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3 Top Index Funds to Keep You in the Investing Game

When we are nearing or entering retirement, we want our nest egg to be as safe as possible. But doing so can lead us to putting all of our holdings in cash and bonds. While that's no doubt a prudent move for the money we'll have to use in the next five years, it can spell disaster down the road.

As we leave longer and longer lives -- a good problem to have, for sure -- we need our nest eggs to last longer. And that's a difficult problem. But there's no better way to do tackle that problem than by leaving a portion of our nest egg invested in the stock market. 

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But not all investments are made equal. Here, three Motley Fool investors tell you why putting your money into Vanguard High Dividend ETF (NYSEMKT: VYM), Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), or Vanguard 500 Index Fund (NASDAQMUTFUND: VFINX) could help keep you in the investing game -- while not making you lose sleep at night.

A stock fund that can hold up well during tough times

Matt Frankel (Vanguard High Dividend Yield ETF): With the market at record highs, if you're looking to play a little defense in your portfolio, it's certainly understandable.

Solid stocks that pay consistently high dividends tend to hold up better during corrections than their non-dividend counterparts do, and one great index fund full of rock-solid dividend stocks is the Vanguard High Dividend Yield ETF, which tracks a weighted index of about 400 stocks with above-average dividend yields and specifically excludes real estate investment trusts.

Top holdings of the fund include Microsoft, Johnson & Johnson, ExxonMobil, JPMorgan Chase, and Wells Fargo. And the fund's expenses are cheap, with a 0.08% expense ratio that's low even by index fund standards.

As of this writing, the fund's dividend yield is about 2.9%, significantly higher than the 1.9% you can expect from a S&P 500 index fund. That makes the fund an excellent choice for investors who depend on their investments for income, or who simply want to let their dividends compound over time.

To be clear, the Vanguard High Dividend Yield ETF isn't correction-proof. If the stock market drops significantly, chances are good that this ETF will do the same. However, this is a great way to stay invested in the stock market if you don't want to pick individual stocks and you want some downside protection from corrections and crashes.

Just Like Matt's Pick, but With a Twist

Brian Stoffel (Vanguard Dividend Appreciation ETF): Like Matt, I'm a big believer in putting your cash behind large and stable companies that offer dividends. Such payouts are evidence of a company's pricing power and financial fortitude.

Another way to gain exposure to such stocks is by buying the Vanguard Dividend Appreciation ETF. This fund is currently invested in 180 companies that have a history of dividend increases. It's very similar to an investment in Dividend Aristocrat-esque stocks.

It's important to note that while the dividends included in this ETF might not be as high as they are in Matt's ETF, the history of dividend growth means that the underlying businesses are getting stronger, with the potential for payout increases in the future.

Currently yielding a more modest 1.9%, the fund's top five holdings include some of the same names mentioned -- Microsoft and Johnson & Johnson -- while including the likes of 3MPepsiCo, and Medtronic

Just as importantly, the expense ratio you'll pay every year is an uber-low 0.08% -- or less than one-tenth of what similar funds charge. Those types of investments, with that kind of expense ratio, should help you rest easy in your retirement knowing that you're still safely exposed to the stock market.

Small costs and big gains

Steve Symington (Vanguard 500 Index Fund): It can be difficult to consistently find the time and motivation to adequately research individual stocks. And even the best professional money managers have trouble consistently outpacing the S&P 500 Index's historical annual returns of roughly 10%. In fact, according to S&P Dow Jones last year, 99% of all actively managed U.S. equity funds underperformed their benchmarks since 2006.

To that end, many investors would be better off buying a low-cost index fund that's meant to mirror the S&P 500, like the Vanguard 500 Index Fund (NASDAQMUTFUND: VFINX). The Vanguard 500 Index Fund gives its investors exposure to 500 of the largest companies in the United States, allowing you to sleep well knowing you're diversified. It also boasts an ultra-low expense ratio of 0.14% annually, far below the 1% average expense ratio of other funds with similar holdings. That means you'll have that much more money over the long run to let the power of compounding gains work its magic.

Of course, the Vanguard 500 Index Fund might not be the most exciting way to stay in the "investing game." But it's a small price to pay for peace of mind, time saved, and superior long-term gains.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Brian Stoffel has no position in any of the stocks mentioned. Matthew Frankel has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool owns shares of Medtronic. The Motley Fool recommends 3M and PepsiCo. The Motley Fool has a disclosure policy.