An original painting by Alex Ferrar
On display at his restaurant Sobremesa, Antigua, Guatemala
Welcome to the second in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As before, the post is named after the featured painting above.
As described in the last post, Q&A, traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.
So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:
- It will get responses to readers who were kind enough to comment.
- It will get the flow of new posts started.
- It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
- It might even introduce you to some older posts you’ve missed so far.
Hope you enjoy them!
Stocks Part VI: Portfolio Ideas to Build and Keep your Wealth
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:
- I’m happy with the stock fund returns and think the expense is low, am I right?
- Am I crazy to want to change the allocation by 10 pts, to 68/32?
- 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.
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 a while. 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. See: 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!
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.
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!
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: International Funds
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!
What we own and why we own it
Hi Jim, hope all is well. I’ve been absorbing your blog like a sponge absorbs water. I just finished reading the entire stock series… really great stuff you’ve got here, it’s enlightening to say the least. Thank you!
I have a question for you regarding Vanguard’s money market fund (VMMXX). Since it is a money market account, Vanguard allows for checkwriting services… my question is, are there any tax implications for writing checks? Vanguard states on their website that “for tax purposes, checks are considered redemptions”.
Here is a link:
Glad you’re enjoying it and I appreciate the kind words!
Money Market funds strive to maintain share value at exactly $1, so typically there is no capital gain or loss when you sell shares. So, no taxable event — even though checks written on them are redemptions.
I say typically because on rare occasions an MM fund will “break the buck” — that is the share value will drop below $1. This is a very big and negative deal. It last happened in the financial crisis of 2008, but only with a couple of MM funds. None were Vanguard’s.
So for all practical purposes, you have nothing to worry about here.
But, with interest rates so low, MM funds are no longer a very profitable place to keep cash. Banks, especially on-line banks, pay more these days and enjoy the benefit of FDIC insurance. My checking account actually pays more interest than VMMXX. But both are vanishingly small percentages.
I still use the MM fund, but mostly now just for convenience.
Stocks Part VIII: The 401k, 403b, IRA and Roth Buckets
Just wanted to tell you I’m so glad I came across your blog!!
I’ve always found the stock market to be so interesting and wanted to become a broker but in the end I’m majoring in accounting. Turned out to be one of the best things I’ve done because I’m already working for a firm making about 25k a year (after taxes).
Anyway, I’m 19 and just opened a Roth and invested my first few paychecks – 3k (enough for VTSMX). I’m extremely lucky at the opportunity I’ve been given.
I still live at home and only have my phone payment; saving about 90%. I’m currently working to get my AA, while it’s not easy being a FT student and maintaining a FT job, I know it’ll be worth it in the end.
Can’t say how grateful I am at the plethora of information I’ve devoured on your site, One step closer to having my FU Money.
Thanks – Jonathan
Congratulations on what sounds like a splendid start. Would that I were as wise when I was 19!
As you might well already know, once your VTSMX account hits 10k Vanguard will automatically roll it into the lower cost VTSAX for you.
Finally, thanks for the kind words. You made my day!
Stocks Part XVII: What if you can’t buy VTSAX, or even Vanguard?
Newbie here! Trying to make sense of all this.
I’m looking for your Vanguard recommendations in my freshly started 401K.
Are these index funds?
Vanguard LifeStrategy® Conservative Growth 0.70%
Vanguard LifeStrategy® Moderate Growth 0.70%
Vanguard LifeStrategy® Growth 0.70%
LVIP Vanguard International Equity ETF 1.20%
What about this guy?
LVIP SSgA S&P 500 Index 0.54%
Always nice to have another newbie join in!
Only the last one is an index fund.
However, the first three are each what are known as a “fund of funds.” That is, they are made up of other funds and each of these are made up of index funds.
The idea is that you get diversification and automatic rebalancing, but the ER (expense ratio) is a bit higher.
For instance, Vanguard LifeStrategy® Growth –https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT — is made up of:
–Vanguard Total Stock Market Index Fund Investor Shares 56.1%
–Vanguard Total International Stock Index Fund Investor Shares 24.1%
–Vanguard Total Bond Market II Index Fund Investor Shares† 15.9%
–Vanguard Total International Bond Index Fund 3.9%
Basically an 80/20 stock/bond split using a nice selection of funds.
Were I young and planning a few more years of work, of those you listed that’s the one that would be my choice.
Case Study #7: What it looks like when everything financial goes wrong
Great story and some very worthwhile advice from all involved. I love the points about living with less and focusing on relationships over “stuff”. I’m also amazed by Tom’s ability to live such a mobile life with a family in tow. Hard to do that with lots of unnecessary possessions on hand. Reminds me of the wisdom in one of David Cain’s recent posts on raptitude.com (“Everything In It ‘s Place, Now and Forever.” )
So as not to armchair quarterback Tom’s decisions in an effort to apply lessons to my own life, I’d love to hear what advice he has based on his story. Above and beyond his very wise comment about the value of relationships over material desires, that is. With all the forks in the road that he faced, I’m sure he developed at least an unconscious list of rules to live by that have helped him maintain such a positive outlook and ability to attract quality people in his life. I say this based on both his successes and his failures, as lessons obviously can be learned from both.
Hey, Tom here. In response to Deacon’s request, I have a few rules I live by …
#1. Seek the truth; there is a lot of deception in the world. Learn to find out what is true and what is false. It takes some effort, but it’s worth it.
#2. Get outside everyday and breath fresh air, get some exercise, even if it’s just a nice long walk.
#3. Look everyone in the eyes when you talk to them; it will instill trust in both parties and you will learn to read others’ responses.
#4. Tell the ones you love (family and partner) that you love them.
#5. Simplify, simplify … Thoreau was right. We sure can’t take all this stuff with us.
#6. Work at a job you love and put your all into your work. That being said, don’t take your work home with you. Take time to unwind.
#7. Eat healthy, have a drink daily, but don’t overdo either.
#8. Be thankful for the things money can’t buy.
#9. If you have kids, take them fishing, camping, whatever. Show them there is another world out there that has nothing to do with electronics or stuff.
#10. Take the back roads in life, stay off the freeways.
Thanks for the response Tom, and to jlcollinsnh for the addendum. Very wise words to live by. I have to say that my #1 and #2 would be exactly the same. Interesting how certain life events will cause me to remember or re-evaluate certain of my own ‘rules’, but these two (and maybe a couple others) are constantly in focus. Thanks again for the words to live by.
You will end up a wealthy man Deacon … like me.
Stocks Part III: Most people lose money in the market
Luckily, Jim chimed in with a great response (no big surprise there) so hopefully that answered your question.
I wrote an article about some of the cognitive biases that cause us to make bad investing decisions so feel to check that out for a few more reasons why most people underperform the market.
From: Stock Series
Thanks for the quick response! I was hoping you would say that since I already maxed out my Traditional IRA for 2014 haha!
Stocks Part I: There is a major crash coming!!!