"The Lost Decade"

[ziggy29]

Originally Posted by Retire Soon

There is not much difference between the Vanguard Index 500 and Vanguard Total Stock Market over the past 9 years. The first column is the total return for Vanguard 500 Index Fund. The second column is for Vanguard Total Stock Market Index, and the third shows how much better or worse the Total Stock Market did than the Index 500.

The problem is that the "total market index" funds tend to be cap-weighted and often contain 90% large cap or more. As such there is going to be very high correlation between the 500 and the total market index.

I don't think Browning "cherry picked" per se but is doing a disservice by focusing on *one* equity asset class when many people should own at least four or five of them (if not more) for diversification.

[Retire Soon]

Vanguard Total Stock Market (VTSMX) closely tracks the Dow Jones Wilsire 5000 index, which represents the broadest and most comprehensive index for the U.S. equity market. The breakdown for VTSMX is:

Giant: 41.76%
Large: 30.61%
Medium: 19.46%
Small: 6.13%
Micro: 2.04%


VTSMX Fund Portfolio: Investing - MSN Money

[innova]

As I'm sitting here reading this, I'm thinking to myself: "So what?"

Knowing this happened in the past, what should someone do for the future. The answer is always: Hold a diversified basket of stocks and bonds with low correlations to each other. Nothing has changed.

Good article by Swedroe makes this clear:
Bear Markets A Necessary Evil - Research

90 day TBills outperformed the SP500 over the last 10 years. It does happen.

yes, tbills bought lump sum 10 years ago outperformed SP500 bought 10 years ago. Fortunately, most of us have probably been DCA'ing in all along the way and this is irrelevant.

Not only did you need to hold all these asset classes back when they were unpopular, you also had to be diligent about your rebalancing, which mean putting more money in these areas even when their returns were dismal compared to growth/tech stocks (or whatever the bubble of the week was back then). Hindsight is 20/20 - it's easy for someone to say today "oh this information doesn't affect me because I'm ultra-diversified" but if you looked at actual results, you would see that many people had failed to rebalance appropriately, or tried to market time a bit or chase hot asset classes, and as a result their returns would be lower.

This is a phenomenal argument for passive investing. Don't market time, don't make predictions, just buy it all in a smart, low-cost way, and you'll avoid the trap the article discusses.

"Investing is simple, but not easy"
--Buffett

[Planit]

Originally Posted by Retire Soon

There is not much difference between the Vanguard Index 500 and Vanguard Total Stock Market over the past 9 years. The first column is the total return for Vanguard 500 Index Fund. The second column is for Vanguard Total Stock Market Index, and the third shows how much better or worse the Total Stock Market did than the Index 500.



(2007)-5.39% 5.49% .10%
(2006)15.64% 15.51% -0.13%
(2005)4.77% 5.98% 1.21
(2004)10.74% 12.52% 1.78%
(2003) 28.50% 31.35% 2.85
(2002)-22.15 -20.96% 1.19
(2001)-12.02% -10.97% 1.05
(2000)-9.06% -10.57% -1.51
(1999) 21.07% 23.81% 2.74

Vanguard Total Stock Market Fund did better by an average of 1.03%. This fund represents large, mid-cap and small-cap funds. I don't see that there would be much difference in a comparison of a large cap index and an index that represents small, medium and large cap companies. I believe that E.S. Browning gave an accurate portrayal of stock market returns and did not "cherry pick" returns. He probably chose the S&P 500 because its a more popular index. There was absolutely no intention of misrepresenting stock market returns.

Irrelevant comparison. Vanguard Total Stock Market is over 70% US Large cap, 99.7% US. You would have lost the benefits of developed foreign stocks, emerging markets, REITs and bonds, all of which outperformed the S&P 500 over that period.

And yes, Browning gave an accurate portrayal of US Large Cap stocks, but that's only 30% of the stock market. He agrees.

Regarding the comment about needing to buy unpopular stocks way back when, actually, you don't. You buy all the asset classes and hold all of them all them time. Rebalancing should actually be rare.

Hey, maybe there's a better way to invest. I hope you find it. But it helped me retire 15 years before my peers. Good luck.

[Planit]

Originally Posted by TickTock

Planit and audreyh1,

Thanks for correcting my recollection and doing the math!


On a separate note, has Bogle changed his stance on international investing? (He was against it. I think this is a blind spot, and probably related to another blind spot that I see. I intended to start a thread on this, but haven't gotten around to it yet.)

My understanding (and this comes from Wiliam Bernstein, because I don't really care what Bogle thinks-- I respect him and love Vanguard, just don't care what his opinion on the market is) is that what he dislikes is UNHEDGED CURRENCY international investing. Doesn't like currency exchange rate risk. They certainly offer a lot of international index funds. I also recall that he hates international BOND funds-- don't think they offer those.

[Retire Soon]

Originally Posted by Planit

Irrelevant comparison. Vanguard Total Stock Market is over 70% US Large cap, 99.7% US. You would have lost the benefits of developed foreign stocks, emerging markets, REITs and bonds, all of which outperformed the S&P 500 over that period.

And yes, Browning gave an accurate portrayal of US Large Cap stocks, but that's only 30% of the stock market. He agrees.

Regarding the comment about needing to buy unpopular stocks way back when, actually, you don't. You buy all the asset classes and hold all of them all them time. Rebalancing should actually be rare.

Hey, maybe there's a better way to invest. I hope you find it. But it helped me retire 15 years before my peers. Good luck.

Who ever said anything about investing your porfolio solely in Vanguard Total Stock Market? I would not recommend that to my worst enemy.

[TickTock]

Originally Posted by Planit

My understanding (and this comes from Wiliam Bernstein, because I don't really care what Bogle thinks-- I respect him and love Vanguard, just don't care what his opinion on the market is) is that what he dislikes is UNHEDGED CURRENCY international investing. Doesn't like currency exchange rate risk. They certainly offer a lot of international index funds.

I think most of the international funds Vanguard offers started after Bogle left and Brennan took over. I don't think any of those are currency hedged.

[ziggy29]

Originally Posted by TickTock

I think most of the international funds Vanguard offers started after Bogle left and Brennan took over. I don't think any of those are currency hedged.

Some may disagree, but to me, adding "currency risk" to the portfolio adds diversification. Often when the market is struggling, the dollar is falling. When that happens, any allocation you have to investments that benefit from a falling dollar might hold their own -- perhaps energy shares, gold shares and unhedged international stocks and bonds.

Of course, it works the other way too (i.e. they fall when the dollar strengthens), but usually currency movements don't occur in lockstep with the U.S. stock market so there is some volatility-dampening effect in many market conditions.