Stocks — Part VI: Portfolio ideas to build and keep your wealth

That’s OK.  It’s about to start.

Today we’re gonna look at the fun stuff.  What, exactly, can we use to build and keep our wealth.

I’m going to give you three portfolios each using the tools (funds) we discussed last time.  First will be exactly what I tell my 20-year-old to do.  She could care less about investing.  With this simple approach she doesn’t have too.  All she needs to do is to keep adding to the pot and let it ride.  Years from now she’ll wake up rich.  Along the way she’ll out-perform roughly 80% of the more actively engaged investors out there.  We’ll call this The Wealth Building Portfolio.

Next I’ll share with you what Mr. and Mrs. jlcollinsnh do as the semi-retired couple we are.  We’ll call that one The Wealth Preservation and Building Portfolio.

Your personal situation is likely different from ours.  But using these two as parameters, and after reviewing your personal “considerations” as we discussed last time, you should be able to fashion the four tools into something that works for you.  If you have questions just post them in the comments and we’ll work thru them together.

Finally, I’ll share with you an idea I’ve been playing with of late.  Let’s call it The Wealth Building with Cash Insurance Portfolio.  I know I’ve got some pretty sharp investors reading this blog and I hope they’ll weigh in with some opinions on it.

The Wealth Building Portfolio.

Here’s the thing.  If you want to survive and prosper as an investor you have two choices.  You can follow Dr. Lo’s advice and seek out broad diversification with asset allocation.  Your hope is that this will smooth out the ride even as it reduces your long-term returns.

Screw that!  You’re young, aggressive and here to build wealth.  You’re out build your pot of F-you Money ASAP.  You want what’s behind door #2.  You’re going to focus on the best performing asset class in history:  Stocks.  You’re going to “get your mind right,” toughen up and learn to ride out the storms.

You’ve heard the expression, “Don’t keep all your eggs in one basket.”

You’ve likely also heard the variation, “Keep all your eggs in one basket and watch that basket very closely.”

Forget it.  Here’s what your old uncle jlcollinsnh says:

Put all your eggs in one basket and forget about it.  

The great irony of investing is the more you watch and fiddle with your holdings the less well you are likely to do.  Fill your basket, add as you go along and ignore it the rest of the time.  You’ll likely wake up rich.

Here’s the basket: VTSAX.  No surprise here if you’ve been reading along in this series so far.  Stock Index Fund.  Low cost so almost all our money is working for us.

Owning 100% stocks like this is considered “very aggressive.”  It is and you should be.  You have decades ahead.  Market ups and downs don’t matter ‘cause you avoid panic and stay the course.  If anything, you recognize them as the “stocks on sale” buying opportunities they are.  Perhaps 40 years from now you might want to add a Bond Index Fund to smooth out the ups and downs.  Worry about that 40 years from now.

At this point I can see the financial gurus of the world gathering feathers and heating up the tar.  So let me explain.

Previously, we explored the idea that financial crisis are just part of the landscape and the best results come from simply riding them out.  You can’t predict them.  You can’t time them.  Over your investing career you’ll experience many of them.  But if you are mentally tough enough you can ignore them.

So now if we agree that we can “get our minds right” what shall we choose for riding out the storm?  Clearly we want the best performing asset class we can find.  Just as clearly, that’s stocks.  If you look at all asset classes from bonds to real estate to gold to farmland to art to racehorses to whatever, stocks provide the best performance over time.  Nothing else comes close.

Not even close

Let’s take a moment to review why this is true.  Stocks are not just little slips of traded paper.  When you own stock you own a piece of a business.  When you own VTSAX you own a piece of every publicly traded business in the USA.  Many have extensive international operations so you get to participate in the world markets too.

These are companies filled with people working relentlessly to expand and serve their customer base.  They are competing in an unforgiving environment that rewards those who can make it happen and discards those who can’t.  It is this intense dynamic that makes stocks and the companies they represent the most powerful and successful investment class in history.

Because VTSAX is an index fund we don’t even have to worry about which will success and which will fail.  It is ‘self cleansing.’  The failures fall away and the winners can grow endlessly.

A portfolio of 100% stocks, which is what VTSAX gives you, in study after study provides the greatest return over time.  

The only downside, and I mean only, is that the ride will be very rough at times.  Admittedly, it’s a big one.  If you are not tough enough to stay the course, if you get scared and bail when the storms are raging you are going to drown.  But that’s a failure in you, not a downside of this asset class.

As an aside, there are a few studies that indicate that a 80%/20%, stock/bond mix will actually outperform, very slightly, 100% stocks.  It is also slightly less volatile.  If you want to go that route and take on the slightly more complicated process, you’ll get no argument from me.

Could it really be this easy?  Yep.  I started investing in 1974.  At the time VTSAX had yet to be created (Bless you Jack Bogle!), but just $15,000 invested in the Dow stocks, and left to ride, by the end of 2011 would be $1,000,000. This despite all the panic and collapses and recessions and disasters that we’ve endured during these last 38 years.  Imagine what you’d have if you’d kept adding to the pot along the way.

Unfortunately, I wasn’t smart enough at the time to do it.  But this is the “Simple Path to Wealth” I created for my then 19-year-old daughter:  Put all your eggs into one basket, add more whenever you can and forget about it.  The more you add the faster you’ll get there.  Job done.

The Wealth Preservation and Building Portfolio.

But wait you say, I’m at or nearing retirement.  I’ve built my wealth.  Now I want to hang on to it.  I want a smoother ride.  What then?

Yeah, me too.  A few years ago as I was nearing my own retirement I made some additions to VTSAX.  Hold on now, this is going to get really complicated.  You’re going to have to add two more index funds.  Oh my!

We now enter the world of Asset Allocation and this will require slightly more of our time.  In addition to adding the additional funds we’ll want to decide how much to allocate to each.  Then once a year or so we’ll want to rebalance to keep the allocations where we want them.  This is also what you’ll be doing if you use the 80% stock/20% bond mix option above.  It’s going to take a couple of hours once a year.  You can handle it.

100% stocks, even in the broadly diversified VTSAX is considered very aggressive.  High short-term risk (read: gut wrenching drops) rewarded with top long-term results.  Perfect for those who can handle the ride and have the time.

But it’s not for everybody.  Maybe you don’t want to deal with this level of risk.  Maybe a bit more peace of mind is required.  As you get older you might want to smooth the ride a bit, even at the cost of lower overall returns.   You have to sleep at night.

Now that I’m kinda, sorta retired and we have F-you Money, me too.  My wife and I hold some other stuff in our portfolio.  But not much.   Here it is:

50% Stocks.  VTSAX (Vanguard Total Stock Market Index Fund)  Still our core holding for all the reasons we’ve discussed.

25%  Real Estate.  VGSLX  (Vanguard REIT Index Fund) and the equity in your home if you own one.  REITs (Real Estate Investment Trusts) invest in real estate.  They provide an inflation hedge and dividend income.  But during periods of deflation real estate prices plummet. (Important: I no longer hold VGSLX. Please See Addendum I below for how this has changed)

REITS are the Ying to our Bonds’ Yang.

20%  Bonds.  VBTLX (Vanguard Total Bond Market Index Fund) Bonds provide income, tend to smooth out the rough ride of stocks and are a deflation hedge.  But during times of inflation and/or rising interest rates they get hammered.

5%  Cash.   Cash is always good to have in hand. Cash is also king during times of deflation.  The more prices drop, the more your cash can buy.  But idle cash doesn’t have much earning potential and when prices rise (inflation) its value steadily erodes.

We mostly keep ours here:  VMMXX.   Money Market Funds used to offer higher yields than banks.  When rates rise they will again.  These days, with interest rates near zero, not so much.  Now we also keep some in our local bank.  If you prefer, an on-line bank like ING works fine too.

So that’s it.  Four simple tools.  Three Index Mutual Funds and a money market and/or bank account.  A wealth builder, an inflation hedge, a deflation hedge and cash for daily needs and emergencies.  Low cost, effective, diversified and simple.

You can fine tune these investments to your own personal considerations.  Want a smoother ride?  Willing to accept a lower long-term return and slower wealth accumulation?  Just increase the percent in VBTLX. Comfortable with volatility?  Want more growth?  Add more to VTSAX.  Expecting higher inflation?  Add more VGSLX .

The Wealth Building with Cash Insurance Portfolio.

Confession time.  I hate bonds and I’m not all that keen on REITs either.

The more I own of them the less I own of stocks and, as we’ve discussed, stocks are far and away the best performing asset class.  So, each dollar not in stocks is a dollar working below par.

Dollars in cash are completely lazing away in the sun drinking Pina-coladas.

Since I consider these dollars are my slaves I want them working full time all the time.

Problem is sometimes (to beat this analogy to death) financial panics and market collapses come along and kill off a bunch of my slaves working away in the stock market fields.  It’s nice then to have others less stressed to pull from the bond and REIT fields to take their place.  But still, even these tend to get wounded in a collapse.

The cash slaves on the beach their feet up in the lounge chairs, slathered sun tan oil and sipping cool drinks get fat and steadily worth less.  But when collapses come they are away from the bullets.  They are the most rested of all when I put them back to work.  Their laziness drives me crazy but when the crunch times come I always wish I had more of them.

Let’s look again at the The Wealth Preservation and Building Portfolio above, figuring we have a million in it:

  • 50% of our dollars in the stock fields working full tilt in the hot sun.  500k
  • 25% with easy duty in the REIT fields.  250k
  • 20% with really easy duty in the bond fields. 200k
  • 5% napping in the sun on the cash beach. 50k

You could easily pull about 4%/40k from it each year for your living expenses and ride out most financial storms.  But you are giving up a big slug of wealth building potential.  Since most financial storms last less than three years, maybe there’s a better way.  What if we did this:

  • 88% of our dollars working full tilt in the hot sun.  880k
  • 12% napping in the sun on the cash beach. 120k

Since most of the time the market goes up, this portfolio will have a far stronger ability to build wealth.  We can draw our 40k from the dividends and capital gains our stocks in VTSAX throw off.

When times get tough and stocks slide, we leave VTSAX alone and let it heal.  With a 120k/three year cushion in cash we can pull those dollars off the beach to spend in the meantime.

When times improve we go back to tapping VTSAX and we rebuild our cash position for the next cycle.

Mmmm.  I haven’t convinced myself just yet.  What do you think?

Addendum #1:  Please note – I no longer hold VGSLX. Please see Stepping away from REITs for a discussion as to why.

Addendum #2:  What if you can’t buy VTSAX? Or even Vanguard?

Addendum #3: Recently I’ve been reading a new blog that has impressed me: Bucking the Trend. This link takes you to the post outlining his new portfolio. While different than those here, it follows the key principles: It’s simple and it uses low cost index funds. And that’s the point.

I prefer more REITS than just those found in VTSAX for their inflation protection and I don’t see the need for International Funds. Buck is comfortable with the REITS already in VTSAX and he wants more international. You know what? Long-term (and that’s the only way to think about investing) it will work just fine. Simple and low cost trump the differences. So consider this one more Portfolio Idea to Build and Keep Your Wealth.

Addendum #4: This is a great example of the right way to use and think about VTSAX

Disclaimer:  Like everything on this blog, this is only sharing ideas.  You are solely responsible for your own choices.

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131 Comments

  1. Posted May 13, 2012 at 1:25 pm | Permalink

    I like the idea of wealth building with cash. It’s your fund to rely on when markets slide. What if markets slide for more than 3 years? I’m afraid that the way our government is printing money like a mad man, and borrowing from China, a payday will be ugly. And markets may fall until we can get our financial house in order. What if you add reserve up to 5 years? Or as you keep growing your nest egg, increase % of cash reserve accordingly. So, a young person may not need much but an older person may need higher percentage of cash reserve to ride out market volatility. Just a thought.

    • Posted May 13, 2012 at 1:37 pm | Permalink

      Since I hold your opinions in such high regard, Shilpan….

      I’m intrigued and encouraged you find value in the idea.

      When I look at the 2008-09 debacle I see a three year climb out of the hole. Since this was the biggest hit since the Depression, and since I think it’s a mistake to build a plan around the possibility of a rare event like a Depression, three years seems a good line. It keeps the majority of capital at work while providing cash to ride out even a very nasty storm. I

      Were an upcoming storm to prove even nastier, we would have to tighten our belts to make it thru. But that is likely true with almost any asset mix.

      I’d be concerned that a five year cushion begins to hurt growth in the good times by keeping too much “on the beach.”

      Interesting idea about increasing the percent of cash as one ages. Maybe a very young person might even decrease it….

  2. WorkingRachel
    Posted May 13, 2012 at 2:26 pm | Permalink

    While I strongly support most of this, do you have any thoughts on foreign investing? I tend to think it’s at least possible, if not likely, that over the course of my lifetime (I’m 31) American companies’ share in and dominance of the world investment market may decline. Given that any wage income I’m earning is also tied into the US economy, I’m inclined to put at least some of my money in foreign investments (of the index fund variety, of course, not in individual shares of random foreign companies). I currently hold some VEIEX and VTMGX–if you wanted to keep it simpler I believe Vanguard has an all-world-minus-U.S. fund, too.

    • Posted May 13, 2012 at 2:51 pm | Permalink

      Welcome Rachel…

      ..thanks for stopping in. Great question!

      Regarding international funds you can certainly add them if you’d like. As you point out, Vanguard offers International Index Funds. They’ll serve you well.

      I don’t bother for these reasons:

      1. The US is still the dominate world economy and, in my view, will remain so for the next 100 years and counting. That dominance will shrink over time, as it has been doing since the end of WWII, but it is not ending anytime soon.

      2. VTSAX is loaded with US companies that are fully international in their operations. Indeed many generate well over half their revenue and profits overseas. So it provides exposure to expanding world markets.

      3. This trend will continue to expand as the international economies around the world continue to grow and prosper.

      4. Accounting standards and transparencies in the US remain the envy of the world. Less funny business to worry about.

      5. Direct international investing introduces currency valuations into the mix and that is a whole other level of risk that needs to be considered.

      Hope this helps!

  3. Posted May 13, 2012 at 6:36 pm | Permalink

    I quite like the idea of keeping some cash around. All the better to go shopping with when the markets take a dump.

    • Posted May 13, 2012 at 6:44 pm | Permalink

      True enough, but in this strategy the cash would be there to prevent selling while the market is swooning.

      If you are keeping some cash aside to invest on drops, how do you decide when the market has dropped enough? Seems I always push my chips in too soon…..

      • Posted May 13, 2012 at 6:48 pm | Permalink

        Me too. But if a stock or fund was soundly valued at say, X, and nothing fundamentally has changed, it’s more of a bargain at 20 or 30 percent off. Calling a bottom and timing the market is a fool’s errand, as you say. I guess the trick is having the conviction huevos to double down.

        • Posted May 13, 2012 at 7:54 pm | Permalink

          Ha! that’s always been my problem. too much huevos and not enough sense….

      • Aaron
        Posted March 4, 2014 at 10:32 am | Permalink

        A little late to the party, but you need a systematic process for investing your cash. It can never be ‘shoot from the hip’ unless you are ridiculously disciplined and probably 1% of 1% of people are like that…

        So here’s an idea. Pick a number that you think the stock market will return on average over your lifetime. Don’t worry about being accurate, just guess. Let’s say 8%. You save your money each year. At the end of the year, you look and see what the stock market did that year. Did it return more than 8%? Awesome. Take your wife out to a nice dinner and celebrate. But leave your cash sitting there. Did it return less than 8%? Great. Put all your savings in the market. This forces you to buy on the way down, and not buy on the way up. Sure you’ll miss out on some nice rallies, but you’ll also buy in big when it’s down.

        I’m not saying everyone should do this, but this is an example of a systematic process. You could say you’ll save your money each year and buy in half for every 10% decline in stocks, and buy in with everything you have for every 20% decline. But by all means have a process if you aren’t going to dollar cost average each month.

  4. AverageJoe
    Posted May 15, 2012 at 8:44 am | Permalink

    Nice and clean! I love it. You include your home equity as real estate? That part surprises me. I don’t like including my house as an “investment”, though I always want to make a good investment decision when buying/selling property I’m gonna live in (like any other piece of the portfolio….).

    • Posted May 15, 2012 at 12:39 pm | Permalink

      Thanks, Joe….

      …glad you like it and glad you’ve chosen to comment.

      I agree that a personal home is not an investment, but since it does soak up a big chuck of my net worth I like to include it as I consider my asset allocations. Make sense?

  5. Fuji
    Posted May 17, 2012 at 6:04 am | Permalink

    I may have asked this questions previously (can’t find the correct blog post if I did), but can I replace Total Bond Market Fund with Wellesley Fund? I know they aren’t the same, but Wellesley is mostly bonds, plus some dividend paying stocks and it seems it might work. I know this is probably obvious to everyone else, so apologies for the dumb question.

    • Posted May 17, 2012 at 4:20 pm | Permalink

      Hi Fuji….

      we did indeed have this conversation and you’ll find it in the comments section here:

      http://jlcollinsnh.wordpress.com/2011/06/14/what-we-own-and-why-we-own-it/

      Oh, and it’s a great question!

      • Fuji
        Posted May 18, 2012 at 4:18 am | Permalink

        I vaguely recalled I had asked the question previously – thanks so very much for such a thorough response! It’s nice to have a smart person’s brain to borrow on occasion. :)
        I feel much better about my choice now. I used to be spread out all over with Vanguard – Energy Fund, PrimeCap, V500 and more. Now I have 50% in Wellesley and 50% in a total stock fund via a 401K and I think I’m going to leave it and forget about it. We’re at least 10 years from retirement and even then I hope not to have to touch that money.
        Thanks again for such a substantive blog, I always am happy to see a new post.

        • Posted May 18, 2012 at 8:39 am | Permalink

          My pleasure, Fuji….

          ..and I think other readers benefit from your questions!

          • Fuji
            Posted May 19, 2012 at 8:38 am | Permalink

            I have loads of questions, lol. You should consider a “ask me a question” button on your blog. You could cull them and use some as springboards for future posts.

  6. Nephi
    Posted May 27, 2012 at 12:28 pm | Permalink

    I’m new to your blog, found it via the MMM blog. I really like this investing strategy but I am having a hard time understanding from looking at the chart for VTSAX on google finance how I would achive these massive gains that you are talking about. Overall, the chart does not indeed always go up. It drops to the bottom and then raises to the top, then drops to the bottom again but doesn’t seem to be going consistently up over the long term. And if you’re referring to the dividend income, for this past year it seems to be around 2% but it doesn’t look much higher or lower in any other years. Is this dividend income the only growth that is gained from the fund? Although after having another look at it I see that the dividend yield would be much greater if I were to purchase during a “sale”. I’m used to looking at dividend stocks so I’m not quite sure how to read the data from a fund. Up until yesterday I was planning on implementing the dogs of the dow strategy that Jacob from ERE recommends.

    • Posted May 27, 2012 at 6:29 pm | Permalink

      Hi Nephi…

      Great question!

      The problem is VTSAX has only been around since about 2000.

      If you look at the chart from its inception what you are seeing is the last 10-12 years of exceptional volatility the market has been thru. If instead you’d been looking a chart from say 1982-1999, you be forgiven if you started to believe the market only went up without pause.

      Check out the chart here:
      http://investing.money.msn.com/investments/stock-charts/?CA=0&CB=0&CC=0&CD=0&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&C5=0&C5D=0&C6=0&C7=0&C7D=0&C8=0&C9=0&CF=0&D8=0&DB=0&DC=0&D9=0&DA=0&D1=0&symbol=%24inx&SZ=0&PT=11

      This is the S&P 500 Index from 1950 and you can more clearly see the relentless upward bias. Or look at the chart I provided in Part IV of the series for an evan longer view.

      Now VTSAX is even broader based (all 5000 US based stocks) than the S&P 500 (the 500 largest) but that provides more diversity and should offer a slightly better performance over time.

      Dividends for VTSAX are around 2%. Sometimes higher, sometimes lower depending on the direction of the market at any given moment. Just like an individual dividend paying stock.

      If you haven’t already, you might want to read the rest of my stock series for more.

      Regarding the “Dogs of the Dow” strategy some love it and some loath it. There are plenty of conversations elsewhere, like ERE, on it. Since it’s not my 1st choice I won’t rehash them here.

      But for readers unfamiliar with the “Dogs” it is basically a strategy of buying the four or five highest dividend paying stocks from the 30companies on the Dow Industrial average. Since dividends rise as share prices fall the idea is that these companies have likely seen problems and a drop in their share price. Since they are large established companies and it is unlikely that they’ll go out of business, the bet is that the share price will recover and you’ll profit. Meanwhile you collect dividends in the 4-6% range.

      Each year you sell the winners and add the new dogs.

      I will say this. If I were trying to retire as early as possible with as little capital as possible I might consider it. This is what Jacob @ ERE did and, while I don’t recall his thoughts on the Dogs I can see where he might like it.

      Suppose you had 150k and wanted to hang it up. The traditional idea of a 4% withdrawal rate would give you $6000 in annual income. The Dogs might throw off 5/5.5% or $7500/$8250. That’s a big step up.

      For more on my thoughts on dividend investing:

      http://jlcollinsnh.wordpress.com/2011/12/27/dividend-growth-investing/

  7. Posted May 28, 2012 at 12:07 pm | Permalink

    Hi Jim-
    Here is a solution for those of us who work with brokers:
    http://now.msn.com/money/0527-german-financial-adviser.aspx
    the New Mexico Fritz

    • Posted May 28, 2012 at 2:30 pm | Permalink

      wow! that’s wild. but actually I’m surprised it doesn’t happen more often.

      Mmmmm….

      …..I wonder if there’s an investment opportunity in tar and feathers?

  8. ddrem
    Posted May 28, 2012 at 6:14 pm | Permalink

    Buying the indexes may have historically been the most profitable way to invest, but we can’t be sure that trend will continue.

    The stock market is a great vehicle for exactly two groups of people: institutions and corporate executives. For individual investors, it’s very much like a ponzi scheme since many companies pay none or only a tiny dividend these days. We have to hope that there is more money pouring into the stock market in the future to keep share prices rising if we hope to achieve our investment goals.

    But stock prices are a function of supply and demand. What would happen if demand left the market for a very long time? There could be any number of financial “disaster” scenarios or even more normal events which greatly reduce demand for stocks. e.g., What would happen if Baby Boomers moved out of the market and into more “safe” investments like bonds as they retired? As it clearly states in every stock market-related commercial: past performance is no guarantee of future results. And if everyone is basing their investment strategy on the belief that because it has always gone up over time it will continue to do so, that seems like a disaster waiting to happen. That is the same logic people were using for buying into the top of the tech bubble.

    And while index funds are surely a better bet than typical mutual funds due to lower management fees, in reality you are trading one stock-picker for another. The indexes aren’t static. The stock pickers at Dow Jones and S&P jettison poor performers and bring in newer stocks all the time.

    But what about the companies comprising the indexes? Their executives and boards are diluting the hell out of your shares with the options they grant themselves. And then they take the cash that could have been returned to you as a dividend and initiate share buybacks to cover up all of that dilution. They have found a great way to enrich themselves at your expense, and no one seems to mind much so long as the stock price continues to climb.

    Our economy and our stock market are not ATMs with a never-ending supply of cash coming out of them. They are vulnerable to many things beyond the control of anyone — even our politicians, central bankers, etc., as witnessed by the near-collapse of our banking system a few years ago. In 1494, the Pope divided the new worlds up between the two greatest world powers, Spain and Portugal. Anyone know how they’re doing now? And if the Roman Empire only lasted 1,000 years, America’s days are surely numbered too. The line may have been up for 100+ years now, but it won’t remain that way indefinitely.

    The stock market could revert to its original purpose of raising capital for corporations instead of being a vehicle for enriching the brokerages and corporate executives at the expense of shareholders. Companies could start paying real dividends again (higher than their bond rates since equity is inherently more risky) and stop diluting their shareholders. The politicians could gets their acts together and reform social security, medicare, etc., balance the budget and start paying down our national debt (~$15T with another ~$60T in unfunded/off-balance-sheet liabilities). And if all that happens in a timely manner, you’ll probably be just fine investing in the indexes. But if all the problems we’re facing aren’t solved, and demand contracts for an extended period of time, the stock market is probably not going to be the best place to put your nest egg.

    • Posted May 28, 2012 at 8:46 pm | Permalink

      Hi ddrem…

      …and welcome.

      Reading thru your comment, pretty clearly we are going have to agree to disagree.

      My views are laid out in some detail in my Stock Series and address the issues you raise. In addition, below I’ll offer some thoughts point by point. I’ve put your words in quotes to separate them from my response for clarity.<

      "Buying the indexes may have historically been the most profitable way to invest, but we can’t be sure that trend will continue."

      True enough, but also true of anything at all. When it comes to predicting the future we have to work with what we have.

      “The stock market is a great vehicle for exactly two groups of people: institutions and corporate executives. For individual investors, it’s very much like a ponzi scheme since many companies pay none or only a tiny dividend these days. We have to hope that there is more money pouring into the stock market in the future to keep share prices rising if we hope to achieve our investment goals.”

      Not sure how the size of dividend payments makes stocks a Ponzi scheme.

      There is nothing magic about dividends. They are only one option companies can use for allocating their earnings.

      Basically there are four things (at least that I can think of off the top of my head) that companies can do with their profits.  They can pay them out as dividends.  They can use them to build the company.  They can buy back their own shares.  They can buy other companies. They can sit on them waiting for opportunities.   See I came up with a fifth!

      Further, dividends are not related to or dependent on investment money coming into the market or the stock paying the dividend. They are sourced from the earnings of the business.

      “But stock prices are a function of supply and demand. What would happen if demand left the market for a very long time? There could be any number of financial “disaster” scenarios or even more normal events which greatly reduce demand for stocks. e.g., What would happen if Baby Boomers moved out of the market and into more “safe” investments like bonds as they retired? As it clearly states in every stock market-related commercial: past performance is no guarantee of future results. And if everyone is basing their investment strategy on the belief that because it has always gone up over time it will continue to do so, that seems like a disaster waiting to happen. That is the same logic people were using for buying into the top of the tech bubble.”

      Supply and demand are only one force driving stock prices. This is the “foam” I describe in Part III: http://jlcollinsnh.wordpress.com/2012/04/25/stocks-part-iii-most-people-lose-money-in-the-market/

      The other, and far more powerful, force is the earning power of the business your stock gives you ownership in.

      “And while index funds are surely a better bet than typical mutual funds due to lower management fees, in reality you are trading one stock-picker for another. The indexes aren’t static. The stock pickers at Dow Jones and S&P jettison poor performers and bring in newer stocks all the time.”

      There is a profound difference between what an active fund manager is attempting and the flow of stocks into and from an index.

      The active manager is trying to choose which companies will out perform their peers. Will JPMorgan do better than Bank of America?

      An index adds companies as their business grows to a sufficient size and discards them only when their business collapses below a minimum level. This is a very powerful process of self cleansing. I covered this in some detail here:
      http://jlcollinsnh.wordpress.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/

      “But what about the companies comprising the indexes? Their executives and boards are diluting the hell out of your shares with the options they grant themselves. And then they take the cash that could have been returned to you as a dividend and initiate share buybacks to cover up all of that dilution. They have found a great way to enrich themselves at your expense, and no one seems to mind much so long as the stock price continues to climb.”

      Certainly there are executive abuses in the board room, but they are not as common as you seem to believe. Shareholders can, and do, vote with their feet. If the execs and board of a company behave irresponsibly it takes surprisingly little time for shareholders to react and step away.

      It is hard for an individual investor to see this coming in any given stock, and that’s another reason indexes outperform.

      Finally, share buybacks are not done to cover up dilution, nor would they be effective in that roll. They are an alternative way to return value to the shareholders, exactly like dividends, but without tax consequences.

      “Our economy and our stock market are not ATMs with a never-ending supply of cash coming out of them. They are vulnerable to many things beyond the control of anyone — even our politicians, central bankers, etc., as witnessed by the near-collapse of our banking system a few years ago. In 1494, the Pope divided the new worlds up between the two greatest world powers, Spain and Portugal. Anyone know how they’re doing now? And if the Roman Empire only lasted 1,000 years, America’s days are surely numbered too. The line may have been up for 100+ years now, but it won’t remain that way indefinitely.”

      Here we agree. No great power lasts forever and if you believe “America’s days are surely numbered” certainly you might want to look elsewhere for your investments.

      But the US is still the dominate world economy and, in my view, will remain so for the next 100 years and counting. That dominance will shrink over time, as it has been doing since the end of WWII, but it is not ending anytime soon.

      “The stock market could revert to its original purpose of raising capital for corporations instead of being a vehicle for enriching the brokerages and corporate executives at the expense of shareholders. Companies could start paying real dividends again (higher than their bond rates since equity is inherently more risky) and stop diluting their shareholders. The politicians could gets their acts together and reform social security, g>medicare, etc., balance the budget and start paying down our national debt (~$15T with another ~$60T in unfunded/off-balance-sheet liabilities). And if all that happens in a timely manner, you’ll probably be just fine investing in the indexes. But if all the problems we’re facing aren’t solved, and demand contracts for an extended period of time, the stock market is probably not going to be the best place to put your nest egg.”

      Overall, a fair list of some of the challenges around today, and they are not likely to be resolved in anything like a timely manner. But it is no where near as grim as the list that might have been put together in 1860 or 1916 or 1933 or 1941.

      But that’s exactly why I favor ownership in successful corporations operating in the USA (still the world’s strongest economy) and around the world seeking new opportunities. That’s what it means to be invested in a broad-based Index Fund. That’s exactly what VTSAX is and it allows me to be poised to benefit from growing prosperity anywhere in the world.

      So, as I said, we disagree and that leaves me curious. Where do you invest your nest egg?

  9. Toddius
    Posted May 30, 2012 at 9:19 pm | Permalink

    I have enjoyed reading the blog.

    You said:
    “At the time VTSAX had yet to be created (Bless you Jack Bogle!), but just $15,000 invested in the Dow stocks, and left to ride, by the end of 2011 would be $1,000,000.”

    How are you figuring this? Back on 1974 the Dow was at about 850 and today it is about 12420. That is only 14 time greater.

    • Posted May 30, 2012 at 10:57 pm | Permalink

      Hi Toddius…

      Glad you like it.

      I used the spreadsheet calculator you can find here:

      http://observationsandnotes.blogspot.com/2011/08/stock-market-dow-growth-calculator.html

      In put start year: 1974
      Under that input investment: $15,000

      In put end year: 2011

      It will tell you the 15k grows to exactly $1,003,387, an annual return of 12%.

      Alternatively it will also tell you that it takes an initial investment of exactly $14,949.36 to end in a cool, even 1m.

      What? You thought I was making it up?? :)

      • Toddius
        Posted May 31, 2012 at 3:27 pm | Permalink

        I thought that 12% was high for the dow, but I wasn’t looking at the dividends. Without the dividend it is only about 7% annually.

        Thanks for your advice. It’s making me rethink my investments entirely.

        • Posted May 31, 2012 at 5:38 pm | Permalink

          My pleasure, and I appriciate your question.

          Just curious, how are you invested at the moment?

          • Toddius
            Posted June 1, 2012 at 11:49 am | Permalink

            I am 30, no kids, not married (but we might as well be), and currently renting our apartment.

            My retirement is 60% in my company’s stocks. The company I work for is employee owned. 20% in various higher-risk, what I now know are, index funds. The last 20% are in various stocks that, looking back, I choose randomly. A total of 40k in my retirement fund.

            Most (80%) of my private savings is cash siting in the bank and the other 20% are in other various stocks. A total of 70k private savings.

            No debt.

            The stocks have done good and bad, but I don’t think they are making money as a whole, far to risky and take more time than I should be spending on them. I put away about half my income, but have not maxed out my retirement in the past. I could have, but I’ve been thinking about buying a house.

            I live in a relatively expensive housing city, and currently looking at rental properties (duplex or triplex). We’d live in one and rent the other(s). I see this as a much better investment than a house, which my friends are all buying. I know it will be more work, but the numbers work out so much better. If I were to buy I will have to use all of my savings and probably dip into some of the retirement.

            That’s me. What do you think?

          • Toddius
            Posted June 1, 2012 at 3:13 pm | Permalink

            I should probably follow this up with admitting that I haven’t had much of a strategy so far. Other than saving and the investment property.

          • Posted June 1, 2012 at 3:24 pm | Permalink

            I think you’ve done very well. Looks like an aggressive savings rate and no debt. Kudos.

            Right now you are almost exactly at a 50/50 allocation stocks v. cash. Way too conservative for a 30 year old, but I’m guessing you are building cash for the house purchase.

            If you haven’t already you might want to read:

            http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

            Buying a house isn’t just about the numbers, but it is important to run them so you know what they say. Personally, in you situation, I wouldn’t do it. 30, single, no kids, working hard…who needs the house hassle. But that’s just me.

            If you do decide to buy, now is likely as good a time to do it as we’ll see for a long while. And I agree the multi-family is the better investment. but that will make you a landlord and that’s a part time job. Think long and hard before taking it on. The market is filled with people burned and desperate to get out of it. who, of course, make great sellers for you.

            as for your stocks, as you know I believe trying to pick individual stocks is a loser’s game. I still do it for fun with a tiny amount of my capital, but the heavy stock lifting in my portfolio is done by VTSAX. but any low cost total stock market or S&P 500 Index Fund offered in your 401k will do.

            Also, 60% in just one stock is very scary. I’d adjust that ASAP.

            My guess is I’m not telling you anything you don’t already know. :)

            Check back and let us know what you decide. Good luck!

          • Toddius
            Posted June 1, 2012 at 5:25 pm | Permalink

            The company stock is not in the same investment category as regular stock. The company is small (500 people) and not publicly traded. In fact, we can’t sell the stock unless we leave and if this is the case then we are forced to sell. The stock price is adjusted annually to the calculated value of the company’s worth. It has an excellent track record, 10% consistently for the past 30 years. I also see this as an investment in my career and position within the company.

            Thank you for the advice. I’ll let you know how it goes.

  10. Julie
    Posted June 19, 2012 at 10:30 am | Permalink

    I’m really enjoying this series. You have a way of simplifying everything without being condescending that is very unique. If you ever get bored with retirement, you should consider becoming a teacher, or at least a financial tutor.

    My only disappointment is that I did not find your blog or this series a year ago. I recently hired a financial advisor and invested my savings after way too many years of not having my money work for me, and I’m realizing that I should have done it differently. Oh well, live and learn, right? I’ll start “fixing” things soon, so that it’s all set up in a way that I’m much more comfortable with. From the start, I kept wondering why I shouldn’t just invest most or all of my money in the S&P 500, but I made the mistake of listening to everyone else’s “advice,” including the so-called experts. It’s great to hear someone with experience confirm what I already believed. Thanks for all of the great advice!

    • Posted June 19, 2012 at 2:40 pm | Permalink

      Wow, Julie….

      high praise indeed. you made my day!

      it’s never too late to get things on track. good luck!

      • Julie
        Posted June 19, 2012 at 10:24 pm | Permalink

        Thanks for the encouragement! Unfortunately I have to delay getting things on track; due to illness, I can’t work, and will likely go through my cash long before I’m better, so I’ll have to liquidate some investments. It’s definitely not the time to be moving things to something new. But as soon as I get back on my feet, that’s the first thing (in addition to finding a way to save up again, of course.) This is a great lesson in why it’s good to have savings!

        And you’ll have to trust me when I say that I wouldn’t have said it if I didn’t mean it. I’ve been following a lot of personal finance blogs, and this is now my favorite. I love your direct, straightforward approach.

  11. Nephi
    Posted August 2, 2012 at 9:05 pm | Permalink

    One question that I have is at what point do you sell? You mention that “We can draw our 40k from the dividends and capital gains our stocks in VTSAX throw off.” The capital gains come from selling, right?

    • Posted August 15, 2012 at 12:50 pm | Permalink

      Hi Nephi….

      Great question! Depending on your needs, there are several options.

      Stock funds, like VTSAX actually provide three avenues that can increase your holdings:

      Dividends, capital gains distributions and capital gains in the price of your shares.

      Dividends are based on the dividends the stocks held in the fund pay and they are paid out on a regular basis, typically twice a year. You can choose to have them paid to you in cash or reinvested in the fund. VTSAX currently pays out around 2% in dividends.

      Capital gains distributions are any capital gains the fund earned by selling stocks within the fund. As you might guess from the name these are paid out, or distributed, on a regular basis just like the dividends. usually on an annual basis. Like dividends, you can choose to have them paid to you in cash or reinvested.

      Also like dividends you will owe tax on these assuming the fund is held in a taxable account.

      Finally, if your fund shares increase in price you will also have a capital gain. However, this is not distributed and no tax is due until you sell your shares. To access this money you must sell shares, something you can do anytime. You can also arrange to have shares sold automatically.

      Hope this helps!

      • Nephi
        Posted August 19, 2012 at 12:45 am | Permalink

        Huh, that’s really interesting. I’ve never heard of capital gains distributions before. I know about dividends but not those. The page for VTSAX on Google Finance only shows dividends but not capital gains distributions information as far as I can see. Looking at morningstar it looks like maybe it hasn’t done any capital gains distributions at least in the past two years. Is that correct? Also, I checked the box to receive follow-up comments by email but it never notified me of your recent reply… I guess I’ll just keep checking back here on my own until I know that’s working.

        • Posted August 19, 2012 at 5:46 pm | Permalink

          Correct!

          As an index fund VTSAX will very rarely, maybe never, sell the stocks it holds so you are unlikely to see a capital gains distribution. This is one of the reasons index funds are considered to be “tax efficient.” for more on how they report such things:

          https://personal.vanguard.com/us/content/Funds/FundsVGFundsAboutGainsLossesJSP.jsp

          actively managed funds, on the other hand, buy and sell all the time. the “active” part of their name.

          each time they do, it is a taxable event, the sum total of which is accounted for at the end of the year. If there is a net gain on these transactions, the shareholders receive a taxable distribution. Any net loss is NOT tax-deductable to the shareholder, but it is carried forward in the fund to offset any future gains.

          This is one of the:

          — many reasons I prefer index funds.
          —reasons some investor prefer choosing their own individual stocks so they can choose if/when to take profits/loses.
          —reasons that if you own actively managed funds it makes sense to hold them in tax advantaged accounts.

          Very sorry to hear you are having trouble with the follow-up comment feature. That’s a WordPress issue and I am clueless as to how to correct it. Any ideas? Anybody?

          • Julie
            Posted August 19, 2012 at 9:33 pm | Permalink

            I’m getting the followup comment emails. I have no idea why I would when someone else wouldn’t, though.

  12. Chetbodet
    Posted December 23, 2012 at 11:54 pm | Permalink

    Why do you recommend VTSAX over the ETF version of the fund VTI? I am looking to invest in one next year in a non tax deferred account. It seems like the trading costs that go along with the mutual fund make it slightly less attractive than the ETF.

    Note: I am looking to invest approx $11K starting with bimonthly investments of $250, but will have less than $50K total invested with Vanguard.

    • Posted December 31, 2012 at 11:29 am | Permalink

      I don’t actually. As you point out, VTSAX and VTI are just different versions of the same fund, along with what is called Investor Shares which has a 3k buy in and a slightly higer expense ratio. VTSAX is just the version I own.

      VTSAX and VTI even have the same ultra low expense ratio and you can get into VTI with out the 10k minimum invstment required by VTSAX.

      My only reservation with VTI would be if you are paying a brokerage commsion to buy and/or sell. That’s a no-no. But dealing directly with Vangard, no problem.

      • J. Martin
        Posted May 10, 2013 at 1:29 pm | Permalink

        Hi, found my way here through the MMM blog and I’ve read the first 6 articles of your Stock series. I pretty new to anything stock market. I have about $1k (yes, one) in a mutual fund through Edward Jones that I haven’t look at in years and know very little about. My main question is about the act of buying stocks. If I don’t go through a brokerage like Edward Jones, how do I give a company like Vanguard my money? I was on their site (the Canadian version because that’s where I live) and didn’t see anything on how to actually buy stocks, or anything about minimum . Is there some kind of software? Do I have to become a member/client?

        Another Question. I am 26, so is my wife, and we have a 2 yr old son. I am still in school, will be for 4-5 more years (doctorate in theology, so no big pay day on the other side), and have about $20k in student loans from my undergrad. These loans are NOT accruing interest until I finish all my schooling, at which point we will have the money saved to pay them off before they ever do. As we save money (after reading MMM we’re seeing the necessity) for these loans should we be putting it in stocks, or just in the bank so that we don’t have to pay off the debt in a down stock year? And, to follow on my last question, I assume one sells stocks in a similar fashion to buying them — but HOW?

        • jlcollinsnh
          Posted May 10, 2013 at 3:32 pm | Permalink

          Welcome JM…

          Glad you found your way over here.

          When you are ready to move your money, just give Vanguard a call and they’ll walk you thru the process of getting it to them. Of course, you’ll also have to contact your current brokerage to get them to release your money. Sometimes they can be real difficult about this, one of the many reason I recommend avoiding them in the first place. Since you only have a $1000 you might just have them give you the cash and then send a check to Vanguard.

          Since you only have $1000 to start, the index funds I typically recommend are not available to you. They require $3000 minimums.

          No worries. You can get into their TRFs. At your age I’d use VTTSX https://personal.vanguard.com/us/funds/snapshot?FundId=1691&FundIntExt=INT

          This is an excellent fund and could easily be the only one you’ll ever need for reasons I describe here: http://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/

          As for the money you’ll be accumulating to pay your student loans, the classic advice is that it — like any money you’ll need within five years or so — should be kept in an insured bank account. Which these days pays close to zero interest. This good advice and is what you should do. But it is not what I, with my high risk tolerance, would do.

          I would add all this money as I could to my VTTSX fund. When the time came to pay off my loan, if the market had gone up, I’d sell the shares needed to raise the 20k and pay it off; keeping the extra money it had earned for me along the way invested. If the market had declined during the years leading up to my graduation, I would simply keep my money invested and keep buying more shares as I could, knowing I was getting them at cheap prices. As for the loan, I’d start making minimal payments as required.

          Then, when the market spiked back up as it always does, I’d pull the money and get rid of the loan.

          As for buying and selling, once you have an account it couldn’t be easier. Assuming you provide Vanguard with your bank info, you can move your money with a few mouse clicks or a phone call. Or you can mail them checks for deposits and have them send you checks for your withdrawals.

          Hope this helps, and keep reading the Series!

      • TKD
        Posted November 4, 2013 at 9:15 pm | Permalink

        Hi Jim,

        Possibly a dumb question, but I’m new to this. If VTI is essentially the same as VTSAX, wouldn’t I want to invest in VTI if I can’t meet the initial $10k threshold? Or would you still recommend VTTSX and then selling it for VTSAX when it reaches $10k?

        • jlcollinsnh
          Posted November 4, 2013 at 10:45 pm | Permalink

          Welcome TKD…

          Not dumb at all.

          The Total Stock Market Index Fund comes in three “flavors”:

          Admiral Shares: VTSAX .05%/$10,000
          Investor Shares: VTSMX .17%/$3000 If you start here, Vanguard automatically rolls you into VTSAX once your account hits 10k and this is not a taxable event.
          an ETF: VTI .05% (ETF=exchange traded fund. You buy ETFs in any amount you want, just like a stock. And, just like a stock, commissions and/or spreads are frequently involved, adding to your costs.)

          If you start with VTI (or VTTSX) you would have to manually roll it into VTSAX once you hit 10k and it would be a taxable event. However, since the ERs are the same you could just leave it in VTI.

          For more: http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

          • TKD
            Posted November 7, 2013 at 3:11 pm | Permalink

            Thank you for your thorough response. This site has been an invaluable tool as I attempt to educate myself on the mystifying world of finance. It has caused me to notice the ridiculous expense ratios and fees I’m currently paying with a financial advisor and I’m scraping together the $10k put into VTSAX and carving out a place in the budget to add to it monthly.

  13. Scott
    Posted January 29, 2013 at 11:01 pm | Permalink

    Look up value averaging — that’s the best way I’ve found to know when to move money between the stocks and the cash.

    And I’d suggest that you stick with the mutual fund, not the ETF, for the major holdings to avoid any bid-ask spread problems. Maybe start with the ETF for the low expense ratio, but once you’re comfortably above the admiral line, flip it into the mutual fund so you don’t have to pay ask for more, or settle for bid when you take it out.

  14. SC
    Posted February 19, 2013 at 4:20 pm | Permalink

    Love it! Love it! I’ve been wanting less theory and more practical steps. Keep it up!

    I like the idea of VTSAX, but as I hope we’ve reached a bottom in housing prices, and we can’t get any lower interest rates, that hopefully implies that interest rates and housing prices will increase going forward. If this is true wouldn’t buying REITs be a great place to put a larger chuck of money over the new few years?

    Also, this might be newbie question, but if you have several index funds within Vanguard, say 50% and 50%, if you want to rebalance them to 60% and 40%, you’d have to sell one to add to the other obviously, but do you have to pay the tax on whatever you’ve earned that you sell to put into another fund? Or because its still within the vanguard account do you not have to pay tax until you sell and/or take it out?

    LOVE IT! Keep it up!

    • Posted February 19, 2013 at 4:57 pm | Permalink

      And I love your enthusiasm, SC!

      Your thinking on interest rates, housing and REITS is sound. As it happens, I agree with your assessment. But remember, we are both now on the slippery slope of predicting the future and timing the market. A losers game, that. Be careful overweighting into REITS.

      As it also happens, I am in the process of selling my house and returning to the wonderful carefree life of renting. Probably bad timing.

      As I discuss above, at this stage of my life I personally use the The Wealth Preservation and Building Portfolio. That holds 25% in VGSLX (Vanguard REIT Index Fund). Once I free up the house equity it will go into this fund to maintain the allocation, but no more.

      Newbie or not, it’s a good question. The fact that you’d be selling one Vanguard fund and buying another does NOT protect you from any capital gain due on the sale. It is a taxable event. Unless, of course, you hold the funds in a tax deferred account like an IRA or 401k. In that case you can buy and sell funds tax free even across fund companies.

      Love your comment. Keep it up!

  15. Steve P
    Posted March 8, 2013 at 12:17 am | Permalink

    Great article! I had a question, I have a fidelity investment account through work (exercised stock options go to this after-tax account here) and it says I can only invest in the VTSMX and not the VTSAX (admiral shares). It says the VTSAX is closed to new funds even though I can meet the minimum of 10k in my account. Do you know if I can only get VTSAX through Vanguard.com?

    Also, your opinion on FSTVX? Fidelity’s version with low expense ratios that look to be on par with VTSAX. Net expense ratio of FSTVX is 0.06% as well.

    Thanks and keep up the great work!

    • Scott
      Posted March 8, 2013 at 1:50 am | Permalink

      MorningStar shows 0.07% for that fund, but otherwise it looks similar. You can look at the cap weightings and see that it’s also a full-market fund.

      If you have an account through work, look and see if there are any institutional-qualified funds. In my normal vanguard account I can get VFIAX for 0.05% ER, but in my Fidelity work account, I can get the VIIIX version for an epic 0.02% ER. (I don’t, though, because I don’t think the S&P 500 index is a good one for index funds. The more modern, broader, lower-turnover ones are better, and avoid the hedge fund front-running.)

      TBH, the difference below like 0.25% ER is not all that important. The most important thing is avoiding the 5%-up-front-and-1%-per-year rip-off funds…

      • Steve P
        Posted March 8, 2013 at 7:58 am | Permalink

        Great! Thank you so very much for the advice!

      • Steve P
        Posted March 8, 2013 at 8:51 am | Permalink

        One more question… Why not an ETF like VTI as opposed to VTSAX? Just curious as to your opinions on a no-load Mutual Fund to a low-cost ETF? Thank you again!

        • Scott
          Posted March 17, 2013 at 7:40 pm | Permalink

          VTI, VTSSX, VTSMX, VTSAX, VITNX, VITSX, and VITPX are all the same fund, just different share classes. (If you have $200,000,000 dollars in it, you get the fancy VITPX version that only charges 0.02%; if you’re a basic investor with $3,000 in it, you get the VTSMX version that charges 0.18%; if you get it through the ETF, and pay bid-ask spreads, you get charged 0.06% with a one-share minimum.)

          I wouldn’t recommend the ETF for something as core as your total market holding. You’ll quickly get above the $10k mark to get the same ER from a mutual fund as the ETF, and the mutual fund means you don’t need to worry about spreads, premiums, trade commissions, etc.

          ETFs have a much better place if you want to bet on things like sectors. Say you decide that you’re underweighted in Utilities (which are 3.4% of VTI/VTSMX, compared to financials at 17.8%). A small allocation to VPU is possible, since you can buy one share (currently around $85) at a time. The mutual fund version, VUIAX, on the other hand, has a minimum investment of $100,000. Since for something like that we’re talking about maybe 2% of the portfolio, the mutual fund only works if your whole portfolio is around $5,000,000: certainly far larger than I expect mine to get (in real terms, at least — who knows about nominally).

      • vicki
        Posted March 16, 2013 at 10:21 pm | Permalink

        Hmm, I just switched 401k investments to S&P 500 because the fee was .o5% while all the other fund choices are atleast .49% (their index life cycle fund is .78%). I’m wondering if I should stick with it.

        • Scott
          Posted March 17, 2013 at 8:06 pm | Permalink

          In that case, I’d say stick with the S&P 500 one. It’s by no means a bad choice, and the difference between the S&P 500 one and a total market ones are very much on the margins. (Some slight turnover differences, and whether small or large caps are doing better for that period.)

          0.05% vs 0.2% doesn’t bother be much. Some asset classes are just more expensive in practice — Vanguard’s non-US Total Market has a 0.16% ER, for example, and it’s worth it.

          But if you look at, say, Vanguard’s US Large Cap Growth Index Fund (0.10%) vs their US Large Cap Growth Equity (Active) Fund (0.54%), you’d better be getting your money’s worth out of the active management — and if you look at the past 10 years, you’ll see that you got some extra beta, but no alpha worth talking about.

          It’s almost certain that a 0.78% index fund is a rip-off. The most expensive index fund I can find at Vanguard is their ex-US small cap one, at 0.45% ER (though it’s also a load fund), with only 3 of 52 funds above 0.3% ER. So sticking with the low-ER stock fund in your 401k makes good sense (so long as it meets your target asset allocation).

          In related news, it drives me nuts that you can’t sort Vanguard’s fund lists by ER on their normal site. You have to go to the Advisors’ site, and find the screening tool that’s no longer in the tools list…

        • vicki
          Posted March 18, 2013 at 10:09 pm | Permalink

          That’s what I was thinking. Thanks Scott!

    • jlcollinsnh
      Posted March 8, 2013 at 10:18 am | Permalink

      Hi Steve…

      VTSAX is open to new investors thru Vanguard and most retirement plans that offer the fund. It being closed to you in your company’s plan must be unique to that plan.

      VTSMX is basically the same fund but with a lower minimum initial investment level and a slightly higher cost ratio. That’s the one I’d use in your case.

      Likewise, VTI is the ETF version. As long as you don’t fall prey to the temptation to trade it like a stock it’s fine too.

      I don’t pay attention to Fidelity funds much these days and so can’t comment on that specific one. But they, and several other traditional mutual fund companies (after years of disparaging index funds and the investors in them) have introduced their own.

      Since these are in response to Vanguard, typically their cost ratios are competitively low. If these are what’s offered in your employer’s plan, go ahead and use them if you’d like.

      But keep in mind, these companies only offer them as “loss leaders” to get you in the door. From there they hope to lure you into their actively managed funds where there is far more money to be made. For them. From you.

      For this and other reasons explained in this series, I only do business with Vanguard.

      • Steve P
        Posted March 8, 2013 at 10:23 am | Permalink

        Got it! Understood on all points and again thank you very much on the advice!

  16. Jonathan
    Posted March 11, 2013 at 4:58 pm | Permalink

    I deeply appreciate all the sage advice here…my only complaint is the slavery metaphor. I think MMM refers to his invested dollars as employees. That works for me. Referring to dollars as “slaves working in the fields” strikes me as an unfortunate use of language, especially given the otherwise excellent content here. But to each his own!

    • jlcollinsnh
      Posted March 11, 2013 at 7:08 pm | Permalink

      Hi Jonathan…

      Thanks for your kind words.

      You point is well taken and is actually something I’ve thought about. I picked up the slave metaphor from one of my favorite books (I still highly recommend it): The Richest Man in Babylon. In it the author uses the slave terminology. Partially, I’m guessing, because slaves were a fact of life in ancient Babylon and partially because the book was written in the early part of the last century when there was less sensitivity around the term.

      I prefer it over employees because it is more accurate: We have absolute ownership of our money. I also like it because it is a more powerful and dramatic word.

      All that said, giving offense or causing hurt is the last thing I want this blog to do. My hope is that we are far enough away from the cruel and ugly realities of slavery in this country to allow it’s use in a financial context. But I could be wrong.

      I’d be interested in hearing from any other readers who might have been given pause in reading it.

      My sincere thanks to you for bringing it up, especially in the gentle way you chose.

      • Jonathan
        Posted March 11, 2013 at 7:28 pm | Permalink

        And my sincere thanks to you, Jim, for your thoughtful and prompt reply!

        I’m not one to insist on politically correct language–I am a MMM reader, after all. And I do see how “slave” can be a useful metaphor for an invested dollar. I have also noticed its use in other contexts, like audio recording equipment. I guess what bothered me about this one aspect of your post was the extension of the metaphor to include details associated with actual, real-world slavery, like forced agricultural labor. There was also a mention of the “laziness” of your cash slaves, which brought a common racial stereotype to my mind. I think it was these additional rhetorical flourishes that prevented me from seeing your use of “slave” as an abstracted metaphor, which I know is how you meant it.

        Thanks again for a great site. I should tell you that based on your advice, I’ve decided to change the bulk of my 403(b) investments. I wanted to put it in VTSAX, as you suggest, and was disappointed to see it’s not available under my employer plan. But then I realized I could select VITPX, which, as far as I understand it, is the institutional version of VTSAX and is otherwise identical to VTSAX. (Please correct me if I’m wrong!) I had my money in one of the LifeStrategy funds before, which was doing fine, but VITPX has a .02% expense ratio, among its other benefits.

        • jlcollinsnh
          Posted March 11, 2013 at 9:46 pm | Permalink

          Your understanding of VITPX is spot on!

        • Scott
          Posted March 17, 2013 at 8:13 pm | Permalink

          You can find much better information about funds on the advisor version of Vanguard’s website. For example, it includes more correlation numbers (one of the most important things in Modern Portfolio Theory), and the stylebox shows the range, not just the central tendency (so you can see that VTSAX is more than a large cap blend fund).

          If you look up VTSAX on the Advisors’ site, you’ll see a “more share classes” link, which will show all the classes, including — as you determined — the epic “Institutional Plus”-class VITPX.

  17. Jared
    Posted March 21, 2013 at 11:39 pm | Permalink

    Jim, first of all, thanks for all your great posts on your blog. I was introduced to it recently and I have been ravenously reading your and MMM’s blogs.

    I have a quick question about investing… maybe quick, we’ll see. I was talking about your recommendations of VTSAX and was sent a graph from the guy I was talking with. It compares Vanguard’s VTI, BlackRock’s MALOX (a global allocation fund) and the S&P 500. Over the last 12 years, the S&P 500 has shown an increase of 21.69%, VTI an increase of 39.22% and MALOX an increase of 74.85%!
    I am wondering if you know anything about fund MALOX from BlackRock. I looked into it a little after this was presented to me, the first thing I noticed was that MALOX runs a .79% expense as opposed to VTSAX at only .05%. However, MALOX has a pretty great track record, and the graph he sent me is with fees factored in. I also saw a $75 transaction fee! which seems a little absurd. Wasn’t able to find out the details on the transaction fee, not sure if there are ways around it of if it is only in some situations, or if that is for every purchase or sell of new shares…
    I am wondering, if this really does as well as it’s showing over the long haul, it seems like a pretty good place to invest. Though, after reading on your blog and on a number of other financial independence blogs, I am a little wary of “active funds.” Most of all I’m curious to know if you know of the MALOX fund and what you know about it as well as what your thoughts are on it and on BlackRock in general.
    I am youngish, 27 and I started investing some right out of college. However, I wasn’t really that interested in the details and let a broker handle it… major mistake, ended up with my investments just sitting in AmericanFunds for the past 5 years essentially gathering dust! At least I didn’t lose my money, just lost all the potential money it could have been making. I’ve got about $12,000 in my Roth IRA and am looking for a productive place for it now. So I’ve been reading and researching but I must admit, I feel like I’m barely treading water in the stocks/investment ocean. Lots of info to wade through.

    Thank you again for all the blogs. You’ve been a great help in getting me some investment planning grounding to start from. You’re style is very educational and concise, thanks for your time helping some of us who are less financially savvy catch up and gain confidence!

    • jlcollinsnh
      Posted March 21, 2013 at 11:49 pm | Permalink

      Welcome Jared…

      Thanks for the kind words! I’m glad you are finding some value here. The fact that you started investing right out of college is awesome, even if you stumbled a bit on the way. Don’t let it bother you. I’ve made far greater mistakes. Just think of it as an expensive education.

      I am completely unfamiliar with MALOX and Blackrock and, candidly, I have little interest in looking into them. From your note you have already read enough of the blog to know my view of actively managed funds is they are not worth the time, let alone your money.

      They always do a fine job of presenting themselves and my guess is that these guys are no different. Who knows, they might even be the exceedingly rare case that does outperform the market over the decades (which at 27 should be your investing horizon). What I do know is I wouldn’t bet my money on it.

      Too bad about your investment in the American Funds, but they haven’t been “essentially gather dust.” They’ve been lining your advisors’ pockets with handsome commsissions and fees. Sorry, I couldn’t resist. :)

      Good luck!

    • Scott
      Posted March 22, 2013 at 1:50 am | Permalink

      The best question to ask yourself is, “Why did my advisor show me a 12-year chart? Is there something special about 12?” The answer, of course, is “Yes”.

      Go do some research for yourself, and look at the chart of the whole history of MALOX compared to VTSMX (the more expensive version of VTSAX). The first thing that will jump out at you is that since June 1996 (when MALOX started), MALOX is only up about 40% to VTSMX’s 140%. Then you’ll notice that it’s easy to make MALOX look better: pick a time that starts in the dot com bubble, so VTMSX starts by falling 40%. Then think, “Hmm, how long ago was that bubble?” and realize, “Gee, about 12 years ago, wasn’t it…”

      More subtly, you’ll notice that the shape of the MALOX graph looks rather similar to VTSMX recently. Mathematically, you can look at the correlation between them (I used 3-year correlation, because that’s the correlation Vanguard shows on their site for all their funds), which shows an R2 of .9393, which (essentially) means that 96.9% (square root of R2) of the movements in MALOX can be explained by VTSMX, so they’ll essentially differ only in beta (size of movements, which is easy to adjust by holding more cash) not in alpha (excess return for the same risk).

      Here’s a good article from Vanguard about how 10-year fund performance appeared to jump this year, since a bad year got removed from the calculation.

      Remember that your adviser won’t work for free. Either he has to make money from those load funds (those transaction fees go to his pocket, not the fund, usually) or you have to pay for his time, and most advisors only do one or the other.

      • Jared
        Posted March 22, 2013 at 10:05 am | Permalink

        Thanks Scott, I was looking for more history on the funds but hadn’t been able to find it. Each of the places I found info on the funds they only went back to 2000. I did notice that in general MALOX did’t increase as strongly over time as VTSAX, it just didn’t drop as steeply during the market downturns. Anyway, I really appreciate your response. I had also been wondering about the use of alpha and beta in other comments you’ve made. Thanks for that quick explanation too!

        • Scott
          Posted March 22, 2013 at 11:32 pm | Permalink

          “Didn’t drop as steeply”? Remember to compare it to a similar-beta fund. Dropping beta from stocks is pretty easy; you just mix in bonds. Take VBIAX, for example, which is a vanguard fund that’s essentially 60% VTSAX and 40% VBTLX (Vanguard’s Total Bond Index fund).

          If you compare MALOX to VBIAX, they behaved very similarly in drawdown depth and recovery rate.

          If you go look up MALOX on Morningstar, you’ll find that the guess is rather close. It says 33% US stock, 23% non-US stock, 17% bonds, and 13% cash (plus some in “other”, which appears to be things like Gold bullion).

          If you like the all-in-one fund model and are willing to (probably) have lower returns in order to (probably) have a more steady ride, consider something like the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), at 0.16% ER. If you look at its holdings page, you’ll see that it just holds (as of 02/28/2013 ), 42% US stock, 40% US Bonds, and 18% international stock (since lately US has been doing better than international, and they don’t do continual rebalancing for tax reasons).

          Personally, I use multiple funds so I can get lower ERs with Admiral shares (the strategy funds only have investor shares), can spread the different funds between my IRA and taxable accounts, and can rebalance with new money (or non-reinvested dividends) to avoid selling (in order to defer taxes as long as possible).

  18. Faey
    Posted April 10, 2013 at 1:16 pm | Permalink

    Hi there Jim

    I found your blog from MMM and MMM through ERE: it’s wonderful reading and lots of creative thinking. Thank you.

    My question is:
    I am swiss and live in Switzerland: is this investment strategy even possible for a non-resident alien?
    I haven’t been able to find anyone – so far – that offers those ETFs here and not sure how the tax situation would be – and also the conditions due to being a foreigner – would be.
    Do you have any suggestions?

    Thank you very much for your time!

    Cheers
    Fay

    • jlcollinsnh
      Posted April 10, 2013 at 4:38 pm | Permalink

      Hi Faey….

      Welcome.

      I’m afraid I have no expertise in how one based in Europe can go about this. As you read thru the blog, be sure to look at the comments. If memory serves, some of my European readers have posted their ideas and approaches.

      Perhaps someone from Switzerland will post a comment here with some ideas for you.

      You might also go to vanguard.com and ask there.

      Please, when you sort it out, comment again and let the rest of us know. Thanks!

      • Faey
        Posted April 26, 2013 at 3:59 pm | Permalink

        Hi Jim

        I have been looking into this and I am looking for equivalent products here. I think investing in the CHF makes more sense for me- I live here – as it is a little more stable than EUR and USD (ahm, at the moment).

        I like the portfolio ratios you go for, so I am evaluating the ETFs TERs and see where that takes me.
        Unfortunately I haven’t managed to find any similar companies to Vanguard when it comes to policy. Just cutthroat business as usual :)

        Again, thank you for your input!

        Cheers

  19. AJW
    Posted April 22, 2013 at 10:45 am | Permalink

    Have to ask the question. What do you think about adding a Vangaurd Small Cap and Mid Cap fund to your portfolio?

    I like the idea of 880K in stock with the remaining in a reserve for the down years, especially if you are getting a Social Security check, and retirement check for both you and spouse! Life is good….

    • jlcollinsnh
      Posted April 26, 2013 at 9:44 am | Permalink

      Hi AJW….

      Thanks! We are indeed enjoying our travels and I appreciate your kinds words on the blog.

      As for small and mid-cap funds I personally don’t feel the need. You pick those stocks up in a Total Stock market fund like VTSAX, the one I use.

      glad you like the 880k+reserve concept. Thanks for weighing in. I still can’t get completely comfortable with it, but it just seems there is some potential there….

      • AB
        Posted September 25, 2013 at 3:43 pm | Permalink

        My 401(k) is through Vanguard, but it doesn’t offer a Total Stock Market Fund. Right now, I’m invested 25% in S&P 500 (VINIX), 50% in Small/Mid-Cap (VEXMX), and 25% in International (VTRIX). Any suggested changes?

        • jlcollinsnh
          Posted September 25, 2013 at 4:29 pm | Permalink

          Welcome AB…

          The funds you are in are fine and a bit more aggressive than a straight Total Stock Market index fund. This because the Small/Mid cap fund is traditionally more volatile and has provided strong performance. But if you are trying to duplicate the Total Stock Market Index this would be closer:

          VINIX (S&P 500 index) ~75%
          VEXMX ~25%

          I hold a fairly contrarian view of not needing international funds. You’ll find my thinking here: http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

          Hope this helps!

          • AB
            Posted September 26, 2013 at 9:14 am | Permalink

            Thank you, sir. I greatly appreciate the reply and the insights you provide in your posts.

    • Scott
      Posted April 26, 2013 at 6:39 pm | Permalink

      Personally, I’d suggest diversifying by adding a bit of VTIAX before betting on small-caps. That said, I do have a bit of VEXAX (actually VXF, the ETF version). It’s essentially VTSAX without the S&P500. (VTSAX = VFIAX + VEXAX.)

      If you do decide to do some active management and pick things other than total indexes, be warned that the Mega, Large, Mid, and Small cap funds at Vanguard aren’t actually disjoint. Large contains both Mega and Mid.

      (Mega is first 290 stocks and Mid is 361, which add up to the 642 in Large. Small is 1436, but you’ll notice that Large + Small is still fewer stocks than the 3225 in Total.)

  20. AJW
    Posted April 22, 2013 at 10:57 am | Permalink

    First I would like to say I think your blog is great. Thank you for your work. Hope you are enjoying traveling ! ! !

    Your thoughts on adding a Vangaurd index Small Cap and Mid Cap fund in a portfolio mix?

  21. Mike
    Posted May 1, 2013 at 3:14 pm | Permalink

    General question on trying to do as you say to retire early:

    I am 49, have about 330K in a 401K, have a pension of about 20K per year coming when I’m 65, but want to retire by age 55. Should I take my money out of my 401K, take the 10% penalty and the tax, and move it into the Vangaurd funds you are discussing above. I dont know much about this but it seems to me that I cant retire early with my retirement money stuck in my 401K. Thanks.

    • jlcollinsnh
      Posted May 1, 2013 at 5:05 pm | Permalink

      Hi Mike….

      I loath taking penalties. As much as I love Vanguard, I’d look for similar funds within your 401k.

      What you want are low cost index funds. One for the total stock market and one for the total bond market. Or a Target Retirement Fund would work. Virtually all 401k plans have these.

      Once you leave the job, you can roll your 401k tax and penalty free into a Vanguard IRA.

      To withdraw your money penalty free, taxes will be due, you’ll need to be 59.5. So if you hang it up at 55 you’ll want some savings outside these tax plans you can draw on before then.

      Hope this helps!

      • Mike
        Posted May 1, 2013 at 8:09 pm | Permalink

        I see. So, to give me the best chance of retiring before 59.5, maybe I will leave the money in my 401K, but move it to an index fund withing the 401K. The other thing I could do perhaps, is limit what I contribute to my 401K going forward, and use the money I was putting into the 401K to put into the Vangaurd Index’d funds. Of course, that would be post-tax money I’d be putting in, as opposed to pre-tax money that I could have continued to put into my 401K, but I would have access to the money I put into Vanguard at any time, instead of having to wait until I’m 59.5 to get it.

        I guess the other thing I could do is just keep dumping money into my 401K, but put it into an index fund within the 401K, as you suggest, and find ways to save extra cash (like getting rid of cable, etc.), and put that money into a Vanguard index fund. This would allow me to keep taking advantage of pre-tax money by continuing to add to my 401K, and also build some cash reserves using personal investments like the Vanguard funds you talk about.

        One other option also is to do what I just said, but also as I get within 5 or so years of 59.5, I can use the 72(t) early withdrawal feature of my 401K, which allows me to withdraw money from my 401K in fixed amounts on a pre-established schedule. This would help in the case where I want to retire around age 55, but I dont have enough cash saved on my own, so I use the cash I do have saved, plus dip into my 401K a little bit to tide me over until I reach 59.5, as which time I can withdraw from my 401K as much as I want without penalty.

        What do you think of these options??

        Thanks again for your help!

        Mike

  22. Clint
    Posted June 6, 2013 at 2:39 pm | Permalink

    1. I’m currently 34 years old, and considering moving everything to VTSAX. Is this the best route at my age? Should I allocate more to the REIT and Bond funds? Assume I am saving as aggressively as possible (25% for now), have no debt, do not own a home, but only have an average total amount currently saved (under $100K).

    2. Why do you not invest in SPY or something that tracks the S&P specifically?

    3. In my 401K, I do have the ability to invest in an index that tracks the total stock market, but I currently have my allocations split between two large cap, a mid cap, an international, and a small cap fund(s). If I plan on putting my Roth and Brokerage into VTSAX, would it be wise to keep my 401K funds as they are, for more diversification?

    4. Is it best to keep a six-month emergency fund in a money market, or is there something that may yield more while still keeping it safe? Assume I have no foreseeable reason to need this money in the next 3 years.

    • jlcollinsnh
      Posted June 6, 2013 at 4:16 pm | Permalink

      Hi Clint…

      Glad you found your way over here. OK, let’s see….

      1. I think of this less in terms of age and more in terms of earned income. Lots of readers around here have retired early or are planning to. While you are working, earning cash flow and building your assets in what I call the accumulation phase, VTSAX is the best tool. Assuming your are prepared for the wild ride.

      Once you have you F-you money and have stopped paid work, it is time to smooth out the ride with some bonds and REITS.

      2. I prefer the broader reach of a total stock market index fund like VTSAX with its 3300 stocks v. the 500 in the S&P. SPY the S&P 500 in is what’s called a SPDR (Standard & Poor’s Depositary Receipts) a type of ETF (exchange traded fund) traded like a stock. No problem, if that’s what you want and are aware of the transaction costs buying and selling it. But for long-term investing like I reccomend, a mutual fund gets it done.

      3. The 4 funds you currently hold in your 401k are more or less mimicking the total stock market — exactly what you get with VTSAX. Just a more complex way to get there, especially in that you’ll need to keep them in balance to avoid an over allocation developing. Short of that, no harm in holding them. No benefit either.

      4. Time was I would have said MM fund, but now with interest rates so low it really doesn’t matter. Since bank accounts also offer FDIC insurance, more and more I’ve gone that way of late.

      • Clint
        Posted June 6, 2013 at 4:27 pm | Permalink

        Right now I’m shooting to retire in 20 years. My income is currently around $62K, and while that will increase, I can’t guarantee by how much. Does that change the picture at all?

        Obviously there are no guarantees, but to ask a further obvious question: How should I feel comfortable that putting everything into VTSAX will have worked out at the end of 20 years, instead of sticking with a more diversified path? Or that in the 19th year, the market doesn’t fall apart? (Again, there are no guarantees; I realize I’m asking an unanswerable abstract, but I’d like to hear what keeps you from worrying about it.)

        • jlcollinsnh
          Posted June 6, 2013 at 4:38 pm | Permalink

          Nope, and 20 years should be plenty of time.

          As for why I feel comfortable with this approach, that’s what this stock series is all about.

          Start with part I. :)

          • Clint
            Posted June 7, 2013 at 1:22 pm | Permalink

            In my 401K, the only index fund I have the ability to invest in is symbol FXSIX. Would this be close enough to VTSAX?

          • Clint
            Posted June 7, 2013 at 1:30 pm | Permalink

            Or should I stick with the current mutual funds in the 401K, if FXSIX is my only option?

          • jlcollinsnh
            Posted June 7, 2013 at 1:39 pm | Permalink

            FXSIX is Fidelity’s S&P500 index fund. It has a nice low expense ratio of .05, which is likely lower than the combined rate of the funds you now hold. But it is not quite as diverse.

            Still, when the dust settles, either approach will get you there.

          • Clint
            Posted June 7, 2013 at 3:35 pm | Permalink

            But if the expense ratio on FXSIX is .04, and the expense ratios on the mutual funds I’m currently in are anywhere from .69 – 1.33, wouldn’t it be best to be all in FXSIX, if the returns will be the same?

          • jlcollinsnh
            Posted June 7, 2013 at 3:43 pm | Permalink

            with those expense ratios on the other funds, yes, I’d go with FXSIX.

          • Clint
            Posted June 7, 2013 at 3:37 pm | Permalink

            Or maybe get rid of the highest expense ratio funds and roll those into FXSIX, leaving the funds that have lower expense ratios?

          • Clint
            Posted June 10, 2013 at 3:46 pm | Permalink

            Two final questions:

            1. If FXSIX, available in my 401K, tracks the S&P only, is there any benefit to keeping the small and mid-cap funds around? Or, to clarify again, just put everything in FXSIX?

            2. What are the benefits/ drawbacks to using VTI as opposed to VTSAX? And if I went the VTI route, what is the best strategy for investing? Buying often would rack up commissions. Better to build up a chunk, then invest quarterly or something less frequent? Or just forget the VTI thing and move to Vanguard, where I can just buy VTSAX?

            Thanks again for your help. I appreciate it.

          • jlcollinsnh
            Posted June 10, 2013 at 4:02 pm | Permalink

            Hi Clint…

            You really need to take the time to read the stock series here. Until you do, you’ll just be following my advice in answer to your questions blindly. Without understanding, you’ll eventually lose your way and, when the going gets tough, you’ll panic and fall off course.

            We’ve also covered the answer to both these questions already, but here you go:

            1. If you keep the mid-small cap funds in addition to FXSIX you will come closer to duplicating VTSAX but at the cost of high fees.
            2. VTI is an ETF and buying ETFs typically involves paying commissions. VTSAX can be bought commission free.

          • Posted June 10, 2013 at 4:20 pm | Permalink

            For investing, you don’t want ETFs unless you can get them commission-free. For Fidelity, you’d want ITOT, which is closer to VTI/VTSAX than FXSIX is, and has an ER only 0.01% higher than VTI/VTSAX.

  23. Posted June 18, 2013 at 12:24 am | Permalink

    I know I’m over a year late to this party (story of my life), but thought I’d chime in with some thoughts, especially related to “The Wealth Building with Cash Insurance Portfolio” (88% VTSAX and 12% cash) proposal. I guess you could also call it “The 3 Year’s Worth of Cash and Remainder in the Total U.S. Stock Market Portfolio”.

    I must caveat the rest in saying that I’m still in the accumulation phase of the FI curve and haven’t spent too much time thinking about the draw-down phase of this hill.

    On its surface, it’s definitely an interesting idea and seems to me to be very much dependent on your mindset. The 88/12 split does not feel at all like preservation and definitely feels more ‘pedal to the metal’. This is fine if your goal is to maybe reduce your SWR down from maybe a nice, although potentially high 4% to something lower or if you want to leave a nice nest egg to some fortunate dependents. If your SWR is already at 2.5%, my opinion would be to steer more toward a preservation mix.

    I know in a previous discussion we established that VTSAX (total U.S. market) also contains all the Real Estate companies contained in VGSLX (REIT Index), so I’d probably lean toward a hybrid approach that looks a bit like your “Wealth Preservation and Building Portfolio” with a subtle change. This way you get both more money invested in stocks and across a greater breadth that still includes real estate (to hedge against hyper-inflation) and bonds (to hedge against deflation). Given $1M portfolio, something like:

    70% in the stock fields working full tilt in the hot sun (includes easier duty REIT). $700K
    18% with really easy duty in the bond fields. $180K
    12% napping in the sun on the cash beach (3 years expenses). $120K

    • 2l2r
      Posted February 13, 2014 at 10:14 am | Permalink

      I like this but I am always keen to see how the cash balance is replenished. Questions such as do we not replenish in a year the stocks are down, or replenish first from bonds after cash is exhausted, so in a 7 year down turn for stocks we would never sell?

      thanks

      • jlcollinsnh
        Posted April 8, 2014 at 12:08 pm | Permalink

        Hi 2l2r…

        That’s exactly the stumbling block I haven’t been able to quite get past….

  24. PSA
    Posted June 24, 2013 at 4:43 pm | Permalink

    I’ve come to you by way of Mr. MM for my own financial situation, but now I have a question that concerns my mother’s. My mom is 71 and retired and she wants my assistance with her investments. Her home is paid off and she lives comfortably from her social security and pension. She doesn’t need to use any of the money she saved in her 403b – although her financial planner took out that money and split it into 2 annuities (possibly variable?) as far as we can tell (she’s just turned over her financial documents for me to decipher and I don’t know much about the post-retirement phase of finances). My mom thinks her assets are too conservatively held. She wants her money to keep making money, especially since she doesn’t really need any of it and could leave an inheritance (her idea – she doesn’t owe me or my brother a thing if she chooses otherwise). She’s always been inherently frugal and understands the basics of investing over the long haul but gets confused in some of the details or with pushy salespeople (hence the annuities). Could the 50/25/20/5 breakout you describe in the post be appropriate for her?

    Thanks for all of the information on your blogs. I’m reading and re-reading them every day and learning more and more each time.

    • jlcollinsnh
      Posted June 24, 2013 at 5:46 pm | Permalink

      Hi PSA…

      ..good to hear the stuff here stands up to rereading.

      Grrr. Just when I think my opinion of financial planners couldn’t be lower…

      If your mother is comfortably living on her SS and pension, there is absolutely NO reason for her to have been sold annuities. Well, other than the fact annuities are very profitable for the insurance companies and the agents that sell them. If she hasn’t already, she should promptly sever all ties to this clown.

      Now for more bad news. As you likely know, when your mom passes on the insurance company will keep whatever is left of those annuities. In effect, they not only have charged her high fees an d commissions, but they’ve made themselves her heir.

      Of course, while bad for her, this is a very sweet deal for them and they’ll not want to let it go easily. In all likelihood there are huge surrender fees built into these, making it very expensive to get out. How expensive you’ll have to wade thru them and pester the company to find out.

      Once you know, you can decide whether to just live with them or take the hit and get out.

      If she decides to get out, and if this is really-truly money she won’t need and will pass on to her heirs, the 50/25/20/5 breakout will work just fine for her. In fact, she doesn’t even need the 5% cash position. But if you and your brother also plan to hold this inheritance long-term, I’d go even further and suggest that VTSAX is all she needs. If I were living comfortably on my SS and a pension it is all I’d own.

      If it is just too cost prohibitive to get out, you can take the monthly annuity payments, open a VTSAX account and have her just start funneling the money in there. Hopefully she will live a very long and healthy life and bleed that insurance company for decades to come. That will be the best revenge.:)

      But that also brings up a very sober consideration. Not to be morbid, but you need to think about your mother’s life expectancy in this decision. If she’s in great health and comes from a family that routinely lives to be 110, the annuities look a lot better (although VTSAX would look better still). The greater the extent to which this is not true about her health, the more motivated to dump the annuities you and she should be.

      Please give her my best and tell her the best way to handle those pushy sales people is to just hang up.

      Good luck and please keep us posted!

      • PSA
        Posted June 25, 2013 at 2:11 pm | Permalink

        Thank you so much for such a prompt and detailed response!

        We’ll have to get into the nuts and bolts of the contracts to see what they really entail and what it would cost to get out of them. I’ve always been wary of insurance/investment bundles; I just wish I had known about this much earlier.

        My mom is active and in great health at the moment. Most of her immediate relatives haven’t yet made it past 85, but she’s in way better health than they were at her age. Of course, anything can always happen, but if someone in her family is going to make it to 110, it will be her.

        Thank you once again for your help!!

        • jlcollinsnh
          Posted June 25, 2013 at 3:38 pm | Permalink

          I hear you.

          When my mother was alive, and before she turned her finances over to me, some jerk sold her a piece of high cost crap call Damson Oil. Funny how I still remember the name after 25 odd years….

          All we can do is lick our wounds, learn from the mistake and move forward.

          Your mother is lucky to have you looking out for her.

          All the best!

  25. Posted October 15, 2013 at 2:15 pm | Permalink

    James,

    What do you think about a ‘poor man’s index’: equal amounts invested in 20 Dow stocks once per year, rebalanced once a year? With 80/20 stock + cash allocation, no mutual funds. I am in my late 20s and am looking for financial independence within the next 5 – 10 years.

    Thank you!

    • jlcollinsnh
      Posted October 15, 2013 at 2:41 pm | Permalink

      Hi FMG…

      I think it would be extra work and transaction cost that would result in lower returns that the index fund VTSAX 80%/20% cash. :)

      • Posted October 16, 2013 at 10:36 am | Permalink

        Extra work, yes. But regarding the transaction costs: say I have 250K. VTSAX charges .05% per year for admiral shares which comes out to $125/year in costs. But if I trade my 20 stocks only once a year to re-balance I’m looking at $4 per trade (ShareBuilder) x 20 trades = $80. Also, sticking to the Dow index blue chips somewhat protects me against bubbles. Please tell me if you see any fallacies in this. Thank you.

        • jlcollinsnh
          Posted October 23, 2013 at 12:26 pm | Permalink

          Sounds like you’ve got the costs handled, so I’ll give you that one.

          My concerns would remain:

          —lower returns over time than with VTSAX
          —sticking to 20 (or 30) blue chips actually makes your portfolio more volatile and more likely to take a bigger hit when bubbles burst.
          —you are a stock picker with this strategy and all the research indicates that is a very, very, very tough game to win.
          —and you won’t know if you’ve won until you have 20-25 years of doing it under your belt
          —since after that amount of time, maybe only 5% of professional investors will be able to say “Yes,” you gotta be awfully sure of yourself to make that bet.

          Personally, I’d rather be on the 95% side of those odds.

          Good luck!

  26. Garrett
    Posted December 3, 2013 at 10:56 am | Permalink

    Great blog and I love the ideas presented here. I am 26 years old and just started my career. I’m more inclined to be aggressive and I am just starting to get the hang (lingo and such) of the stock market. Is investing from Vanguard directly the same as lets say investing in their stock (VTI) on the NYSE. And what about Ichan Enterprise LP (IEP) on the NASDAQ, I feel like with his wealth of knowledge his stock would be a good purchase as well. Also, with the market as high as it is I’m afraid to buy at its current position (currently over 16K for the dow), would I be better off waiting until the fed starts tapering in a few months to get a better bargain??

    Thanks in advance!!

    • jlcollinsnh
      Posted December 3, 2013 at 9:52 pm | Permalink

      Welcome Garrett…

      Glad you’re here and enjoying it. But your comment tells me you need to do much more reading here.

      VTI is the ETF version of VTSAX, both are the Total Stock Market Index portfolios offered by Vanguard. Typically, but not always, you have to pay commissions to buy or sell shares in an ETF, plus ETFs were designed for trading and trading is a losing strategy. That’s why I prefer the fund.

      LPs (Limited Partnerships) are loaded with fees that are wonderful for the managers at the expense of the investors. The exact opposite of the low cost index funds recommended here.

      “After reading your series and the Bogle book, I can’t come up with a reason not to pursue a nearly solely index-fund strategy. It is so elegant in its simplicity and it makes intuitive sense to me, and you can outperform nearly everyone else with zero work and nearly zero fees. That’s incredible!” Brad http://www.richmondsavers.com/vanguard-funds-and-the-impact-of-fees-on-your-investment/#comment-1847

      Your last question is about market timing which I cover at length here:
      http://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

      You should definitely wait to invest. Not because of what the Fed might or might not do. Or because the Dow is at 16,000. But because you lack an understanding of investing principles. No worries. Keep reading. You’ll get there just fine.

      Good luck!

  27. Posted April 4, 2014 at 11:43 am | Permalink

    Hi Jim, I’m loving your posts referred by MMM, thanks so much for all the great info. A long time ago, I kinda fell into the conventional wisdom trap of 60/40 allocation of stocks/bonds; but I have to say that I am comfortable with a bit more risk (even at my advanced age :). I’m 56 and retired 3 years ago, and left my 401k in my company’s plan because it’s cheap and easy. 58% is mostly in 3 funds, S&P Index (.06 fees), BlackRock US Equity (.09) and BlackRock Extended Equity (also 9 cents). The 42% is in PIMCO’s biggie, the Total Return Fund, but the expense here is significant — 0.46 %. The past 10 yrs has been great, but the last 2 PIMCO has suffered. So I guess I have 3 questions for you, if you care to opine: (1) I’m happy with the stock fund returns and think the expense is low, am I right? (2) Am I crazy to want to change the allocation by 10 pts, to 68/32? (3) Even if PIMCO’s expense is high, I think it has performed much better than Vanguard’s — do you still think it’s a bad idea to stay with it? You should know that I’ve got a separate 50k invested in REIT’s outside the retirement fund, as well as 50k in a Colombian coffee farm! And I’m considering Lending Club as well… so I feel like I’m doing pretty well as far as diversification goes. Thanks! Scott

    • jlcollinsnh
      Posted April 8, 2014 at 12:33 pm | Permalink

      Welcome Scott!
      Glad you found your way here.

      You certainly sound well diversified and I bet there is a great story behind your Columbian coffee farm! If you care to share it, I also bet I’m not the only one who’d be interested. ;)

      As to your questions:

      1. Your S&P index fund and the two BlackRock funds have nice low ERs. While it is good you’re happy with the returns, don’t forget we’ve been in a powerful Bull market for the last few years. At some point the Bear will revisit for awhile. This won’t mean the funds stopped working. Just a heads up.

      2. Not crazy at all, especially with your other diverse investments and as long as you recognize that you will be adding some risk in seeking greater returns. Balancing risk/reward and smoothing the ride is what asset allocation is all about. But don’t be tempted to try to time the market in doing this: http://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

      3. Jack Bogle is fond of saying “performance comes and goes, but expenses are forever.” Or something like that. Many actively managed funds will outperform the index for a year or two or even several. But ultimately they underperform as apparently PIMCO is now. If, as I suspect, your BlackRock funds are also actively managed I would have the same concern about them even though it sounds like they’ve done well for you of late. This is why my money is only in index funds as described in the post.

      Hope this helps!

      • Posted April 11, 2014 at 12:00 pm | Permalink

        It DOES help, thanks Jim.

        So… the story on the Colombian Coffee Farm, it’s interesting. When my last company offered me a generous early-out pkg a few years ago, at 53, I could have walked across the virtual street to Apple or Google etc., but I was already in the mindset of escaping the cubicle.

        Since I had saved pretty well and they literally GAVE ME the F-you money (how ironic), my wife decided to take a sabbatical and we hit the road, living in several places in Mexico for the past year, then Florida’s “Space Coast” for a few months, and I write to you now from our current temporary home in S Africa, right next to Kruger Nat’l Park, where zebras and giraffe regularly block our driveway and hang out on the porch. We are so thrilled to be able to do this, and it is definitely on a tight budget.

        Anyhow, while living in Mexico with a lot of free time to read, I stumbled into various excellent blogs, like MMM and Live and Invest Overseas and now yours.

        Live and Invest Overseas is where I learned about the coffee farm, and so I took a week-long “due diligence” trip last August to Medellin to investigate. It seems that Colombia has the POTENTIAL to grow some of the very finest coffee in the world, yet their multiple layers of profit-grabbing, price-dictating middlemen have not only impoverished the coffee farmers, they have indirectly forced the production of mediocre coffee.

        Along came a company called Coffee Latin America and its sisters Logistics Latin America and Tierra Cafetera (now Cima), which bought a few very large farms that were in distress, and created a new model by inviting investors to share in the land ownership and the profits from coffee production.

        By cutting out the middlemen, they are able to focus on high-quality coffee only, return to the old ways of production (mono-crop to multi-crop), stop using chemical pesticides, and rewarding the farmers with higher pay, incentive bonuses, and health & pension benefits (never seen before).

        So, I can’t vouch for the results yet, because I’ve only been invested a half-year, but the 5-year projections show profit growing steadily from 3% to 19%, and continue on indefinitely at 19. Plus I physically own my 3 acres of the 120-acre farm, and am free to sell it, but the company has first right of purchase.

        So in a nutshell, I bought 3 acres of a Colombian coffee farm that is now dedicated to replanting high-quality beans in a sustainable, organic manner, with socially responsible practices, for $50,000 US, and I lease it back to the coffee farm in return for 2.5% (my share of the farm) of 80% of the profits. (The 20% goes to the farmers as incentive bonus.)

        I think it’s a win-win-win and I’d rather have it there than where it was, in employee stock shares that were going up, down, and nowhere. I can only hope that the returns will be as promised, but I know 19% is a lot to ask for; I’d be happy with 10.

        If anyone is interested, I can pass along the website for the company, I’m hesitant to do it now because it may appear that I’m promulgating or shilling for them. That’s not my intention…but you asked! :)

        • jlcollinsnh
          Posted April 12, 2014 at 7:35 pm | Permalink

          Wow Scott!

          By all means, post the link if you’d like.

          Great story, on many levels.

          Perfect example of how new vistas open up when we lift our noses from the grindstone.

          Right now I have a question in http://jlcollinsnh.com/ask-jlcollinsnh/ concerning ethical investments. Your coffee plantation will be part of my response.

          And I love how they gave you the F-you money to fund a chuck of your escape. Ha!

          Now I want to hear about living in South Africa! My wife is from Zanzibar and ever since our last visit we’ve talked about return to explore more of that continent.

          Thanks!

          • Posted April 13, 2014 at 4:33 am | Permalink

            Hi Jim, thanks for the kind words. The company’s link is http://www.cimacoffeefarms.com, there’s plenty of information there. But I’m also happy to answer questions. The coffee culture there is amazing. And I should add that the company did NOT buy out the old farm owners and kick them out; instead, they allow them to live out their lives in their house on the farm, and employed their adult children who wanted to stay in the business.

            S Africa is fantastic! No amount of zoo visits or watching Tarzan reruns can prepare you for the feeling of watching these magnificent animals parade around an immense national park, like Kruger in S Africa. Although you are pretty much trapped in your car. We’re so lucky to have a brother who owns a house in a reserve called Marloth Park, literally on the border of Kruger, where there are so many wild animals roaming around that they strongly urge you not to walk after dark in case one of the predators has gotten under or over the fence. So it’s like a reverse zoo; we’re trapped in our cages all night, trying to sleep through the scary noises outside! In daytime, my 2-mile walk to the market regularly includes sharing the dirt road with zebras, warthogs, kudu, impala, and even giraffes.

            You and your wife MUST return, there are so many incredible places and animals to see. We can only afford S Africa on our tight budget, including 3 months free rent and a free flight from my Amex points, and we can only hope that our investments (and Mustachian ways) enable us to visit many other African countries in the future.

  28. Posted May 2, 2014 at 1:26 pm | Permalink

    I would still consider myself a “beginner” investor so i really enjoyed this post. And mainly because I’ve been invested in VTSAX in my Roth for a few years now. I have many decades to go so I will just add to it and ride it out. This is being bookmarked.

  29. Arpit
    Posted May 3, 2014 at 4:44 pm | Permalink

    Hell Jim,

    First of all thank you very much for sharing this insight on the world of investing. You are a true inspiration for me.

    This is regarding the cash position on the portfolio. It is very interesting one and I am also thinking about it from my portfolio perspective. I am in my mid 30s and I have started investing in VTSAX but thinking about cash position. It is very interesting that super investors like Seth Klarman and Mohnish Pabrai have 20 to 30% of their portfolio in cash. Their reasoning behind this is, cash helps to navigate through difficult period and during those period (like 2008) you can deploy cash to take full advantage of it. If you see one of the reason why Buffet, Seth Klarman, Mohnish Pabrai has successfully beat any other fund manager on wall street is due to their ability to stay focused and have nerves of still to stay invested during down market and also grab opportunities at that time. But my dilemma is, for average investors like you and me is it worth to have say 5% of saving in cash? I mean what is better – to be completely invested in market to make every penny you saved work for you vs hold 5% cash and wait for down turn to take advantage of it.

    I know that answer to this question also depends upon individual’s comfort level but just curious to know your and all other visitors view on it.

    • jlcollinsnh
      Posted May 4, 2014 at 4:29 pm | Permalink

      Welcome Arpit…

      Thanks for the very kind words.

      I am unfamiliar with Seth Klarman and Mohnish Pabrai. My guess is that they are active, stock pickers? Typically, folks like that like to keep large amounts of cash on hand as they look for opportunities and/or wait for market declines.

      That’s what Buffett does, but interestingly it is not what he recommends:
      http://www.youtube.com/watch?feature=player_embedded&v=idr6c8NHuWs

      http://video.cnbc.com/gallery/?video=3000251489&play=1

      He recommends Vanguard Index Funds and holding them forever.

      If you do that, you really don’t need a large pool of unproductive cash sitting around. I try to keep my cash to a minimum.

      If the market plunges, when I rebalance some of my bond holdings will shift to stocks and I’ll get to take advantage of the drop that way.

      That said, 5% is certainly a modest amount if you want to hold some cash.

      Make sense?

      • Aaron
        Posted May 5, 2014 at 9:57 am | Permalink

        Yeah the reason why Buffett says one thing but does another, is that he knows most people can’t, or won’t, do what he does. Unless you are willing to work as hard as he, Klarman, Greenblatt and others, don’t even try to copy them. Just invest in index funds.

  30. Mike
    Posted June 5, 2014 at 5:28 pm | Permalink

    Hi Jim,

    I recently came across an article on MMM’s blog and noticed comments back and forth between him and yourself from 2012. It was on his asset allocation article. In it MMM suggests a portfolio allocation of 25% Large Cap, 25% Small Cap, 25% Intl Dev & 25% Short Term Bonds taken from William Bernstein’s “The Intelligent Asset Allocator”.

    Currently I am 100% invested in VTSAX as you advise on your blog, and as MMM originally did on his. I’m 24 years old and my portfolio currently sits at about $40,000 between my 401K, IRA, HSA and Taxable Account. My goal is to “retire” by 34.

    In the comment section of MMM’s article you agreed that anyone looking to retire within 10 years should be doing AA. I was wondering what you would recommend for me?

    Thanks in advance, love the blog.
    -Mike

    • jlcollinsnh
      Posted June 5, 2014 at 6:59 pm | Permalink

      Hi Mike…

      I’m afraid you have me at a loss as I don’t recall which post of MMM’s or what my comment there was.

      But as my post says above, I think of this in terms of two stages.

      In the wealth acquisition stage when you are still working I favor 100% VTSAX. Your savings rate in these years should be high and that money newly invested each month serves to smooth out the wild ride the market is.

      Once you “retire” and your earned income drops, you begin living off your investments. At this point I add bonds to smooth the ride.

      Of course, some make money in their “retirement” and if that’s the case you can balance between the two.

      Make sense?

      Glad you like it! :)

      • Mike
        Posted June 5, 2014 at 7:12 pm | Permalink

        Here’s the url to the article I was referencing:

        http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/

        And heres your quote to MMM:

        “For those retired or planning to in the next decade or so, AA makes all the sense in the world. Heck, even I do it now, although I hate owning bonds. In fact, I wouldn’t argue real hard against it even for longer terms it it helps an investor sleep better at night.”

        I asked because I am both in the wealth accumulation phase and within 10 years of “retirement”.

        I value your advice, thanks

        • jlcollinsnh
          Posted June 5, 2014 at 7:29 pm | Permalink

          Thanks Mike…

          ..that helps.

          What that quote refers to is the individual’s risk tolerance v. investment returns.

          In the comments on that post MMM observed that some research has indicated that an assets allocation of stocks/bonds (80/20 I believe) sometimes out-performs 100% stocks over time, assuming faithful rebalancing. While I’ve seen those studies, I’ve seen more that favor 100% stocks, no rebalancing required. In both cases the margins are narrow, so I default to the simplier 100% stocks using VTSAX.

          But that is the wilder ride and some find that very uncomfortable, especially as they close in on retirement. That’s the thinking behind the quote you cite.

          From a purely performance perspective, my call is 100% stocks. But stock investing is a long-term game and even with 10 years they could move against you. Risk v. reward.

          Only you can decide the balance that works best for you.

          This calculator might help: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

  31. Posted June 16, 2014 at 11:10 pm | Permalink

    Hi,

    You mention above in the article that “80%/20%, stock/bond mix will actually outperform, very slightly, 100% stocks” according to studies. Do you have a link to any of these studies, or an example that shows what stocks/bonds they did to beat the just 100% stock allocation? However, since it’s only slightly would you still recommend just 100% stock allocation since that’s simpler?

  32. markmark
    Posted June 18, 2014 at 11:22 pm | Permalink

    Hi jlcollinsnh, Just want to ask if you know if there are VANGUARD-similar firms here in the Philippines? I searched some but the fees are above the >1% expense ratio. Thanks! Your articles are helpful, please keep sharing.

    • jlcollinsnh
      Posted June 19, 2014 at 11:10 am | Permalink

      Hi MM…

      As far as I know, Vanguard does not have a presence there and I have no idea if there are similar firms. But I tend to doubt it. There really aren’t any similar firms in terms of how Vanguard aligns itself with the best interests of its investors even here in the USA.

      You might want to ask here:
      http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/

      Many of my international readers hang out there, even those not in Europe. Perhaps one of them will have some ideas for you.

      Good luck and please be sure to let us know what you learn!

  33. Cody
    Posted January 16, 2013 at 9:29 pm | Permalink

    I know you endorse VTSAX until you get closer to retirement. My question is how do you know when to start diversifying? I realize that everyone’s situation is different and it’s a tough question to answer. Are there any warning signs or checkpoints where one should look to start diversifying? I’m just starting to invest and I hope to have my F-you money in 10 years. I haven’t built much wealth so diversifying for me is counterproductive. I have no idea when to start. Please excuse me if there’s a post on this that I’ve missed.

  34. Posted January 16, 2013 at 11:37 pm | Permalink

    Hi Cody….

    Great question. Remember that diversifying smooths out the ride, but at the expense of overall performance. With that in mind….

    I’d stick with VTSAX (stocks) as long as I was working and saving 50%+ of my income. I’d just keep adding and building my holdings and actually hoping the market would fall so I could buy more shares on sale.

    As I was approaching the time I wanted to live on that money and would be unable to contribute more I would diversify.

    If the market were down or flat as I approached that shift, I’d keep adding to VTSAX till the last possible moment.

    If the market was soaring and everybody was talking about how this time it was different and the market could only go higher, I’d start shifting my allocation sooner. That’s when crashes happen.

  35. Scott
    Posted March 8, 2013 at 2:15 am | Permalink

    I’d endorse having a small (maybe even large) allocation to high-beta, negative-correlation bonds, because the rebalancing effects can actually improve return over pure stocks. In an (inevitable) stock down-turn, having some bonds that went up means you can buy even more stocks when they’re cheap.

    Take a look at the 5-year graph of VB vs EDV (2 vanguard ETFs, one stock and one bond, ERs of 0.10% and 0.12%), for example. VB’s regression line is about 11% per year, EDV’s is about 12% per year (thanks to Bernanke), but with perfect daily rebalancing a 50/50 mix of the two is about 15.5% per year, despite being far less volatile (never dropping more than about 10% from a high, when each of the other two had drops of about 40%). Remember that that timeframe includes the great recession. Negative correlations are seriously powerful :)

    Disclaimer: perfect daily rebalancing is impossible to accomplish. Actual results may be higher or lower. EDV’s great performance over the time period is largely due to market conditions that are nigh impossible to have happen again now. Your mileage may vary. Past performance is no guarantee of future results. All investments can lose money. You’re read this stuff before. Blah, blah, blah. If you don’t independently verify tips from blog comments, you’ll probably under-perform the market. I wish I had a crystal ball.

  36. Clint
    Posted September 3, 2013 at 4:15 pm | Permalink

    Two questions regarding small cap stocks:

    1. If small caps historically tend to outperform large caps (over the long term and provided you don’t panic), why do you not recommend overweighting small caps? Or being only invested in a small cap index?

    2. More practically, if one only has a choice of an S&P-tracking index fund in a 401K, would you see any problem with balancing it out with the addition of a small cap fund?

    3. If one were to look to tilt toward small caps, would you recommend VISVX (small value) or VSMAX (small cap index)?

    As always, thank you. Hope you’re having a good vacation.

  37. jlcollinsnh
    Posted September 20, 2013 at 10:09 am | Permalink

    Great questions, Clint, and thanks for the kind wishes on my travels and you patience in waiting tim my return for this response! It was a wonderful trip!

    OK….

    1. Your premise is correct and that could be a fine strategy.

    But you have two considerations. First, the small caps will give you an even more volatile ride, along with long periods of underperformance. Second, you’ll want to consider adding an international fund, and the extra risk these entail, as you won’t have this covered as with VTSAX. For more:
    http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

    2. That would work. Just remember, if your aim is to duplicate VTSAX, that index holds only about 20% in small caps. So 80/20 would be your S&P 500/SC allocation.

    3. I’d go with VSMAX for the broader sweep of small cap stocks it holds.

    Hope that helps!

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