As a finance expert, I often get asked about the best investments for long-term wealth building. My answer remains consistent: low-cost, diversified index funds. They offer broad market exposure, minimal fees, and the power of compounding. In this article, I explore six index funds that I believe are worth holding forever. I break down their performance, risk factors, and why they fit into a “buy and hold” strategy.
Table of Contents
Why Index Funds? The Case for Passive Investing
Index funds track a market benchmark, such as the S&P 500 or the total stock market, rather than trying to outperform it. The math behind their success is straightforward. Actively managed funds struggle to beat their benchmarks consistently due to higher fees and human error. Nobel laureate Eugene Fama’s Efficient Market Hypothesis suggests that stock prices reflect all available information, making it nearly impossible to consistently “beat the market.”
Consider the following comparison between an actively managed fund and an index fund:
FV = P \times (1 + r)^nWhere:
- FV = Future Value
- P = Principal investment
- r = Annual return
- n = Number of years
If an index fund charges 0.04% in fees and an active fund charges 1%, the difference compounds over time. A $10,000 investment growing at 7% annually for 30 years would yield:
- Index Fund (0.04% fee): FV = 10,000 \times (1 + 0.0696)^{30} = \$76,122
- Active Fund (1% fee): FV = 10,000 \times (1 + 0.06)^{30} = \$57,434
The index fund generates nearly $20,000 more due to lower fees. This is why Warren Buffett famously said, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
The 6 Best Index Funds to Hold Forever
1. Vanguard Total Stock Market Index Fund (VTSAX)
Why It’s a Forever Hold:
VTSAX tracks the CRSP US Total Market Index, covering nearly 100% of the U.S. equity market. It includes large-, mid-, small-, and micro-cap stocks, providing unmatched diversification.
Key Metrics:
- Expense Ratio: 0.04%
- 10-Year Avg. Return: 11.8%
- Top Holdings: Apple, Microsoft, Amazon
Historical Performance:
| Year | Return (%) |
|---|---|
| 2020 | 20.99 |
| 2021 | 25.68 |
| 2022 | -19.53 |
| 2023 | 26.27 |
Even in downturns like 2022, VTSAX recovered strongly. Its low cost and broad exposure make it a core holding.
2. Vanguard S&P 500 Index Fund (VFIAX)
Why It’s a Forever Hold:
The S&P 500 is the gold standard for U.S. large-cap stocks. VFIAX mirrors this index, offering stability and growth. Over the last 50 years, the S&P 500 has returned about 10% annually.
Key Metrics:
- Expense Ratio: 0.04%
- Dividend Yield: 1.37%
- Top Holdings: Similar to VTSAX but excludes small-caps
Example Calculation:
If you invested $500 monthly in VFIAX for 30 years at a 10% return:
This shows the power of dollar-cost averaging.
3. Vanguard Total International Stock Index Fund (VTIAX)
Why It’s a Forever Hold:
U.S. stocks don’t always outperform. VTIAX provides exposure to developed and emerging markets, hedging against domestic volatility.
Key Metrics:
- Expense Ratio: 0.11%
- 10-Year Avg. Return: 4.5%
- Top Holdings: Nestlé, Toyota, Samsung
Diversification Benefit:
Adding international stocks reduces portfolio risk. The correlation between U.S. and international markets is not perfect, providing a cushion during downturns.
4. Vanguard Total Bond Market Index Fund (VBTLX)
Why It’s a Forever Hold:
Bonds stabilize a portfolio. VBTLX tracks the Bloomberg U.S. Aggregate Float Adjusted Index, covering government and corporate bonds.
Key Metrics:
- Expense Ratio: 0.05%
- Yield to Maturity: ~4.5%
- Duration: 6.5 years
Role in a Portfolio:
A classic 60/40 (stocks/bonds) portfolio historically reduces volatility. For a retiree, VBTLX provides steady income.
5. iShares Core U.S. Aggregate Bond ETF (AGG)
Why It’s a Forever Hold:
Similar to VBTLX but in ETF form, AGG is highly liquid and slightly cheaper (0.03% expense ratio). It’s ideal for taxable accounts due to tax efficiency.
Comparison Table:
| Fund | Expense Ratio | Avg. Daily Volume |
|---|---|---|
| VBTLX | 0.05% | Lower |
| AGG | 0.03% | ~3M shares |
6. Schwab U.S. Broad Market ETF (SCHB)
Why It’s a Forever Hold:
SCHB is one of the cheapest broad-market ETFs (0.03% expense ratio). It tracks the Dow Jones U.S. Broad Stock Market Index, similar to VTSAX but with a lower minimum investment.
Performance vs. VTSAX:
| Metric | SCHB | VTSAX |
|---|---|---|
| 10-Yr Return | 11.7% | 11.8% |
| Expense | 0.03% | 0.04% |
The difference is negligible, making SCHB a strong alternative.
How to Allocate These Funds
A sample forever portfolio might look like this:
- 50% VTSAX (U.S. Stocks)
- 20% VTIAX (International Stocks)
- 20% VBTLX (Bonds)
- 10% AGG (Extra Bond Diversification)
Rebalance annually to maintain these ratios.
Final Thoughts
Index funds are the closest thing to a “set it and forget it” investment. The six funds I discussed provide global diversification, low costs, and resilience. I’ve used them in my own portfolio for years, and history suggests they’ll continue to perform.
