At a glance
- An investment product like a stock, bond, ETF, or mutual fund gives you access to one or more asset classes.
- Consider cost, investment style, and convenience when you choose an investment product.
- The individual investments you choose should match your target asset mix.
If building your portfolio is like building a house, your account is the house itself. The features you want to include—a fireplace, garage, and eat-in kitchen—are your target asset mix. The specific finishes you choose? They’re your investments.
If you’ve already determined your target asset mix and account type, you’re ready to choose your investments. Here’s a quick look at 4 common investment products.
Understand investment basics:
Step 1—Understanding risk and return
Step 2—Choosing the right asset mix
Step 3—Saving for retirement
Step 4—Opening a nonretirement account
>> Step 5—Investing in a stock, bond, ETF, or mutual fund
An investment product gives you access to a single asset class or a combination of asset classes. An individual stock or bond exposes you to a single asset class—stocks or bonds, respectively—while a single ETF or mutual fund can expose you to one or more asset classes.
A stock is traded on a major exchange like the New York Stock Exchange or Nasdaq. When you own a stock, you essentially own part of a specific company, and you get some of its assets and profits.
A bond is a loan. When you purchase a bond, you’re lending money to the bond issuer (e.g., a government, government agency, or corporation) in exchange for repayment plus interest by a specified date (maturity).
An index (i.e., a market benchmark) is a selection of stocks, bonds, or other securities that represents what’s going on in the overall market. For example, the S&P 500 Index represents 500 of the largest U.S. companies.
An ETF bundles together many stocks or bonds in a single investment and may track an index. When you own an ETF, you own a portion of its underlying portfolio. An ETF also trades on major exchanges.
A mutual fund, like an ETF, bundles together many stocks, bonds, or other securities in a single investment and may track an index. How you buy and sell ETFs and mutual funds is a notable difference between them. ETFs trade on major stock exchanges directly from one investor to another, while mutual fund companies, banks, and brokerage firms buy and sell mutual funds.
Cost matters when you’re investing. The less money you spend, the more you keep. The cost of an investment depends primarily on its expense ratio and commission.
An expense ratio is the percentage of a fund’s total assets that goes toward the cost of running the fund each year. For example, if you invest $1,000 in an ETF or a mutual fund with a 0.10% expense ratio, you’ll pay $1 a year in fees. If you invest the same amount in a fund with an expense ratio of 0.60%, you’ll pay $6 a year.
While this difference may seem insignificant, it can add up over the long term. When you pay less to invest, you have more money available to compound (when your investment earnings generate their own investment earnings).
A commission is a fee you pay to a broker each time you buy or sell one or more shares of an individual stock, bond, or ETF. For example, if you buy shares of 20 individual stocks, you’ll be subject to 20 commission charges. If each commission is $5, that’s $100 (regardless of the total amount you invest).
Similar to an expense ratio, when you pay less in commissions, you have more money available to compound.
Which products may have an expense ratio?
- Mutual funds
Which products may have a commission?
- Individual stocks
- Individual bonds
#2: Investment style
An investment style describes a technique used to pursue a goal. Some investment products, including mutual funds and ETFs, can be active or passive.
Actively managed funds seek to outperform the market and generate above-average returns. An active fund’s portfolio management team relies on research, market forecasting, and personal experience to make decisions about which bonds and stocks they’re going to buy.
Want a financial advisor to help you make investing decisions?
Although actively managed funds attempt to beat the market, they may underperform the market. Mutual funds offer the biggest selection of actively managed funds, but some ETFs are actively managed too.
A passively managed fund (known as an index fund) holds all (or a sample) of the bonds or stocks in the index it tracks. The fund then mirrors the index and only buys or sells when the index makes a significant change.
Most ETFs are passively managed, whereas mutual funds can be either passively or actively managed.
Compare index vs. actively managed funds
Individual stock and bond funds aren’t considered active or passive because they aren’t professionally managed (which is why they don’t have an expense ratio).
If you’re like most investors, the amount of time and effort you want to spend building a diversified portfolio may be the most important factor in choosing an investment product.
Answer the questions below and follow the lines to help you determine which product may be the best option to meet your needs.
Find an investment product that meets your needs
Do you want to individually select all of the stocks, bonds, and securities you own?
Considerations: The process can be time-consuming and potentially costly (if the products you choose have commissions). And you’re on your own when it comes to rebalancing.
Invest in …
Individual stocks and bonds
Do you want to make automatic investments or withdrawals?
Considerations: Because your transactions are scheduled in advance, you have no control over the price of the shares you buy or sell.
Invest in …
Do you want to get a complete portfolio in an all-in-one fund?
Considerations: If you don’t choose the right fund to invest in initially, you risk being off track to meet your goals.
Invest in …
Do you have $1,000 or more to invest?
You can invest in most Vanguard mutual funds for a minimum initial investment of $1,000 or $3,000. You can buy an ETF for the price of a single share, which could be $50 or less.
Invest in …
Do you want to know the price of your investment the minute you buy or sell it?
Considerations: You have to know yourself. Will real-time pricing tempt you to try to time the market?
Invest in …
Invest in …
You’re investing now!
Once you’ve chosen an investment product, select a specific investment with an objective that matches your own. (You can view the objective of each Vanguard fund on the Overview tab of the fund page under Product summary.)
Whether you chose a single investment or several investments to hold in your portfolio, the total percentage of stocks, bonds, and cash you own should match your target asset allocation.
Too many mutual funds to choose from?
Check out a list of Vanguard Select Funds™
Too many ETF options?
Build a complete portfolio with just 4 ETFs
So now that you’re officially investing, what’s next? Maintaining your portfolio. Read our next article.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.