Mailbag: What Is The One Fund I Should Invest In?

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Mailbag: What Is The One Fund I Should Invest In?

I am just getting started in investing, and I want to invest in just one fund. What fund should I invest in?

For those who are just getting started in investing, we often recommend using the Vanguard STAR Fund (VGSTX).

Here is our reasoning:

1. It has a very low expense ratio of 0.34%

2. The Vanguard STAR Fund (VGSTX) is an asset allocation blend of several other Vanguard Funds

3. It is not as aggressive as an all stock portfolio, which gives a smoother ride for first time investors

4. $1,000 minimum initial investment is the lowest of all Vanguard mutual funds

Here are the details about each one of these.

Vanguard Star Fund (VGSTX)

1. It has a very low expense ratio of 0.34%

Vanguard STAR Fund Expenses

2. The Vanguard STAR Fund (VGSTX) is an asset allocation blend of several other Vanguard Funds

Vanguard STAR Fund Composition

3. It is not as aggressive as an all stock portfolio, which gives a smoother ride for first time investors

Currently the Vanguard Star Fund (VGSTX) has the following composition:

  • 4.14% Cash
  • 34.63% Bonds
  • 38.58% US Stock
  • 22.22% Foreign Stock
  • 0.43% Other

While this includes 34.63% bonds (or 38.77 if you include the cash), and we normally would not recommend any bonds for a young person, the portfolio still has 60.8% stock for appreciation.

Vanguard STAR Fund Annual Returns 2014-06

You can see that the since inception return so far has been 9.89%. To compute a monthly return, you don’t divide by 12 (which would be 0.82% per month), you actually take the 12th root which is 0.79% per month. That means that (1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 *1.0079 =1.0989. The compounding effect means that the gains of the first month are compounded in the gains of the next months to produce a higher annual return.

Here are the annual returns between 1999 and 2013.  Even though these are less volatile than an all stock portfolio, these are volatile enough for a first time investor:

Vanguard STAR Annual Returns 1999-2013

For those investors who want an asset allocation with even more bond, you use the Vanguard STAR Fund (VGSTX) in conjunction with an all bond fund to blend a more conservative asset allocation.

4. $1,000 minimum initial investment is the lowest of all Vanguard mutual funds

Vanguard STAR Fund Minimums

Interestingly, if you start at age 20 with an initial deposit of $1,000 and then automate saving and investing $100 a month, by your 66th birthday you would have $1,041,950 at a monthly appreciation of 0.79% (9.889 annualized).

Although Vanguard suggests that the initial minimum is $1,000 and additional investments are a minimum of $100, if you are willing to do automatic deposits, an automatic monthly deposit of any amount will get the account opened.

This information is current as of August, 2014. You can read the latest information about the Vanguard STAR Fund at Vanguard.com.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)