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.
Low Expenses
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.
Extremely Diversified
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.
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.
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 0it.
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This fund put me through college. One of the best deals out there; especially right now.
My IRA (started in 1984 and continued for a few years as long as it was deductible) is in STAR. My son only earned $1000 last year. He put it into a Roth IRA. Star was one of the few funds that let him start with so little. He avoided the low balance fee on funds by putting his account under our family umbrella. Vanguard is very helpful.
If one feels that the asset allocation in equities (60%) is too conservative, one can start a taxable account of stock funds (preferably low-cost index) as well to make the overall equity allocation closer to one’s liking (70-80-or even 90%!). This is a good strategy especially if your STAR fund is in a tax-advantaged account (like IRA or Roth) where the fixed-income returns grow tax-free/deferred. The taxable equity fund account thus grows relatively well-tax managed over the long-term.
Where can I apply for the Vanguard Star Fund?
On-line? Office in White Plains, NY? Stamford or Greenwich, CT?
Kathleen, you can buy the fund on their website (www.vanguard.com). I know nothing about their regional offices, but I imagine they would be surprised if somebody showed up wanting to buy something.
I wish to invest in a Roth Vanguard Star Fund for my son. I heard on the radio that you can do this for a minimum of $1000. Can you direct me to the information re: a Roth Fund? Thank you
I currently own the Star Fund as I’m just starting out with investing. My plan is to move in to other funds once my account balance is over the minimum required for the other Vanguard funds. The bond exposure really helped my investments as the stock market plunged, and now that stocks are doing better my portfolio is as well. I’m very pleased with how the fund has performed over the last year.
With bond yields at historic multi-decade lows, is it a good idea to have 35% in bond funds?
If that’s what your asset allocation calls for, then yes. Statistical evidence shows it is unwise to try and outguess the market.
John,
Remember that the price of bonds go up when interest rates go down.
I would like to talk to someone about this fund. I have three grandchildren under the age of 9 yrs. I do not have $1000 for each one. Thanks
Fredia, I would recommend visiting http://www.Vanguard.com and calling the customer service number on the website. I’m sure they can give you better advice than you would get here.
Invested in a Roth IRA via Vanguard STAR FUND last week, its been going good so far.. You can also change your asset allocation in your account anytime you want. With a 0.37% expense ratio, you can’t beat that with other actively managed funds out there. I suggest you take it into consideration if your planning to invest.
The STAR fund is awesome. I like the $1,000 minimum investment as well as the actively-managed mix of well-diversified funds. I tend to be an emotional investor and with the STAR fund’s diversification, I feel much safer leaving the investment alone. I recommend it to anyone who wants to take a moderate approach to investing and is somewhat averse to a lot of risk.
how do i start?…..i have 1000.00 dollars to invest
Go to http://www.Vanguard.com, find the number for customer support, and call them. They will be able to walk you through it.