Vanguard Star Fund (VGSTX): The Ultimate Investment For Beginners?
One of the most difficult stumbling blocks for new investors is determining an appropriate asset allocation. Should you invest in stock? Bonds? Real estate? Gold? Pork bellies? There are so many asset classes out there and so many different ways to combine them, it’s easy to see how beginners might become paralyzed for fear of choosing the wrong investment options.
Enter so-called balanced funds, which are designed to be one-stop shops for all your investment needs. Balanced funds derive their name from the fact that they invest in a fixed portfolio split between equities and bonds, often with a healthy helping of foreign equity exposure as well. While balanced funds can be found in almost any allocation you can think of, most of the larger, more popular ones contain around 60-65% stocks and 35-40% bonds. There are many quality balanced funds out there to choose from, but for the absolute beginner, one stands head and shoulders above the rest: the Vanguard Star Fund (VGSTX).
The Star Fund is sometimes cited as the ultimate investment for beginners for a number of important reasons.
The Vanguard Star Fund sports an expense ratio of just 0.32% per year, which is an absurdly low price to pay for quality active management. Since expenses are one of the few things that really matter in investing, it pays to keep them low. Sure, 0.32% isn’t quite as low as most index funds, but the Star Fund has a few other advantages that go a long way towards making up for this disadvantage, at least for those without a lot of money to invest.
The Star Fund invests in 11 different mutual funds, comprising 4 major asset classes: large-cap domestic stocks, small-cap domestic stocks, foreign stocks, and bonds. The full list of funds in the Vanguard Star Fund is as follows…
- Vanguard Windsor II Fund
- Vanguard Long-Term Investment Grade Bond Fund
- Vanguard GNMA Fund
- Vanguard Short-Term Investment Grade Bond Fund
- Vanguard Windsor Fund
- Vanguard Primecap Fund
- Vanguard Morgan Growth Fund
- Vanguard U.S. Growth Fund
- Vanguard International Growth Fund
- Vanguard International Value Fund
- Vanguard Explorer Fund
Overall, the Star Fund’s asset allocation looks like this:
- 45% U.S. Stocks
- 15% Foreign Stocks
- 35% Bonds
- 5% Cash and Equivalents
Low Initial Investment
Unlike other Vanguard funds, the Star Fund only requires an initial investment of $1,000 to get started. Other Vanguard funds require $3,000 and competing balanced funds at other mutual fund companies routinely start at $5,000-10,000 or more.
EDIT: No Vanguard STAR Fund review would be complete without a brief mention of how it compares with Vanguard’s Target Retirement Funds now that they sport a $1,000 minimum as well. My verdict? The Target Retirement Funds get a slight edge because they’re cheaper. I do like the fixed 60/40 allocation of the STAR Fund, though. Simple.
Good Long-Term Performance
Over the past 10 years, the Star Fund has turned in strong performance numbers in the top 12% of its peer group, according to Morningstar (sign up for a free Morningstar membership for access to in-depth mutual fund ratings and statistics), which basically means the fund has turned in above-average returns for the amount of risk it has taken on, relative to a sample of its peers. Moderate risk coupled with good returns: what else could an investor ask for?
Relatively Conservative, But Not Too Conservative
With only 60% of its assets invested in stocks, some might argue the Vanguard Star Fund is a bit too conservative for anybody younger than 40. On the surface, those people might have a point. After all, the percentage of your portfolio invested in stocks (coupled with expense ratios) is the main determinant of long-term returns. It turns out, however, that adding more bonds to an equity-oriented portfolio tends to decrease volatility far more than returns. Sure, a young investor with only 10% invested in bonds will probably earn higher returns over the long run, but his portfolio will also be much more volatile. In an ideal world, investors would simply ignore volatility and stay the course but in reality, how many of you haven’t even considered the option of selling a portion of your stocks to limit future losses? Beginners are far more likely to commit that common mistake than investors who have been around for a while. Thus, it makes sense for beginners to toe the water with a conservative allocation like that of the Star Fund before diving into the deep-end head first. Besides, a 60% stock allocation is more than adequate to beat inflation by 3-4% per year over the long haul.
Is The Vanguard STAR Fund A Good Investment?
All in all, the Vanguard Star Fund (VGSTX) has the makings of an ideal one-stop investment for beginners. It’s aggressive enough to grow your retirement account over time but not so aggressive as to induce panic. In 2008, the Star Fund lost about 25% of its value, or only about half the overall market’s 50% loss. Sure, 25% is nothing to smile about, but there’s a big psychological difference between losing 1/4 of your money and losing 1/2 of it.
As an addendum, I often enjoy watching which search queries visitors use to reach my site. One of the most popular STAR Fund-related phrases? ”Vanguard funds for grandchildren.” Yeah, it’s pretty good for that. In fact, I would say it’s almost tailor-made for that kind of purpose.
Most of the statistics in this article were collected using Morningstar. Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence. Did I mention it’s free?