Apr 25, 2022
Despite the Federal Reserve's increasingly hawkish stance, inflation continues to be a problem. In March, U.S. consumer prices rose 8.5% from a year ago, marking the biggest jump since 1981.
Inflation erodes purchasing power. According to Shark Tank star and investment mogul Kevin O’Leary, that means keeping large sums of money in a low-interest savings account is a big mistake.
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“Right now in a bank account, you’re getting very little [interest],” he says in a recent interview with CNBC. “And inflation is over 6%. So you’re actually losing money every 12 months.”
O’Leary suggests having three months of salary on hand in case of emergency. But after you've built that cushion, O’Leary recommends investing in index funds, which offer an easy and diversified way to get exposure to the stock market.
Here’s a look at three index funds. Each of them focuses on different chunks of the market — own all three and you’re well diversified.
Fidelity ZERO Large Cap Index Fund (FNILX)
The S&P 500 Index is widely regarded as the benchmark index for the U.S. stock market. Several funds track the S&P 500 in order to provide investors with convenient exposure to U.S. equities.
But if a fund wants to use the S&P 500 name, it has to pay a licensing fee that essentially gets passed on to investors.
The Fidelity ZERO Large Cap Index Fund closely mirrors the performance of the S&P 500. But it’s not an “official” S&P 500 copycat, so it doesn’t have to pay the licensing fee. In turn, FNILX boasts an expense ratio of 0%.
Every dollar you put into FNILX gets put to work.
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Vanguard Small-Cap ETF (VB)
Small-cap stocks don’t get as much attention as their large-cap counterparts. But investors should ignore them.
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The largest companies we see today were once small. Companies with plenty of room to grow have tremendous upside.
For a low-cost way to invest in this growth-oriented group, investors can check out Vanguard Small-Cap ETF. It tracks the CRSP U.S. Small Cap Index, which measures companies in the bottom 2%-15% of the investable universe.
VB is diversified, holding around 1,550 stocks. It also has a low expense ratio of just 0.05%.
One thing to keep in mind: Because small-cap stocks are relatively young, they tend to be more volatile than more established large-cap names.
Vanguard Total International Stock ETF (VXUS)
To truly diversify your portfolio — especially in this age of globalization — having some exposure outside of the U.S. is essential. Thankfully, it’s easy these days to invest overseas.
For instance, Vanguard Total International Stock ETF seeks to match the performance of the FTSE Global All Cap ex-US Index. By owning this index fund, investors get broad exposure across developed, as well as emerging non-U.S. equity markets.
The fund’s top holdings include global industry titans such as Samsung Electronics, Nestle, Tencent Holdings and Toyota. It also owns smaller names and holds over 7,800 stocks, with an expense ratio of 0.07%.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
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