Should You Invest Into 1 or Multiple Index Funds?

Index fund investment

This is a really common question. 

However, the first thing we need to go through is what is an index fund and how do they operate. Then you can work out if you need more diversification based on your portfolio preferences.

Many people think that they need to add more conservative ETFs into their portfolio that perhaps include bonds etc. However, that’s not entirely correct. Sometimes, the more you diversify the lower your overall returns. The key is to find a balance between diversification to lower risk, and growth to maximise returns

Index Fund Background

An index basically is a collection of companies or assets. These can range from really anything. From tracking, say the S&P 500 to the ASX to a collection of the top 30 emerging green companies.

Index funds have grown massively over the last 30+ years. So the options are massive today.

So for example, you can actually buy an index target retirement fund, within that fund it’s buying a bunch of different indexes, which include some more conservative indexes. 

So you are probably thinking, did you just say I can invest in a fund that tracks more than one index? Absolutely I said that.

There are many examples of this:

Vanguard for example has retirement funds that have 5 or so different index funds as their underlying allocations which help to provide more conservative investment approaches.

So if you are more conservative and want to look at diversifying into other index funds to include conservative govt bonds for example. 

Rather than have too many moving parts and lots of different index fund investments. Find one that fits your goals.

So you can buy just one fund with your contribution and if that fund is a target retirement fund. Like I mentioned, within that fund you’re getting a bunch of different indexes.

So you’re getting the same diversification benefit. the same auto allocation benefit without having to go pick individual ones.

Ask yourself the following:

Basically, it comes down to 2 questions:

1. How much can you invest

2. When do you need the money

The longer you have to invest, the higher your end returns will be.

If you look at funds like vanguard & fidelity, they are some of the largest and most reputable funds around.

These funds will do everything for you – they are doing the hard work.

They ensure they are super low cost, super tax-efficient and you don’t have to worry about all these things that take a lot of time and speciality to sort out.

Ok, so these companies make it so simple for you that you can actually select a retirement fund that fits your timeline until retirement.

For example, I’m born in 1986: Based on that birth year they recommend the Vanguard Target Retirement 2050 Fund.

To give you an idea of exactly the breakdown of this particular fund. It holds 5 different index funds.

Vanguard Target Retirement 2050 Fund (investment basket)

Vanguard Total Stock Market Index Fund Investor Shares 54.10%

Vanguard Total International Stock Index Fund Investor Shares 36.30%

Vanguard Total Bond Market II Index Fund Investor Shares† 6.60%

Vanguard Total International Bond Index Fund Investor Shares 2.90%

Vanguard Total International Bond II Index Fund 0.10%


However, if you compare this to one of my other favourite vanguard funds the Vanguard S&P 500 Index fund ETF this retirement fund has returned an average of 10.09% per year where the vanguard S&P 500 index fund ETF has returned over 14.5% per year across the same time.

But if you look at the 2, one is slightly lower risk and the other slightly higher. So you can find something for your risk tolerance and also your investment timeframe.

If you’re looking for best performing index funds I’m going to give you my 3 recommendations.

Now, I want to be clear that nothing constitutes personal advice, this is just based on fact and historical performance to predict future performance:

One thing that you will also notice with these top 3 picks is that they all have a very low expense ratio, This is important as even just a small increase in the expense ratio can cost you a lot of money over time.

In no particular order:

Schwab U.S Large -Cap ETF

They have an expense ratio of .03% so for every $10,000 invested you pay $3.

The Annual yearly return over the last decade has been 13.55% year on year.

A common question is what exactly does Schwab mean when they call it a U.S Large-Cap ETF.

Basically, it’s a fund that tracks the Dow Jones U.S. Large-Cap Total Stock Market Index and consists of over 750 of the largest U.S. companies. 

This ETF has holdings in companies from industrial sectors such as information technology, healthcare, consumer discretionary, communication services and finance. A few of these companies include Apple (AAPL), Microsoft (MSFT), Facebook (FB), Tesla (TSLA) and JPMorgan(JPM).

They also pay a dividend of roughly 1.5% so if you reinvested that dividend you’re getting another 1.5% per year on top of the 13.55% so 15.05% plus per year.

The 2nd on the list is the:

IShares Core S&P 500 ETF

This ETF also has an expense ratio of .03% so a very low expense ratio.

This fund consists of more than 500 leading companies in the U.S and is designed to mimic the S&P index. 

The index has companies from industrial sectors such as IT, healthcare, and consumer staples, some companies you are investing in include NVIDIA, Home Depot, proctor and gamble, and VISA.

This fund is extremely liquid which is good, over more than 1.2million shares trade a day. And they also pay a dividend of approximately 1.8%.

So again over the last decade, this fund has returned 13.83% year on year or if you reinvested your dividend 15.63%

And, lastly, my list wouldn’t be complete without my current favorite fund.

The Vanguard S&P 500 ETF:

Again this is an S&P 500 tracking index so similar to the Ishares core S&P 500 ETF. It has companies in the fund that include Mastercard, Amazon, home depo, and united health group.

Its expense ratio is the same as the others at .03% and it has high liquidity with about 1 million shares a day trading.

Over the last decade, this fund has performed at 14.45% year on year and its dividend yield was 1.45% so if you reinvested the dividend you would have had 15.9% year on year growth

So if you’re looking for long-term top capital growth these 3 are my top picks.

Now, earlier we were speaking about having even more diversified or as we can now call it conservative index funds.

If you are looking for a fund that holds some more conservative assets you might want to consider looking at target retirement funds.

I gave you an example earlier for one of the Vanguard funds, but that’s just one of the funds.

You have funds that are even more conservative:

The more conservative funds are going to hold fewer stocks and more bonds and inflation-protected securities.

So to quite simply answer the question of should you invest in more than one index fund I say no.

Just ask yourself the 2 questions I posed earlier:

– How much can you invest and how often

– When do you need the money

Duration of time until retirement, the amount of money to be invested and it’s frequency will help you determine the type of index fund you should invest in.

How much should you invest?

When considering how much you should invest the approach I believe in is the dollar- cost averaging approach.

Basically the way dollar-cost averaging works is that you commit to investing a certain amount each month for the long term. What this does is that it balances out your investment. You get more stocks for your money when the markets are down and less when the markets are up.

The goal is that you have a commercial approach and when the markets crash you don’t let fear get the better of you. You stick with the strategy knowing that you’re getting more stocks for your money and that over time the index tracking fund will go up.

Before you start investing you should always have a budget strategy in place so that you set yourself up for success at the very beginning.

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Andrew Mitchell