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The 8 Best Vanguard Funds That You Should Buy

The difference between an Index Fund (ETF) and a Mutual Fund

Target Retirement 2050 Fund (Investor Shares) VFIFX

REIT Index Fund (Admiral Shares) VGSLX

Growth Index Fund (Admiral Shares)  VIGAX

Strategic Equity Fund (Investor Shares)  VSEQX

Total International Stock Index Fund (Investor Shares)  VGTSX

Were big fans of Vanguard, but admittedly, investing in Vanguard funds is a bit more complicated than using a Robo Advisor.  In this article, we break down what we think of Vanguards 8 best funds while balancing both performance and cost.

If youre looking for a deeper dive into our logic as well as some colorful commentary than check out the podcast episode we did on this:

Before we jump in, its important to mention why we are focusing so heavily on fees here.Due to their exponential nature, fees ofjust 1%can cause you to lose up to 25% of your earnings.Thats pretty horrendous and often what turns investors on to Vanguard in the first place.

I also highly suggest you check the fees on your accounts via the freePersonal Capital fee analyzer.In addition to running simulations, the analyzer pinpoints all of the overly fee-hungry funds across your accounts retirement or otherwise.

First, lets quickly discuss what anIndex Fund (ETF)and aMutual Fundare. Who better to ask thenVanguardthemselves?

An ETF is a collection (or basket) of tens, hundreds, or sometimes thousands ofstocksorbondsin a single fund.

If youve ever owned a mutual fundparticularly anindex fundthen owning an ETF will feel familiar because it has the same built-indiversificationand low costs.

AMutual Fundis very similar to an ETF with one crucial difference:

You can set up automatic investments and withdrawals into and out of mutual funds based on your preferences.

In other words, if you want toautomate your investing, then you use aMutual Fund. If you wantcheaper fees over time and dont mindmaking contributions every month, then you should choose anETF. I use ETFs because I dont mind making investments manually and fees are the worst.

We often get asked how much you need to invest in Vanguard. If youre investing in an ETF, then all you need is $1. If youre investing in a Vanguard Mutual Fund, then the minimum initial investment is between $1,000 and $3,000.

This ETF is Vanguards flagship fund and in our opinion, their best. Its a blend of Large, Mid and Small cap companies in the US. Its thelowest feeweve ever seen on a fund, and its mostly because the fund tracks a few smaller indexes allowing it to belargely automated.

Often when people mention that they invested in Vanguard, they are referring to this fund. Since92%+ of fund managers cant even beat this, Id be very skeptical if anyone suggested they can perform better after-fees than this fund.Even Warren Buffet agrees. Of course, it would be shrewd to invest in more than just VTI. Its impressive, butits not all things.

This fund is alifecycle fund, so it starts out with most stocks and slowly tapers into bonds over time. The point is you take on risk now while youre young and slowly reduce risk as you reach retirement age, so big market swings dont wipe out your retirement money.

While this fund isnt their best regarding the fee, it covers a much-needed gap in most peoples portfolio. As you know, were big fans ofbuy and hold, and this fund fits in there perfectly.

The number in the fund name, like 2050, corresponds to your typicalretirementdate usually, thats when youre 59 1/2.We often find ourselves picking funds with dates well past typical retirement age, so we get something a bit more growth-focused early on.

This fund was the industrys first for individual investors. Invest in 500 of thebiggest, baddestcompanies based in the US. By definition, this fund is filled with the best Large Cap companies, and since it focuses on the biggest companies in the US, its the closest to tracking the US economy.

Why own a property and rent it when your money gets stuck in the home, and there is so much work to be done? Instead, invest in a REIT and takerental profit and liquidity. This index fund is not just a REIT but afund of many REITs, so youre heavily diversified in the rental game.

Note:You wont find much yield here which is a bit of a drag considering real estate is a solid income play. As a replacement for the income portion of your portfolio, we recommendFundrise.Currently, their yield is2.196xthat of the Vanguard REIT.

Compared to VGSLX, Fundrise sticks to mid-size deals overlooked by huge funds and as a result, provides a markedly higher return. You can also opt to concentrate on income or appreciation focused funds.

With the Growth Index, Vanguard pickshigh-growth companiesthat will knock it out of the park for you.Its a bit riskier, but the returns are solid.

Even though the focus is on high growth companies, the fund follows abuy and hold approachwhere once they locate a stable company they stay invested in them for a while.

Any well-balanced portfolio hasbondsin it. Theyre much less sexy than stocks but are also much less risky. When youre young, 10% of your portfolio should be in something similar to BND, and as you get older, youll increase that percentage significantly. All the bonds that are in this fund are investment grade, and you should aim to hold this fund in the medium to long term based on its contents.

In preparation for market corrections or as we see them, investment opportunities, we tend to hold more bonds.  Since long-term bond funds, rose ~20% in price in 2008 we see this as a win-win.

Since bonds tend to do better when the stock market is doing poorly, we want ourOpportunity Fundsto be full of them.

We recommend keeping your Opportunity Fund in aSmart Saveraccount. Its roughly 80% US Treasuries and 20% long-term bonds. The accounts return often handily beats the highest-yielding savings accounts of the moment.

Like the Growth Index fund but smaller companies, potentially higher growth and a large portion of the funds composition is selected by a computer. Thefee is the highesthere because proportionately the most amount of work goes into running this fund. 0.29% isnt a big fee by a long shot, but I do think its important to note.

Also, again, this ones theriskiestof the bunch. Of your Vanguard investments,we wouldnt recommend making this one more than 10% of the total amount you invest.

Similar in approach to our 1 choice, VTI, onlythis fund focuses only on companies outside the US. The fund covers both developed and emerging markets.

Its pretty volatile, so we keep it as a small portion of our portfolio to help offset our heavy US exposure.

Manage your cash and optimize your investments in one place.WithPersonal Capitalyou can analyze your 401k to better diversify your holdings and reduce fees. I had no idea I was paying over 1% of my assets in fees every year but their help I was able to get it down below 0.3%.

Once you have all of your accounts linked, you can also leverage theirRetirement Plannerto plot out exactly what your retirement would look like. Using a Monte Carlo simulation, they determine how likely it is that youll reach the level of income in retirement that youre hoping for.

Ive been using Personal Capital since 2013, and I havent found a better free online tool for building and managing wealth.

Vanguard created a short list of their funds called the Vanguard Select Funds. One interesting thing about the list is how they determine what funds get on it:

The Vanguard Portfolio Review Department evaluates our low-cost fund lineup on an ongoing basis to determine the funds selected. This in-house team of investment professionals evaluates the funds using a proprietary screening process and criteria. Vanguard Select Funds

So, basically, theyre hand-picked using voodoo. I will say that a lot of their most expensive funds (where they can make the most money) are on that list like theWindsor IIwhos fee is 0.34%.

Its worth mentioning that most of the funds on our list are on their list with the exception that we excluded the high-cost funds. There are a billion studies that show there is no correlation between a high cost and a high return. Thats why we focus on shooting for the average on the show, easily thebest bang for your buck given the risk.

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