Is a “total stock market” index fund diverse enough alone?
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. 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). 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. "Brendan, 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." Good idea to stay only with VTI if you are 30. For 50, I recommend: 65% VTI 15% VOO 10% VXUS 10% BND
Let's say that you want to invest in the stock market.  Choosing and investing in only one stock is risky.  You can lower your risk by diversifying, or investing in lots of different stocks.  However, you have some problems with this:  When you buy stocks directly, you have to buy whole shares, and you don't have enough money to buy even one whole share of all the stocks you want to invest in. You aren't even sure which stocks you should buy. A mutual fund solves both of these problems.  You get together with other investors and pool your money together to buy a group of stocks.  That way, your investment is diversified in lots of different stocks without having to have enough money to buy whole shares of each one.  And the mutual fund has a manager that chooses which stocks the fund will invest in, so you don't have to pick. There are lots of mutual funds to choose from, with as many different objectives as you can imagine.  Some invest in large companies, others small; some invest in a certain sector of companies (utilities or health care, for example), some invest in stocks that pay a dividend, others are focused on growth.  Some funds don't invest in stocks at all; they might invest in bonds, real estate, or precious metals.  Some funds are actively managed, where the manager actively buys and sells different stocks in the fund continuously (and takes a fee for his services), and others simply invest in a list of stocks and rarely buy or sell (these are called index funds). To answer your question, yes, the JPMorgan Emerging Markets Equity Fund is a mutual fund.  It is an actively-managed stock mutual fund that attempts to invest in growing companies that do business in countries with rapidly developing economies. Yes, it is unreasonable and unsustainable. We all want returns in excess of 15% but even the best and richest investors do not sustain those kinds of returns. You should not invest more than a fraction of your net worth in individual stocks in any case. You should diversify using index funds or ETFs. "would constantly fluctuate and provide an indication of how well the market is doing. The index is there to tell if you made profit or loss by investing in the market.  Using a pure total market cap will only tell you ""Did IPO activity exceed bankruptcy and privatization activity""." Cost.  If an investor wanted to diversify his portfolio by investing in the companies that make up the S&P 500, the per-share and commission costs to individually place trades for each and every one of those companies would be prohibitive. I can buy one share of an exchange-traded fund that tracks the S&P 500 for less than the purchase price of a single share in some of the companies that make up the index. "You quickly run into issues of what denotes ""similar"", and how to construct an appropriate index methodology. For example, do you group all CB arb funds together globally or separate them by country? Is long-bias equity long-short different to no-bias and variable-bias? Is a fund that concentrates on sovereign debt more like a macro fund or a fixed income fund? And so on. By definition, hedge funds try not to mimic their peers, with varying degrees of success.  Even if you get through that problem, how do you create the index? You may not be able to get return numbers for all the ""similar"" funds, and even if you do, how do you weight them? By AUM, or equal weight?  There are commercial indices out there (CSFB, Eurekahedge, Marhedge, Barclays, MSCI, etc) but there's no one accepted standard, and it's unlikely that there ever will be as a result. It's certainly interesting to look at your performance versus one of these indices, and many investors do monitor fund performance this way, but to demand strict benchmarking to one of them is a big ask..." "Note that an index fund may not be able to precisely mirror the index it's tracking. If enough many people invest enough money into funds based on that index, there may not always be sufficient shares available of every stock included in the index for the fund to both accept additional investment and track the index precisely.  This is one of the places where the details of one index fund may differ from another even when they're following the same index. IDEALLY they ought to deliver the same returns, but in practical terms they're going to diverge a bit. (Personally, as long as I'm getting ""market rate of return"" or better on average across all my funds, at a risk I'm comfortable with, I honestly don't care enough to try to optimize it further. Pick a distribution based on some stochastic modelling tools, rebalance periodically to maintain that distribution, and otherwise ignore it. That's very much to the taste of someone like me who wants the savings to work for him rather than vice versa.)" Funds can't limit themselves to a small number of stocks without also limiting themselves to a small amount of total investment. I think 25 companies is too small to be practical from their point of view. "Diversification is extremely important and the one true ""Free Lunch"" of investing, meaning it can provide both greater returns and less risk than a portfolio that is not diversified. The reason people say otherwise is because they are talking about ""true"" portfolio diversification, which cannot be achieved by simply spreading money across stocks. To truly diversify a portfolio it must be diversified across multiple, unrelated ""Return Drivers."" I describe this throughout my best-selling book and am pleased to provide complimentary links to the following two chapters, where I discuss the lack of diversification from spreading money solely across stocks (including correlation tables), as well as the benefits of true portfolio diversification: Jackass Investing - Myth #8: Trading is Gambling – Investing is Safer Jackass Investing - Myth #20: There is No Free Lunch" Quick and dirty paper but pretty interesting.. I'm not in Portfolio Management but I probably would have ended up at the modal number as well.   I don't know the subject deeply enough to answer my own question, but is the bias always toward underestimation of variance? Or is that a complex of the way the problem was set up?   Another question I have for those in investment management; Would this impact asset allocation? "As Dheer pointed out, the top ten mega-cap corporations account for a huge part (20%) of your ""S&P 500"" portfolio when weighted proportionally. This is one of the reasons why I have personally avoided the index-fund/etf craze -- I don't really need another mechanism to buy ExxonMobil, IBM and Wal-Mart on my behalf. I like the equal-weight concept -- if I'm investing in a broad sector (Large Cap companies), I want diversification across the entire sector and avoid concentration. The downside to this approach is that there will be more portfolio turnover (and expense), since you're holding more shares of the lower tranches of the index where companies are more apt to churn. (ie. #500 on the index gets replaced by an up and comer). So you're likely to have a higher expense ratio, which matters to many folks." diversifying; but isn't that what mutual funds already do? They diversify and reduce stock-specific risk by moving from individual stocks to many stocks, but you can diversify even further by selecting different fund types (e.g. large-cal, small-cap, fixed- income (bond) funds, international, etc.).  Your target-date fund probably includes a few different types already, and will automatically reallocate to less risky investments as you get close to the target date. I would look at the fees of different types of funds, and compare them to the historical returns of those funds.  You can also use things like morningstar and other ratings as guides, but they are generally very large buckets and may not be much help distinguishing between individual funds. So to answer the question, yes you can diversify further - and probably get better returns (and lower fees) that a target-date fund.  The question is - is it worth your time and effort to do so?  You're obviously comfortable investing for the long-term, so you might get some benefit by spending a little time looking for different funds to increase your diversification. Note that ETFs don't really diversify any differently than mutual funds, they are just a different mechanism to invest in funds, and allow different trading strategies (trading during the day, derivatives, selling short, etc.). How much should a rational investor have in individual stocks? Probably none. An additional dollar invested in a ETF or low cost index fund comprised of many stocks will be far less risky than a specific stock. And you'd need a lot more capital to make buying, voting, and selling in individual stocks as if you were running your own personal index fund worthwhile. I think in index funds use weightings to  make it easier to track the index without constantly trading. So my advice here is to allocate based not on some financial principal but just loss aversion. Don't gamble with more than you can afford to lose. Figure out how much of that 320k you need. It doesn't sound like you can actually afford to lose it all. So I'd say 5 percent and make sure that's funded from other equity holdings or you'll end up overweight in stocks. As these all seem to be US Equity, just getting one broad based US Equity index might offer similar diversification at lower cost. Over 5 years, 20 basis points in fees will only make about 1% difference. However, for longer periods (retirement saving), it is worth it to aim for the lowest fees. For further diversification, you might want to consider other asset classes, such as foreign equity, fixed income, etc. "It sounds like you need an index fund that follows so called Sustainability index. A sustainability index does not simply select ""socially responsible"" industries. It attempts to replicate the target market, in terms of countries, industries, and company sizes, but it also aims to select most ""sustainable"" companies from each category. This document explains how Dow Jones Sustainability World index is constructed (emphasis mine): An example of a fund following such index is iShares Dow Jones Global Sustainability Screened UCITS ETF, which also excludes ""sin stocks""." I am in the same boat as you right now, I have about a year experience working for a financial advisor but even then it is not relevant enough for being an analyst.  I have put in over 120 apps over the past month and a half to any position that I meet 90% of requirements. The only thing I don't have is years of experience. I know how to code VBA, and how to build financial models but alas, I am looked over.  I have also been trying to network like crazy and just accepted to do a temp job working for a bank as a loan analyst and hopefully that will pan out into something better.  Many jobs want experiences with SAP and SQL, and I don't have either of those either, and there is no where to get experience because no junior analyst positions will take me without enough experience.  I turned down a banking internship because I did not want to take out loans for college, and now I am thinking I made the wrong choice. Hopefully some one will pick us up and catch us up to speed soon!  What area are you living in? I am in the Chicago area and I see new postings every day.  Also are you going to every job board? Career-builder, Monster, Indeed, LinkedIn, Craigslist? I have also hooked up with a few recruiting firms, they are the ones who got me the temp job. If you are in the Chicago area I will recommend a few for you to look into and a couple to stay away from.  Good luck on your search! I know you need it, because I need it too...