Vanguard 500 vs. Total Stock Market

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I was amazed at the response I got to my commentary earlier this week on fund-industry reform. A decent number of you had plenty to say on that topic yourself, and to say the least, I was most impressed. You guys really seem to know your stuff. One of my correspondents even endorsed Eliot Spitzer for president.

But most of the email I received had to do with my admission (in the disclosure statement that concludes all Fool content) that I didn't own shares of Vanguard 500 Index Fund (VFINX). To put it mildly, many folks were shocked that I didn't own this time-tested titan, which as you're no doubt aware, the Fool has recommended for eons as just about the best mutual fund going. And that recommendation is certainly well-founded: The fund is dirt-cheap, tax-efficient and a great way to track the S&P 500. Really, for systematic investors, I can't think of a better way to shadow that particular bogy.

But here's a secret: While it's true that I don't own Vanguard 500, I do own shares of Vanguard Total Stock Market Index Fund (VTSMX). I go into more detail about my preference for this passively managed gem in the first issue of Motley Fool Champion Funds, but the gist of it is this: Total Stock Market tracks the Wilshire 5000 Index, and I like the broader exposure to the market's various cap ranges provided by that particular benchmark. In short, you net more of Mr. Market's small fish with Total Stock Market, and I'm a fan of the greater degree of diversification.

That said, as I spent much of yesterday explaining to the folks who wrote in, I'm not a strict index investor at all. Yes, absolutely: I'm a dyed-in-the-wool Fool, and also, yes, I certainly believe that low-cost index funds such as Vanguard 500 or Total Stock Market can be mighty fine places to begin building your mutual fund portfolio.

But investing exclusively in index funds pretty much assures that you'll lose to the market each year by about the amount of your funds' expenses -- and like you, no doubt, my aim is to pick funds that will help me beat the market over the long haul.

Which is precisely what we're trying to do with Motley Fool Champion Funds. If you haven't already, give it a try (for free) by clicking here. And please keep those virtual cards and letters coming. I'd love to know what you think.

Shannon Zimmerman is the editor and chief analyst for Motley Fool Champion Funds . Try not to hold it against him that he doesn't own shares of Vanguard 500. The guy is invested in Vanguard Total Stock Market, y'know!