The Best 401(k) Funds from Vanguard

Short-Term Bonds for Safety

With a balanced fund like Wellington as your core, you really don’t need another bond fund in your 401(k). But otherwise, it’s worth putting about 10% of your 401(k) money in Vanguard Short-Term Investment-Grade Bond Fund (MUTF:VFSTX).

This fund invests at least 80% of its assets in “investment-grade” or better short- and intermediate-term bonds. It makes a great cash substitute for a long-term portfolio. While it lost about 7.6% in the credit crunch of 2008, it completely recovered in only six months. And while the stock market rocked back and forth in 2011, and money market funds had to be subsidized to stay afloat, VFSTX put up a nice 1.9% return with one-third less volatility than the overall bond market.

Vanguard’s Intermediate-Term Investment-Grade Bond Fund (MUTF:VFICX) also is a good choice, but it will be a bit more volatile when interest rates begin to rise. That said, over the long haul, intermediate-term bonds tend to provide 80% of long bonds’ total return with about half the risk.

Connecting the Dots

Whether you use PRIMECAP (best option) or Wellington (a strong alternative) as your core, you’ll be in good hands with some of the best institutional investors in the business. Round out your equity holdings with either Selected Value, or a combination of Vanguard Mid-Cap Growth Index and Vanguard Mid-Cap Value Index, adjusting your weightings as market conditions warrant.

From there, head overseas with about 10% to 15% in International Growth and Emerging Markets.

Finally, put 10% of your 401(k) money in Vanguard Short-Term Investment-Grade Bond Fund or Vanguard Intermediate-Term Investment-Grade Bond Fund. Remember, this is only if your core is pure equity funds. If you’re using a balanced fund like Wellington, which already has a large allocation to bonds, you won’t need additional fixed-income funds.

For specific breakdowns, please see the table below. Even if some of the funds aren’t available to you, you can use it as a guide to building a strong, diversified retirement portfolio.

Remember, it’s your retirement. So make sure your 401(k) plan is designed to help you, not your benefits manager.

Dan Wiener is the editor of The Independent Adviser for Vanguard Investors. A five-time winner of the Specialized Information Publishers Foundation Editorial Excellence Award, Wiener is the founder of the Fund Family Shareholder Association and chief executive officer of Adviser Investments, a Newton, Mass., investment advisory firm.