Recently I reviewed Betterment, an online tool that makes investing in stocks and bonds very easy. As easy as Betterment is to use (I opened an account to give it a try before writing the review), however, I did have one big complaint – cost. In response to the review, Jon Stein, the CEO of Betterment, left a comment. The comment included the following about Vanguard:
In good conscience, you suggest, as others do, “Just buy an index ETF from Vanguard, it only costs xx%.” But, it’s not so easy, because the vast majority of people don’t (or can’t?) follow this advice. Perhaps they don’t know where to begin with Vanguard’s hundreds of funds (even when told to stick to one), perhaps they don’t know which numbers to trust, perhaps they get bogged down in the wrong data. Maybe they don’t re-balance, or they don’t allocate assets correctly, or they try to time the market instead of contributing regularly. What seems easy in theory, in practice is not.
Actually, investing with Vanguard is easy not only in theory, but also in practice. In fact, there are several really easy ways to invest with Vanguard, and all of them are less expensive than investing with Betterment. The point here is not to trash Betterment. Betterment has done a commendable job of making investing in ETFs extremely easy and may be a good choice for some. Rather, the point is to provide you with the options so you can make the best choice for your future. So let’s get started.
Vanguard Target Retirement Funds
Called an all-in-one-fund, Vanguard’s Target Retirement funds are by far the easiest way to invest through Vanguard. All you do is pick the fund corresponding to when you want to retire. For example, for those 44 to 48 years old, one option is the Vanguard Target Retirement 2030 Fund (VTHRX). Here’s the asset allocation for the 2030 fund as of 4/30/2011:
The minimum investment is $1,000 and the expense ratio is only 0.18%. The fund automatically re-balances and reallocates investments as you near retirement. As a friend of mine likes to say, easy peasy lemon squeezy.
Vanguard LifeStrategy Funds
While the Target Retirement funds are a great way to save for retirement, Vanguard also offers all-in-one funds for other savings goals. Called the LifeStrategy Funds, Vanguard offers funds for savings goals of 3 to 5 years duration or longer. For example, for investment goals three to five years away, Vanguard offers the LifeStrategy Income Fund.
As of April 30, 2011, the LifeStragey Income Fund (VASIX) invests about 27% in stocks, 53% in bonds, and the rest in short-term reserves. This fund does require a $3,000 minimum, and its expense ratio is again just 0.18%. Other LifeStrategy funds are available that invest more aggressively, one of which puts 86% in stocks.
Vanguard Core Funds
The most “advanced” way to invest with Vanguard that we’ll talk about today is through its core funds. While Jon Stein of Betterment is right that Vanguard offers a lot of funds, most investors can ignore almost all of them (I do). But Vanguard offers what it calls core funds that makes investing easy.
The core funds range from money market funds to international stock funds. Putting together a well-diversified portfolio involves investing in no more than two or three funds. For example, our friends over at MSN Money put together a simple portfolio with the following three Vanguard funds:
- 55%: Vanguard Total Stock Market (VTSMX)
- 35%: Vanguard Total International Stock (VGTSX)
- 10%: Vanguard Total Bond Market Index (VBMFX)
Each of these funds has an expense ratio of less than 0.30%
In the end, you need to make the investing choices that are best for you. If you want professional investing advice, seek it from a certified professional. But here’s the key – don’t make a choice out of fear. For some, Betterment may indeed be a good choice. But don’t make any investment choice out of fear that investing with Vanguard or other mutual fund options is too complicated.