I recently received the following question:
Our son, who is in his twenties, would like to start dollar cost averaging. He is leaning towards Vanguard S&P 500 ETF (VOO). What is your opinion? Maybe you would recommend a different fund?
I’m glad your son is getting started with investing!
As you likely already know, if he has any earned income, I’d recommend he contribute to his Roth IRA and invest his money there.
As he is very young and just getting started, he has a lot of flexibility in picking what he invests in. So long as he is picking a diversified index fund, he cannot go too wrong given his long time horizon. I’d focus on funds with low expense ratios.
When picking a one-fund investment, an important question to ask is: What if it goes down? The more comfortable he is with market downturns (an inevitability), the more concentrated his holdings could be at this age. The less comfortable he is with market downturns, the more diversified a fund he should pick. It is more important that he stays invested than picks an investment with the largest return.
VOO concentrates on only Large Cap in the United States, which has had great returns for over a decade. Over longer time periods, Mid Cap Value has seen the best risk-adjusted returns, which makes it a good alternative. This would be Vanguard Mid-Cap Value ETF (ticker VOE, expense ratio 0.07%) / Vanguard Mid-Cap Value Index Fund (ticker VMVAX, expense ratio 0.07%).
For more diversification in the U.S. markets, Schwab Total Stock Market Index Fund (ticker SWTSX, expense ratio 0.03%) or Vanguard Total Stock Market Index Fund (ticker VTSAX, expense ratio 0.04%) / Vanguard Total Stock Market ETF (ticker VTI, expense ratio 0.03%) might be a good fit. These provide low-cost exposure to the entire U.S. equity market.
For even more diversification, he could look at the Vanguard Total World Stock ETF (ticker VT, expense ratio 0.08%) or the mutual fund Vanguard Total World Stock Index Fund (ticker VTWAX, expense ratio 0.10%). Both of these provide low-cost exposure to all stock markets around the globe.
At a young age with no expected withdrawals, one can mathematically tolerate more risk but it may not be wise for a new investor.
In month to month snapshots, diversification dampens both the highs and the lows while capturing the steady return of the markets.
Any of these ETFs or mutual funds seem like they could be a good one-fund pick for the long haul.
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