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Trading in and out of the market is one of the primary ways to lower your investment returns over time, especially when you’re working with a volatile market. With day trading, things can change in a matter of moments and in a random manner, which is why you’re better off extending your time horizon and working with investments designed to track the broader market. You’ll also be afforded tax breaks by simply holding your investments for longer periods of time.
Here, we’ll look at three passive investments that can make up the core of any portfolio.
1. Vanguard Total Stock Market Index Fund
Heralded as the ultimate passive investment, Vanguard’s Total Stock Market Index Fund (NASDAQMUTFUND: VTSAX) can make up the core of most any portfolio — and in some cases, it can make up your entire portfolio. When you invest in a total stock market fund, you’re investing in all companies across the broader market, which includes large-cap, mid-cap, and small-cap companies.
The benefit here is that you’ll no longer need to follow the market or try to time your way in and out. All you’ll need to do is consistently invest on a pre-determined schedule, like every week or every other week. The investment thesis is simple: While you can expect a bumpy ride along the way, your investment balances are likely to increase, given the uptrend in broad markets over time.
Further, by adding more at regular intervals, you’ll harness the magic of compound interest. The longer you hold your shares, the more likely you’ll be to qualify for favorable long-term capital-gains tax rates, which apply only when you sell.
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2. Fidelity ZERO Total Market Index Fund
Similar to Vanguard’s Total Stock Market but geared toward Fidelity customers, the Fidelity ZERO Total Market Fund (NASDAQMUTFUND: FZROX) offers a very similar set of investments. Yet Fidelity goes even further than Vanguard Total Stock Market with its 0.04% annual expense ratio, offering the ZERO fund at zero cost.
One of the best ways to ensure your long-term investment returns are what they need to be is to reduce your investment costs to their lowest possible point. High fees and other administrative expenses can have the effect of requiring you to work longer to reach your financial goals. To be clear, 0.04% is quite low compared to many mutual funds, but it’s still quite refreshing to see a fund that has managed to avoid charging anything to fund investors.
A passive fund like this one also doesn’t come with any trading costs if you hold it on Fidelity’s brokerage platform, so it’s especially appealing to those who have accounts at Fidelity.
3. Vanguard FTSE All-World ex-US Index Fund
Vanguard’s FTSE All-World ex-US Index Fund (NASDAQMUTFUND: VFWAX) offers exposure to all companies based outside the United States and allows investors to take advantage of economic growth beyond what’s happening within domestic borders.
Based on Vanguard’s empirical research, the growth prospects and opportunity set for international investments tends to be a bit more appealing for the 2020s than for domestic investments. International stocks make up 44% of the global stock market, and the expected return for international stocks is slated to be higher than domestic stocks over the next decade.
While the outperformance of international stocks over the next decade is far from a guarantee, it’s good to at least have some exposure to international stocks in the event they do outperform.
Passive is efficient
Remember, when you invest in passive funds, all you need to do is make the investment. There’s no time or research requirement to stay in the fund, and you won’t need to obsessively follow the market every day, week, or month. You simply need to make the commitment to yourself to stay invested and continue to invest over time.
It will be a lot more difficult to get burned by the market if you adhere to time-tested investing principles, like buying the entire global set of stocks, weathering difficult times, and keeping costs as low as possible.
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Sam Swenson, CFA, CPA owns shares of Fidelity Total Market Index Fund and Vanguard Total Stock Market Index Fd Admiral Shs. The Motley Fool owns shares of and recommends Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.
