Mutual funds are a great way to invest in a broader market, and help you avoid rookie errors that could cost you big money. Here are 5 to get you started.

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. Often times, 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, 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 percent 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.

Stock market mutual funds

Vanguard Total Stock Market Index Fund (VTSMX)

Expenses: 0.15 percent
Turnover: 5 percent
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: 0.34 percent
Turnover: 11 percent
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 percent
Turnover: 11 percent
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 percent
Turnover: 12 percent
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.

Bond market mutual funds

Vanguard Total Bond Market Index (VBMFX)

Expenses: 0.15 percent
Turnover: 61 percent
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.

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9 comments
Cole says:

Like the article but it is kind of old now. Would your advice in this article still hold true?

David Cole says:

Wallace Jersey College 30 Basketball North Stitched Black Rasheed Any sugestions for sort term investments. Around 1-10 years. Im thinking I will just go with a market index fund or somesort of bond type. I like using companys like Trowe Price as it makes investing for me simple.

David Weliver says:

I’m going to do a post on short-term investing soon; it’s a challenge for everybody these days (including me), to figure out something that’s better than a 0.5% savings account and without all the risk of stocks. As a quick answer, I like Vanguard’s life strategy funds (I imagine others like TRowe have similar options) and also Betterment, a new platform that lets you simply pick your desired allocation of stocks and bonds for different goals and it invests in index funds for you accordingly.

Andrew says:

These are good funds for everyday investors looking to dollar cost average. Low cost, and geared toward mid to long term retirement investors. Keep diversity in mind and be sure to maintain a plan. Good piece.

Brian says:

I also really like the Vanguard REIT Index for those who already have the stock and bond indexes and want to get some exposure to real estate.

Investor shares VGSIX ($3,000 minimum; 0.26% expense; 12% turnover)
Admiral shares VGSLX ($10,000 minimum; 0.12% expense; 12% turnover)

Brian says:

Forgot to caution the REIT index does have a 1% redemption fee if the shares have been held for less than a year.

David Weliver says:

Good idea, Brian. The REIT index is a great addition if you want to diversify beyond stocks and bonds. Also, the Vanguard International Stock Index (VGTSX) mentioned in the pos also has a redemption fee if held for less than two months. I forgot to mention that too and it’s important, although it should go without saying that these suggestions are best for long-term buy-and-hold scenarios.

Timmmay says:

I was looking into the Vanguard REIT funds and can’t seem to find any information on a redemption fee. Under the fees and minimums page for each fund, there is no redemption fee listed. Was this changed or am I missing something?

 
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