Best type of (Vanguard) mutual fund for young adult, that will probably withdraw for a home within 10 years?
mom2jel last edited by mom2jel
My 23 yr old has currently invested: $15k Vanguard Healthcare Fund, $5k Vanguard Prime Money Market, (and $3k Vanguard Healthcare Roth IRA).
He will be receiving $35k; I’m thinking he’ll want to pull funds out for a home down payment within 10 years. He isn’t working so putting into IRA isn’t doable right now. What Vanguard fund type do we look at putting this gift into?
I’d like to keep it semi-simple for him by keeping it all at Vanguard, one other possibility is Mairs & Power Growth Fund.
ETA: he has no debt.
Back when I started investing in mutual funds, there were a lot less choices; I look at Vanguard now and I’m so confused. I’ve had my Vanguard various funds for over thirty years and they’ve done very well so I haven’t looked at what else they have to offer.
@mom2jel WTF is Vanguard healthcare fund? Is that like HSA?
Vanguard Healthcare Fund mutual fund: “(invests in) domestic and foreign companies involved in various aspects of the health care industry, such as pharmaceutical firms, medical supply companies, and research firms.”
It’s done really well for me; example, twenty years ago we were given $10k that I invested in it. Didn’t add to it, just left it be for college funds. It’s now at $107K. Since my son had scholarships that covered all of his college expenses, he’ll get his 1/3 given to him. When I looked at the “gift tax”, I can give him the full amount this year since he’s still our dependent (next year he should be working and I probably won’t be able to claim him).
I am not an RIA.
He has two investments, neither of which is really suitable. Money Market is too conservative for a 10 year investment. Health Care is too aggressive - he’s betting on one segment (that has done exceptionally well historically) to continue to do so. Ask those who invested in Fidelity Japan how that worked out back in the 90s.
My belief is that he should be in a 40/60 split of Vanguard Total Market and Vanguard Total Bond. Risk tolerance is a big factor here - if he can handle the potential that he could lose a little money over 10 years vs. a much more likely strong gain, then he could nudge that to 50/50 or even 60/40. But the higher than ratio, the higher the risk.
Today, the risk is absurdly high.
Also, note that since you mentioned that funds would be invested outside of retirement accounts that Vanguard Total Stock Market is highly tax efficient. I don’t invest in bonds outside of my retirement account, so he’d have to do a little leg work to see what his net tax rate would be on the bond portion. If it’s high, he should look at the Tax-Managed or Municipal bond offerings, although those have a bit of concentration risk as well.
Hope this helps.
Credentials: 10+ years as a Chief Financial Officer. MBA from top 25 school (graduating # 1… hooray me!). Lots and lots and lots of time explaining to people why their investments don’t match their risk profile & goals.
I just went to look up the results for Vanguard Healthcare.
Congrats to whoever invested in them for the past 20 years - the annualized return has been a whopping 16%(!!!) over the past 30 years.
The problem is that once everyone realizes this and piles in, it gets much harder to maintain.
The 1 year return is 2 points behind a much-lower risk index.
Vanguard’s fund description:
"For more than 25 years, this actively managed fund has offered investors low-cost exposure to domestic and foreign companies involved in various aspects of the health care industry, such as pharmaceutical firms, medical supply companies, and research firms. The fund tends to be more geographically diverse and exhibit lower turnover than other health care funds. Still, one risk to note is the fund’s narrow scope, investing solely within the health care sector. Returns may vary widely from year to year, so this fund should be considered complementary to an already diversified portfolio with a long-term time horizon.
Don’t experts recommend investing in index funds?
Mairs & Power Growth is another one that has done well for me and it seems to weather the downturn in the market (which I’m afraid is going to happen in the next couple of years); they also invest heavily in Minnesota based companies which I’m partial to since we live here.
The Vanguard Total Stock seems similar to MP Growth so I’m not sure if I should do that one.
I guess I’m aiming more for long term for him as I do my researching. When he eventually gets a job he should be making decent money as an actuary. This son doesn’t spend money, like at all, so if he lives at home for a year or so (and I’ll have him maxing out his Roth with automatic investing) he should actually be okay for a house downpayment (he already has a decent car).
I really stay away from bond funds, I know I should invest in them but I just can’t stand the low returns.
If you decide to go 100% stocks, just know that the maximum (reasonably conservative) decline you can expect at any one point in time is probably around 50%.
Is that likely? Not at all. Is it feasible? Indeed.
People love investing in all stocks until the market turns, they lose 20-25% in value (a VERY real outcome) and then they sell because they “can’t afford to lose any more”.
If you can honestly say you’d hold tight under losing 30% or 35% of the portfolio, have at a 100% stock position.
Otherwise, consider adding a significant dollop of bonds.
** Disclaimer: IANA RIA, and I’m certainly not your RIA. Stocks could go up 50% this year, down 60%, anywhere in between, or more or less.
High Technology last edited by
If you pick one or two long-term equity funds, he should be fine. Generally higher risk is rewarded with higher return (leaving purely speculative plays out of this equation for now). When you look at a 10-year horizon, then most of the volatility isn’t as important since there is zero need for liquidity now… The big problem with mutual funds is the fees (but Vanguard’s are low) and year-end taxable distributions (based on other people’s trading) – ETFs have low (or lower fees) and don’t provide the year-end capital gains distributions… If he’s just starting out, he won’t be in a real high tax bracket for a few years.
ALL THAT SAID, despite his age, your goals for him are kind of like a 50-year old person looking to retire --> but even more extreme. Rather than needing the money over a 25+ year retirement period, he needs it (almost) all at once in 10 years time. So you’d want to pick your funds now, and put them on a “glide path” with a 10-year horizon. To keep math really simple, that could be diversifying 10% out of the portfolio each year so it’s fully short-term bond/cash in 10 years time. There are an infinite number of variations to this, depending on how much risk/reward he(or you) are willing to take. For example, diversifying 5%/year would have him keep 50% in the market even at the end… or he could diversify 10-20%/year starting in year 6, which will LIKELY provide a better return, but with more volatility.
A multi-year diversification would also help mitigate the big bang of taxes in the final year as the capital gains will be recognized over multiple years.
I’m also not a RIA, so my views are my own (but I might know a little bit about retirement planning).
As if anyone cares, lol. I changed my mind after looking at funds.
I think what I’ll do is $25k to Mairs & Power Growth and add $10k to his Vanguard Healthcare Fund (which will then be $25k) and then he can decide later if he wants to move money around.
I’m still going to show him my comparison of different Vanguard funds (Growth Index, Total Stock, and Balanced Index) to see if he has any strong feelings.
There are also plenty of low-cost stock and bond index funds you can buy at Schwab. Some of these Schwab Funds have investment minimums at $1. Maybe worth a look at. I do own some.
frugalpete last edited by
Note that you can also buy other companies’ mutual funds (and stocks, bonds and ETFs) through a Vanguard brokerage account. If you like health related mutual funds, look also at T Rowe Price Health Science, available in Van brokerage, which has surpassed Van Health Care the past 5 years (I haven’t checked further back).
Disclosure: I own both those funds.
I’ve done Janus (original), T. Rowe Price, and Dodge & Cox previously; I moved everything to Vanguard / Mairs & Power about 10 years ago because I didn’t like so many smaller funds.
For myself, I own a piddly $2k of Berkshire Hathaway B through Vanguard Brokerage, DRiP’s with Disney, J&J, General Mills, and also have the Mairs & Power Growth Fund as well as several Vanguard Funds.
I’m a long-term holder and just keep doing the automatic monthly purchase; last year (age 51) I did realize that I need to max my Roth IRA investment each year so I’m doing that and not adding any more to the regular funds.
I started out with my mom “helping” me pick two Vanguard funds ($2k each) back when I was 18; I laughed yesterday with my son that the same scenario is taking place between him and me now.
I don’t think he’ll do much with his investments until his 30’s; I’ve been open with my three boys about my investments so they do know how important the long-term investing is.
My idiot (separated) husband knows nothing about investing (and he’s the type that gets freaked out when the market has a downturn), my parents are 87 and my mom is of the CD’s and Savings Bonds era so I needed someplace to think aloud - because in real life I can’t just go talk to anyone that we have $108k sitting around to give to our boys, lol.
One more tidbit: There are always ETF’s (exchange traded funds). The minimum to buy is one share (varies). They’re bought through brokerage accounts. Individual brokers (Schwab, Fidelity, E-Trade, Vanguard, TD, etc.) have their own groups of ETFs with no brokerage commission. If you buy them through Robinhood, all ETFs that you’re able to buy there should have no commission.
There’s also the Vanguard Star Fund. $1,000 minimum. It’s a balanced fund and good if you can’t make up your mind since it basically invests in a dozen other Vanguard funds.