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Take Charge Of Your Investing With Mutual Funds

10/08/03 03:19:27 PM PST
by Ram Vazirani

Investing isn't as hard as you think. Check out these mutual funds.

Scandal upon scandal! Enron! Merrill Lynch! No one could blame you if you're sick and tired of investing and losing money due to circumstances beyond your control, but this is not the time for you to quit. You need to invest your savings now because Social Security alone will not be able to support you in your golden years. Once you get past all the crooks, slippery slopes, and dangerous paths, investing is not as hard as you think.

If you want to manage your own money but don't have the time and don't know how to select a stock, bond, mutual fund, or even an advisor, you need to keep this in mind: Your investment program and results should reflect your background, needs, and risk tolerance level. You need to keep your expenses low. You are not a gambler. You just want to invest your savings intelligently.


Before you begin a long-term investing program, pay off your credit card loans, build an emergency fund, take care of your insurance needs, and consider buying a house if you haven't already. In addition, spend some time checking out annual total returns from stock, bond, and Treasury bill markets over the long term to gain some historical perspective (Figure 1).

Figure 1: Historical Annual Returns. Here you see the annual total returns (%) of Treasury bills, intermediate-term government bonds, and large company stocks.

Add up how much you need to fulfill all your financial requirements, and specify deadlines for yourself to attain those goals. Figure out how much you need to save on a regular basis to reach your targets. Whether you save weekly or yearly is not as important as making sure you never skip putting something aside. Some experts suggest that most of your bonuses and raises should go directly to your savings. Use your savings first to fund your eligible tax-deferred accounts before you divert them to taxable accounts.

Accumulating wealth does not depend upon the size of your periodic investment, but how long you stay invested. As long as you invest regularly, you should begin investing as early as you can.


If you invest your savings in just the following four Vanguard mutual funds, you will have a well-rounded portfolio:

  • Vanguard Treasury Money Market Fund (VMPXX) for preserving capital
  • Vanguard Short-Term Treasury Fund Investor Shares (VFISX) for generating interest income
  • Vanguard Inflation-Protected Securities Fund (VIPSX) for preserving purchasing power, and
  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) for accumulating wealth.

Any of these four funds can be used in either retirement or taxable accounts, except that the tax laws lead some investors to use "I" bonds in their taxable accounts instead of VIPSX, which they use in their retirement accounts. Check how much each fund requires for opening an account and the minimum amount you need to add later.

Let us look at each fund before discussing allocation of your savings to the funds. Remember not to extrapolate historical results of these funds into future expectations.

  • Vanguard Treasury Money Market Fund (VMPXX)

    Save until you have sufficient funds to move most of the money from the bank to a money market fund like the Vanguard Treasury Money Market Fund (VMPXX). This is the fund for you if you are looking to preserve all or part of your capital. You can also treat it like cash or a checking account. Like cash, it neither earns much interest nor has any meaningful risk, and it loses purchasing power during inflationary periods.

    Although the fund does not earn as much income as other money market funds, you may favor it because of its high quality. Experienced investors park their money in a fund like VMPXX until they find a suitable investment opportunity. You could use this fund in your taxable account to hold the money that you will need to satisfy all your obligations coming due within the next 12 to 18 months, as well as your emergency fund for a year's living expenses. Since 1993, the fund's quarterly total returns have ranged from 0.19% to 1.51% (Figure 2).

    Figure 2: Vanguard Treasury Money Market Fund

  • Vanguard Short-Term Treasury Fund Investor Shares (VFISX)

    Investors generally buy interest-bearing bonds to earn income to pay for living expenses, or when they are afraid to buy stocks, or if they cannot tie up their money for 10 years. Although bonds from other issuers give higher interest, I prefer US Treasury bonds because they are free of any default or currency risk.

    I favor short-term bonds with maturity of about three years, like Vanguard Short-Term Treasury Fund Investor Shares (VFISX), because they do not lose as much value as other bonds when interest rates rise. In the last 77 years, the maximum setback in any year that intermediate-term US Treasury bonds suffered has been only about 5%. Note that the reduced risk from shorter-maturity bonds comes at the cost of lower interest income. Since 1993, quarterly total returns of the VFISX have ranged from -1.19% to 3.92% (Figure 3).

    Figure 3: Vanguard Short-Term Treasury Fund Investor Shares

  • > Vanguard Inflation-Protected Securities Fund (VIPSX)

    Treasury Inflation-Protected Securities (Tips), which were introduced in 1997, are good investment vehicles for preserving purchasing power. They pay a guaranteed real rate of interest, set when Tips are issued. They solve a major problem facing investors in fixed- or zero-coupon bonds. Whereas these bonds lose value when interest rates climb, Tips' face value increases with the Consumer Price Index. However, that benefit comes at a cost; interest rates on Tips are lower than those of fixed-coupon Treasury bonds of similar maturity.

    Vanguard Inflation-Protected Securities Fund (VIPSX) invests mostly in Tips. You may want to buy it only in a tax-deferred account because increase in its principal is taxable each year, even though you will not collect the higher principal until maturity. "I" bonds can help you achieve the same goals in your taxable accounts. Since its inception in second-quarter 2000, quarterly total returns have ranged from -1.14% to 7.96% (Figure 4).

    Figure 4: Vanguard Inflation Protected Securities Fund

  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

    Stock prices are very volatile; individual stocks can lose half of their value overnight. Despite frequent sharp declines, stock indexes have generally recovered to scale new heights, reflecting our ever-expanding economy. Although it has paid to add to our index holdings during bear markets thus far, remember that an emergency can force you to sell your investments at a substantial loss. There are no guarantees in the investment world, where the unthinkable occurs regularly.

    Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) is a low-cost, no-load total stock market index fund. It can help you achieve your long-term goal of wealth accumulation, as long as you can stay invested for 10 years (that should not be a problem for many employees accumulating funds for their retirement); sleep well during bear markets; and take advantage of market dips to load up on the VTSMX.

    Index funds boast a good record. You do not have to know accounting or economics to invest in index funds. We will always have crooked CEOs or unethical analysts, but they cannot do much damage to index portfolios. When you invest in this index fund, someone will always tell you that the days of index funds are now over. Every year, some expert will tell you why your index fund will not do as well as some mutual fund. For your peace of mind, you may want to compare the historical record of your index fund with the expert's recommendation over the previous 10 to 20 years.

    Since 1993, this fund's quarterly total returns have ranged from -16.84% to 21.51%. Whenever the value of these shares falls at least 15% from your average cost, you should consider doubling up your next annual investment installment and immediately adding it to your holdings in the fund (Figure 5).

    Figure 5: Vanguard Total Stock Market Index Fund Investor Shares


After you have outlined all your financial goals, you must determine how you want to distribute your savings in the four funds so you can reach your goals without losing sleep.

How much of your total assets should be in the stock index fund depends upon your ability to tolerate loss and your time horizon. There is a two-step calculation that first computes the theoretical limit beyond which you should not invest in this fund, and then it figures the actual amount that you can invest.

In its 77-year history, the Standard & Poor's 500 fell 43% in one year. If you can sleep well through such a sharp loss, you can put as much as 90% of your assets in the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). On the other hand, if you cannot tolerate a decline of any kind, keep at least 10% in this fund. For any other level of loss tolerance within this range, theoretical allocation to this fund should be proportional the ability to tolerate a 20% loss will restrict your investment in this fund to 50% of your assets.

Next, incorporate your time horizon into this computation to calculate your actual allocation to this fund. Invest only up to 10% of your theoretical limit in this fund for each year that you plan to hold it. If you can tolerate a 30% loss and if you can invest for five years, you can actually put 35% of your total assets in this fund (your risk tolerance level of 30% loss limits your investment in this fund to 70% of your assets, and your five-year time horizon allows you to invest 50% that is, 10 times five of your theoretical limit of 70% or 35%). Incidentally, an employee within 15 years of retirement should not allocate more than 50% of assets to stocks.

After you have determined the percentage of your assets that should be in the Vanguard Total Stock Market Index Fund Investor Shares, you can either divide equally the balance of your savings in the three remaining funds or allocate the balance to each of these three funds according to your timetable for fulfilling your different goals.

Try to hold on to your asset allocations whenever you add periodic savings to your portfolio. When you receive a sudden windfall, avoid buying funds in a lump sum. Considering the volatile nature of the markets, it may be better to spread out investments in equal dollar amounts over 18 to 36 months.


You do not have to rebalance your total portfolio more than once a year. At that time, the portfolio should be restored to original percentage allocations unless there has been a significant change in your investment goals or risk tolerance levels. Avoid market timing or going in and out of the stock index fund; that is a game for profes sionals. Avoid frequent changes in your objectives, so you do not always end up buying at the top and selling at the bottom.


Mutual funds are neither insured nor guaranteed. Although you can lose money in mutual funds, a well-diversified portfolio made up of the four mutual funds mentioned here can help you achieve your long-term goals. Diversification will reduce your risk exposure, although it will also lower your returns.

Our approach is not based on any forecasts or market timing. We rely on regular saving, investing, and diversification. Each fund has a different objective, and the results of your total portfolio will be influenced by the funds where you have allocated most of your savings.

Investors should not buy any fund until they have studied complete information about the fund and concluded that the fund is suitable for them. Although I have only mentioned the Vanguard funds, investors can use similar funds from other companies. Some Vanguard funds have more than one class of shares, with different minimums and expense ratios. Those listed here have the lowest minimums, and understandably highest expense ratios within the bunch, and yet they are competitive with other funds.

Ram S. Vazirani, a retired investment advisor in Pasadena, CA, can be reached at


Vanguard Treasury Money Market Fund (VMPXX)

Vanguard Short-Term Treasury Fund Investor Shares (VFISX)

Vanguard Inflation-Protected Securities Fund (VIPSX)

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Current and past articles from Working Money, The Investors' Magazine, can be found at

Ram Vazirani

E-mail address:

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