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The 5 Best Vanguard Funds for the Next 5 Years

This diverse set of Vanguard funds will have you set for the long term

Vanguard funds are pretty versatile, offering most investors a number of solutions for just about any situation.

The 5 Best Vanguard Funds for the Next 5 Years

Looking for a solid balanced fund to protect against volatility and a bear market? Need a low-cost actively managed fund to navigate the choppy waters ahead. Just want to set it and forget it with some of the best index funds on the market?

In short, if you’ve got a need, the best Vanguard funds out there will probably be enough to tackle it.

If you’re looking down the road, a five-year period is a good window of time to keep in mind, especially now. The average full market cycle — which would contain all of a bull market and bear market, or peak-to-peak or trough-to-tough if you prefer — has a typical duration that ranges between five and seven years.

In short: We’re past due for a bear market now. For investment selection purposes, the next five years is sure to contain a bear market and at least a portion of a bull market.

How should you approach this uncertain horizon? You can start by checking out this list of the best Vanguard funds to hold for the next five years.

Best Vanguard Funds for the Next 5 Years: Vanguard Wellesley Income (VWINX)

Expenses: 0.25%
Minimum Initial Investment: $3,000

If I were forced to choose just one fund for the next five years, a top contender for that selection would be Vanguard Wellesley Income (VWINX).

Although price volatility and bear markets may be exciting to some investors, the best funds for turbulent times are the boring ones … and you can’t get much more boring than VWINX. Vanguard Wellesley currently has two-thirds of its weight in bonds, with the remaining third in stocks including Wells Fargo (WFC), Microsoft (MSFT) and JPMorgan Chase (JPM).

I like VWINX, especially for my conservative clients, because it has historically held up in mid- to long-term time horizons that contain a bear market, which is almost certain to come in the next five years (if it hasn’t begun already).

For a sample of its bear market strength, VWINX declined 9.8% in 2008 when the last bear market was in full force. However, the S&P 500 fell 37% that year.

Looking back 15 years, which contains two bear markets, Wellesley has a 7.1% 15-year annualized return. This not only beats 98% of its peers in the conservative allocation category, but it crushes the S&P 500, which has a 4.2% return for the period.

Best Vanguard Funds for the Next 5 Years: Vanguard Equity Income (VEIPX)

Expenses: 0.29%
Minimum Initial Investment: $3,000

Actively managed funds may prove to be valuable over the next five years, and Vanguard Equity Income (VEIPX) is a standout for stock pickers at Vanguard.

VEIPX recently earned the distinction of being one of our best value funds that actually earn their fees. Investors can easily find Vanguard index funds that have much lower expenses than VEIPX’s … but the performance record more than justifies the slightly higher fees. (And still, 0.29% for an actively managed fund is a pittance.)

This fairly conservative fund is well spread across the major sectors, boasting top holdings similar to VWINX — MSFT, WFC and JPM, with Verizon (VZ) and Johnson & Johnson (JNJ) rounding out the top five.

Since the end of 2003, lead fund manager James P. Stetler has guided VEIPX to a five-star rating and category-busting returns. The 10-year annualized return of 7.5% beats 93% of large-value stock funds, which returned 5.6%, and it edges out the S&P 500 return of 7.1% for the same period.

Although VEIPX is not typically a leader in up markets, it tends to hold up well for a stock fund in down markets, which adds to its appeal for the next five years.

Best Vanguard Funds for the Next 5 Years: Vanguard Mid Cap Index (VIMSX)

Expenses: 0.23%
Minimum Initial Investment: $3,000

One of the best Vanguard funds to hold for any long-term period — five years, 10, 15, whatever — is the Vanguard Mid Cap Index (VIMSX).

I recently named VIMSX the one best fund to hold forever, and this was no exaggeration. Mid-cap stocks can have more volatile price swings than large-cap stocks in the short term, but the payoff in the long run can be well worth the added market risk.

Therefore, to qualify my “one best fund” opinion, VIMSX stands a good chance of being among the best funds for long-term performance.

As you might expect, VIMSX beats the S&P 500 for the past five years, doing so with a 15.2% five-year annualized return, compared to 14.5% for the S&P 500. The performance difference is even better the further back you go — the most impressive feat for VIMSX is its 15-year annualized return of 8.1%, which nearly doubles that of the S&P 500’s return of 4.1% for the same period.

This long-term outperformance is especially noteworthy because there have been two bear markets in the past 15 years, and mid-cap stocks typically have more market risk.

Top holdings for VIMSX include Monster Beverage Corp (MNST), Biomarin Pharmaceutical (BMRN) and O’Reilly Automotive (ORLY).

Best Vanguard Funds for the Next 5 Years: Vanguard Total Bond Market Index (VBMFX)

Expenses: 0.2%
Minimum Initial Investment: $3,000

There aren’t many five-year periods where bonds beat stocks as an asset class, but if you want a solid bond fund for the next five years, Vanguard Total Bond Market Index (VBMFX) is a wise choice.

If there was one key lesson learned in the fixed income world in recent years, it’s that the bond market is too complex and unpredictable — even for the most experienced of active bond fund managers.

For example, in 2014, when many actively managed bond fund managers were shortening the average duration of their holdings in anticipation of a rate hike from the Fed, index funds like VBMFX beat their active peers because the rate hike never came and short-term bonds lost to long-term bonds. That year, VBMFX returned 5.8%, which beat nearly two-thirds of funds in the intermediate-term bond category.

In the next five years, when interest rates are almost certain to be rising at a steady pace, bond investors are wise to avoid long-term bonds because of their interest rate sensitivity, and short-term bonds aren’t likely to provide much in the way of gains or yield.

The sweet spot for bond funds will be those in the intermediate-term category.

And when even the smallest edge counts with bond fund performance, an index fund like VBMFX with a rock-bottom expense ratio is a smart move.

Best Vanguard Funds for the Next 5 Years: Vanguard Total Stock Market Index (VTSMX)

Expenses: 0.17%
Minimum Initial Investment: $3,000

The ultimate set-it-and-forget-it fund for the next five years may be Vanguard Total Stock Market Index (VTSMX).

Although a bear market for stocks is almost certain to occur in the next five years, smart investors know that the odds are heavily in favor of stocks outperforming the other major asset classes — bonds and cash — over a period of five years or more.

And although European stocks are leading the world of equities now, the healthiest economy in the world is likely to be that of the U.S. for greater part of the next five years.

With all these reasonable assumptions in mind, a low-cost, broadly diversified U.S. stock index fund like VTSMX is a smart five-year bet to make now. VTSMX has a great spread of sector exposure, and a large-cap-heavy mix of stocks (all told, about a quarter of the fund is dedicated to medium- and small-cap stocks). Thus, top holdings are going to look very similar to most large-cap indices, with Apple (AAPL), Microsoft and Exxon Mobil (XOM) weighted heaviest in the fund.

For those investors looking to build a solid portfolio of mutual funds, the Total Stock Market Index funds makes for an outstanding core holding.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VIMSX, VTSMX and VBMFX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.

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