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If I Were Building an Investment Portfolio From Scratch Today, I'd Start With These 2 ETFs
Key Points
New investors should focus their attention on exchange-traded funds, since they provide a low-cost way to own a broad basket of stocks.
The Vanguard S&P 500 ETF gives exposure to the largest American stocks, but concentration has gotten extreme.
The Vanguard Total International Stock ETF adds foreign businesses that don’t overlap with the S&P 500, boosting geographic diversification.
Investors will struggle to find a better arena for building wealth than the stock market. Over the past 30 years, the S&P 500 (SNPINDEX: ^GSPC) has generated a total return of 1,760% at recent prices. A $10,000 investment at that time would be worth more than $186,000 today.
Newcomers might easily be intimidated at first. You might assume you need expert skills and a lot of time to get started, especially if you're trying to navigate the endless amount of data out there and process the constant stream of headlines. It also doesn't help that there are thousands of stocks to pick from.
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This is where exchange-traded funds (ETFs) add tremendous value, particularly if you're a beginner. ETFs are baskets of stocks that track various indexes, sectors, countries, or investing styles. You can buy and sell them just like a stock. And the beauty is that they don't require massive sums of capital to own, either.
If I were building an investment portfolio from scratch today, I'd start with these two ETFs and plan to hold them for a decade and beyond.
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Own the largest American businesses
The first ETF I'd buy is the Vanguard S&P 500 ETF (NYSEMKT: VOO). With a hypothetical $10,000 in starting capital, I'd allocate 80% here.
For starters, the cost is impossible to overlook. This ETF charges an expense ratio of just 0.03%. That amounts to $2.40 of a hypothetical $8,000 investment, meaning more money stays in your pocket.
Its performance recently has been outstanding. Over the past 10 years, the Vanguard S&P 500 ETF has produced a total return of 318%. That's better than the results that most active money managers put up.
It's no surprise that this ETF tracks the S&P 500. Owning 500 or so large, profitable U.S. companies gives investors ample exposure to the broader American economy. Gaining financially from the country's inventiveness and growth has been lucrative historically.
While there are hundreds of companies in this fund, investors shouldn't ignore its concentration. Businesses are weighted based on their market capitalizations. The bigger the company, the more influence it has over total returns -- the top 10 positions make up 39.1% of the ETF. All sectors are included, but information technology represents 39.7% of the portfolio.
Warren Buffett believes that the Vanguard S&P 500 ETF is the best choice for most people. It's hard to argue with the legendary investor.
Build some foreign exposure
The second ETF I'd buy is the Vanguard Total International Stock ETF (NASDAQ: VXUS). The remaining 20% of the initial $10,000 amount would be used to buy this product.
Its fee structure is also compelling. The expense ratio is 0.05%. That's the cost investors are being asked to pay to gain access to foreign businesses. It's still extremely low compared to what mutual funds and hedge funds charge.
None of the almost 9,000 different stocks in this ETF are in the S&P 500, so investors don't have to worry about any overlap. This portfolio contains shares in non-U.S. companies. Consequently, it immediately boosts international exposure, enabling you to profit from the success of these companies, a variable many investors probably haven't really thought about.
Japan, Taiwan, and the United Kingdom are the top three countries represented. Together, they make up 33.5% of the asset base. Additionally, Taiwan Semiconductor Manufacturing, Samsung Electronics, and SK Hynix are the three biggest stock positions, accounting for a combined 7.9% of the fund. These are high-quality businesses benefiting from the artificial intelligence boom. You'll notice that concentration is significantly less of a concern.
Starting from scratch, buying the Vanguard Total International Stock ETF will round out my portfolio.
Neil Patel has positions in Vanguard S&P 500 ETF and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.