds, which would be your next recommendation between the REIT or the TIPS?

User avatar
mhc
Posts: 3522
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Can I be diversified with only Vanguard Index Funds?

Post by mhc » Wed Jan 01, 2014 11:50 pm

At your age, skip the TIPS. There is a recent thread that discusses this. You can look it up if you want to read more.

REIT's are not needed. Some people like to add them, some don't. I don't.

You asked about correlations. I think the best way to understand correlations is to look at growth charts. You can go to Morningstar and compare funds and see how they react to different situations (e.g., 2008).

Post Reply