Build a Portfolio With the Best Vanguard Funds

A Sample Vanguard Portfolio

Woman looking at her cash and thinking about how to invest it

There are so many great Vanguard funds on the market that it can be difficult for an investor to decide how to build a portfolio with them. The trick is to narrow down the options to a selection of a few funds that work best for your needs.

There are options for every type of investor. Vanguard may be the go-to source for investing in index funds, but it also offers some of the best actively managed funds money can buy. With such a broad selection of high-quality, low-cost mutual funds, most investors can build a strong portfolio using only Vanguard funds.

Start With the Best Portfolio Structure

Before you choose the best Vanguard funds to use for your portfolio, it may be helpful to review a simple but effective portfolio structure, called core and satellite. In this strategy, your portfolio is built around a "core holding," such as a large-cap stock index mutual fund, which represents the largest portion of the portfolio. Other types of funds—the "satellite holdings"—comprise smaller portions of the portfolio and serve to balance out the risk level.

The satellites typically consist of funds from various categories, such as foreign stock, small-cap stock, bond funds, and sometimes sector funds.

The primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in different baskets) while outperforming a standard benchmark for performance, such as the S&P 500 Index.

Sample Portfolio of the Best Vanguard Funds

Now that we have a smart design for our portfolio of Vanguard funds, we can look at an example that can serve as a model to build your own portfolio:

  • 35% Vanguard 500 Index (VFINX): Large-cap U.S. stocks
  • 15% Vanguard Total International Stock Index (VGTSX): Foreign stocks
  • 10% Vanguard Explorer (VEXPX): Small-cap stocks
  • 5% Vanguard Health Care (VGHCX): Health sector
  • 35% Vanguard Total Bond Market Index (VBMFX): Bonds

This particular blend of Vanguard funds is an example of a moderate portfolio, which is appropriate for an investor with a moderately high risk tolerance and a time horizon of at least five years. Moderate investors are willing to accept periods of modest market volatility in exchange for the possibility of receiving returns that outpace inflation by a significant margin. The asset allocation breakdown is 65% stocks and 35% bonds.

The use of sector funds such as VGHCX is optional. If other sectors are added, be sure to keep the allocation around 5% for each sector and try not to exceed a total of 15% allocation to sectors (i.e., 5% allocated to three different sector funds).

The Lazy Portfolio Option

You may have noticed that this model portfolio includes actively managed Vanguard funds as well as index funds. But some investors understandably like the idea of investing only in Vanguard's index funds, which have extremely low expense ratios and track their respective benchmarks. These features reduce the manager risk associated with actively managed funds since they don't require your active attention to make sure your investments are correctly allocated.

Because of the passive nature of index funds, some investors affectionately call a portfolio of index funds a "lazy portfolio." Here's a simple example of a lazy portfolio of Vanguard funds:

  • 40% Vanguard Total Stock Market Index Fund (VTSMX)
  • 30% Vanguard Total International Stock Index Fund (VGTSX)
  • 30% Vanguard Total Bond Market Index Fund (VBMFX)

This lazy portfolio is another moderate allocation, this one being 70% stocks and 30% bonds. In this case, however, you don't have to pay additional fees for someone to actively watch each fund's mix to ensure it's performing as you want. You can be confident the index funds will follow the market index on which they're modeled.

No matter which Vanguard funds you choose, just be sure you are using a diverse mix of mutual fund categories that will each perform well under different market conditions.

Note: The VTSMX, VFINX, VBMFX and VGTSX are closed to new investors. You can invest in lower-cost Admiral Shares of these funds that carry a minimum investment of $3,000 or ETFs that follow the same investing strategy. Here are the alternatives suggested by Vanguard for these funds–

   Admiral Shares Fund  ETF
Vanguard 500 Index (VFINX Vanguard 500 Index Fund Admiral Shares (VFIAX) Vanguard S&P 500 ETF (VOO)
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)  Vanguard Total Stock Market ETF (VTI) 
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)  Vanguard Total Bond Market ETF (BND)
Vanguard Total International Stock Index Fund Investor Shares (VGTSX)  Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)  Vanguard Total International Stock ETF (VXUS) 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.