Vanguard FA, Should we do it?

[Another Reader]

International is one place I disagree with Vanguard completely. I have a strong US bias based on long term performance. Europe has some good companies, but finding broad exposure that produces good results over time is difficult. With regard to emerging markets, I avoid anyone that views GAAP as optional and that's a big problem in those places. I will take most of my international exposure from American companies that do business abroad.

Bonds are not my cup of tea either. My pensions and real estate replace bonds for me. Individual guaranteed instruments, such as treasuries and CD's, are useful for me.

These are reasons I would not buy into a "one size fits all" portfolio like what Vanguard recommends. I hope the OP is realizing that she probably knows as much as most of the people at Vanguard with whom she is talking. A financial adviser at Vanguard is not likely going to solve her problem with fear and lack of confidence.

 

[target2019]

Ok, VG suggests 30% in International index stock funds. My Roth has 100% international to offset the rest of the portfolio which has much less. Down -8%. And with the turmoil in the EU right now...hope it gets better.

The bond funds down, thought they were supposed to hedge the market. Our allocation is 60/40, pretty normal. Am I alone in trying to understand bond funds and how they stabilize your portfolio? I'd have to move to Fidelity to get their advice, I assume.

I walked the VG advisor, not a paid FA, to firecalc.com. He went through the process with me. My question is the asset allocation in firecalc similar to stock/bond funds that VG use? I'd feel more comfortable if I knew we had the right funds.

If you ask Vanguard, of course you will hear the company line. What else can the advisor do? First two sentences also apply to every other investment company. They have standards and boilerplate portfolios for you.

If you lay out everything at Bogleheads, you'll probably get a lot of attention. They have a specific format for presenting the portfolio you have. You could even start a personal portfolio thread here, and maybe it would get traction.

You may never know if you have the right funds. Most around here are relying a lot on a low expense ratio for a particular fund. If you don't like the int'l drop, then eliminate it from your portfolio. Are you sure you have the 30% int'l that is called for? It is not a total 30%, but rather something like 1/3 of your equity allocation. If you have 60% equity allocation, then the formula would mean US is 40% overall, and int'l is 20% overall.

 

[Texas Proud]

For $1.5M you should be able to get a free advisor at Fido.

I would agree with this... when I was working a lady in the office next to me used them and had a FA she used to go to.... he gave advice on all of her investments even if not at FIDO... also recommended non FIDO funds...

 

[Rianne]

While historically bond funds zig when stock funds zag, the magnitudes are very different... the don't hedge the market, but they do serve to provide a smoother ride. You can see that in the line graph in the link below.... blue line is 60/40 blend, red line is 100/0 and yellow line is 0/100.

There is no "right" fund, but the three funds in the link.... or better yet their Admiral or ETF versions that have better ERs... are really all that one would need to have a prudent 60/40 portfolio.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1998&firstMonth=10&endYear=2018&lastMonth=10&endDate=11%2F14%2F2018&initialAmount=1000000&annualOperation=2&annualAdjustment=40000&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTSMX&allocation1_1=42&allocation1_2=70&symbol2=VGTSX&allocation2_1=18&allocation2_2=30&symbol3=VBMFX&allocation3_1=40&allocation3_3=100

That link is really helpful. Did you set it up with VG funds? I kept comparing the Dow historical to the success of our portfolio. It does not work. I get it, the Dow are specific companies that are the "bellweather" to the market. But the mix of funds, companies are very different in VG stock index funds. For instance, I looked at Dow Jones in July 2018. At a certain point it was around 24,117. Our portfolio balance was 1,580,000 at that moment in time.

Dow Oct 28 is 24,442. Our portfolio 1,500,00. It makes no sense to watch the Dow. Our funds are moving parts that may have little to do with Dow.

 

[TwoByFour]

I don't know why the Dow is followed so much as it represents such a narrow slice of the market. When I do look at the market, which is not all that often, I look at the S&P 500. When most analysts talk about "the market", as in beating it, they usually mean the S&P 500.

 

[pb4uski]

That link is really helpful. Did you set it up with VG funds? I kept comparing the Dow historical to the success of our portfolio. It does not work. I get it, the Dow are specific companies that are the "bellweather" to the market. But the mix of funds, companies are very different in VG stock index funds. For instance, I looked at Dow Jones in July 2018. At a certain point it was around 24,117. Our portfolio balance was 1,580,000 at that moment in time.

Dow Oct 28 is 24,442. Our portfolio 1,500,00. It makes no sense to watch the Dow. Our funds are moving parts that may have little to do with Dow.

Yes, they are Vanguard funds... Total Stock, Total International Stock and Total Bond.... don't you see that? If you tap or click on the ticker then the name will show up.

It makes no sense to use the Dow as a benchmark for a 60/40 portfolio, as I think you have figured out. I have a couple 60/40 benchmarks that I use... but I focus the most on the Vanguard Life-Strategy Moderate Growth Fund (VSMGX).

$1,580 invested in VSMGX on July 6 would be worth $1,523 on Oct 28, so your portfolio undererformed that benchmark by $23.

https://investor.vanguard.com/mutual-funds/profile/VSMGX#tab=1
http://quotes.morningstar.com/chart...2018","endDay":"10/28/2018","chartWidth":955}

 

[Rianne]

Yes, they are Vanguard funds... Total Stock, Total International Stock and Total Bond.... don't you see that? If you tap or click on the ticker then the name will show up.

It makes no sense to use the Dow as a benchmark for a 60/40 portfolio, as I think you have figured out. I have a couple 60/40 benchmarks that I use... but I focus the most on the Vanguard Life-Strategy Moderate Growth Fund (VSMGX).

$1,580 invested in VSMGX on July 6 would be worth $1,523 on Oct 28, so your portfolio undererformed that benchmark by $23.

https://investor.vanguard.com/mutual-funds/profile/VSMGX#tab=1
VSMGX Vanguard LifeStrategy Moderate Growth Fund Investor Shares Fund VSMGX chart

Yes, I see that. My question: Did you set up the portfolio listed on the link?

 

[pb4uski]

Yes, I set up the portfolios listed in the link. There are some predefined portfolios under the button at the top of each column were it says Portfolio#1, Portfolio #2, et al.

 

[Rianne]

The bond fund reinvests into the increasing yield securities over time, but can have short term losses in a rising interest rate environment. JMHO.

My ignorance in investing has come full circle. Stock index funds are easy to understand. Bond index funds confuse me.

Stock index funds reinvest (if you're not taking gains) in the stock prices for that day. If the stock price for the entire index fund goes up, you are re investing at the higher price of the entire index which makes it safer than individual stocks.
Bond index funds drive me crazy. I do not get that benefit. You said in a sentence the way it works but I don't understand it. Humor me: When the interest rates rise, you are purchasing or re investing in higher bond rates. Therefore, the value is less: short term. How does that benefit long term?


VBMFX
Performance Overview

Morningstar Return Rating★★★
Year-to-Date Return-2.41%
5-Year Average Return1.68%
Number of Years Up28
Number of Years Down3

Best 1 Yr Total Return (Oct 30, 2018)7.56%
Worst 1 Yr Total Return (Oct 30, 2018)-2.26%
Best 3-Yr Total Return7.56%
Worst 3-Yr Total Return1.21%



VTSAX

Performance Overview

Morningstar Return Rating★★★★
Year-to-Date Return2.42%
5-Year Average Return10.78%
Number of Years Up14
Number of Years Down3

Best 1 Yr Total Return (Oct 30, 2018)33.52%
Worst 1 Yr Total Return (Oct 30, 2018)-36.99%
Best 3-Yr Total Return33.52%
Worst 3-Yr Total Return-8.38%






How is this balanced? My DH will not discuss this with me because I simply do not get the "strategy"

 

[TwoByFour]

Rianne,
I highly recommend you read this short book on investing. It costs $18 and is well worth it. Many of your questions will be explained, in detail, in it.

Boglehead Guide to Investing.
https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

(Bogleheads are those people who follow John Bogle's philosophy of investing. Bogle is the founder of Vanguard)

 

[Rianne]

Ok, I will. Thanks.

 

[Rianne]

YEY, got it on Audible for free! Thanks.

 

[pb4uski]

.... Bond index funds drive me crazy. I do not get that benefit. You said in a sentence the way it works but I don't understand it. Humor me: When the interest rates rise, you are purchasing or re investing in higher bond rates. Therefore, the value is less: short term. How does that benefit long term? ....

Bond funds are real simple (like stock funds)... the fund owns a portfolio of bonds (or stocks) and you own a share of the fund.... and you get your share of the performance of the fund. The investments in the fund are marked to market daily and the NAV is the market value of the portfolio relating to one share of the fund.

Bond prices move inversely to interest rates... as rates rise bond prices decline... that is what we have been seeing this year. But the flip side is that the proceeds from any maturing bonds are reinvested at higher yields. Over time, those higher yields offset any reduction in value due to lower interest rates and as bonds mature their value converge to par.

So for example, let's say that the fund bought a bond that pays 5% interest at par of $1,000 and the bond currently has 3 years to maturity. To make it easy, we'll make it a zero coupon bond.. so the the fund pays $1,000 and expects to receive $1,158* in 3 years. Interest rates suddenly spike to 7%. The market value of the bond declines to $945, a loss of $55. Assuming no further changes in interest rates, between now and maturity the market value of the bond will rise from $945** to $1,158 at maturity. All of this is reflected in the NAV, but of course, much more subtle than in this illustration.

*$1,158 = $1,000*(1+5%)^3
**$945 = $1,158/(1+7%)^3

 

[Rianne]

Bond funds are real simple (like stock funds)... the fund owns a portfolio of bonds (or stocks) and you own a share of the fund.... and you get your share of the performance of the fund. The investments in the fund are marked to market daily and the NAV is the market value of the portfolio relating to one share of the fund.

Bond prices move inversely to interest rates... as rates rise bond prices decline... that is what we have been seeing this year. But the flip side is that the proceeds from any maturing bonds are reinvested at higher yields. Over time, those higher yields offset any reduction in value due to lower interest rates and as bonds mature their value converge to par.

So for example, let's say that the fund bought a bond that pays 5% interest at par of $1,000 and the bond currently has 3 years to maturity. To make it easy, we'll make it a zero coupon bond.. so the the fund pays $1,000 and expects to receive $1,158* in 3 years. Interest rates suddenly spike to 7%. The market value of the bond declines to $945, a loss of $55. Assuming no further changes in interest rates, between now and maturity the market value of the bond will rise from $945** to $1,158 at maturity. All of this is reflected in the NAV, but of course, much more subtle than in this illustration.

*$1,158 = $1,000*(1+5%)^3
**$945 = $1,158/(1+7%)^3

So interest rates stay stable until the fed raises them. Explain long term (assume 5 years invest time?) and short term (assume 1 yr?) The benefit of long term vs short term and how that hedges the stock market. BTW, this may be a better discussion after I listen to my free Boglehead audio book

 

[steelyman]

Someone posted an announcement of a book that was (then) offered free on Kindle. It is “Why Bother With Bonds?”, by Rick Van Ness.

I’d always been confused about the bond market but this easy read cleared things up for me. Or at least (from the old comic strip “Shoe”) I’m confused on a much higher plane.

[ADDED] Hope this link works:

https://www.amazon.com/dp/B00PL7WS16/ref=cm_sw_r_em_api_c_SUU7BbSW546H9

 

[Dtail]

So interest rates stay stable until the fed raises them. Explain long term (assume 5 years invest time?) and short term (assume 1 yr?) The benefit of long term vs short term and how that hedges the stock market. BTW, this may be a better discussion after I listen to my free Boglehead audio book

In addition to @pb4uskis's good explanation, see below for an article on the concept from Kitces.
You have lots of reading this weekend.

https://www.kitces.com/blog/how-bon...ve-help-defend-against-rising-interest-rates/

 

[Rianne]

I'm halfway through the Bogle audio book and just read (absorbed/understood is a different story) kitces article. How can anyone say bonds are just as easy to understand as stocks? A dollar has a PV of $1, then with inflation over 5 years the FV of that dollar is less 3%. So in 5 years that dollar is worth $.97. Easy Peasy. I buy a stock for $1 and in 5 years that dollar is $.97, but the stock price went up 7% in 5 years. So I made 4% on that dollar. I challenge anyone to make the bond that easy to understand.

 

[jazz4cash]

Kitces! Thanks for that link Dtail

 

[target2019]

What is a bond? By Vanguard
https://investor.vanguard.com/investing/investment/what-is-a-bond

 

[target2019]

I'm halfway through the Bogle audio book and just read (absorbed/understood is a different story) kitces article. How can anyone say bonds are just as easy to understand as stocks? A dollar has a PV of $1, then with inflation over 5 years the FV of that dollar is less 3%. So in 5 years that dollar is worth $.97. Easy Peasy. I buy a stock for $1 and in 5 years that dollar is $.97, but the stock price went up 7% in 5 years. So I made 4% on that dollar. I challenge anyone to make the bond that easy to understand.

Bonds are for income and stability.

 

[Rianne]

What is a bond? By Vanguard
https://investor.vanguard.com/investing/investment/what-is-a-bond

Thanks, that along with the Kitces article helps. I guess "yield" gets me confused in a bond fund. The whole thing about a VG FA, when you have bond or stock funds, the companies included in those funds are managed by other fund managers. For instance, a small cap company goes belly up or is successful and moves to a large cap company. The fund managers are moving things around within those funds to stabilize the funds.

The Bogle audio tape mentioned, if a huge influx of money into a company because of success, can mess up the long term stability of that fund. I always think about the weight a stock/bond fund puts on a particular company. Can probably find that in the many links inside VG, as to what companies are in a fund and their weight in the fund.

I wonder how they move companies in or out due to fluctuations. Or weight them differently. We have a 10+ history with VG. The Bogle audio talked about the 1, 3, 5, 10 year success of the funds and how a 2nd grader did better than many seasoned investors because he stayed the course and picked the total stock/bond funds. The tape also was not complementary of Jim Cramer.

 

[walkinwood]

I too would suggest some reading to understand stock & bond market history.



The Four Pillars of investing by William Bernstein gave me a great education on investing. It is a long book and it gets dreary at times - but this is your life savings, so you may as well put in the work.


You can then make an informed decision on whether an FA is worth your money & time.


Without a firm grasp of the history & academic research, you may panic at the wrong time & may not be able to recover.


Good luck.

 

[target2019]

The whole thing about a VG FA, when you have bond or stock funds, the companies included in those funds are managed by other fund managers. For instance, a small cap company goes belly up or is successful and moves to a large cap company. The fund managers are moving things around within those funds to stabilize the funds.

Rewritten:
An index fund follows a precise path. Vanguard Small Cap Index (NAESX) follows CRSP US Small Cap Index as a benchmark. The managers of NAESX state that they will follow the benchmark. When NAESX strays from the benchmark, the managers ensure that buys and sells are executed to stay 100% faithful to the strategy and policy.

In an active fund, managers do move things around, although there is still a stated policy.

What I suspect happens with a poorly performing company, is that the company disappears from the benchmark, and another takes its place. That is different from what you describe.

 

[rt-texas]

I signed on with Vanguard PAS just over a year ago; had a major health scare and wanted someone to backstop my wife in case.

Fast forward to now...I took control of the portfolio back app. 90 days ago. Scare turned out to be just that, a scare only.

I am still sitting in the re-balance that he executed and will let it lay for now. But I see no reason to pay over $600 a month for a someone to tell me to stay the course.

MDW is 57 and I'm 59. Just retired this summer. Have two years worth of cash in MM accounts and I also do some freelance cad design for old clients to give a little extra to the kitty.

 

[Skeptic]

I see no reason to pay over $600 a month for someone to tell me to stay the course.

+100