If you are going to build an investment portfolio from scratch, there are few companies that offer better tools, resources and low-cost investment products than Vanguard. Vanguard is one of the largest mutual fund and ETF providers in the world and caters primarily to do-it-yourself investors looking for optimal portfolio diversification at the lowest possible cost. With its more than 200 funds, there is not an investment profile Vanguard cannot match. All it requires is you have a clear understanding of your investment profile, and Vanguard will help you with the rest.

Designing Your Portfolio

Before you can design your investment portfolio, you need to have a clear understanding of your investment needs, objectives and risk tolerance. This enables you to narrow down the vast number of investment options to those that most closely match your investment profile. Vanguard’s online tools can assist you in that process with the answers to a series of questions regarding your investment goals and investing style. Vanguard then compiles your responses and produces a recommended portfolio of index funds, including an asset allocation mix. If you agree with the recommendation, you can buy the portfolio. Or, if you have your own ideas for diversifying your portfolio, you can use Vanguard’s search feature to find funds based on search criteria such as risk profile, active or index funds, and asset class.

A recommended portfolio for a younger investor with a moderately high tolerance for risk might look like the following allocation.

Vanguard Total Stock Market Index (VTSMX) – 42% Allocation

The Vanguard Total Stock Market Index fund captures the returns of the entire U.S. stock market, including some 3,800 large-, mid-, and small-cap stocks. Because it is dominated by large-cap stocks, the fund rarely deviates from the S&P 500 Index by more than a percentage point. However, its exposure to small- and mid-cap stocks has enabled it to outperform the S&P 500 by more than half a percentage point in each of the last 10 years. Its expense ratio is extremely low at 0.017% for investments under $10,000.

Vanguard Total International Stock Index (VGTSX) – 28% Allocation

The Vanguard Total International Stock Index fund adds growth potential for those periods when foreign stocks outperform U.S. stocks. The fund tracks the MSCI All Country World ex USA Investable Market Index, which is comprised of nearly 6,000 stocks from more than 43 developed and emerging countries. Its expense ratio is just 0.19%.

Vanguard Total Bond Market Index (VBMFX) – 21% Allocation

Since bonds do not generally correlate with the movements of stocks, they tend to stabilize portfolio returns over time. How much you allocate toward bonds versus stocks should be based on your tolerance for volatility. The Vanguard Total Bond Market Index fund provides broad exposure to investment-grade corporate bonds as well as U.S. government bonds of varying maturities. It has a low expense ratio of 0.2%.

Vanguard Total International Bond Index (VTIBX) – 9% Allocation

For the same reason that it is important to have exposure to foreign stocks, it is just as important to have some exposure to foreign bonds. The Vanguard Total International Bond Index is invested in nearly 4,000 different holdings with its largest exposure in developed European countries. To boost yield, it also maintains some exposure to emerging countries. The fund was established in 2013 so it has yet to develop a measurable track record. Its expense ratio is just 0.14%.

Sample Recommended Portfolio

This simple, low-cost portfolio should serve an investor well over time. With Vanguard, it is easy to tweak your portfolio to accommodate any change in investing style or risk tolerance. For example, if the same investor wants to get a little more aggressive, he can allocate a portion of his stock portfolio to the Vanguard Small-Cap Index fund.

Index Funds or ETFs?

When you design your portfolio using Vanguard’s online allocation tool, you are asked if you want to use index funds or exchange-traded funds (ETFs). Which one to choose is purely a matter of preference as they both offer low-cost access to the key market indexes. They are both passively managed, but ETFs tend to be lower cost. For each of the index funds in the sample recommended portfolio, there is an equivalent ETF, and there is absolutely nothing wrong with mixing both into your portfolio.