Building My Portfolio: Consider Simply Buying The Entire Market

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In Part 1 of this series, I talked about basing investing decisions on what I feel is most likely to persist in the future. This is another “big picture” post.

We invest our money because we want to do something besides just sit there. We want it to grow while we’re also busy working. The most basic way of doing that is to either start a business, or buy shares of another business. Some businesses will fail, some will do great, and it can be risky to bet on which one will do what. But as a whole, it is a pretty safe call to say that profits will be generated and value will be created. In the long run, you will end up with these profits. Therefore, one way to invest is simply to buy all the companies. And if you buy them in proportion to how much they are valued, then you end up with a good representation of the entire “market”.

This idea has been promoted by many financial experts. Jack Bogle offers a good explanation is his book The Little Book of Common Sense Investing. This excellent article on investing in total markets lists many others.

It may seem a bit crude at first (kind of like using a shotgun), but in fact it’s actually quite an elegant idea. You let the individual companies fight it out, and you just sit back and enjoy. For example, let’s say there is a growing desire for alternative fuels. Well, many companies are bound to pop up try and profit from that. Some will be wildly successful, some will fail. Maybe such energy companies become a huge part of the economy – well, if you bought total stock market fund you’d own all those winners. To paraphrase author Burton Malkiel – “My advice is that rather than futilely attempting to find the needle in the haystack, buy the haystack”.

This can be implemented on a country level, or even on a world level. The Vanguard Total Stock Market ETF (VTI) tracks the total US market via the Wilshire 5000 index and includes over 3,600 stocks. The Vanguard FTSE All-World ex-US ETF (VEU) tracks the entire world’s publicly traded companies, minus that of the US, and holds over 1,500 representative stocks from 47 countries. Since by the market capitalization of the world is currently split up about 45% Non-US/55% US, if you buy 3 shares of VEU for each share of VTI, and you’d be tracking the performance of virtually all of the world’s liquid companies.

I like this as a portfolio idea, but there are some other theories to consider as well…

Read more: Index of Posts On Building My Portfolio

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  1. BuildAndSucceed says

    Excellent post… I agree with the theory and I think it’s an excellent way to START investing. Most likely, this is the method I will use to begin investing. I’ve also read about it in a couple books.

  2. Small mistake: market cap of the world is split 41% US and 59% global excluding-US (rest of the world), not the 55%/45% mentioned in the article.

  3. I think it’s a great idea – simple and elegant and no chasing of returns or worrying about particular sectors or stocks that get people into trouble. Mutual fund and investment companies will hate you! To “rebalance,” you could reevaluate the current market cap of US vs. non-US, and then make sure your portfolio matches, on maybe a yearly basis.

    You might consider some bonds/commodities as well, but I’m sure this will be discussed in future posts. 🙂

  4. Why 3 shares of VEU for each share of VTI when market capitalization of the world is 45% Non-US/55% US?

  5. I think this is a great way of keeping it really simple. Although, I think the 3 VEU to 1 VTI is a little off — that would result in 55% non-US and 45% US.

    Another thing I am wondering about is if 45% international exposure too much, or too little?

  6. This may be a dumb question, but what’s the difference between investing in ETFs vs. Index Funds? My portfolio is…

    75% Vanguard Total Intl Stock Index (VGTSX) (more b/c it seems to be doing a lot better this year with the dollar prices..)
    25% Vanguard Total Stock Mkt Index (VTSMX)

    Would that be basically equivalent to what you’re recommending, only in index fund form, as far as which parts of the market are being tracked?

  7. I cut and pasted from an older blog post, so the specific ratios will probably be off and will also change in the future. The 3-to-1 ratio is just a rough estimate.

    Alexa – ETFs may have lower expense ratios, but more transactional costs like commissions

    ETF v Mutual Cost Vanguard Cost Calculator

  8. Hey, I’m looking into opening a Roth IRA soon. I was just wondering who you opened your IRA with? Or maybe you have a review or recommendations?

    I’m looking into Scottrade.

  9. I think this method is good – another benefit of “buying the market” is the LOW expense ratios attached to index funds.

  10. Or you could go with a world stock fund such as Vanguards Global Equity fund and do this with one fund…. I am sure there are other ones as well, but I’m only familiar with that one. Holds 43% North Am, 13% Pacific, 32% Euro and 13% Emerging mkt. It has a country breakdown on the Vanguard site. YTD perf is 27% (end of Sept) and 10 yr avg is 12.50% (all this from website…).

  11. Creative Investor says

    It’s definitely a good idea to invest into an index mutual fund (or ETF) to begin your investing “career.” Once you’re more comfortable (and interested) with the stock market, you can take riskier bets with more potential upside.

    As far as whether investing into two funds like Jonathan suggested, or one fund as Thad mentioned earlier, I’d rather go with two funds and probably from two different fund families to get the most money management experience (from fund managers) for the buck.

  12. The markets rallied today! My 401 (k) with TRowP is up by about $100 in one day and I only have about $12,000 in it. Why can’t we have every day like that, Mr. Market? I am so motivated to invest my cash that is earning only 4.75 APY in EmigrantDirect. I think I am going to open a Zecco for now, unless anyone advises me not to?

  13. Question: by “buy them in proportion to how much they are valued”, do you mean buying the same number of shares of each as opposed to buying the same dollar amount of each?

  14. Know The Ledge says

    I like this strategy, especially for the new investor but even for the experienced investor. The market will beat most funds and portfolios of average investors.

  15. Jonathan, I vaguely remember reading somewhere on your site that you preferred dollar cost averaging into an index fund as a safe and smart way of investing.

    My question for you and any other reader is as follows: There are ETFs that basically mirror the S&P500 (such as the commonly traded SPY), and then there are ETFs that leverage the S&P500 at 1.5x, 2x, or 2.5x, so that if the S&P500 goes up 1%, the ETF you buy would theoretically go up 1.5%, 2%, or 2.5%. However, do you know if the leveraged ETFs have higher fees that would eat into your leveraged profits? Because from a LONG TERM perspective, if you expect the S&P500 to go up an average of 10% annually, why would anyone not want to buy a leveraged ETF and earn more than 10%?

  16. Be careful with leveraged ETFs. For an example, the 2x ETF does not give double the long-term returns for a variety of reasons. See link below:

    The case against leveraged ETFs

  17. Any new investor could benefit from reading this post.

    There is more risk in an individual stock than an Index ETF.

    I mainly invest in the SPY and Sector SPDRs.

    As a long term investor, this approach has been working well for me.

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