It takes someone with pretty good knowledge of the stock market to be able to diversify your own portfolio by purchasing single stocks. Luckily for the rest of us there is an easy way to purchase already diversified funds that manage our risk for us.
Mutual funds are funds that are managed by large companies. The funds are most often diversified by sector, location and asset type. Buying these funds allows you to do the same thing you would do if you put your money into a large amount of different stocks. These funds offer convenience as well as safety. Mutual funds usually have a minimum investment as well as a minimum for their automatic investment plan.
Some examples of Mutual Funds
VFINX Vanguard Index Trust 500 Index
VGTSX Vanguard Total Intl Stock Index Inv
VFFVX Vanguard Target Retirement 2055 Inv
I am a huge fan of Vanguard funds as they offer virtually the lowest fees on the internet. The last mutual fund I listed is a very special fund that I personally own. They are relatively new and revolutionary. It is a managed mutual fund that aims at your target date retirement. I wish to retire in 42 years or so in 2055 and the fund slowly transitions from equities to more secure fixed income the closer that date reaches. These are amazing funds to put into a Roth IRA for any investor. I highly recommend them.
Index funds are similar to mutual funds in that they are a diversified fund. The way they are different is that they are far more specific and targeted than just a mutual fund. Most of them have a goal and only purchase stocks that meet specific criteria.
Some examples of Index Funds
VDAIX Vanguard Dividend Appreciation Index Fund Investor Shares
This fund only purchases stocks that have consistently increased their dividends over the last 10 years.
VVIAX Vanguard Value Index Adm
This fund only purchases companies that are currently undervalued by investors and typically grow slower than normal companies. They rely on their dividends for market value growth.
VIVAX Vanguard Value Index Inv
This fund is relatively similar to the fund above. The main difference is the minimum investment is less so you don’t need as much money to get into the fund.
ETF stands for an Exchange Traded Fund. An ETF is a mutual fund or an index fund that is broken down and sold as shares. Often times people won’t be able to reach the minimum investment of some of the funds I have listed above but still want to get in on the investments. An alternative option is to see if there is an ETF listed for a particular fund that you can purchase. ETFs can be purchased just like any other stocks.
Some examples of ETFs
VWO Vanguard FTSE Emerging Markets ETF
VTI Vanguard Total Stock Market ETF
BSV Vanguard Short Term Bond ETF
One thing to remember is that within every Mutual Fund, Index Fund and ETF there should be a reason you are looking to buy that particular investment. For instance, the Bond ETF I listed above should be purchased as a hedge against a Total Stock Market ETF. While the Bond ETF and the Total Stock Market ETF are diversified individually, purchasing both of those ETFs diversifies them against each other. This makes your portfolio about as diversified and safe as it can possibly be. Remember that with every purchase on the stock market comes a risk. All risk can never be completely eliminated. It can only be mitigated.
Value Investing for Long-Term Investors
Diversifying Your Portfolio by Asset Class
How to Evaluate a Single Value Stock