Making your first buy in your shiny new IRA is like being a kid in a candy store -- except you're an adult, and instead of candy, the store is filled with big, scary stocks and exchange-traded funds.
Not knowing what to buy is one of the biggest deterrents to first-time investors who want to start saving for retirement. Decades of research have proven that funds tracking an index almost always outperform actively managed funds in the long term because of their significantly lower fees, making them a great first buy for your portfolio. A low-cost index exchange-traded fund, or ETF, can be great starting point for new investors because they offer:
- Instant diversification: Index funds hold shares of many companies -- sometimes hundreds of them.
- Low cost: Index funds are not actively managed, which means they cost less.
- No minimum buy: This is good for first-timers who are just beginning to build their resources; many mutual funds have a minimum investment of between $1000 and $3,000.
For decades, Vanguard has been at the forefront of index funds, and it has several ETFs that offer tremendous value and easy diversification. Here are three Vanguard ETFs that are a great starting point for new investors.
Vanguard S&P 500 ETF (NYSEMKT:VOO)
This ETF is a great portfolio-building fund for a first-time buyer. A large-cap index fund hits the risk sweet spot. It is the perfect middle ground between more volatile sectors of the market, such as small-cap funds or individual stocks, and other overly cautious options, such as fixed-income funds. Most first-timers will have at least 20 years before they plan to withdraw from their retirement nest egg. Those who are smart enough to start saving early may have more than 40 years, so there is no need to seek out a fund with bond or cash exposure this early in the game. This fund tracks the S&P 500 and is 98% invested in U.S. stocks, providing instant diversification among the largest companies in the U.S.
The best part about this fund? It's dirt cheap. With a 0.05% expense ratio, you won't start your illustrious investing career by blowing a big chunk of change on fees.
Vanguard Small-Cap ETF (NYSEMKT:VB)
If you feel confident that you are ready to ride out the highs and lows of the market, try Vanguard Small-Cap ETF. Although the name says "small cap," this fund holds about 43% medium-sized company stock. The rest is comprised of mostly small-sized companies, and a little less than 9% goes to micro-sized companies. This will give you a nice exposure to both mid- and small-cap stocks and will allow you to easily diversify your asset allocation. This fund also comes with an attractive expense ratio of 0.1%.
Vanguard Total Stock Market ETF (NYSEMKT:VTI)
As the name would suggest, this ETF is the "kitchen sink" of funds. Once again, Vanguard provides a low-cost fund that offers tremendous value. This fund is great for a newbie, because you get total market exposure without having to decide on asset allocation. You are missing international exposure with this fund; "total" market means the U.S. market. What you do get, however, is low turnover and low expenses paired with excellent market exposure. This fund is heavily weighted in large and giant-sized stocks at about 71%. Medium-sized stocks claim 19%, and small- and micro-sized stocks get less than 10%.
This stock is ideal for beginners who want to start investing but need more time to develop their investing style and establish long-term goals. If you choose this fund as your first, you may want to follow up with Vanguard Small-Cap ETF or an international fund.
Any of these three funds will give you a solid foundation on which to start building your retirement portfolio.
Fool contributor Melinda Melendez has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.