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Income investors just starting out should consider a long-term investment approach like a 60/40 stock/bond portfolio, built on ETFs.
On the stock side, Vanguard has two diversified dividend ETFs that pair well.
On the bond side, Vanguard has two diversified bond ETFs that pair well.
One old rule of thumb on Wall Street is that investors should put 60% of their assets in stocks and 40% in bonds to create a balanced portfolio. If you are aggressive, you could go 80/20, and if you are conservative, you could go 40/60. The point is to mix stocks and bonds to create a simple portfolio that you can maintain over the long term.
If you have $2,000 and are just starting out, this is good advice, and these four Vanguard exchange-traded funds (ETFs) can set you up with a forever portfolio.
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The best way to make a lot of money very quickly is to buy one single investment that is guaranteed to skyrocket in value. Since there are no guarantees on Wall Street, that also happens to be the best way to potentially lose a lot of money. The next best way is to put a portion of your money in growth opportunities, but put the rest in a diverse portfolio to help temper the selective risks being taken.
Image source: Getty Images.
One of the easiest ways to diversify is to mix stocks and bonds into a portfolio. Historically, stocks have provided growth, and bonds have provided stability. When stocks are rising, bonds tend to underperform. But when stocks are falling, bonds outperform, evening things out. The advent of exchange-traded funds has made it incredibly easy to create a balanced portfolio of stocks and bonds that is tailored to your investment needs. Vanguard is a go-to source, with particularly attractive options for budding income investors.
For some investors, picking stocks is fun; for others, it is absolute torture. If you don't want to torture yourself, a stock ETF is the way to go. Dividend stocks can be attractive because they provide a tangible return via the dividend, and it normally requires a certain level of financial strength for a company to pay a dividend. A quick and easy way to get dividend stocks into your portfolio is via Vanguard High Dividend Yield ETF (NYSEMKT: VYM).
Without getting too deep into the woods, Vanguard High Dividend Yield ETF takes all U.S. dividend-paying companies and lines them up by yield. It then selects the 50% of the list with the highest yield. There are over 580 stocks in the portfolio, so you are getting a well-diversified ETF. The dividend yield is lower than you might expect at 2.8%, but that is still more than twice the yield of the S&P 500 index (SNPINDEX: ^GSPC).
That only covers the U.S. market, though. There's a whole world of dividend-paying stocks out there. Which is why you should probably pair Vanguard High Dividend Yield ETF with Vanguard International High Dividend Yield ETF (NASDAQ: VYMI). It basically does the same thing as its U.S.-focused counterpart but with international stocks, with a portfolio of over 1,500 stocks. The dividend yield is 4.1%. It probably makes sense to own more U.S. stocks than foreign stocks, but owning both of these ETFs will cover the equity side of a balanced portfolio.
Using the 60/40 split, you'll want to allot $1,200 to these two ETFs, with 60% to 75% of that dedicated to U.S.-focused Vanguard High Dividend Yield ETF.
Many investors don't realize that the bond market is larger and more complex than the stock market. For most investors, it just doesn't make much sense to try to pick individual bonds, which makes ETFs a great fit for the remaining $800 of this portfolio. But to simplify things, Vanguard offers Vanguard Total Bond Market ETF (NASDAQ: BND) that basically buys all of the U.S. bond market.
Once again, however, the United States is just one country in a very large world. Which is why Vanguard also offers Vanguard Total International Bond Market ETF (NASDAQ: BNDX). Just like with the stock side of the equation here, two ETFs provide you a well-diversified global portfolio of bonds. Vanguard Total Bond Market ETF's yield is around 3.8%, while Vanguard Total International Bond Market ETF's yield is roughly 4.2%.
Once again, you'll probably want to keep 60% to 75% of your bond investments in domestic bonds, with the rest in international bonds. But the big goal is diversification, which you'll get in a big way here since both ETFs basically buy every bond that is available to buy.
A portfolio with these four ETFs isn't going to provide you with overnight success. But, if history is any guide, it will provide reliable income and capital appreciation over the long term. And all it requires is four trades to start and four trades once a year to bring your allocation percentages back in line with your targets. Given the broad-based nature of the four Vanguard ETFs here, meanwhile, you really don't need to think too much about what the ETFs are doing. You just get to sit back and reap the benefits of owning a well-diversified income-focused portfolio over the long term.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
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