When it comes to investing, diversity is key! This is why index funds, which provide various stocks and bonds, are so valuable for traders. Since these funds already consist of different investments, you might wonder how many you should have.
The number of index funds you should own depends on the funds themselves and your strategy. Owning various index funds can be effective, but sometimes just one is enough. The two types of index funds (mutual funds and ETFs) have different pros and cons in this regard.
Understanding the differences between index funds and how they apply to you is vital for new investors. Read on to learn how you can build the best index fund portfolio for your needs.
IMPORTANT SIDENOTE:I surveyed 5000+ traders (and interviewed 50+ consistently profitable traders) to identify 7 statistically proven steps that will empower you to become a consistently profitable trader. Read my article: ‘7 Proven Steps To Profitable Trading’ for an in-depth assessment of data collected through this survey! – This is perhaps the most comprehensive and data backed article on becoming consistently profitable trader that you will find on the internet!
Table of Contents
Number of Index Funds To Own: What To Consider?
Determining how many index funds you should own depends on which funds you are acquiring. Your overall investment goals and strategy also influence the number.
Let’s start by examining the different types of index funds.
Index funds generally fall into two categories: mutual funds and ETFs (exchange-traded funds).
So how many should you own of either one? For starters, you generally need to hold fewer mutual funds than you would ETFs. The reason is mutual funds are typically broader, covering a more comprehensive array of investments than ETFs.
However, ETFs have specific advantages, like flexibility and low cost.
Both are mixes of various assets and securities, but they have some crucial differences to know.
An investing manager actively handles mutual funds, and they are only buyable at the end of trading days. Meanwhile, ETFs are passively managed and traded the way stocks are.
Below, this article dives into the two index fund types and how their differences affect your investing strategy.
There is no magic number, but you typically need fewer mutual funds than ETFs. Often, less than a handful or only one mutual fund is enough.
This idea may seem contradictory since traders often hear how vital portfolio diversity is. To understand why owning numerous mutual funds is usually unnecessary, you should first know how mutual funds work.
Here’s a review of some basics.
When purchasing a share of a mutual fund, you partially own the fund and its profits. Fund managers actively buy and sell securities in these funds to provide the most significant profit possible.
They cost more than ETFs since you’re also paying for the workforce that runs the fund. This additional cost comes via fund fees, such as 12B-1 fees (as opposed to the commission). These extra costs are essential to consider when assessing how many and which mutual funds you desire.
Typical mutual fund costs range from a few hundred dollars to a few thousand per share. The mutual fund VTSAX currently has a minimum buy-in of $3000. With such a high entry point, you’ll likely not be buying as many of them as ETFs and stocks.
Why You Don’t Need Many Mutual Funds?
You don’t need a variety of mutual funds because many of them are already diversified. Not to mention mutual funds are actively managed and change with the market.
We will continue using VTSAX as an example.
In Vanguard’s words, VTSAX is a mutual fund that “is designed to provide investors with exposure to the entire U.S. equity market.” Index funds like these, or ones tracking leading indices like the S&P 500, are thus typically quite diverse.
While diversity is good in investing, too much of it is potentially detrimental. So, you ordinarily don’t want too many mutual funds.
Moreover, mutual funds have investing experts steer the fund towards profit. They account for changes in the market and morph the fund for optimal returns.
Plenty of investors trust just one or a few mutual funds to grow their profits better than they could. The alternative is buying a wider variety of ETFs and securities.
These investors place their trust well; many mutual funds historically hold outstanding track records of consistent profit. This is why top investment firms and companies often consider them a form of risk mitigation.
How Many ETFs You Should Own?
The number of exchange-traded funds you should own varies. Generally, anywhere from 5 to 10 ETFs can work for most investors. However, the best number for you will depend on the specific funds and your strategy.
You generally want more of them than you would mutual funds. But you don’t need to buy a variety like you might with stocks.
But why would you want a wider variety than you would with mutual funds?
Primarily because ETFs are narrower in scope and cheaper than other index funds. Also, ETFs are ordinarily passively managed. Meaning they don’t actively evolve the same way mutual funds do.
Unlike mutual funds, ETFs are tradeable like stocks. You can easily purchase a plethora of different ones from most brokers. Traders can also buy and sell options for ETFs during trading hours (assuming they have permission).
Why Do You Want More ETF Variety Than Mutual Funds?
As mentioned above, ETFs usually are narrower in scope than mutual funds. They cover specific niches and industries that mutual funds might not include.
Because of this, they track a smaller breadth of the market. So, you want to possess more exchange-traded funds to get adequate coverage and risk mitigation.
ETFs are also passively managed. They closely follow a set index or niche with consistency.
Investors thus might need to buy more of them over time to keep up with changes in the market. Mutual funds differ in this respect since fund managers can strategically reinvest for you.
How Your Trading Strategy Affects the Number of Index Funds To Own?
Your unique investment goals determine the best number of index funds to own. This is primarily because those goals steer you towards particular types of funds.
For example, you will probably prefer ETFs if you like being hands-on with your investments. Meanwhile, investors who want to set up recurring deposits and withdrawals might wish for mutual funds.
Keep in mind you can also have a mix of different types of index funds. It’s fairly common for experienced investors to own both exchange-traded funds and mutual funds.
Now let’s examine how index funds benefit certain circ*mstances.
How Actively You Trade?
First, consider how actively you want to trade index funds.
Want steady growth without too much hassle? A couple of mutual funds can be very effective to that end. But if you feel pumped to make big plays, then a basket of various ETFs is the way to go.
Investors add to mutual funds but generally don’t use them for trading actively. After all, you’re paying for an expert investment manager to handle the fund for you.
If you don’t want to participate in the market directly, owning a couple of mutual funds is a great option.
If you want to be more hands-on with your money, definitely go for ETFs. Exchange-traded funds work like stocks and thus have much more inherent flexibility. You’ll benefit from the variety of niches, but you also need to give them more attention.
Recurring Transfers and Retirement
Mutual funds accommodate recurring fund transfers well. For example, you could set up a weekly deposit into a single solid fund and essentially need nothing else.
That’s partially why mutual funds are perfect for consistent, long-term growth. A few well-kept mutual funds can potentially balloon into fruitful retirement funds over the years.
But what if your goals center on short-term profit, or you aren’t making regular transfers? In those cases, you’ll want a variety of index funds and probably more ETFs.
Due to trading like stocks, these funds often see a lot of price movement compared to mutual funds. So for astute investors, the recurring transfers aren’t as necessary if they make consistently profitable trades.
This strategy often benefits from a variety of ETFs, much like a diverse stock portfolio. And unlike mutual funds, exchange-traded funds are typically short-term investments.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
Roadmap to Becoming a Consistently Profitable Trader:I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you.Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders,and to learn how these learnings can be leveraged to your advantage.
There’s no perfect number for how many index funds you should own. It depends mainly on the funds themselves and your investing strategy.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘7 Proven Steps To Profitable Trading’. I surveyed 5000+ traders (and interviewed 50+ consistently profitable traders) to identify 7 statistically proven steps that will help you become a consistently profitable trader. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
Usually, average investors own from 3 to 10 index funds. However, there is no particular number of index funds that you should own. Long-term investors very often own only one index fund.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at. Rather, you should consider the number of different sources of risk you are getting with those ETFs.
Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.
When you have too many funds of the exact nature and objectives, you're actually just creating an index fund but a more expensive one. It becomes difficult to generate returns because the low-return funds already negate the profit made in the portfolio. It also makes monitoring hard.
Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
How the 4% Rule Works. The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio's value. If you have $1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule.
80% of your portfolio's losses may be traced to 20% of your investments. 80% of your trading profits in the US market might be coming from 20% of positions (aka amount of assets owned). 80% of the US stock market capitalisation comes from around 20% of the S&P 500 Index.
According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. At 10%, you could double your initial investment every seven years (72 divided by 10).
If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
The thing is, index funds are arguably the average investor's best bet when it comes to building a retirement nest egg. And yes, you can absolutely become a self-made millionaire using these ho-hum holdings.
Index funds are a low-cost way to invest, provide better returns than most fund managers, and help investors to achieve their goals more consistently. On the other hand, many indexes put too much weight on large-cap stocks and lack the flexibility of managed funds.
Lower risk: Because they're diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn't mean you can't lose money or that they're as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.
Index funds give investors access to near-market returns with no stock picking or market timing required. But are market-level returns enough to grow your retirement account to seven figures? That's the million-dollar question. The easy answer is -- yes -- you can retire a millionaire with index funds.
While the index is not immune to overall market downturns, long-term investors have historically earned a nearly 10% average annual return. However, as with all investments, it's important to note that past performance can't be used to predict future results.
Legendary investor Warren Buffet once said that all it takes to make money as an investor is to 'consistently buy an S&P 500 low-cost index fund. ' And academic research tends to agree that the S&P 500 is a good investment in the long term, despite occasional drawdowns.
Hence his will stipulates that the money left to his wife, Astrid Menks, is invested in index funds: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.
The S&P 500 offers a current dividend yield of 1.6% and has delivered an average of 2.34%. That means if you want to generate $100,000 in annual passive income from a vanilla index fund, you would need $4,273,504 in assets ($100,000 divided by 2.34%).
ETFs are more tax-efficient than index funds by nature, thanks to the way they're structured. When you sell an ETF, you're typically selling it to another investor who's buying it, and the cash is coming directly from them. Capital gains taxes on that sale are yours and yours alone to pay.
The 90/10 investing strategy for retirement savings involves allocating 90% of one's investment capital in low-cost S&P 500 index funds and the remaining 10% in short-term government bonds. The 90/10 investing rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk.
The "rule" simply states that the stock market is fairly valued when the sum of the S&P 500's forward (12-month) P/E and the year-over-year change in the consumer price index (CPI) equals 20.
Here's how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade, assuming little or no volatility (which is unlikely in real life).
To make money in stocks, you must protect the money you have. Live to invest another day by following this simple rule: Always sell a stock it if falls 7%-8% below what you paid for it. No questions asked.
According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time. In some cases, like 1952 to 1955 or 1995 to 1998, the value of the investment doubled in only three years.
The biggest difference between investing in index funds and investing in stocks is risk. Individual stocks tend to be far more volatile than fund-based products, including index funds. This can mean a bigger chance for upside … but it also means considerably greater chance of loss.
Index funds aim to replicate the performance of the index they track instead of trying to outperform the market through individual stock selection. Low costs, diversification and transparency make index funds an attractive investment option for beginners.
Much of it, yes, but not entirely. In a broad-based sell-off of a market, the benchmark index will lose value accordingly. That means an index fund tied to the benchmark will also lose value.
What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.
Index funds—whether mutual funds or ETFs (exchange-traded funds)—are naturally tax-efficient for a couple of reasons: Because index funds simply replicate the holdings of an index, they don't trade in and out of securities as often as an active fund would.
The S&P 500 is an index, so it can't be traded directly. Those who want to invest in the companies that comprise the S&P must invest in a mutual fund or exchange-traded fund (ETF) that tracks the index, such as the Vanguard 500 ETF (VOO).
While they aren't the same thing, these two types of investment tools are popular among billionaires. They appeal to people of high net worth who can afford large investments and higher risk. Such people are sometimes categorized as sophisticated investors or accredited investors.
An S&P 500 index fund alone can absolutely achieve the growth needed to make you into a millionaire. But you probably don't want that to be your sole investment, particularly when you're close to retirement.
Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They like the passive income from equity securities just like they like the passive rental income that real estate provides. They simply don't want to use their time managing investments.
Instead of buying stocks in 500 companies, you can simply buy shares in an S&P 500 index fund. This can help you earn passive income because the S&P 500 has had about a 12% return since 1926. Index funds also provide passive income in the form of dividends.
Yes.Index funds pay dividends as the regulations require them to do so, in most cases. As a result, index funds will pay out any interest or dividends earned by the individual investments in the fund's portfolio.
As is the case with any investment, you can lose money in an index fund. Still, index funds allow investors to track the market in a low-cost, consistent way, according to most analysts and advisors.
Index funds are generally considered safe because they don't rely too much on the performance of any individual stock, and they also don't rely on the competence of investment managers as actively managed mutual funds or hedge funds do.
You may want to sell a mutual fund if it is massively outperforming its benchmark. Other reasons to sell include "style drift," you need to rebalance your portfolio or your risk tolerance has changed. The final reason to sell mutual funds is if there are cheaper options available.
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
This means that if you make $100,000 shortly before retirement, you can start to plan using the ballpark expectation that you'll need about $75,000 a year to live on in retirement. You'll likely need less income in retirement than during your working years because: Most people spend less in retirement.
Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month.
Whether you're nervous about market volatility or simply want an investment you can count on to keep your money safe, an S&P 500 ETF or index fund is a fantastic choice. This type of investment tracks the S&P 500 itself, meaning it includes the same stocks as the index and aims to mirror its performance.
The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31st 2022, had an annual compounded rate of return of 12.6%, including reinvestment of dividends.
Investing just $100 a month over a period of years can be a lucrative strategy to grow your wealth over time. Doing so allows for the benefit of compounding returns, where gains build off of previous gains.
The phrase "beating the market" means earning an investment return that exceeds the performance of the Standard & Poor's 500 index. Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.
S&P 500 5 Year Return is at 57.45%, compared to 55.60% last month and 73.30% last year. This is higher than the long term average of 44.33%. The S&P 500 5 Year Return is the investment return received for a 5 year period, excluding dividends, when holding the S&P 500 index.
What is the Rule of 72? The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
You should therefore only keep as many funds in your portfolio as you're comfortable monitoring. For example, if you hold 10 or 20 different funds, you'll need to keep a close eye on the changing value of all these investments to make sure your asset allocation still matches your investment goals.
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
A three-fund portfolio isn't complex. It just means choosing one representative fund to include in your portfolio from the domestic stock, international stock and bond categories. These funds can all belong to the same family or come from different mutual fund companies.
This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security. This protects against material losses should that single company perform poorly or become insolvent.
The 90/10 investing strategy for retirement savings involves allocating 90% of one's investment capital in low-cost S&P 500 index funds and the remaining 10% in short-term government bonds. The 90/10 investing rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk.
Depending on which research you pull, you can find arguments suggesting that anywhere between 10 and 60 individual stocks will make up a well-diversified series of investments. However, for investors looking for a rule of thumb, we would suggest considering this from a budget-first perspective: Invest with funds.
Introduction: My name is Jeremiah Abshire, I am a outstanding, kind, clever, hilarious, curious, hilarious, outstanding person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
