Personal Finance & Money Asked on September 28, 2021
I have recently put 2K into the vanguard life strategy 100% fund, which is a pre diversified fund of funds. I also drip feed this account monthly. Now I’m putting another 2K from savings into vanguard and I’m deciding which vanguard fund to choose. My options are to 1) stick with the prediversified life strategy or 2) pick one or more of the other funds available on vanguard.
If I were to pick option 2, would I reduce the compounding effect from option 1? Put another way, is it better to put all money into only 1 fund of funds because it’ll start higher up on the compounding curve or will it make no effect and actually greater diversification acquired with option 2 is more valuable?
Compounding is just a percentage effect. It does not matter if you have one investment with 10 000$ at 5% return or two investments with 5000$ at 5% return. In total it is the same.
I am not familiar with the exact product but a fund of funds should already be sufficiently diversified. There is probably little to gain by adding another fund to your portfolie in terms of diversification. Rather the contrary, combining funds can lead to accidential concentration. For example, if you combine an MSCI world with a S&P500, you are not diversifying you are increasing your concentration on US stocks which already make up roughly 60% of you MSCI world fund.
A fund of funds is a product that is meant as a one-and-only investment. Assuming the chosen asset allocation matches your preferences, there is little reason to invest in another fund
Correct answer by Manziel on September 28, 2021
There is very little one can do to effect the "miracle of compounding" it is simplistic, but this article is right on point.
Here is what you can do:
While picking a good investment helps, sub optimal investments also work out very well. How old are you? If you are below 40 years old and far from retirement, I would probably opt to do a low cos S&P 500 fund, or a Broad market index fund. There is very little point in a young person owning bonds (which life strategy funds tend to own).
One benefit you do get at Vanguard, of concentrating on one fund, is admiral shares which are lower fees when you account hits a certain balance. This of course assists compounding.
Time and leaving your investments alone are the keys to success here.
Answered by Pete B. on September 28, 2021
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