Maximizing Wealth: A Simple Three-Fund Strategy

Investing for the future doesn’t have to be complicated. Instead of fretting over every market change, a reliable method for building wealth is through dollar-cost averaging with low-cost, passively managed exchange-traded funds (ETFs) that track major market indices.

Among ETF providers, Vanguard excels due to its shareholder-owned model, which allows for low fees. A complete portfolio with Vanguard can yield returns that match or outperform key benchmarks. Below, we explore three essential funds that form the backbone of a balanced long-term investment strategy.

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Diverse Market Exposure

The Vanguard S&P 500 ETF (NYSEMKT: VOO) closely follows the S&P 500, which is the primary gauge for the U.S. stock market. With an expense ratio of just 0.03%, it significantly undercuts the average 0.77% seen in similar funds. It has a beta of 1, indicating it moves with the market, and an alpha of -0.04, suggesting its returns are nearly aligned with the benchmark after adjusting for risk and fees.

Among its top holdings, Apple leads at 7.11%, followed by Nvidia at 6.76%, Microsoft at 6.26%, Amazon at 3.61%, and Meta Platforms at 2.57%. A $10,000 investment made at inception would have grown to $71,640, assuming dividends were reinvested in a tax-deferred account. The fund currently offers a yield of 1.17%.

VOO Total Return Level data by YCharts.

Strong Growth Potential

The Vanguard Growth Index Fund ETF Shares (NYSEMKT: VUG) targets large U.S. companies that show significant growth potential. Its fee stands at only 0.04%, compared to the average 0.94% for funds in the same category. The fund has a beta of 1.2, indicating a tendency to amplify market movements by 20%, but its alpha of -2.33 suggests it may underperform its benchmark when adjusted for risk.

Over the past decade, the Vanguard Growth ETF has yielded an impressive total return of 341.7%, outpacing the Vanguard Total International Stock Index Fund ETF Shares (NASDAQ: VXUS) which only gained 68.7% during the same period.

This notable growth is largely due to the success of U.S. technology firms propelled by advances in artificial intelligence and cloud computing.

Although conventional wisdom recommends a mix of international stocks, focusing on U.S. large-cap growth via the Vanguard Growth ETF reflects the strong positions of leading tech firms. The fund’s significant holdings include: Apple at 11.71%, Nvidia at 10.94%, Microsoft at 10.80%, Amazon at 6%, and Meta Platforms at 4.70%. A $10,000 initial investment would now be worth $103,860, given reinvested dividends in a tax-advantaged setting.

VUG Total Return Level data by YCharts.

Portfolio Stability via Bonds

The Vanguard Total Bond Market Index Fund (NASDAQ: BND) adds crucial stability to your portfolio with broad fixed-income exposure. It follows the Bloomberg U.S. Aggregate Float Adjusted Index, showing a beta of 0.99, which means it tracks the market closely, and an alpha of -0.08 indicating similar risk-adjusted returns to its benchmark.

With a low expense ratio of 0.03% and a yield of 4.41%, this fund serves as a buffer against stock market fluctuations. However, an investment of $10,000 at the start would have only appreciated to $16,860, reflecting bonds’ modest growth compared to stocks over the last two decades.

BND Total Return Level data by YCharts.

Crafting Your Investment Allocation

Many investors follow the rule of thumb of subtracting their age from 100 to decide their stock allocation, placing the rest in safer assets like bonds. However, due to longer life expectancies and the steady outperformance of U.S. stocks, a more aggressive approach is now encouraged.

Here’s an updated framework for determining your age-based asset allocation:

Age 20: 90% stocks, 10% bonds

Age 30: 80% stocks, 20% bonds

Age 40: 70% stocks, 30% bonds

Age 50: 60% stocks, 40% bonds

Adjust these allocations based on personal circumstances, such as job security and other income resources. Individual risk tolerance should also play a role in deciding how conservative or aggressive your approach will be.

For your equity allocation, consider a greater percentage in the Vanguard 500 Index Fund for stability while also integrating the Vanguard Growth Fund for additional growth prospects. Its impressive performance compared to international stocks highlights the advantages of a strong U.S. investment focus; however, it’s essential to recognize that this strategy can also involve higher risk.

Conclusion

This three-fund investment strategy combines simplicity, low expenses, and a strong historical performance track record. For those interested in a straightforward method of wealth building, these Vanguard ETFs deliver the essential elements needed for a solid investment portfolio, which can easily adapt as your situation evolves.

A Second Chance at Profiting

Have you ever felt that you missed out on investing in top-performing stocks? You might want to consider this opportunity.

Occasionally, our expert analysts reveal “Double Down” stock recommendations for companies on the verge of significant growth. If you think you’ve missed your chance, investing now might be a prudent decision, as past results illustrate:

• Nvidia: A $1,000 investment when we doubled down in 2009 would now be worth $359,936!*
• Apple: Investing $1,000 upon our recommendation in 2008 would have grown to $46,730!*
• Netflix: A $1,000 stake at the time of our double down in 2004 would now be valued at $492,745!*

Currently, we’re issuing “Double Down” alerts for three promising companies, and this opportunity might not present itself again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of December 9, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. George Budwell has positions in Apple, Microsoft, Nvidia, Vanguard S&P 500 ETF, and Vanguard Total Bond Market ETF. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, Vanguard S&P 500 ETF, Vanguard Total Bond Market ETF, and Vanguard Total International Stock ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.