[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 It kind of feels out of date after last week, but I think it will help provide a bit of perspective given the current political, economic, and infectious environment.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.
Overall Performance
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 and another business, all of which had another awesome year.
I'm a big fan of small businesses and real estate, but there's no doubt I'll always own some index funds in my portfolio. As I wrote a couple of years ago, index funds have some serious advantages:
- 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!
The reason people don’t talk about index funds is because they are so boring. I think Bogle said in one of his books it is about as exciting as watching the paint dry, or watching the grass grow. But, it is not boring for the original owners of the prototype Vanguard S and P 500 index fund that has achieved a 10.89 percent average return since 1976. To the contrary, it is exciting. It just does not make a flashy news story. I am intrigued by this small value tilt. Between 1975 and 1983 small stocks went crazy. They returned 35.3 percent annually! If you remove that data small and large (stocks) return the same. I liked Rick Ferri’s comment on your podcast about the small value tilt. If I recall correctly, he believes it still exists, but you might have to wait 20 years to achieve it!
I agree with Rick on that point. That said, if over my investment horizon small value merely returns the same as the overall market, that’s okay with me too. No harm done.
Could you possibly post the ticker symbols for the Vanguard funds you own?
Thanks in advance.
Yes, but keep in mind if you can’t figure out the ticker symbols from me listing the names of the funds you probably shouldn’t be managing your own money.
Total Stock Market – VTSAX
Total International Stock Market – VTIAX
Small Value Index – VSIAX
REIT Index – VGSLX
Intermediate Tax Exempt Bond Fund – VWIUX
Hope that helps.
Thanks very helpful!!
Could you possible also list the ticker for Vanguard Small-Cap International ETF.
Also does Vanguard have a TIPS fund?
Thanks
VSS
Yes. Vanguard Inflation protected bond fund.
If I’m not mistaken, most of your portfolio is equities and not bonds. Is that not a lack of diversification? If so, your portfolio is currently taking a big hit, no?
Equity/bond ratio is more about asset allocation than diversification.
A 90/10 stock/bond portfolio can be as diversified as a 10/90 portfolio.
Agreed. Certainly nobody is going to accuse me of not having a diversified portfolio.
You have your own definition of diversification, however, 90%/10% stock/bond AA is not generally considered diversification.; Quite the opposite. It’s not even open to debate.
I think it’s open to debate. I mean, that 90% could represent 10,000 different publicly traded companies across a dozen factors. That’s diversified by most definitions even if it is aggressive.
Legally, it is diversified. The target date funds that employees are automatically opted into have anywhere from a 90/10 to 95/5 AA if the date is far enough out, and those funds are mandated by the SEC to be ‘diversified’.
“Interested investors may find that target-date funds provide an easy way to hold a diversified investment portfolio that rebalances over time to become less focused on potential growth and more focused on producing income.”
https://www.finra.org/investors/learn-to-invest/types-investments/retirement/target-date-funds-find-right-target-you
Once you get enough invested to cover your future needs, it’s okay to favor higher-yielding investments even though they may have higher risk or volatility, since you won’t need that money for a long time. For example, I may be 60/40 until I have met all my future income requirements then go all stocks for new investments from then on. It’s similar to the bucket method, popularized by Morningstar and others.
You mean higher returning, right? Yield has a specific meaning referring to the income portion of the return. You can get a higher yield while actually having a lower total return.
Yes, good clarification.
60% stocks, 20% bonds, 20% real estate. So 60% of the portfolio is down about 12%. Basically, I lost more money every day this week than I lost in all of 2008. So yea, I took a big hit. I hope to take an even bigger one with the next bear market.
My guess is you beat pretty much all the endowments and pension funds in the country. Over any time period. Nice!
Curious about your reasons for preferring TIPS fund over ETF?
I’ll have to find the article (Swedroe, Ferri?) but basically there was a structural issue with ETFs and TIPS. Can’t remember what it was. It was a minor deal but enough that I said “if I have the choice, I should take the fund.”
WCI “I lost more money every day this week than I lost in all of 2008. So yea, I took a big hit. I hope to take an even bigger one with the next bull market”
One of my sayings ” I took a big hit in taxes on my yearly RMD. If I am lucky I’ll take a bigger hit next year”
How many people understand the logic of those comments?
Great post! If you were going to set up a diversified taxable account portfolio, would you use the same funds? Drop the REIT fund?
I’ve read your post on the 150 portfolios better than yours and also the one where you talked about having the option of treating each individual account separately (401K, Roth, taxable, etc). For simplicity reasons I like that style. I shoot for about 80/20 (stocks/bonds) in each of my individual accounts.
That’s really super simple if every account holds different stuff. If you want super simple, just buy a target retirement fund in each account. If you want to try to be tax efficient, then take advantage of tax location.
It sounds worse than it is. I selected a growth strategy asset allocation in our 401Ks. They have some vanguard index funds, so I may switch some day. The rest of the accounts (Roth IRAs) I do low cost index funds per investment strategy and in taxable account I do the same, but was just trying to avoid having tax inefficient in the taxable account.
Dr. Dahle, given that you compare the TSP G-fund to a money market fund on steroids, it makes me wonder if it is more properly seen as being cash (i.e., in a high-interest savings account) rather than a part of an investor’s bond allocation. Would you agree?
If you prefer to split those into two asset classes, then sure, call it cash. It’s your money so you get to classify it however you like. Cash is really just very short duration bonds.
Good morning!
What funds do you hold in your backdoor Roths and HSAs since they are forever tax free? Would it be VGSLX and bond funds? Anything else?
Thanks!
It has varied over the years in accordance with my written asset allocation. At this very moment I have VTI (Vanguard Total Stock Market ETF) and FZROX (Fidelity Total Stock Market) in my HSA and Vanguard REIT Index Fund and Vanguard Small Value Index Fund in Roth IRAs. Bonds are in my TSP G Fund, Vanguard Intermediate Muni Bond Fund in Taxable, and Schwab TIPS ETF in a 401(k).
More details on this subject can be found here: https://www.whitecoatinvestor.com/how-i-currently-implement-my-asset-allocation/
but it’s been a long time. Maybe it would be helpful to do an update.
Thanks!
SO is that VWITX /VWIUX in taxable? Is that because their returns are tax free?
For muni bonds to be triple tax free, you have to own them in your own state. I live in NYC.
So would VNYUX be a very good option for me in a taxable account?
Also, since the fed is expected to keep lowering interest rates, isn’t that bad for these bond funds?
Yes. yes.
Yes.
I have no idea what the Fed or interest rates will do and I don’t take that into account when choosing my long term investments and I recommend you do not either. If you need bonds in your portfolio according to your written financial plan, get bonds. If you don’t have a plan, get one.
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
I think you said owning your own state Muni bonds/bond fund is a good idea? Do you also own your own state’s muni bonds or a muni bond fund?
Or do you only stick with VWIUX?
Thanks again.
Yes, it is a good idea.
No, I don’t own my own states because Vanguard doesn’t have a Utah muni bond fund.
Curious if you’re still holding VWITX. I’ve had this in Taxable and, like many bonds, this has been getting hammered too. I’d love your thoughts on whether you’ve switched to shorter term securities or staying with intermediate and longer term ones.
I’ve never owned long term bonds. Yes, I’m sticking with intermediate term munis as per my written investing plan. Yes, they’re well down for the year. But so are my stocks. It’s not like there are assets that are exempt from the effect of rising interest rates. It’s bad for bonds, stocks, and real estate returns, but it still needs to happen.
I’ll just respond to appreciate that you still took the time to plug a good financial habit on an old thread – written financial plans for the win. Also great to hear you sticking w the plan.
Yes I appreciate this too!
Also, would love an updated post on your portfolio and how to pick an asset allocation!
I don’t think an updated post would be very interesting because the portfolio hasn’t changed. 60% stocks, 20% bonds, 20% real estate. The real estate part is a little interesting, but how many times can I tell you about VTI, VXUS, VBR, and VSS? Same old, same old, just a lot more of it.
More asset allocations here: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Do you keep VXUS and VSS in taxable because they are international?
Where do you keep VTI and VBR?
Me? I keep almost everything in taxable because that’s most of my portfolio. So I’ve got VXUS, VSS, VTI, and some VBR in taxable now. Also some bonds (munis and I bonds) and most of my real estate. All I have left in tax-protected is the G Fund in my TSP, SCHP (Schwab TIPS ETF), a debt real estate fund, VNQ (Vanguard REIT ETF), and some VBR.
It’s not a question of “what goes in taxable and what doesn’t” it’s question of what order you put things in taxable if you have to put something in taxable.
https://www.whitecoatinvestor.com/asset-location/
Hi Jim,
I suspect that you may say it doesn’t matter, but I’m trying to decide if the Vanguard international small cap index fund (VFSAX) or the ETF (VSS) is best to use for long-term investing. I see that you chose the ETF, did you do that solely because of the lower expense ratio?
I keep looking back in Bernstein’s Investor Manifesto where he wrote, ‘”I have nothing against ETFs, but I do believe that most investors are better served by the more traditional open-end mutual funds for three reasons. First, the commission and spread costs incurred by ETFs will quickly erode their minuscule expense advantage.”
It doesn’t matter.
No, I chose it because the best TLHing harvesting partner (iShares) I could find was an ETF.