[Update immediately prior to publication: This post was written just a couple of weeks ago and primarily references 2019 data. It kind of feels out of date after last week, but I think it will help provide a bit of perspective given the current political, economic, and infectious environment. If you, like me, are a stock market investor, remember that a key part of successful investing is staying the course during times like these. I know it feels hard and that this time it is different. Yes, every downturn is a little different, but we've seen this movie before and we know how it ends. Stick around for the credits.]
I've been investing in index funds for the last 15 years. If I haven't bought shares in an index fund in every month over that time period, it has certainly been done in the majority of months. Lately, I've been hearing a lot of people asking why I spend so much time talking about a relatively small portion of my portfolio–the real estate portion. I typically give a real estate update about twice a year (next one in two days) about how our real estate investments are performing, but I don't think I dedicated even a single post in 2019 to index funds. The last index fund post on the site I could find was this one:
So today, I thought I'd do something different. Rather than talk about my recent real estate performance, I thought I'd talk about my recent index fund performance. Conveniently, I recently updated my investment spreadsheet for the end of 2019, so we'll use 2019 numbers.
Vanguard Total Stock Market Fund
This is a major holding in my retirement portfolio, at about 25% of the portfolio. It also rears its ugly head in my HSA and my kids' UTMAs. According to Vanguard, its time-weighted performance in 2019 was 30.65%. Unfortunately, I don't get the time-weighted return. I get a dollar-weighted return, because I have money coming in and out of the fund all year long. My 2019 annualized return was only 29.95%. How did that happen? Well, let's take a look:
- 3/25 Small withdrawal (dividend)
- 4/9 Big contribution
- 4/12 Huge withdrawal (moving this holding from one account to another)
- 4/24 Huge contribution (money was out of the market for 12 days)
- 6/17 Small withdrawal (dividend I think)
- 6/20 Small withdrawal (dividend I think)
- 7/5 Medium contribution
- 7/10 Small contribution
- 9/16 Large withdrawal (charitable contribution)
- 10/7 Medium contribution
- 11/4 Large contribution
- 12/10 Large withdrawal (charitable contribution)
- 12/24 Small withdrawal (rebalancing, dividend)
- 12/26 Large contribution
With all that money coming in and out it is no surprise that my dollar-weighted return was slightly different from my time-weighted return. It could have just as easily been higher as lower though, but since the overall trend was contributing more money as the year went on, it's usually going to lag behind. Still, hard to complain about a 30% return. Just the return on this portion of my portfolio basically paid all of our living expenses this year. It was a very good year for US Stocks.
Vanguard Small Value Stock Index Fund
This is another big holding in my portfolio, making up about 15% of the retirement portfolio and 25% of the kids' 529s. The idea behind a “tilt” to small and value stocks is that these riskier, less sexy stocks are supposed to have higher longer-term returns. That has not been the case for at least the last decade, but hopefully, over my 60 year investing career, it will be. Vanguard reports a time-weighted return of 22.61%. My dollar-weighted return for the year was 24.77%. Gotta love that. Not sure why I did so much better. Looks like I had a big chunk out of the market for one day in May and had significant contributions in January, May, July, and December. I must have caught some good days with those.
Vanguard Total International Stock Market Index Fund
This is my primary retirement portfolio international stock holding (15%) and is something I've been investing in continually for 15 years. It also shows up in all of the kids' accounts — UTMAs, 529s, and even indirectly in their Roth IRAs. It has outperformed the US stock fund some years, but not others, especially lately while US stocks, especially large growth stocks, have been on a tear. Time-weighted performance was 21.43% in 2019. My spreadsheet says I only made 17.99%. Just a function of missing some good months with my mid-year contributions I think. Still, the difference between the value at the beginning of the year and the value at the end of the year was more than we spent in 2019, not counting the renovation, so hard to complain too much about the timing-related underperformance. Seems like what I lost with TISM I gained back with SV anyway.
Vanguard Small-Cap International ETF
This 5% of my portfolio spent 2019 in my 401(k) but is slowly moving into the taxable account these days. I've owned this fund in one form or another since Vanguard came out with it in 2009. Time-weighted performance for 2019 was 21.38%. I made 21.32% according to my spreadsheet. How did I get it that close? Well, I didn't actually buy or sell any shares in 2019. I started the year a little overweight and ended it a little underweight.
Well, those are my four main stock holdings. I own a few others in various non-retirement accounts, but they're mostly variations on a theme:
- Fidelity Zero Total Market Index Fund (HSA): 31.15% for the fund, 36.89% for me
- DFA Small Value Fund (529s): 18.12% for the fund, 17.91% for the kids
- Vanguard Target Retirement 2050 Fund (Kids' Roth IRAs): 24.96% for the fund, 24.39% for the kids
- Vanguard REIT Index Fund: I usually report this with my real estate holdings, but made 30.78% in 2019 (fund made 28.94%)
Let's talk about our bond funds now.
Schwab US TIPS ETF
TIPS are 10% of our portfolio. I changed from the Vanguard fund to the Schwab ETF a couple of years ago because I needed to move this asset class to my practice 401(k). I actually prefer the fund due to some minor issues with bond ETFs, but it's good enough for my purposes. The fund returned 8.52% and I earned 8.92%. Pretty good year for TIPS, the last few haven't been great, at least since 2011-2012.
TSP G Fund
You know how everyone says that interest rates are going up? Well, they've been saying that ever since 2009. Unfortunately, I believed them and left money in one of the best fixed-income investments possible in a period of rising rates. Of course, in a period of falling and stable rates like we've actually had, it's not awesome. It is very safe however and it now makes up my entire TSP account. 2.16% in 2019. Not technically an index fund, but still very low cost and very, very safe. Kind of like a federal money market fund on steroids.
Vanguard Intermediate-Term Tax-Exempt Fund
I have 10% of my portfolio in nominal bonds, but I include the G Fund in that. This fund makes up the rest of that 10%. It sits in my taxable account and made 6.93% in 2019. It's not technically an index fund, but it might as well be.
My overall retirement portfolio performance for 2019 was 28.69%, but that isn't just these index funds. It also includes both real estate and my small business holdings (including my holdings in the WCI Network blogs Physician on FIRE and Passive Income MD) and another business, all of which had another awesome year.
- Great long-term performance
- No time requirement
- No uncompensated risk or manager risk
- Low costs
- Tax efficiency
- Easy to build a portfolio
- Widely available
- Guarantees market returns
- No factor risks (at least with total market funds)
- No regret due to not owning a winning stock — you own them all!
If you're going to invest in stocks (and you should) do so using index funds.
What do you think? How did your index funds do in 2019? Were you happy with your overall performance? Comment below!