Where Are The Tops Allocated Stocks In The S&P 500 Invest With An Index Fund Strategy

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Invest With An Index Fund Strategy

There are a variety of methods that can be employed to form a successful, and easy to manage investment portfolio. My objective is to share a very simple investing strategy that anyone can use. The first step is to open a brokerage account that you can control, preferably one that can also offer you the option to establish an Individual Retirement Account (IRA). Bear in mind that this strategy can also be used to build a retirement nest egg, using an IRA account to tax defer contributions. The strategy can also be used as an investment that you can tap into anytime you want, and without any restrictions that are otherwise typically imposed on IRA accounts.

The next step is to invest into index funds. Wait, what? What are index funds? These are funds that are setup to track the performance of an existing index such as the Dow, S&P 500, domestic and international stock markets, and even the total bond market. For instance an index fund that replicates the S&P 500 will hold the exact stocks, at the same weight as the S&P 500. So why invest in funds that track the S&P 500? The S&P is known as an economic indicator that tracks the performance of the largest 500 publicly traded companies in the United States. Many investing professionals measure their own performance against the performance of the S&P 500. At an average, the performance of the S&P 500 will outperform the returns produced by the majority of the professional investors on any given year.

By investing in an index fund that tracks the S&P 500, you set yourself to get market returns on your investment. Index funds have lower expense ratios, the lower your investment cost, the higher your returns likely to be. With an expense ratio as low as 0.25%, it makes index funds extremely attractive, compared with regular mutual funds that have expense ratios of 0.50% to 1.5%. A percentage difference may appear trivial, however expenses can add up to thousands of dollars in long-term period. The low cost is primarily due to the fact that they are not traded as often as are actively managed funds.

Now to answer your question that you have had in mind since the start of this article of where to locate these investment vehicles. Vanguard offers a verity of choices, as do many other investments firms that are basically designed to track stocks, bonds, municipal bonds, sectors, and industries. For instance, you can invest in index funds that are designed to track technology stocks, or funds that track energy stocks. Here are three good fund choices that are offered by Vanguard:

  • Vanguard 500 Index Inv (VFINX) tracks the S&P 500, with an expense ratio of .17%.
  • Vanguard Total Bond Market Index Inv (VBMFX) tracks most of high-graded government, as well as corporate bonds, and has an expense ratio of 0.20%.
  • Vanguard International Value Inv (VTRIX) would provide some exposure to the international market, and has an expense ratio of 0.43%. In addition you can find index funds that track the European, and Asian stock markets.

These are only a few of many fund choices that are offered by Vanguard. Depending on your age, and your risk tolerance, you can choose to spread your investment among these three different index funds in a variety of mixed allocations.

Here are a few examples of a reasonable asset allocation:

  • High Risk (Young)

    • 60% in Vanguard 500 Index
    • 25% in Vanguard International Value
    • 15% in Vanguard Total Bond Market Index
  • Medium Risk (Mid-life)

    • 50% in Vanguard 500 Index
    • 15% in Vanguard International Value
    • 35% in Vanguard Total Bond Market Index
  • Low Risk (Older)

    • 20% in Vanguard 500 Index
    • 5% in Vanguard International Value
    • 75% in Vanguard Total Bond Market Index

One final item to make note of is rebalancing your portfolio periodically. With the passing of time and market fluctuations, your allocation percentage will change as one index fund performs better, or worse than the other two index funds within your portfolio. Rebalancing your portfolio therefore is essential to bringing your allocation levels in line with your risk tolerance; this also limits overexposure to one class over the others.

To recap, focus on the type of index fund, expense ratio, asset allocation based on you risk tolerance, and rebalancing your portfolio periodically. This article is meant to introduce you to index funds and how they can be used in your investing strategy. However, you should consult your investment, or retirement advisor for guidance, as every person’s situation and risk tolerance is different.

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