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Index funds are the best way to invest in the stock market because they offer cheap diversification. Beware, however, sometimes funds labeled as index funds really aren't.
Any thoughts on getting globally diversified with index funds, and verifying said diversification? It's not trivial, since some index funds, especially international ones, are heavily biased towards one category of company. A "China fund" composed only of state-owned enterprises is not nearly as diversified as it could be.
Excellent question.
The Vanguard 500 index fund buys each stock in proportion to its market capitalization, which gives you optimal diversification among these stocks. To the best of my knowledge there is no easy-to-follow mathematical formula for diversification across countries especially given exchange rate risks. Also, you probably shouldn't use passive investment vehicles (like index funds) for investing in corruption-ridden financial markets such as China's.
But you probably should invest internationally and use the index approach when investing in stocks in rich countries. Although given the international nature of the 500 biggest U.S. companies (which the Vanguard 500 index fund consists of) you do get a lot of international diversification when you invest in it. If you are a relatively small U.S. investor it might not be worth it to invest in non-U.S. stocks, but I'm not sure about this.
Vanguard provides VGTSX (Total International), which attempts to invest in non-US markets in a balanced and diversified manner. I consider an international fund crucial to maintaining diversification, though many people feel it's too volatile. It was the only thing I found in all my reading where people had widely varying opinions with no true consensus, in which case you should go with your risk tolerance.
(Warning: contains a naive request for free advice. Feel free to ignore.)
I may be "retiring" from the Canadian public service, with a bit of a cash buyout and (I assume) some of the money from my pension fund.
Is this something I could consider?
Yes. Also, the longer you expect to live the more money you should put into stocks. Because of the relatively small size of the Canadian economy you shouldn't put too high a percentage of your assets into Canadian securities. All of your investments in the U.S. stock market should be through index funds.
Don't forget the tax consequences of your investments.
Vanguard invented the index fund philosophy; they have some of, if not the, lowest administration costs; and they are owned by their fund shareholders. I second the recommendation.
Thoughts on this compared to the Vanguard target date retirement funds?
When using a date fund, it's harder to attain your target asset allocation if you have any other retirement savings. I'm currently in VEMAX (emerging markets) and VTSAX (total stock market), along with Wilshire 5000 and EAFE (Europe-Australia-Far-East) from another account. I do the balancing myself with a simple one-page spreadsheet. (25% bonds, 75% stocks (35% international, 65% domestic)). All of my bonds are medium term US government securities. Date funds do the rebalancing for you, but they don't take into account your other holdings, nor your personal risk tolerance.
How frequently do you re-balance?
I alter the percentages mainly through new contributions, so it gets tweaked every month, though I do a buy/sell rebalance once a year.
Vanguard? It's all about the XSLV PowerShares S&P SmallCap Low Volatility Portfolio. Check out that performance.