Mistake #1: Investing in Index Funds

Why is investing in index funds the first mistake on the list?  Because Vanguard’s managed funds dramatically outperform its index funds.

Take Vanguard’s 500 Index fund, for example. It’s the family's largest fund, with more than $100 billion in assets. In fact, it’s the third-largest mutual fund in the world.

Now, the average Vanguard investor hardly thinks twice when he or she invests money with this fund. Often, it’s their first choice because they think it's the safest, best-diversified fund money can buy, since it mimics the S&P 500 and has low operating expenses.

But the 500 Index is not the safest index fund, nor is it the best-performing index fund. In fact, during the last bear market, investors lost more than $40 billion in this fund. In fact, more than 26% of the fund's assets are tied up in just 10 stocks, and nearly half (49%) of its assets are invested in just three sectors.

The bottom line: Index funds, even the best ones, simply don’t compare to Vanguard’s actively managed funds.

Mistake #2: Ignoring the Demographics of the Economy

Here’s a demographic trend that investors need to watch very closely: As 77 million baby boomers turn 65 over the next few years, they’ll begin retiring, downsizing and needing more medical assistance. That’s 25% of our population looking for more medical attention.

Investing in the health care industry is one of the smartest moves investors can make now. The boomers are getting older, and they'll need more and more medical devices, drugs, managed care, biotech innovations and so on.

But there’s just one problem for Vanguard investors. Vanguard’s famous health care fund is closed to new investors.

Where there’s a will there’s a way…