Why bother diversified? Why not all in Index SP500?

[G-Man]

I’m not sure but my accounts are with Fidelity and you can buy Vanguard ETF’s on Fidelity’s platform. VTI is the total US stock market index ETF.

Is there an extra cost for purchasing Vanguard ETF's/Mutual Funds within Fidelity?

 

[RetiredAt49]

Is there an extra cost for purchasing Vanguard ETF's/Mutual Funds within Fidelity?

Nope it’s 100% free. I also have algorithmic day trading accounts with other brokers like TD Ameritrade and my algo leverages ETF’s (like VOO) and it’s 100% free as well. My favorite ETF’s for algo trading are TQQQ and SQQQ because TQQQ is a triple leveraged ETF that tracks QQQ and SQQQ is the inverse of TQQQ.

 

[yakers]

+1. Vanguard has us in a globally-diversified array of bond and stock index funds, which, last I tallied, exposes us to some 27,000 securities. Seems like one could approximate that with just two funds, the Vanguard World Stock and the World Bond fund, but who am I to argue with our Vanguard CFP?

To me that is not unreasonable, over a long enough period of time should work for investors and retirees in withdrawal but I have become uncomfortable with BND/IBND for fixed income without finding a single fund to replace them. So I have ibonds, MM, some TIPs and my TSP G fund (no CDs right now) and balanced funds like VG W&W. When the BND 12 month yield to catch up with its current monthly yield I would go back to BND and maybe go back to sleep for the rest of my now shortening investment horizon.

 

[mickeyd]

I view both my pension and VA disability as the equivalent of a large portfolio of government bonds.

Same here, however I do not consider them as bonds. Because they are not bonds. Did you consider your military pay as bonds? Probably not. Same deal. BTW, thanks for your service.

 

[Koolau]

Same here, however I do not consider them as bonds. Because they are not bonds. Did you consider your military pay as bonds? Probably not. Same deal. BTW, thanks for your service.

Think of them as bond-like or just ballast for equities. In any case, they are "safe" and "reliable" income producers which mean (to some of us) we can take a bigger stake in equities. As always, we all have our ways of looking at things so YMMV.

 

[gman1234]

S&P all of the way!

I did that. Sold a business in early 2000's and put all in S&P 500 stock (SPY) and Berkshire Hathaway. At one point around 2007, I moved about 15% in DNP and I've done great.

DNP by the way pays ~8% per year at its typical stock price of ~$10 (paid monthly giving a compounded rate of > 9%). I always feel like this is a Ponzi scheme or something since it seems too good to be true but I still have it 15 years later and it keeps paying (and growing - getting more percentage of my portfolio every year but I still keep it).

Greg

 

[JackJester]

ummm. DNP has way underperformed SPY per the chart below. And its Net Expense Ratio is 1.9% vs 0.09% for SPY. Its distribution yield is 1.9% vs 1.5% for SPY. Sure its NAV is only $10 vs $427 for SPY, but its all apples to apples when you invest the same $ in each fund. DNP is primarily an Energy Fund: "Under normal conditions, more than 65% of the Fund's total assets will be invested in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services" ...So I don't see any advantage of DNP over SPY, but maybe I'm missing something.

 

[gman1234]

It's more of a Bond fund. I don't expect it to out perform SPY. However, I HAVE received 8+ percent per year (paid monthly) for 15 years and not once did they miss or reduce a payment. I don't care about the day to day stock price - I just like the cash flow. I don't care about expense ratio - I care about receiving 8%. I have about 300K in there now and get ~2K / month, every month. We talk about 4% withdrawal - this is twice that. There are worse things...

 

[gman1234]

Now, I will add this. If you are a ways from retirement, then I agree that equities are best (SPY is good). BUT, if you need/want cash on a regular basis, this has been a great alternative to bonds or CDs.

 

[clifp]

For those of us who have "won the game"
I think it is all about diversification, as much as possible

A 100% fixed income with a 2% WR gives the illusion of safety. A decade of 10% inflation would require a 5% WR by the end of that period just to keep up with inflation.

Likewise 100% in SPY, has not only the obvious stock market risk, but US large cap have had a fabulous century for good reason, large US tech companies have literally changed the world. But AI, renewable energy, plus some tech I'm not smart enough to even identify, may change the world over the next 25 years. The companies that do that may be small startups today, or large foreign companies. Meaning an exposure to small caps and foreign stocks is a good idea.

100% Real Estate is also a bad idea, high interest rates hurt real estate, and perhaps manufactured homes and relaxed zone requirments will greatly increase the supply, who knows. Still at a minimum owning your own home, greatly reduces the risk of higher housing costs, blowing your budget.

100% commodities is obviously a bad idea, but a modest allocation to gold, oil or farmland or even crypto makes sense.

I've added some individually risky investments, angel investing, and hard money lending, plus a solar project, which generates income with minimal work, but to the extent they have a low correlation to the stock and bond market, I think they make sense.

 

[almost there]

"I think it is all about diversification"

Agree, but if you have "won the game", why bother with the market at all?

 

[USGrant1962]

ummm. DNP has way underperformed SPY per the chart below. And its Net Expense Ratio is 1.9% vs 0.09% for SPY. Its distribution yield is 1.9% vs 1.5% for SPY. Sure its NAV is only $10 vs $427 for SPY, but its all apples to apples when you invest the same $ in each fund. DNP is primarily an Energy Fund: "Under normal conditions, more than 65% of the Fund's total assets will be invested in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services" ...So I don't see any advantage of DNP over SPY, but maybe I'm missing something. View attachment 46177

You are missing something - that's a price chart, not a total return chart so it is missing dividends. However, your point stands. SPY has handily outperformed DNP over 5 years with about 70% return versus ~38%.

 

[Phroig]

DNP has a mix of equity and debt. Like all CEFs, it uses leverage to boost returns; this, of course, works well when interest rates are low. A significant portion of recent distributions has been return of capital. (This is analogous to selling some SPY shares to increase cash flow.) The current premium is just over 20%, but this seems to be typical for the fund.
Closed end funds work well until they don’t. Some popular PIMCO funds have recently imploded. However, there’s nothing inherently wrong with owning an investment as long as you understand, and are comfortable with, the risks involved.

 

[clifp]

"I think it is all about diversification"

Agree, but if you have "won the game", why bother with the market at all?

Because the game can and often does change. A super rich German in 1925 who had also his wealth tied up in Weimar Republic bonds was wiped out in the next 20 years, but actually did ok with the German stock market, and even better if he held assets outside of Germany.

I think of it like designing a rocket or airplane, with no single point of failure. I'm ok, if stocks, bonds, real estate,or my alternative investments go to zero. Probably ok if 2 fail, and probably not ok if 3 go to zero.

 

[Koolau]

For those of us who have "won the game"
I think it is all about diversification, as much as possible

A 100% fixed income with a 2% WR gives the illusion of safety. A decade of 10% inflation would require a 5% WR by the end of that period just to keep up with inflation.

Likewise 100% in SPY, has not only the obvious stock market risk, but US large cap have had a fabulous century for good reason, large US tech companies have literally changed the world. But AI, renewable energy, plus some tech I'm not smart enough to even identify, may change the world over the next 25 years. The companies that do that may be small startups today, or large foreign companies. Meaning an exposure to small caps and foreign stocks is a good idea.

100% Real Estate is also a bad idea, high interest rates hurt real estate, and perhaps manufactured homes and relaxed zone requirments will greatly increase the supply, who knows. Still at a minimum owning your own home, greatly reduces the risk of higher housing costs, blowing your budget.

100% commodities is obviously a bad idea, but a modest allocation to gold, oil or farmland or even crypto makes sense.

I've added some individually risky investments, angel investing, and hard money lending, plus a solar project, which generates income with minimal work, but to the extent they have a low correlation to the stock and bond market, I think they make sense.

Pretty much my philosophy. I never wanted to go for the highest possible returns. I just want reasonable returns with relatively limited downside.

 

[WhenIsItTime]

Going all into the S&P at a single time of high valuations and extended US overperformance is risky.

I bet most here already have a large position in the S&P. For sure, starting in all cash would bring in a host of other considerations.

If you want to diversify, put equal money into US S&P, US Nasdaq, a commodity index, TLT, a foreign bond index, a foreign developed market index, and a foreign emerging market index and re-balance every year (or add funds to the underperformer).

I bet most here already have a large position in the S&P. For sure, starting in all cash would bring in a host of other considerations.

3/7's foreign?

+1 -- I do not have the stomach for a 20+ percent decline.

Many here did RE. Long retirement time horizon. Significant portion of assets shouldn't be needed for years. Doesn't concern me to have them ride through the storms. 20% crashes recover in an average of 3 years. Most of my money will sit for more than 20 years. I tend to agree with OP.

 

[dknighd]

Eventually I want to "set it and forget it". I probably would not choose 100% in an S&P 500 index fund. I have not decided what I want yet. If I was going to go all USA stocks I might choose a Russel 3000 index, just to add more companies. But I like some international exposure, some bonds, and some cash like things.


All my tax deferred (or tax free) money is currently with TIAA. I'm leaning toward using mostly their "Social Choice" fund (which is 60/40 stocks/bonds, and 70/30 domestic/foreign) and flexible TIAA traditional for some "cash like."


Honestly, while I like the set it and forget mentality, things do change.
Especially as you age, and eventually give up having to earn money.


For me thinking about it has almost become a hobby. It helps keep my mind alive. I do not change more than 10% per year.

 

[Chuckanut]

I bet most here already have a large position in the S&P. For sure, starting in all cash would bring in a host of other considerations.

3/7's foreign?

Many here did RE. Long retirement time horizon. Significant portion of assets shouldn't be needed for years. Doesn't concern me to have them ride through the storms. 20% crashes recover in an average of 3 years. Most of my money will sit for more than 20 years. I tend to agree with OP.

I survived a 20% crash that happened in one day. I also experienced a huge bear market in the mid 70’s to early 80’s that combined with very high double digit inflation.

OTOH, I was young, didn’t have a lot of money in the market compared to today, and had at least 30 more years to make it up.

But, today I also have SS at 70, and a pension which I boosted by buying 5 more years of service. And I don’t have young children to raise and put through college. So I can ride out an extended market downturn, while putting food on the table, paying the rent, and providing for medical needs.

 

[dknighd]

I think you have to be smile and be happy

 

[bloom2708]

Our 60% stocks are all in Total US. The return is similar to the S&P 500 index.

Our 40% is Federal Money Market and individual short term Treasuries.

If we needed to be 100% stocks, 100% S&P 500 index would be reasonable to me. We just don't need to be 100% stocks.

 

[Koolau]

Sorry, but this thread is spread over several days now and my pea sized brain is becoming forgetful.

Has anyone made a "good" case for LESS diversity? Simplicity, yes. Diversity??

IOW, even when I didn't know ANYTHING, I knew about diversity. Spread your money over more things and you're likely to weather the market's storms better. No, you probably won't die the richest man in the cemetery, but those at your funeral will still be licking their chops to get with the lawyer afterward for a round of Cognac.

 

[MichaelB]

Has anyone made a "good" case for LESS diversity? Simplicity, yes. Diversity??

Warren Buffet has made a great case.

Diversification is protection against ignorance," Buffett said. "It makes little sense if you know what you are doing." He also said: "A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don't need to own very many of them."

Of course, those of us with less risk tolerance and less knowledge are better off diversifying.

 

[tulak]

Everyone I know compares their performance to the S&P500.

That’s a good enough reason for me to stick with the S&P500 or in my case, Total US which tracks closely.

 

[Stormy Kromer]

Everyone I know compares their performance to the S&P500.

That’s a good enough reason for me to stick with the S&P500 or in my case, Total US which tracks closely.

For 40 years I have been trying to beat the SP 500 and have failed.....I give up. My equity exposure from now on is SP 500. I'll bet I beat 97% of the rest. If you add in International I will beat 99.9%.

Backtest me 20 years and prove me wrong. Its' too simple to to understand.

 

[tulak]

For 40 years I have been trying to beat the SP 500 and have failed.....I give up. My equity exposure from now on is SP 500. I'll bet I beat 97% of the rest. If you add in International I will beat 99.9%.

Backtest me 20 years and prove me wrong. Its' too simple to to understand.

Exactly.

I’ve also tried, not as long, but long enough. I’d rather focus my efforts in other parts of my life.