Which Vanguard ETF Should You Choose: VT or VTI?

I often find myself recommending both Vanguard Total World Stock ETF (VT) and Vanguard Total Stock Market ETF (VTI). Both are excellent choices, each offering its unique advantages. However, the choice ultimately depends on your investment goals, risk tolerance, and global diversification preferences.

Why Both Are Great

VT is generally regarded as slightly safer due to its comprehensive portfolio, which includes stocks from all over the world. Essentially, you can set it and forget it, allowing you to live your life without constant worry about market fluctuations. Just buy and hold, and you're good to go. On the other hand, VTI focuses on the U.S. market, providing broader exposure to a single region which may appeal to investors who want to concentrate their investments in the domestic market.

It's worth noting that individuals in Europe are limited in their ability to invest in VTI. Instead, they can invest in iShares Core SP 500 ETF (IVV) or other alternatives. However, if you're able to invest in VTI, it offers a similar level of diversification within a single market.

Is Diversification Overrated?

Is diversification really the key to investing success, or are there better options? While the principle of diversifying into various asset classes is sound, it's crucial to properly manage and rebalance those assets.

Much like the general idea of diversifying your investments, the key to success is in the specific execution. Investing in small and foreign companies, for instance, can potentially improve your performance and reduce volatility. Different asset classes tend to move in different directions, which can help balance out market fluctuations. However, if you cannot rebalance your asset allocations as certain classes grow or shrink, your investment strategy may suffer.

Should You Use ETFs for Asset Allocation?

The two Vanguard ETFs in question are not designed for active asset allocation. Both funds are heavily weighted towards well-performing stock classes, which is the opposite of what you should aim for in an asset allocation strategy. A properly managed asset allocation should act like the Robin Hood of investments, taking from the rich and giving to the poor, effectively buying low and selling high.

For those looking for an automated and diversified portfolio, employing a robo-advisor or a target date or lifestyle fund is highly recommended. Alternatively, most 401(k) plans offer intuitive tools and services for managing your investments. For more personalized advice, consulting with a human financial advisor can be beneficial. Various asset allocation models are also available online for self-directed investors.

A Clear Guide on Building an Asset Allocation Model

If you're interested in building an asset allocation model, there are plenty of resources available to guide you. A comprehensive guide can help you understand the historical performance and risk levels of different asset mixes. By leveraging these models, you can create a more efficient and diversified portfolio suited to your specific needs and goals.

Ultimately, both VT and VTI are solid choices from Vanguard. The key is to maintain a long-term perspective and consider your individual investment strategy. If you're looking for the most extensive diversification among stocks, either VT or VTI can be a good fit. However, it's important to have a clear understanding of why you're choosing one over the other and how it fits into your overall investment plan.

Good luck with your financial journey!