The Index Card: Why Personal Finance Doesn't Have to Be Complicated

by Helaine Olen

Seventy percent: A good S&P 500 index fund. This fund will provide domestic and international (more on that later) exposure to large-cap companies based in the United States. The S&P 500 represents industries that include technology, banking, and health care so you are assured quick diversification. Fifteen percent: A small-cap index fund such as the Russell 2000 Index. While large-cap companies tend to drive headlines, you also want to make sure your portfolio contains exposure to small-cap funds. Why? Small-cap funds have generally outperformed large-cap funds. Before we get too excited about outperformance, remember that it comes with greater risk. Think of small-cap companies as small and agile. Some companies will be poised for growth and may even evolve into large-cap companies, while others may go bust. You will see this in the slightly more volatile returns of small-cap companies. Fifteen percent: A broad-based international fund like Vanguard’s Total International Stock Index Fund. You will want an international fund that has access to both developed—think Europe and parts of Asia—and emerging—think South America, Africa, and other parts of Asia—markets. Make sure that you choose an international fund and not a “global” fund. An international fund will have little to no holdings in U.S.-based companies, whereas a global fund will try to mimic the globe and, in turn, have exposure to the United States. At first glance, a 15 percent allocation to international marke...