One of the toughest things to do when starting to invest in picking which mutual funds to invest in, even when you’ve wedded yourself to mostly tracking the indexes. There are many different indexes, and there are many different funds that track these indexes. Then you have to decide if you want an exchange traded fund (ETF) which you can buy and sell during the day like a stock or a plain old vanilla mutual fund. The paralysis that comes from making these decision can often be much more costly than choosing one fund versus another. Generally speaking the most important part of investing is to be invested. Letting a IRA account sit in cash for years does no good.

So what should you invest in? I don’t have any firm answers, but below are some index funds that I’ve either personally invested in or taken some time to look at.

The best known indexes of the U.S. Stock Market are the Dow Jones Industrial Average, the S&P 500, Wilshire 5000, and the Russell 2000, but there are many other indexes. Most indexes segment U.S. companies by size as measured by market capitilization. For example the S&P 500 index is suppose to the be 500 largest companies in the U.S. (in actuality it’s somewhat different).   The Rusell 2000 on the other hand is index of small companies.  Private companies, Standard and Poor in the case of the S&P 500, maintain the composition of the index by choosing which companies are added or removed from the index.  Some indexes are sector indexes, for instances the Dow Jones Transportation Index tracks transportation companies.  Most indexes, the exception being the Dow Jow Industrial Average, are weighted by market capitalization to give greater relevance to bigger companies.  For example if I had an index consisting of only two stocks, A and B. Company A is 4 times as large as B, my index would be 4 times more sentitive to the price movement in stock A in comparison to stock B. The Dow Jones on the other hand does not differentiate companies by size, and as result if I constructed an index using it’s price weighted methodology that index would be equally sentitive to price movements in stock A or B. 

Below are a list of some funds.  I’ve highlighted in yellow funds that I personally own.  When it comes to indexe funds, it’s really all about cost.   Choose the lowest cost fund for you.  This is measured not only management fees but potential trading costs.  For instance, I own WFIVX because at my brokerage, E*Trade, I can buy and sell it for free and the company rebates the 12-1b fees.   I would incur a transaction cost if I did the same thing with a Vanguard fund.  However if you use Vanguard then you would probably have the opposite problem.

Index/Fund Description Fund Name Fund Symbol ETF Fund ETF Symbol
Total Market Index, Wilshire 5000 Vanguard Total Market Index Fund VTSMX Vangurad Total Market ETF VTI
Fidelity Spartan Total Market Index Fund FSTMX
T. Rowe Price Total Market Index Fund POIMX
Wishire 5000 Index Fund WFIVX
S&P 500 Index Vangaurd S&P 500 Fund VFINX SPDR S&P 500 ETF SPY
Fidelity Spartan 500 Fund FSMKX
Schwab S&P 500 Index SWPIX
Russell 2000 Index Vanguard Small Cap Index NAESX iShares Russell 2000 Value Index IWN
E*TRADE Russell 2000 Index ETRUX

I believe a critical part of anyone’s portfolio should be exposure to foreign stocks, especially if you’re young.  Foreign investing is a much trickier beast than domestic investing.  Along with a diverse set regional, and country indexes, foreign funds can also be further broken to mature vs. emerging markets.  Brazil, Russian, India and China (often collectively known as BRIC) are considered emerging market, while western Europe is a mature market.  There is also the distinction to be made between foreign and international.  Internatioanl funds contain U.S. companies, while foreign funds exclude U.S. Companies.  The best known and mostly widely used indexes are the MSCI (Morgan Stanley Capital International) and FTSE (Financial Times and London Stock Exchange) Indexes.  Morgan Stanley maintains a wide range country/regional and sector indexes while FTSE tends to specialize in larger, broader indexes.  However, finding quality traditional mutual funds that track them all is not so easy.  Barclay iShares offers a wide set of MSCI and FTSE ETFs (a few which I’ve listed here).

Index/Fund Description Fund Name Fund Symbol ETF Fund ETF Symbol
FTSE All-World ex US Index Vanguard FTSE All-World ex-US Index Inv VFWIX Vanguard FTSE All-World ex-US ETF VEU
Vanguard International Stock Index Fund. International Fund. Holds underlying
Vanguard European, Pacific, and Emeerging Market Vanguard Funds		 VGTSX
MSCI Emerging Markets Index Vanguard Emerging Market Fund VEIEX iShares MSCI Emerg Mkts Fund EEM
MSCI Brazil Markets Index iShares MSCI Brazil EWZ
MSCI Japan Markets Index iShares MSCI Japan EWJ
FTSE Xinhua China 25 Index iShares Xinhua China 25 FXI
Actively Managed Dodge & Cox Internation Fund DOFX

As you can see I’ve also included DODFX which is an actively managed mutual fund. I own the fund and think highly of it’s managment style, and Dodge & Cox ability to deliver consistently excellent returns while still keeping expenses relatively low. If there’s one place to have an actively managed fund, it’s foreign given the increased complications that come with following multiple countries.