By Dr. James M. Dahle, WCI Founder
I don't write about it very often, but regular readers know the vast majority of my portfolio is invested in traditional low-cost, broadly-diversified index mutual funds and their exchange traded fund (ETF) equivalents. I'm talking about funds like the Vanguard Total Stock Market Index Fund (25% of my retirement portfolio and 100% of my HSA portfolio) and the Vanguard Total International Stock Market Index Fund (15% of my retirement portfolio and 50% of my 529 portfolio.) Now I have small portions of my portfolio dedicated to things like bonds, small value stocks, and real estate, but you won't see any individual stock picking, market timing, or significant use of active management of publicly traded securities.
Recently I was looking for an old post about index funds to link to and realized I didn't have one. So this is one of those back to basic posts. If you already know index funds rule, feel free to move on to something else on the site. If you haven't, this post is for you.
Top 10 Reasons to Invest in Index Funds
#1 Better Performance
This is the main reason I use index funds as the major building blocks in my portfolio and the main thing I look at for those minor portions of the portfolio where I consider doing something different from indexing. The empirical data is quite clear on this. Buying individual stocks (or bonds) introduces uncompensated risk, i.e. a risk that you are not compensated adequately for taking. This is the risk of a company going bankrupt or a borrower defaulting or being downgraded. This is when an individual security goes down in value when the overall market is going up and it happens all the time to people who buy individual securities. It doesn't happen to me though, because I invest in mutual funds. Mutual funds give you broad diversification, pooled costs, daily liquidity, and professional management all for a very low cost.
You can get those particular benefits with an actively managed mutual fund just as well as an index fund. However, the data on active management vs passive management is clear too. Time and time again it has been shown that active management doesn't work well enough to overcome its additional costs, particularly over the long term and even more so in a taxable account. At 10 years, an index fund is outperforming 80%+ of its peers. By the time you get out to your 30-60 year investing horizon and consider all of the asset classes in your portfolio, an index fund portfolio is going to outperform 99% of similar actively managed portfolios.
So when you invest in index funds, over the long run you can expect higher returns than those who pick stocks or mutual funds. Even Doonesbury agrees:
#2 Less Time-Consuming
Another important reason I invest in index funds is that it takes dramatically less time to invest in this manner. While I have to spend additional time on my own portfolio to direct significant ongoing contributions, I manage my parents' all-index-fund portfolio in about an hour a year. Seriously. An hour. That's it. What do we do in that hour? We rebalance it and pull out their required minimum distribution. And even the initial set-up didn't take much longer than that.
When you invest in index funds you don't have to spend any time at all researching stocks or following companies. You don't watch CNBC. You don't read Forbes or The Wall Street Journal. You don't have to, because it isn't going to change anything you do. Nor do you want to, because once you realize all that information is completely unactionable, you see just how boring it is to pour through when you could be doing something else with your life. We invest to live, we don't live to invest.
Here's another issue. Most stock pickers or mutual fund pickers don't subtract the value of their time from their portfolio. For a high-earning professional, that cost is hardly insignificant. In fact, it may be your highest investing cost. Even if you manage to beat the market one year, the chances of you having done so after accounting for the value of the time you lost doing it is pretty darn low. You would have been better off doing another procedure, reading a few more slides or CTs, or seeing a few more patients. “But I enjoy it” is hardly an excuse, especially when you're not only wasting time on it but getting lower performance (see # 1) to boot. I'll bet there is something else you enjoy more anyway.
#3 Less Risky
Not only do you get to avoid taking uncompensated risk with individual securities, but you also get to avoid manager risk. This is the risk that your manager is stupid, makes a mistake, or retires. “But Warren Buffett is brilliant!” Yes, but he's also mortal, just like every other money manager out there. (And he recommends you invest in index funds rather than Berkshire-Hathaway.) When you invest in actively managed mutual funds, you're always left to wonder whether the cause of your recent underperformance is just cyclical or whether the manager is either no longer skilled or no longer lucky. By the time you figure it out, it's often too late. Not to mention the value of your time managing the managers.
#4 Lower Cost
Costs matter, and over the long run, they matter a lot. The main reason index funds outperform actively managed mutual funds is that they have dramatically lower costs. You avoid mutual funds loads and 12b-1 fees. Your expense ratio is likely to be only 1/10th that of an actively managed fund (0.02-0.2% versus 0.5-2%.) There are hidden costs as well- commissions and bid-ask spreads that come from the higher turnover most actively managed funds have. And of course, your highest cost- the value of your time selecting and monitoring a portfolio of managers.
#5 More Tax-Efficient
Mt. Roberts above Juneau on an Alaskan Cruise–Index investing allows me the time and money to go on cruises and climb mountains
An index fund portfolio is generally much more tax-efficient than an actively managed portfolio. The turnover is lower, so there are fewer capital gains distributions, particularly with a broadly diversified index fund, such as the total market funds. The only time these funds have turnover is when there is an Initial Public Offering (no capital gain distribution) or when a company gets delisted from the exchange (again, no capital gain distribution.) Theoretically, the turnover ought to be 0%. In actuality, it's about 4% for various technical reasons. That means the average stock is held for 25 years. Considering the average mutual fund turnover is 85%, holding their average stock for just a little over a year, 4% is basically 0%.
Capital gains are also minimized by the fact that you don't have to change funds every few years when a fund manager retires or loses his touch.
#6 Easy Portfolio Building Blocks
One of the best parts of index fund is that they simplify the portfolio construction process. If your investing policy statement calls for 5% of the portfolio in REITs, you can simply invest 5% of the money into the Vanguard REIT Index Fund. Done. Need international stocks? Add an international fund. Corporate bonds? There's a corporate bond index fund. No style drift. No worries about overlap with other holdings. You know what's in the fund just by reading the fund name. Sometimes I think it's amazing that anyone would pay thousands of dollars a year to someone else to build their portfolio for them when it can be so easy.
#7 Wide Availability
I can buy my favorite index mutual fund, the Vanguard Total Stock Market Index Fund in my partnership 401(k), our individual 401(k)s, our Health Savings Account, our Roth IRAs, our children's 529s, our children's UGMAs, our children's Roth IRAs, and our taxable account. It is a component of the portfolio in our partnership defined benefit plan too. Even my old 401(k), the TSP, has a similar fund. It's as universal as it comes. So no need to find a different mutual fund for every account you invest in. And even if I didn't have access to Vanguard funds or a Total Stock Market fund, the chances of me not having access to an equivalent fund from Fidelity, Schwab, or iShares (or at least a 500 index fund) are low and getting lower all the time.
#8 Capture Market Returns
l love that index funds guarantee me the market return. If the market goes up 8% one year, I got 8%. The S&P 500 index is up 1% today? So's my fund. No worries about tracking error. Beating the market is very tough, and most who try fail (and fail big). Of those who succeed, they usually only do so minimally. But matching the market? Nah, that's easy.
#9 No Factor Risks
The Total Market versus Factor Investing debate will go on for years. Most of the time you can use low-cost index funds for either approach. But one nice thing about a total market approach is that you can be agnostic about sectors and factors. If small stocks do well, you own those. If value stocks do well, you own those. Low volatility? Check. Momentum? Check. Any other factor or sector you can come up with? You own that too. You don't have to worry about a factor being discovered, bid-up, and then underperforming.
#10 Minimize Regret
I owned Apple before it skyrocketed. I got in on the ground floor. Same with every other high-flying stock out there. Sure, I own lots of losers too, but I never have to worry about missing out on the meteoric rise of a stock. That helps me control the most important thing in my portfolio- my own behavior.
There are many roads to Dublin. If you build a reasonable portfolio, fund it adequately, and control your behavior, you are highly likely to reach your financial goals. But for whatever portion of your portfolio you invest in stocks and bonds, do yourself a favor and use an index fund.
What do you think? Do you invest in low-cost index funds? Why or why not? What do you like about them? What do you dislike? Comment below!
I recently worked with two of my colleagues (both anesthesia docs) to fix their 403B account where we work. One of them had been suckered into the target fund offered by our employer (avg ER of 0.6), because that was the default selection for our 403B. I quickly walked him through the various funds it invested in, showed him the high expense ratio’s and less than stellar performance of those funds compared to the vanguard funds offerred at our institution. We then changed everything over and fixed it in about 15 minutes. It was that simple.
My other buddy is paying a fee-based financial advisor 1% Assets Under Management (AUM). He told me “I don’t have the time to do it myself.” I told him how much that line was going to cost him over the next 50 years, and I asked him to go home, pull up his portfolio and see if his financial advisor was putting his money into low-cost index funds or not. He sent me a screen shot. About half the money was in a fund with a 0.92% ER and similar performance to the index fund that corresponded to that fund. The second major component of his portfoilo had 12B-1 fees and an overall expense ratio of 0.6%. Add on top of that the 1% AUM he was paying and the guy was getting ripped off. He will be firing his financial advisor for a transition into low-cost index fund investing.
Going back to the basics on this topic really never does get old! As the pastor that married my wife and I says, “You can never hear ‘true’ things enough.” Reinforcement is almost always a good thing. Thanks for the post.
Rick Ferri likes to say “The truth about index investing must be told over and over again because lies are constantly being told around it.” You’re right, I probably ought to hit it more often.
The wise person learns from the mistakes of others. For everything except real estate I invest in index funds. Why? Well, because I made some classic mistakes and learned the hard way. That is, I proved to myself through trial and error in my twenties that: 1) I could not successfully trade stocks; 2) I could not successfully pick winning actively managed mutual funds; 3) there really were unscrupulous high front end fee money managers out there that take your money. (I also learned that I could not beat the odds in Vegas…) Fortunately, I learned those lessons when big money to me was a thousand dollars. (Hey, that was 5% of my income when I was commissioned!) If you are just starting out, do yourself a favor and start a long term program investing in index funds. Sometime along the way, when you have extra money to invest and have developed an advantage (for me investing in local real estate) you can branch out. But like WCI keep your core investments in index funds.
I’ve been a big fan of index investing since the mid-1980’s. Yes, they and I have been around that long! I think for most readers index investing is all they need.
Although I’m not disagreeing with anything here I want to point out a difference between private and public markets. I think in publicly traded stocks there is a nearly infinite amount of data and talent being applied to optimize value. An amateur or even a professional is unlikely to outperform the index. And if they do, transaction costs and taxes will take away any gain.
In private markets that isn’t necessarily true. My biggest profits have come from private investing. Small private companies, surgery centers where you work etc can be a source of high return with low risk. I don’t want people to feel they can’t invest in a good opportunity, just because it isn’t an index fund.
For sure, see my post on Monday about what we do with the other 15% of our portfolio.
It’s worth noting that part of the value you extract from the types of private investments you mentioned is the illiquidity premium. Arguably, a downside of investing in publicly traded stocks and mutual funds is that if you have a long time horizon, you don’t necessarily need the liquidity, but you pay for it anyway. Though the convenience and low management fees more than make up for it, usually.
Excellent point and one reason I invest in real estate and websites. I would gladly give up even more of my liquidity for higher returns. I mean, the vast majority of my retirement portfolio won’t be spent for literally decades.
just read random walk down wall street
if that does not convince you to index, nothing will
then read bogles books on funds as he shows the tyranny of compounding and how it eats up your profits over your investing career
31% of money is now indexed
There are physician-specific financial advisors out there that will put you in index funds for 1 percent AUM fees. I completely agree indexing is the way to go, and now I handle my own broad, low cost index portfolio. I am perplexed though why someone would pay 1 percent per year to be in index funds?? It’s not like the advisor is going to give any boost to the overall market.
I mean, I understand value added by preventing people from jumping in and out of the market, but couldn’t this be accomplished with basic education and an annual flat fee check in, if necessary
Hard to blame the advisor for taking the money, but I agree there is little reason to pay 1% when there are so many (and more all the time) willing to do it for less.
I have about index funds or mutual funds in my employer accounts because that’s my only option. I don’t have a problem with that, but there is no control over the turnover but indexes tend to be ok. In my own account though to include IRA I have all stocks. We park them. So we don’t pay trade fees (once upon a time we did pre-computer) nor capital gains (since we never sell) and can retire now in our 40s and easy live off the dividend income. It works. So we are like 90% individual stocks and 10% funds allocated. And we have maybe 80 stocks. No work involved so I don’t pay attention. We pay no one to manage our stuff. There is nothing to manage.
I also agree that it is completely insane to pay someone to manage an indexed portfolio. Waste of money.
You need to meet more docs if you think it’s insane. Better to pay someone than not do it at all or not stay the course or whatever. But I agree, it doesn’t take very much knowledge to put a portfolio together or rebalance it. You could learn everything you need to know in 8 hours in an online course…. 🙂
Tell us more about this course… 😉
Seriously, I feel like it’s all I’ve talked about for a month, then I get emails from people saying, “Can I still get the discounted rate on the course, I fell asleep.” For ten days? It’s a tricky balance making sure every one has heard about it and had sufficient chances to buy it without pissing off all the people who read about it 3 times already and decided they didn’t want it!
oh yes! I realize there are plenty of physicians swindled with unnecessary
management fees out there. And worse yet for many of the younger folks who have never been through a bear market they think they are “winning” using their portfolio manager and the associated fees. The bull is driving the win…..
We took a cruise last summer and I have a similar picture of myself on top of Mt Juneau (no tram = less riff-raff????). A Disney cruise (with all the trappings) is among the most expensive vacations I have taken, but it was worth every penny to experience that as a family with a young child. I suspect low-cost index funds have helped me be in a financial position to afford it.
Excellent post Dr Dahle! As a busy physician establishing my career, index investing allows me to receive the market return without the risks mentioned in the post. Question for you: what do you make of the notion that there is “too much money” flowing into index funds? Is there a real concern of this?
Not at this point. While index investors do “ride the coattails” of active investors, it doesn’t take very many talented active investors to keep the publicly traded stock market efficient enough that indexing is still the right move for the rest of us. I think index funds are now 30% of the market. I would say it would have to be 90%+ before I’d start worrying about that sort of an issue.
Saw your comment on previous post about controversies lighting up your posts.
As a joke I was going to post nothing new here.
But after reading this post I underestimated the power of your second argument. I index and rebalance my work Plan (they don’t offer a small cap fund) but my wife’s retirement I went with the basic vanguard 2040 fund as that is what she chose before we got married and is a reasonable approach.
We have now maxed out all our retirement accounts 2 403b, 2 457, 2 back door roths and I heavily invested into my son’s 529 (used vanguard age based plan) in 2009 and based on my current calculations we have more than enough to cover all three kids college expenses if we get 7% (less of the go to cheaper schools, I budgeted 4 year private) return going forward kids are 8, 4, 1. I even captured some of the profit that sit in money market that if there is a pull back I will shift to younger kids accounts most likely in age based plans or a portfolio of index funds. There is a very good chance that we could have significant funds left over but I love the idea of a generational college fund. My parents paid for my education and I want to do the same.
So I am just starting to build the taxable portion of my portfolio. We still have a significant mortgage debt with after tax effective rate of a little less 2.5%. I struggle with the pay off mortgage or invest question. Since the mortgages are 30 years with 24-26 years left I love the built in inflation hedge (CPI is starting to creep up 2.2% last year). My plan is to build taxible account and if we want to retire early I would optimize capital gains capture to pay off mortgages in the early years of retirement depending on interest rates at the time.
But to your point, I was planning on building my own portfolio for the taxable portion but your comment on time really hit me. I will most likely come up with a balanced portfolio of index funds (a little weighted towards small caps as my retirement portfolio is light on them) and follow your advise.
Great post
Why not look at it all as one big account? Is your taxable account being invested to something besides retirement or something?
I basically am hence adding more small caps to the portion of my portfolio. I guess the only goals for this account is to have funds to pay off mortgage when I want to reduce expenses or provide more cash flow through dividends. My current taxible portfolio generates about 13-14k in dividends but is spread out between multiple accounts some are stocks purchased for me as a kid (ATT, Eversource Verizon make up largest positions) and all ATT spin offs. An absolute nightmare for cost basis purposes if I wanted to sell. These will be a step up gift to my wife or kids one day. No desire to put time in to calculate basis and would rather just keep Collecting dividends than sell.
You really have to start an investing plan with the goals. Just vaguely “I want to invest it” doesn’t work very well. If the goal is to have a lump sum in 5 years to pay off a mortgage, then you invest it one way. If the goal is to use it for an early retirement in 10 years, then you invest another way. If you plan to start spending the income from it this year, then you invest it a different way. So nobody can really give you advice on how to invest until they know what you’re investing for.
If you give to charity, you can use those charitable gifts to flush those low basis individual stocks out of the portfolio.
Early retirement! pay off mortgage but would need to beat the effective 2.5% I am paying on the loan. So if I can get an after tax return >2.5% range then it is beneficial to not pay off mortgage. Hence money will go into equities. Likely indexed with leaning toward small caps to balance out other small cap deficient accounts.
Isn’t it fun time to make a plan and see how it works out. My goal was to put enough into my sons 529 to cover college by the time he was 8 and stop contributing then. When I first ran the numbers it was for two kids. Based on how well the market has done I have been able to pull some out for market downturn and also have enough to cover three (not planned but also not not planned ????)
During thanksgiving my father in law was talking to my wife about her retirement plan. She said she plans on working until about 65. She calls my financial planning Majic Math and has no interest whatsoever in following along. She would have had most of her money in Bank of America savings account and hired someone. Not all ER docs think like you Jim.
I tell her she will most likely be able to retire at 52 and she says “ok, but I plan to work to 65”. I guess I’ll get a boat so I will have something to do when she goes to work.
What kind of boat?
20-22 center consol. Something big enough to have fun but small enough so I won’t be stupid and try to chase tuna offshore. Really no point in buying one now wouldn’t use it enough to justify expense.
Great reminder with the basics!! Boring portfolios are great in the long run!!!!
Just wanted to say that I’m glad I found this blog.
I’m not a physician–I’m a high-earning scientist/consultant–but much of this information has a great deal of utility for my situation.
You should try reaching out to others like me if you’re looking to expand your audience.
Any tips on how I might do that? Obviously 95% of investing is the same for everyone, but only 1% of this blog is truly doctor specific. The other 4% applies to all high income professionals.
Normally scientists have access to a lot more tax protected accounts than the normal person. My husband and I have 2 403B, 2 457, and the university puts over 15% of our earnings into a 401K (we give 6% and they give the rest). This means that in total we can tax defer 15% of what we make plus 78K. Now add consulting to that, we can put 25% of the earnings into the individual 401K. It’s quite a bit (more than 180K), and in my case a lot of the question is up to which point to contribute pre-tax or Roth (the 403 and 457 allow Roth). When people talk about “maxing out retirement accounts” I am not sure at to which point to follow.
Another issue is that the pressure to retire early is rather low. A tenured professor probably has little interest in early retirement. We have a huge amount of freedom, research accounts pay for gear and a lot of the travel we do, the work itself is fun. I don’t foresee retiring before 70, and working into 75, 80 is very common. This also plays into the Roth/traditional question because of the RMDs before retirement.
I’ve been in that situation before where it was really hard to max it all out. Somehow we always managed to do it, but I completely understand if one cannot, especially if they’re already saving over 20% of gross for retirement. In those situations, you choose the best accounts to use first. Get any match obviously first, then if in peak earnings years, generally lean toward tax-deferred accounts over tax free ones. That said, I’d probably use a Roth IRA over a 457 just because it is my money rather than the employers.
The Roth vs tax-deferred question has been extensively discussed elsewhere including here: https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
If you really put that much away and work until 80, you’re going to have some very happy heirs.
Thanks for the link! Thankfully my 457 is a governmental one, so I’m not afraid of saving there. This year I think we will be able to max it all out including the backdoor Roth, but I wonder if it is wise to put it all traditional, since the 403 and the 457 all allow Roth. I looked at your post about it. It is the best I read on this, but I still find it hard to make this decision. There is a lot of information that I don’t have. I am not even sure these years are typical, highest earning, or even a lower bound. Thanks of the help though!
Then split the difference.
My colleague recently interviewed a few AUM advisors. I went to a meeting with him out of curiosity. Their performance was good, pretty much similar or slightly above the index. Their arguments for AUM were:
1) It is time to let go and stop managing my own money (a polite way to say: I am incompetent and they were amazed I was still fooling around on with such a large amount of money)
2) During a bear market, the smart money will sell fast and before I realize what is going on, I will loose a lot.
3) Their team will be able to tell when the bear market will come and I will not have to ride it out to the bottom like I did in 2009.
4) The AUM fees are tax deductible, so do not worry about them
5) If the performance is better than the index, then the fees pay for themselves.
My greatest issue with this approach was: no attention to taxes. I have accumulated hundreds of thousands of capital gains so far. They told me they would not sell everything at once. Something that I have not figured out: how much better their performance must be (vs the index) to offset the constant buying and selling of securities, since the true performance that matters is the after tax performance.
What were your experiences with AUM advisors ? How do they compare to index funds ? I am very curious to hear.
And I forgot, one of their first questions was to find out if I already have whole life insurance.
Of course!!!
They have to earn a living and fund their index funds which I guarantee do not have an AUM fee.
I had a 1% aum advisor for several years. An older colleague put me on to them. Was initially great as it got me away from too much time on quicken etc but ultimately was very much not worth the 1%. They reported returns before fees. When looking at after fees I lagged the market. They also didn’t tell me about the Backdoor Roth until I asked , as that prompted money moving from my IRA to my 401k. I am still coming to my optimal simpler portfolio, but I’m saving thousands per year now.
What did you think of their arguments?
I’m so glad that I mostly put my money into index funds in the mid to late 1990s when I started investing. It wasn’t nearly as trendy then, and actually it was harder since the dotcom bubble and the irrational exuberance had people buying not only active funds that were going nuts, but individual stocks. I did buy a few active mutual funds, but I mostly went with the Vanguard S&P 500 Index Fund. Fast forward 20 something years later and I’m financially independent. It works.
Yes, it does. It requires some time and discipline, but it does work and really doesn’t require a lot of effort beyond the initial earning of the money.
Unless I am totally misunderstanding something about savings and investment, there is really no need for an investment adviser because this is not that hard and not that time consuming to do yourself. It is not like trying to re-wire the space shuttle or something. For people who have a whole lot of money, say maybe 2-3 times the amount they could ever actually spend, maybe an investment adviser is a good idea to find those luxury condo buildings in Dubai that you can invest in, or the new start-ups that have some promise, like when Home Depot started out, or Starbucks, or whatever, using money you don’t care about losing completely. But for us mere mortals who will have enough, but not too much more than that, to retire in mid-to-late 60’s and avoid having to stand in the free meal lines at the church downtown, this is not that hard to do ourselves. We are physicians for crying out loud. The admissions committees made sure we were reasonably teachable before they hit “print” on the acceptance letter (or, before they hit “send” on the acceptance email). You CAN read stuff like this blog / site, read Bogle’s books, WCI’s books and course, etc and invest your money. Most of the professional advice we really will need involves tax advice, not advice selecting or managing our investment choices.
Maybe I see it that way because my whole mindset, about everything, is not very advise-able. I never do things the way people advise me to. I figure out on my own the way to do nearly everything I do, professionally and in my personal life. I read, research, look stuff up, and grab little snippets of useful info from a variety of sources, keeping what I need and leaving the rest, and figure things out for myself. I can only remember one time I got useful advice and that was about what kind of colleges I should apply to, but not which ones in particular (I figured that out myself). And that advice was from someone who had known me well for 6 years at that point. Every other situation, the advice I’ve gotten from professionals has been worthless as a package (I got little bits of wisdom at times from each of the professionals, but I had to put the pieces together myself). As a physician, you look at a patient, gather data, and ask questions, look stuff up if needed, and then figure it out. That’s what we do all day. Investing your money is not that hard and you don’t need an adviser. The Internet is your adviser.
I feel similarly, but I’ve met plenty of docs who don’t. The best thing I can do for them is help them find someone who gives good advice at a fair price.
Using index funds or index ETFs, which of the portfolios do you like of the ones in your thread list of 150 portfolios for someone who wants to keep it simple but still have the major asset classes in their portfolio?
Which ones do I like? I like them all. My favorite is my own. This post might help you:
https://www.whitecoatinvestor.com/in-defense-of-the-easy-way/
I LOVE index funds. Basically for the exact reasons you stated in this post. Any time someone asks me what I invest in I just say Index funds. Sure, It might be “boring” but it has worked great for the past few years.
I’m also not trying to beat the market by any means. I’m just trying to retire at some point in my life and I’m pretty sure matching the market will do that for me.
I’m 34 and recently finished fellowship. I’m planning to start a taxable retirement account in addition to my Roth IRA (vanguard) I started during residency and my profit sharing 401k plan (fidelity) through my private practice group.
My portfolio plan is based on yours as listed below:
1. Vanguard Total Stock Market Index Fund 27.5% = VTI
2. Vanguard Small Cap ETF 10% = VB
3. Vanguard Value Index Fund 5%= VTV
4. Vanguard Small Value index Fund 5%= VBR
5. Vanguard REIT Index Fund 7.5% = VNQ
6. Vanguard Total International Stock Market Fund 20% = VXUS
7. Vanguard Emerging Markets Index Fund 5% = VWO
8. Vanguard International Small Index Fund 5%= VSS
9. Vanguard or Schwab TIPS 10% = VIPSX or SCHP
10. Bridgeway Ultra Small Company Mutual Fund (Small Cap) 5% = BRSIX
My questions are 1) any recommended changes for that portfolio? 2.) Is going with basically all ETFs rather than mutual funds a fine way to go? 3.) I plan to open the account through vanguard for simplicity, so for the TIPS portion should I go with the Schwab version for a lower expense ratio or with the Vanguard option with no transaction fees?
thanks for any advice
1. It’s really complex. Probably more than necessary. For example, you could consider dropping the small cap and value funds and just put more in small value. You’re also betting on emerging markets. You know TISM includes them, right? So you’re overweighting them.
2. Either way is probably fine. Whichever has lower costs and less hassle.
3. I’d use the Vanguard option. If I were at Schwab, I’d consider the Schwab version (and have used it there in the past.)
I like the idea of simplifying it. I plan to make the changes you suggested. Thanks for your help.
I thank you for your amazing information. I didn’t even know about these funds till reading some of your posts. As a 35 year old whether you have 100k, 500k, or 1 mill that you could invest, can you go wrong going all in the VTSAX provided you have a 1 year emergency fund? I don’t plan to retire until at least 15-20 years from now and my hope would be the funds giving me 5-7% returns over that time. I know schwab or fidelity just came out with similar funds with no fees but the vanguard is among the lowest i believe and has some track record.
I know timing the market is silly but a slight correction over the year might be the best time to make a big move like this.
Well, the market goes down in 1 in every 3 years and has a 10% drop about once a year and a 20% drop about once every 3 years. So yea, you can go wrong, but I obviously think VTSAX is a solid investment.
What are your thoughts on BRK B VS S and P 500 or VTI?
Thx
I don’t buy individual stocks like Berkshire Hathaway. I prefer a Total Market Index Fund (VTI) to one with a mere 500 stocks in it. It’s more diversified and avoids issues with people front-running the index.
I have to learn how to put maintenance fees on paper, I loved the article, I will start thinking about my retirement. Thanks for the article.
Solid all-around list of the reasons that index funds are awesome! I appreciate that you summed it up in such a succinct fabric that we can all understand and relate to. I agree with all of your points and then some. I think that getting your hands dirty with real estate is another great way to add to a solid index portfolio, but the simplicity of index investing just can’t be beat.
Good stuff!
A question about Index funds in a bear market
I recently found an article that suggested that in 2017 that many actively managed funds were able to outperform index funds. There is a movement among financial advisors that warn against the potential of losing a lot more with index funds during a bear market. This may be related to the overweighting of FAANG and the concept that there is less correlation in stock prices between company’s in recent years which individual stock pickers can sometimes see . Is there any truth to this idea?
Who wrote the article? There’s your answer.
In any given year, 40-45% of fund beat an appropriate index fund comparison. But if multiply that out for 30 years, and especially with multiple asset classes, you may find your odds of outperformance to be under 10%.
Thanks so much for your reply. I wanted to let you know that your blog has been invaluable to a countless number of docs who do not routinely interact on the site. I sincerely thank you. Specifically is there any truth to the fact that an index fund because of market cap weightings may hold disproportionately overvalued stocks and therefore trounce you in a bear market because those overvalued stocks will likely lose the most. Am I guaranteed in essence to lose a 100% of the loss in a bear market and does it matter in the long run?
Yes.
Yes.
No.
The alternative, equal weighting, has its own issues. I prefer market cap weighting. Most of equal weighting is just a small and value tilt anyway, which of course should have better long term returns.
So if my financial advisor wants me to roll over my 401k from a previous job to his firm to manage as an IRA, where he takes 1% of the asset, but manages it, and has historically done well —— should I not do this?
I wouldn’t pay someone 1% given how many great advisors I know who will do a fine job for less. But I really don’t know enough about you to answer that question.
What are your thoughts on funds like CPOAX and BFOCX which have consistently beaten S and P 500 over 10 years with a return of 30 to 40 %?
Yes, 100%! I agree with all of these, especially about it being less time consuming. 98% of my stock investments are index tracking ETFs, and it makes my life much simpler. The true form of passive investing.