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Hi Beverly,

I listen to Jim Cramer's radio show every chance I get. I am 38 years old and have never invested in the stock market. My pension is in the form of an annuity through the union that I work for. Jim said that he suggests that first-time investors invest in one of Vanguard's mutual funds. But there are so many of them -- can you guide me in the right direction?Thank You,Mark Gregory


Jim's right -- Vanguard is a great place for a beginning investor to start. (Indeed, it's often a one-stop shop for even the most sophisticated investors.) Not only does it have loads of general investing information on its

Web site, but it offers a superior product.

Unlike most other mutual fund companies, Vanguard is a


company -- which means the shareholders in the funds are also essentially shareholders in the company. (Most mutual fund companies have a for-profit parent company -- like insurance powerhouse

Marsh & McLennan


, which owns Putnam, or

Janus Capital


. Vanguard, though, essentially runs like a not-for-profit company -- which translates into razor-thin expenses on its funds. And that means you get to keep more of the money you make.

Vanguard funds carry the lowest average operating expenses of any family of retail mutual funds, according to fund-tracker Lipper, a Reuters company. In 2002, the average expense ratio for Vanguard funds was 0.26% of assets -- less than one-fifth of the mutual fund industry's average of 1.36%.

John Bogle, Vanguard's founder, is also credited with inventing the index fund -- a mutual fund that owns only the stocks in any given index (be it the

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S&P 500

, Wilshire 5000 or any other index), and owns them in the same ratio that they're held in the index. (The first indexed mutual fund was launched in 1976 and is now known as the


Vanguard 500 Index fund.) Now, indexing has

many and varied adherents in the financial industry as well as academia, and should play a major role in virtually every portfolio.

But while some investors insist on trying to beat the market by investing in actively managed funds (in which the portfolio manager picks and chooses stocks that could outperform according to his or her own research), those attempts usually fail over the long term. (For more on this, click


here and


Study after study has shown that index funds outperform 75% of actively managed funds over virtually any time period. But half of the remaining funds (or 12.5%) that outperform their relevant benchmark do so just as a matter of chance, according to research done by finance professor and chair of the Richard H. Driehaus Center in Behavioral Finance at Chicago's DePaul University, Werner De Bondt. Those numbers are even more compelling because they don't include the thousands of failed funds that have either folded or merged over the years.

So now investors are forced to pick among the 10,000 funds, 25% of which will likely beat their relevant index in any given year. That last phrase is key -- the 25% of funds that beat their benchmark don't do so every year. Because a fund has beaten the index in the past year or two is no indication of whether it will continue to outperform.

And it must outperform by quite a lot, given how expensive most actively managed funds are. For starters, the average equity index fund has an expense ratio of 0.79% -- and exchange traded funds, or ETFs, are roughly half that (although you will have to pay a trading fee when purchasing). The average actively managed equity fund has an expense ratio of 1.49%, according to Morningstar.

Because index funds trade much less frequently, they are almost always more tax-efficient, which again means you'll preserve more of your return. You can learn more about the benefits and methods of tax efficiency


here and


But even once you've settled on Vanguard and index fund investing, there are a plethora of choices. (Vanguard is by no means the only fund shop to offer index funds; indeed, they almost all do, but it is generally the cheapest.)

If you're looking for stock funds, a good place to start is the


Vanguard 500 Index fund. The S&P 500, which represents about 80% of the stock market, is generally considered the best way to make your portfolio look like the U.S. economy. If you want to capture small stocks as well, you can opt for the Vanguard


Total Stock Market fund, which essentially represents the entire stock market.

Vanguard also offers a wide variety of index funds that invest in smaller indexes, including a series of sector index funds

about to be launched this fall. But beginning investors don't need this level of specificity -- stick to the broader indexes.

There are other options as well. Vanguard just announced it will launch a series of target retirement funds this fall. These six new funds will adjust the mix of assets (stocks, bonds, cash) according to the retirement date. At 38, you might want to consider the Target Retirement 2025 fund, which has 60% of its allocation in stocks and 30% in bonds, or the 2035 fund, which has 80% in stocks and 20% in bonds. Also to be launched are funds for people already retired (the Income fund) and those with plans to retire in 2005, 2015 and 2045.

Now, just a quick word about asset allocation -- you need to consider what you're investing


. Retirement? If you have some time, a mix of stocks and bonds that favors stocks should be fine. Investing for your kids' education? Well, when are they going to college? Any money that you'll need in the next three to five years should be in cash. If you have a little more time, add bonds to the mix. Money in stocks shouldn't be earmarked for any goals less than 10 years away -- at least.

Whew. That's a lot of information, and it's only the tip of the iceberg. But don't get overwhelmed. Just do your homework, choose one or two broad index funds that meet your needs and don't sweat the short-term dips. In the long term, you'll be far better off.