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I'm young, new to investing, and have the following nagging question.

Let's assume I have $1000 of disposable income that I'm willing to throw into the market. I've read with small amounts such as this one, index funds are my best bet for long term investments. With that in mind, is it wise to invest in the same index funds that I am already investing into my maxed-out 401(k)?

Let's use VFINX for this example.

I'm looking for any advice and/or links, even if it's not directly related to the answer of this question.

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The issue is not whether you invest in the same fund in two accounts. The issue is the total amount of money you have invested in that fund. In other words, if you have $10,000 of money invested, and you don't want it all invested in the same thing, then don't invest it all in VFINX. It doesn't matter whether you invest some of it in VFINX in your 401k and some of it in VFINX in another account; that's still investing all of it in VFINX. If, on the other hand, you do want to invest everything in VFINX, then go ahead. The point is that it, for purposes of having "too many eggs in one basket", it doesn't matter very much what accounts you're holding the investment in; what matters is what actual financial instruments (e.g., which stocks, which mutual funds, which ETFs) you buy.

It seems your real question, then, is "is it a good idea to invest all my money in one mutual fund?" The answer is likely no, but there are certainly people who do that (and there are certainly people for whom VFINX is that one fund). It is certainly reasonable to want to diversify your holdings into a few different funds. (But again, what matters is what funds you buy, not which account you buy them in.)

You may want to read up on asset allocation. If you follow an index-fund-based strategy, the general idea is that you would want to identify several broad asset classes (e.g., US stocks, international stocks, corporate bonds) and then invest in a small number of mutual funds targeting those asset classes. If that is the way you want to do things, you might want to check out the Bogleheads asset allocation page, which explains asset allocation from the perspective of the "Bogleheads" philosophy (which involves, among other things, always investing in cheap index funds). Which asset allocation is right for you is a personal choice that depends on your age, anticipated retirement expenses, psychological makeup, and other factors, but reading the materials there should get you started. If you do get to the point where you need to consider how to distribute your asset allocation across multiple accounts, there is a Bogleheads page on that as well.

(I should note that, for tax purposes, it often does make a difference which account you hold investments in, but that is a separate question and doesn't seem to be the focus of your question here.)

  • Thanks so much for this wealth of information! You're right. my question was more along the lines of 'should I put all my eggs one basket if it's a fund'. I do have a lot of reading to do, and I'll add your links to my list of books and sites I've been slowly mulling through. Also, for clarification, I was speaking about an amount that was a magnitude smaller; $1,000. I doubt that changes your answer in any way, but I figure I'd bring that amount up, as you stated $10,000. Thank you again! – Art Nov 30 '15 at 14:43
  • @Art: I used $10,000 to indicate that, like I said, what matters is the total allocation of your investments, not what you do with the $1000 you happen to be investing right now. If you currently have $9000 invested and it's all in VFINX, your choice about what to do with the next $1000 may be different than if you currently have $9000 spread across several funds. In other words, you want to invest the $1000 so as to create (or move toward) your desired allocation across all your invested funds. – BrenBarn Nov 30 '15 at 19:12

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