A very underrated part of investing is how many companies you can invest in with only a few purchases. Thanks to exchange-traded funds (ETFs) -- which are funds that contain many stocks in one investment -- investors can access hundreds or even thousands of companies with one purchase.
As you're investing for retirement, you don't need tons of stocks to have a well-diversified and productive portfolio; you just need a few ETFs. Here are four that can be your retirement portfolio's foundation.
1. The S&P 500
The stock market has three major indexes -- the S&P 500, the Nasdaq Composite, and the Dow Jones -- but the S&P 500 reigns supreme in popularity. Tracking the 500 largest public U.S. companies, the S&P 500 is the most followed index in the stock market, and its performance is often used interchangeably with the overall stock market's performance. Personally, the S&P 500 will always be in my portfolio.
An ETF like the Vanguard S&P 500 ETF (VOO -0.61%) is a great option because it's a trifecta: low cost, instant diversification, and blue chip stocks. It has a 0.03% expense ratio ($3 per $10,000 invested) and contains companies from all major sectors. And maybe more importantly, those companies are blue chip industry leaders that have stood the test of time.
Since the S&P 500 only contains large-cap stocks, it typically provides more stability than funds with small companies. You might not see the hypergrowth you can with smaller-cap stocks, but the S&P 500 has historically provided good long-term returns. Past results don't guarantee future performance, but there's no reason to believe the S&P 500 won't be a good long-term investment.
2. Small caps
Small-cap stocks are companies with a market cap between $300 million and $2 billion. Because of their relatively small size, small-cap companies are usually riskier and more volatile than larger-cap stocks. However, this small size also leaves room for high growth potential, which tends to decline as companies reach a certain size.
You can offset some of the risks of small-cap stocks by investing in a small-cap index like the Russell 2000. The Russell 2000 tracks the smallest 2,000 stocks in the Russell 3000 index, and it's widely considered the primary benchmark for small-cap stocks (similar to the S&P 500 for large-cap stocks).
A Russell 2000 ETF such as the Vanguard Russell 2000 ETF (VTWO -0.05%) is a great option because of its low cost (0.10%) and mixture of growth and value stocks. You don't want a large percentage of your retirement portfolio in small-cap funds because of the volatility, but you want some exposure.
3. Mid caps
Mid-cap stocks can be the sweet middle ground between the stability of large-cap companies and the growth potential of small-cap companies. Mid-cap stocks are companies with a market cap between $2 billion and $10 billion and can either be younger, growing companies or more-established companies that operate in a niche of their industry.
You don't want your portfolio to only consist of two extremes (large caps and small caps); you want exposure to companies that operate in the middle. Many mid-cap index funds cover every sector you could want and have historically produced good long-term returns. Take the Vanguard Mid-Cap ETF (VO -0.33%), for example, which contains over 350 companies and has averaged over 9% annual returns since its inception.
4. International
Every well-rounded stock portfolio should include companies outside the U.S. There are countless great companies around the world, so you don't want to limit yourself to the U.S. Investing in international companies can, however, require more due diligence because you have to consider things like local politics and the economic stability of the region.
International markets are classified as either developed or emerging. Developed markets have more-advanced economies, established industries, and solid infrastructure. Emerging markets might not have the advanced economics or infrastructure of developed markets, but they're generally progressing in the right direction, giving them more upside.
Instead of spending time researching different regions and the companies within them, you can lean on an international ETF like the Vanguard Total International Stock (VXUS -0.28%), which contains over 7,900 companies from both developed and emerging regions:
- Europe (39.8%)
- Asia-Pacific (26.8%)
- North America (7.6%)
- Emerging markets (25.3%)
- Middle East(0.5%)
Ideally, you'd have around 20% of your stock portfolio in international stocks.
Stefon Walters has positions in Vanguard Index Funds-Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, and Vanguard Star Funds-Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, and Vanguard Star Funds-Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.
