I am a young investor interested in investing in a roth IRA and am interested in the Vanguard family.
Currently my IRA is with a bank with a very low interest rate. I have researching different funds and like Vanguards no load index funds.
Which is better to invest in??
1. Vanguard 500 Stock Index Fund
2. Vanguard Total Stock Market Index Fund
The question is actually a very interesting question. Here is why. Both indexes are capitalization weighted. What that means to you the investor is that both on a market value basis are going to contain very nearly the same weight of stocks. What I mean by that the top 10 holdings of both will contain exactly the same stocks in almost exactly the same proportions. Even though the total market index contains many more stocks the additional stocks make up a very small portion of the total. The top 10 holding of the 500 index make up 22% of the total but only 18.5% of the Total Market index–not all that much difference. When you compare the returns over the years of the two they again are very similar. The 10 year return for the 500 index is – 3.51% and the other – 2.57%. I guess that one might conclude that the total market index does have a better long term return but the shorter term returns are much much closer together. I suspect that the difference between the two long term returns is due to the recent near demise of several very large capitalization companies–Citigroup, AIG, GM, and Bank America. Certainly there would be slightly less risk to you the investor by investing in a portfolio containing 3500 stocks than in one containing only 500, but because of the capitalization weighting not as much as one would hope.