Section III-A - Lesson 6
Your 401k Vanguard Mutual Funds Account
If you are fortunate enough to be investing your 401k money at work in a 401k Vanguard Mutual Funds account, you will probably be asked to select one or more investments from a list that looks like this.
Typical 401k Vanguard Mutual Funds Menu
Cash Reserves
Vanguard Prime Money Market Fund
Bonds
Vanguard Total Bond Market Index Fund
Vanguard GNMA Fund
Balanced
Vanguard Wellington Fund
Domestic Stocks
Vanguard 500 Index Fund
Vanguard Total Stock Market Index Fund
Vanguard Windsor Fund
Vanguard U. S. Growth Fund
Vanguard Explorer Fund
International Stocks
Vanguard International Value Fund
For details about any or all of these Vanguard funds you can go to the Vanguard website, or call Vanguard toll free at 1-800-662-7447.
The Best 401k Vanguard Mutual Funds For You
Even though the Vanguard Group provides you with a wide variety of choices, you should know from your reading earlier in this section (see Lesson 4) that while it is often made to sound like the more investments you pick, the better, the opposite is actually true.
The fact of the matter is that splitting your investment among two or more choices will only make you poorer, not safer. There is usually one, and only one, correct selection for you on the entire list of investments, and this will be the most widely diversified domestic common stock fund on the menu.
In the case of the "typical" 401k Vanguard Funds menu shown above, the most widely diversified domestic common stock fund would be The Vanguard Total Stock Market Index Fund which is constructed to imitate the performance of the Wilshire 5000 Index.
If this selection were not available on your particular 401k Vanguard Funds menu, your next best selection would be The Vanguard 500 Index Fund, the most popular fund in the world, which is constructed to imitate the performance of the S&P 500 Index.
When you purchase shares of an S&P 500 Index fund you are participating in the growth of the 500 largest and most influential companies in America that jointly represent more than 70% of the value of all U.S. traded common stocks.
You are essentially "buying the general market" and over the years you can expect to get the rate of return of the general market, which since 1926 has been more than 10% annually.
This Index fund provides a simple, easy solution to the challenge of selecting the right investment. With this fund you will always be widely diversified in a broad based cross section of the American economy and you should expect to prosper over the years as our country prospers.
You should "allocate" 100% of your contribution to this investment. Anything you split it with will greatly reduce your long-term overall rate of return and will not gain you any further meaningful diversification. Your money is already "split" amongst the 500 most prestigious corporations in America, so you certainly don't have "all your eggs in one basket".
What about stability, you might ask. Couldn't you expect less fluctuation in the value of your holdings if you balanced your stock fund holdings with a bond fund or money market fund, for example?
Sure you could, if you were willing to give up half, or two-thirds of your potential wealth for the sake of not seeing your investment fluctuate from time to time. I hope you're not willing to do that. If you're the least bit unclear about this, go back and re-read the lessons about understanding risk in the previous section.
Take time to realize, on an emotional level, that your 401k is a long-term investment proposition and that, because you won't be needing most of the money for many years to come, you don't really need to be concerned about the fluctuation, but only about the long-term rate of return.
In a long-term investment program - spanning 30 years or more - time, diversification, and the timing technique of dollar-cost-averaging (making small regular contributions) serve to minimize the risks of owning common stocks to the point of non-existence.
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