Time and again, research shows that the best way to achieve great long-term performance is to focus on keeping costs down. Instead of paying big fees to chase the White Whale of outperformance, simply taking what the market gives you and keeping more of your hard-earned money safe from expenses tends to be the winning strategy.
Not only does this low cost strategy work for your portfolio, it works for your peace of mind, too. After all, if you have long-lasting confidence in long-term, low-cost investing, there’s no reason to agonize over risky decisions that go awry. Furthermore, a long-term approach to investing means less fretting about short-term losses.
Thanks to a great combination of efficient technology and more competition, it is cheaper than ever before to build a diversified nest egg. And as fees continue to march lower each year, you may be surprised at just how cheaply you can build a first-class portfolio for 2018.
If you’re looking for the best cheap funds to buy for next year, here are nine different options spanning most major asset classes to get you started.
This fund family covers both an exchange-traded fund and a mutual fund, and it provides exposure to U.S. stocks of all shapes and sizes and sectors.
Benchmarked to the CRSP U.S. Total Market Index, this is a domestic equity fund that covers a massive universe of more than 3,600 stocks, including large-cap names you know and love like Apple Inc. (NASDAQ:AAPL) and smaller companies you may not have heard of.
Best of all, Vanguard Total Stock Market is increasingly inexpensive, charging an expense ratio of just 0.04% or $4 annually via the Vanguard Total Stock Market ETF (NYSEARCA:VTI).
The Vanguard S&P 500 family is a more focused play on U.S. stocks, dedicated only to large-cap investments. But this fund is iconic because it is one of the most popular places on the planet to stash your investment cash; as of this writing, this fund alone manages roughly $600 billion in assets!
When you have scale like that, you can afford to cut your fees down dramatically. After all, the 0.04% on the Vanguard S&P 500 ETF (NYSEARCA:VOO) adds up to $4 on $10,000 invested for an individual, but over billions of dollars that adds up in a hurry. It’s a win-win for Vanguard, and for low-cost investors looking at diversified large-cap options in 2018.
Moving away from broad-based funds, some investors like to focus more on specific flavors of the market. What you’ll find in the iShares Core U.S. Value ETF (NYSEARCA:IUSV) is a fund that relies on value investing metrics such as a low-ratio-to-sales or earnings. The fund is linked to the S&P 900 Value Index, which includes smaller stocks that meet certain characteristics as well as giants that include JP Morgan Chase & Co. (NYSE:JPM).
This iShares fund may not get as much attention as some of the flagship Vanguard funds, but it is still super cheap at 0.05% and it is one of the older funds in the space with an inception date way back in 2000.
iShares and Vanguard are the leaders of ETF investing in many ways, but investment firm Charles Schwab Corp. (NYSE:SCHW) is not just sitting on the sidelines. The Schwab US Large-Cap Growth ETF (NYSEARCA:SCHG) proves that wrong by allowing investors to make a tactical bet on the largest growth-oriented companies at a rock-bottom pricing of 0.04% in fees annually.
Benchmarked to the Dow Jones US Large-Cap Growth Total Stock Market Index, the fund includes the largest 750 companies that meet growth characteristics in both their revenue and profitability.
Vanguard Dividend Appreciation Index (NYSEARCA:VIG) tracks a group of U.S. corporations that have high-quality operations. And investors know that these companies are reliable because these stocks provide profit sharing with shareholders through the form of regular dividends.
That makes this index fund a kind of half step between stocks and bonds. You get exposure to the stock market, yes, but you also get reliable income from these dividends
With stable names in the portfolio, including Microsoft Corporation (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ), this is a great bedrock fund for income and stability in 2018 — and at 0.08%, it’s super cheap.
For investors looking to play the stock market, the allure of small and fast-growing companies is where the excitement is. Sure, big companies often make the biggest headlines … but wouldn’t it be nicer to invest in those dominant businesses while they are still start-ups?
That’s what this Vanguard Small-Cap Index Fund (NYSEARCA:VB) does. “Small-cap” means small capitalization — specifically, companies that fall in the bottom 15% of publicly traded corporations as measured by size. There is obviously more risk in smaller companies that aren’t as well funded or established. But if you get in on the ground floor, the gains can be very impressive.
The iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) will allow you to move away from stocks and into bonds, via a broad-based fund that targets high-quality investments. It is designed to hold both government and corporate bonds, but is limited only to those that win the highest “investment grade” ratings.
The fund is an “aggregate” bond index, however, because it mixes up durations and holds debt that matures in as little as one year as well as debt that takes as long as 30 years to mature.
What if you just want to think about longer-term bonds, since these investments tend to offer better yields in exchange for more risk? After all, with a duration of 20 years or more, a lot could go wrong to limit payback to investors, and that naturally demands a higher rate of return.
If this is your strategy, the Vanguard Long-Term Bond ETF (NYSEARCA:BLV) is your best option. This fixed-income mainstay yields 3.5% currently thanks to a focus on longer duration securities — and it does so in an incredibly cost-effective manner.
The flip side of the long-term bond ETF is, of course, the Vanguard Short-Term Bond ETF (NYSEARCA:BSV). The expense ratio is equally low, but the difference here is all about duration.
You only get a paltry 1.8% yield in the short-term bond fund, but a focus on only investment-grade debt and maturity that is less than five years all but guarantees these bond payments will be made on time. The tradeoff for that certainty, of course, is yield. But if you just want a crash-proof place to invest money that offers more than a bank savings account, this ETF is it.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.