I'm just getting into investing (currently small amounts, to increase dramatically when I finish off my moderate interest student loans). From what I've read, index funds are the way to go, and I like Vanguard's Total Stock Market Index fund because it's even more diverse than an S&P 500 fund, and seems to do better than the S&P 500 too.

My question is, is there any point to getting anything else, since I'm already diversified with all of the public companies in the U.S.? I obviously have a couple months expenses in cash, but bonds seem pretty worthless, at least until I retire. Am I missing something?

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    Answer: It depends. It all depends on your risk profile. If you are ok with investing 100% of your investment funds in equities, then sure, it is fine. If you are ok with investing 100% of your investments in the US stock market (subject to US-only swings) - i'm assuming the Vanguard fund is US securities -, it's fine. If you are ok with tying up all your assets into one asset class (no FI, no real estate, etc), it's fine Sep 25, 2013 at 18:43
  • for what it's worth, I am in a similar position - recent college grad, cash/MMA/rotating CD structure for liquidity, and most of the rest in free dollar-cost-averaged ETFs (or company stock via ESPP). I dabble a little in emerging market FI funds in my 401k, but otherwise I'm highly equity based. The reason it's ok is our young age is conducive to a very aggressive growth profile. Not so good when you're getting older and can't afford to lose 50% of your money in a month. Sep 25, 2013 at 18:47
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    Why not throw in a total international stock and total bond fund for a little extra diversification?
    – Craig W
    Sep 25, 2013 at 19:35

6 Answers 6


You're missing the concept of systemic risk, which is the risk of the entire market or an entire asset class. Diversification is about achieving a balance between risk and return that's appropriate for you. Your investment in Vanguard's fund, although diversified between many public companies, is still restricted to one asset class in one country. Yes, you lower your risk by investing in all of these companies, but you don't erase it entirely.


Clearly, there is still risk, despite your diversification. You may decide that you want other investments or a different asset allocation that reduce the overall risk of your portfolio. Over the long run, you may earn a high level of return, but never forget that there is still risk involved.

bonds seem pretty worthless, at least until I retire

According to your profile, you're about my age. Our cohort will probably begin retiring sometime around 2050 or later, and no one knows what the bond market will look like over the next 40 years. We may have forecasts for the next few years, but not for almost four decades. Writing off an entire asset class for almost four decades doesn't seem like a good idea. Also, bonds are like equity, and all other asset classes, in that there are different levels of risk within the asset class too. When calculating the overall risk/return profile of my portfolio, I certainly don't consider Treasuries as the same risk level as corporate bonds or high-yield (or junk) bonds from abroad.

Depending on your risk preferences, you may find that an asset allocation that includes US and/or international bonds/fixed-income, international equities, real-estate, and cash (to make rebalancing your asset allocation easier) reduces your risk to levels you're willing to tolerate, while still allowing you to achieve returns during periods where one asset class, e.g. equities, is losing value or performing below your expectations.

  • If you look at that graph, it never stays down for more than a couple years. Going back farther, it seems like stocks have never taken more than a decade to recover, and always do better than bonds over that time period too. Sep 25, 2013 at 21:15
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    @BrendanLong That's true, but if this was the only position in your portfolio, and you were retiring in 2009, I imagine you would regret not shifting to a different asset allocation or set of risk preferences over time. Furthermore, if you have positions in your portfolio that increased during the dip in VTI, rebalancing your portfolio during that time would have allowed you to purchase more shares of VTI at a lower price. Sep 25, 2013 at 21:22
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    @BrendanLong Also, this doesn't relate 100% to your question because you specifically mentioned retirement, but your risk preferences and chosen asset allocation should also depend on your goal and its time frame. When I save for grad school, my asset allocation and risk tolerance is very different from my retirement portfolio (on a similar note, when someone closer to retirement chooses an asset allocation, it may differ from ours because we have more time to take risks). Sep 25, 2013 at 21:24

and seems to do better than the S&P 500 too.

No, that's not true. In fact, this fund is somewhere between S&P500 and the NASDAQ Composite indexes wrt to performance. From my experience (I have it too), it seems to fall almost in the middle between SPY and QQQ in daily moves.

So it does provide diversification, but you're basically diversifying between various indexes. The cost is the higher expense ratios (compare VTI to VOO).

  • I'm not talking about daily prices though. All I care about is what it will be worth in 20-30 years. Sep 25, 2013 at 21:16
  • @BrendanLong that would just be a compounded result of daily movements, wouldn't it?
    – littleadv
    Sep 25, 2013 at 21:27
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    @littleadv VTI and VOO have the same expense ratio (0.05%).
    – Michael A
    Mar 18, 2014 at 13:39

Write off the entire asset class of corporate bonds? Finance theory says yes, the only two asset classes that you need are stocks and treasury bills (very short-term US government bonds). See the Capital Asset Pricing Model (CAPM).


I don't think you are missing much, if anything, Brendan. You get massive diversification and low fees with a fund like VTI. I'm not sure if it is good to have everything with only one broker though. I would add to the conversation that the goal shouldn't be to have a giant pile of money in x years..and then spend it down in retirement. A much better/safer goal is to have enough dividends being generated that you never have to touch your capital. Looks like you are starting young so congrats.



The short answer is no, there is no need to get into any other funds. For all intents and purposes the S&P 500 is "The Stock Market". The news media may quote the Dow when the market reaches new highs or crashes but all of the Dow 30 stocks are included in the S&P 500.

The S&P is also marketcap weighted, which means that it owns in higher proportion the big "Blue Chip" stocks more than the smaller less known companies. To explain, the top 10 holdings in the S&P represent 18% of the total index, while the bottom 10 only represent 0.17% (less than 1 percent). They do have an equal weighted S&P in which all 500 companies represent only 1/500th of the index and that is technically even more diversified but in actuality it makes it more volatile because it has a higher concentration of those smaller less known companies. So it will tend to perform better during up markets and worse during down markets.

As far as diversification into different asset classes or other countries, that's non-sense. The S&P 500 has companies in it that give you that exposure. For example, it includes companies that directly benefit from rising oil prices, rising gold prices, etc known as the Energy and Materials sector. It also includes companies that own malls, apartment complexes, etc. known as the Real Estate sector. And as far as other countries, most of the companies in the S&P are multi-national companies, meaning that they do business over seas in many parts of the world. Apple and FaceBook for example sell their products in many different countries. So you don't need to invest any of your money into an Emerging Market fund or an Asia Fund because most of our companies are already doing business in those parts of the world. Likewise, you don't need to specifically invest into a real estate or gold fund.

As far as bonds go, if you're in your twenties you have no need for them either. Why, because the S&P 500 also pays you dividends and these dividends grow over time. So for example, if Microsoft increases its dividend payment by 100% over a ten year period , all of the shares you buy today at a 2.5% yield will, in 10 years, have a higher 5% yield. A bond on the other hand will never increase its yield over time. If it pays out 4%, that's all it will ever pay.

You want to invest because you want to grow your money and if you want to invest passively the fastest way to do that is through index ETFs like the $SPY, $IVV, and $RSP. Also look into the $XIV, it's an inverse VIX ETF, it moves 5x faster than the S&P in the same direction. If you want to actively trade your money, you can grow it even faster by getting into things like options, highly volatile penny stocks, shorting stocks, and futures. Don't get involved in FX or currency trading, unless it through futures.

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    "As far as diversification into different asset classes or other countries, that's non-sense. The S&P 500 has companies in it that give you that exposure." This, in fact, is nonsense. Exposure is not a binary concept. The S&P 500 only "gives you that exposure" if "that exposure" is defined as the exposure given by the S&P 500. Plenty of alternative/foreign assets exist that are not owned by companies in the S&P 500, but are available to be held by investors.
    – David
    Dec 8, 2016 at 20:54

Good idea to stay only with VTI if you are 30. For 50, I recommend: 65% VTI 15% VOO 10% VXUS 10% BND

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    Specific recommendations like this have limited value; if you want the answer to be more relevant I suggest you add reasoning to why you have chosen the mix you have. Note that this site does not promote specific recommendations, so what is more valuable are the fundamentals that led you to this answer (ie: 'because you are 30, you can take a lot of risk, and therefore...' or whatever you are saying). Dec 6, 2016 at 16:11

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