Why bother diversified? Why not all in Index SP500?
- Thread starter Enuff2Eat
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Midpack
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Koolau
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm sure you could do worse, but why not a wider spectrum of stock - say Vanguard Total World Stock.
What about a balance with bonds?
How about Scott Burns Couch Potato investing? Simple and easy to balance.
Very good friend is pretty much 100% SP500 and retired in his early 50's.
Why would he do so?
- He has more than enough.
- He's using a withdrawal method that results withdrawals that are variable and can live with the variability
- He dislikes insurance of any form and considers bonds to be insurance
- He's more of a "free market" type philosophically when it comes to investments
Everybody has a different need, willingness, and ability to take risk.
Cheers
Big-Papa
Other than cash I'm all in equities. I have a long WD period so equities have the best shot against inflation for a ~50 year retirement. SORR isn't fun but my WD is low enough I sleep well at night and, if history is a reliable guide, I'll be BTD in a few years. If not, I'm perfectly content at my current standard of living! If that happens I might skim off living expenses and invest some more conservatively and let the rest ride as I get older but for now equities work for me.
VanWinkle
Thinks s/he gets paid by the post
If you have a taxable account and qualified account, you will need different stock funds in each one if you want to tax loss harvest. That would look like VTSAX in taxable and VFIAX in qualified. That is the reason all of my equity allocation is not in one S&P 500 fund. You could stick with 31 days and no reinvestment, but that is a hassle.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I think that would be fine. Link below compares Vanguard's Total Stock and S&P 500 results since 1994... they are similiar enough to me and the less diversified index fund actually outperformed.
| Vanguard Total Stock Mkt Idx Inv | Vanguard 500 Index Investor | ||||||
| Year | Inflation | Return | Balance | Return | Balance | ||
| 1993 | 2.75% | 10.62% | $11,062 | 9.89% | $10,989 | 10.62% | 9.89% |
| 1994 | 2.67% | -0.17% | $11,044 | 1.18% | $11,118 | -0.17% | 1.18% |
| 1995 | 2.54% | 35.79% | $14,996 | 37.45% | $15,282 | 35.79% | 37.45% |
| 1996 | 3.32% | 20.96% | $18,139 | 22.88% | $18,778 | 20.96% | 22.88% |
| 1997 | 1.70% | 30.99% | $23,761 | 33.19% | $25,010 | 30.99% | 33.19% |
| 1998 | 1.61% | 23.26% | $29,289 | 28.62% | $32,168 | 23.26% | 28.62% |
| 1999 | 2.68% | 23.81% | $36,264 | 21.07% | $38,945 | 23.81% | 21.07% |
| 2000 | 3.39% | -10.57% | $32,429 | -9.06% | $35,418 | -10.57% | -9.06% |
| 2001 | 1.55% | -10.97% | $28,873 | -12.02% | $31,160 | -10.97% | -12.02% |
| 2002 | 2.38% | -20.96% | $22,821 | -22.15% | $24,259 | -20.96% | -22.15% |
| 2003 | 1.88% | 31.35% | $29,976 | 28.50% | $31,174 | 31.35% | 28.50% |
| 2004 | 3.26% | 12.51% | $33,728 | 10.74% | $34,522 | 12.51% | 10.74% |
| 2005 | 3.42% | 5.98% | $35,745 | 4.77% | $36,170 | 5.98% | 4.77% |
| 2006 | 2.54% | 15.51% | $41,289 | 15.64% | $41,827 | 15.51% | 15.64% |
| 2007 | 4.08% | 5.49% | $43,556 | 5.39% | $44,081 | 5.49% | 5.39% |
| 2008 | 0.09% | -37.04% | $27,424 | -37.02% | $27,762 | -37.04% | -37.02% |
| 2009 | 2.72% | 28.70% | $35,294 | 26.49% | $35,114 | 28.70% | 26.49% |
| 2010 | 1.50% | 17.09% | $41,327 | 14.91% | $40,351 | 17.09% | 14.91% |
| 2011 | 2.96% | 0.96% | $41,724 | 1.97% | $41,145 | 0.96% | 1.97% |
| 2012 | 1.74% | 16.25% | $48,506 | 15.82% | $47,656 | 16.25% | 15.82% |
| 2013 | 1.50% | 33.35% | $64,682 | 32.18% | $62,989 | 33.35% | 32.18% |
| 2014 | 0.76% | 12.43% | $72,721 | 13.51% | $71,498 | 12.43% | 13.51% |
| 2015 | 0.73% | 0.29% | $72,935 | 1.25% | $72,391 | 0.29% | 1.25% |
| 2016 | 2.07% | 12.53% | $82,076 | 11.82% | $80,945 | 12.53% | 11.82% |
| 2017 | 2.11% | 21.05% | $99,355 | 21.67% | $98,484 | 21.05% | 21.67% |
| 2018 | 1.91% | -5.26% | $94,132 | -4.52% | $94,028 | -5.26% | -4.52% |
| 2019 | 2.29% | 30.65% | $122,983 | 31.33% | $123,485 | 30.65% | 31.33% |
| 2020 | 1.36% | 20.87% | $148,649 | 18.25% | $146,018 | 20.87% | 18.25% |
| 2021 | 7.04% | 25.59% | $186,685 | 28.53% | $187,680 | 25.59% | 28.53% |
| 2022 | 6.45% | -19.60% | $150,090 | -18.23% | $153,468 | -19.60% | -18.23% |
| 2023 | 1.70% | 8.25% | $162,467 | 9.12% | $167,468 | 8.25% | 9.12% |
https://www.portfoliovisualizer.com...cation1_1=100&symbol2=VFINX&allocation2_2=100
Depends on which index (weighted or equal weight). Just 10 stocks make up ~30% of the S&P by weight so it's not that diversified.
Also depends what you are looking for in diversification. To manage risk the assets need to be uncorrelated. You could own thousands of stocks but if they are all correlated you haven't gotten any diversification and haven't reduced risk.
This is a bit of a stumbling explanation:
Also depends what you are looking for in diversification. To manage risk the assets need to be uncorrelated. You could own thousands of stocks but if they are all correlated you haven't gotten any diversification and haven't reduced risk.
This is a bit of a stumbling explanation:
I think Ray Dalio is very smart, but I'm just dubious of the % correlation of different assets. I just don't think it's that clear. 2022 was a perfect example. My sense is consensus was very clear on stock v bond correlation , yet owning a portfolio of 20-30% bonds did very little to offset the poor returns of stocks. I saw that in my moms account.
enjoyinglife102
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Your choice - follow Warren Buffet's advice or random strangers on the internet.
rwdflynavy
Recycles dryer sheets
Other than cash, which is about 3% of our portfolio, we are all equities. We are also in a fairly unique situation compared to most here.
I'm retired military and we comfortably live off my pension and VA disability. I retired 5 years ago at 49 and still do a little part time work, mostly so I can still add to retirement accounts.
I view both my pension and VA disability as the equivalent of a large portfolio of government bonds. Very safe and adjusted for inflation. So I don't feel a need to have a big chunk in bonds at this point.
We don't anticipate any significant withdrawals from our retirement accounts for at least another decade or so and even then, our SWR plan is 2-3%, so not too worried about SORR.
My MIL passed away and my wife received a good chunk in inheritance which has served to increase our savings that much more.
I'm retired military and we comfortably live off my pension and VA disability. I retired 5 years ago at 49 and still do a little part time work, mostly so I can still add to retirement accounts.
I view both my pension and VA disability as the equivalent of a large portfolio of government bonds. Very safe and adjusted for inflation. So I don't feel a need to have a big chunk in bonds at this point.
We don't anticipate any significant withdrawals from our retirement accounts for at least another decade or so and even then, our SWR plan is 2-3%, so not too worried about SORR.
My MIL passed away and my wife received a good chunk in inheritance which has served to increase our savings that much more.
I'm not defending Dalio. I chose to post his vid because it was one of the shorter ones discussing the point.
I think the logic and math of risk reduction with uncorrelated assets is sound which means that the old consensus that stocks-zig when bonds-zag has broken down some what. When bottomless pocketed buyers (central banks with "printers") buy bonds with a goal to control rates, the market is no longer functioning the way it did when the stocks+bonds=diversification consensus was formed and the correlation is no longer an inverse relationship... at least not to the degree it was 40 years ago.
So the trick becomes finding 10 truly uncorrelated assets. I only looked into it for about 5 minutes a couple of weeks ago and the suggested assets were non-starters like fine art and wine. The wine might work except I buy cheap stuff and I'd drink my assets skewing my portfolio allocation...
I'm not defending Dalio. I chose to post his vid because it was one of the shorter ones discussing the point.
I think the logic and math of risk reduction with uncorrelated assets is sound which means that the old consensus that stocks-zig when bonds-zag has broken down some what. When bottomless pocketed buyers (central banks with "printers") buy bonds with a goal to control rates, the market is no longer functioning the way it did when the stocks+bonds=diversification consensus was formed and the correlation is no longer an inverse relationship... at least not to the degree it was 40 years ago.
So the trick becomes finding 10 truly uncorrelated assets. I only looked into it for about 5 minutes a couple of weeks ago and the suggested assets were non-starters like fine art and wine. The wine might work except I buy cheap stuff and I'd drink my assets skewing my portfolio allocation...
Nothing wrong with cheap wine ha!
I am all stock, but diversified with S and P, IWM, SCHG and international
I just cant get into bonds , I know they mitigate the volatility, but I view that as just the price I pay for market returns...and to reach my goal all I need are market returns...and actually now almost 6.5 years into retirement I need much less, so barring something cataclysmic happening I'll be fine.
target2019
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
There's a chart below this quote that helps explain "most investors". If you're not in that bunch, it's your choice.
So, you've made a decision to accept the results of an index with 500 companies. If that's ok with you, fine. But I'd advise a friend to look further at what diversification consists of.
https://www.fidelity.com/learning-center/investment-products/mutual-funds/diversification
So, you've made a decision to accept the results of an index with 500 companies. If that's ok with you, fine. But I'd advise a friend to look further at what diversification consists of.
RetiredAt49
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Excluding rentals, my AA = 100% equities. My largest portfolio is a taxable non retirement account and thus I use VOO and VTI as TLH partners otherwise I’d be mostly in the S&P 500. The only other index fund I strongly believe in is QQQ (which has been extremely profitable especially lately). YMMW but yes I believe in couch potato portfolios…
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I was very heavy in an S&P 500 while working - and would contribute about 80 % S&P and 20% fixed income fund. Why? The S&P 500 fund was rather broad, and by far and away the least expensive fund. When there was a biggish dip, I would transfer some money from the fixed income fund into the S&P - but never the other way.
In preparation for retirement, I piled up a cash reserve (or cash buckets, if you will). In my IRAs, I attempt to have a broad base of what I consider reasonable funds (Vanguard Total Stock Market and some Vanguard International Total Stock Market), some sectors - which bounce around, and a very little bit of stock. I also have "cash" in the IRAs for dry powder.
In my IRAs, I pretty much got out of bond funds and bought some individual treasuries in spring 2022 - as a result of Pb4uski's repeated demonstrations as to what was going to happen to bond fund values as interest rates rose, and started buying individual treasuries, and more recently a few CDs, to park cash.
You could do a lot worse than an S&P 500.
In preparation for retirement, I piled up a cash reserve (or cash buckets, if you will). In my IRAs, I attempt to have a broad base of what I consider reasonable funds (Vanguard Total Stock Market and some Vanguard International Total Stock Market), some sectors - which bounce around, and a very little bit of stock. I also have "cash" in the IRAs for dry powder.
In my IRAs, I pretty much got out of bond funds and bought some individual treasuries in spring 2022 - as a result of Pb4uski's repeated demonstrations as to what was going to happen to bond fund values as interest rates rose, and started buying individual treasuries, and more recently a few CDs, to park cash.
You could do a lot worse than an S&P 500.
Searching on this topic isn't much help. I think that's why the OP asked to see what others think and what you'll find is answers all over the map.
There's no right or wrong answer. You can either own the market or you can hedge with different assets and rebalance (slice and dice). I used to think the latter would do better, but it's more of a wash than ever. If you go back far enough, you'll see that owning different asset classes did result in better performance, but if you look over the last 20 or so years that benefit is gone. Maybe it'll return, maybe it won't?
Portfolio 1 = 100% US Large Cap
Portfolio 2 = 100% US Total Market
Portfolio 3 = 25% each of US Large Growth, US Large Value, US Small Growth, US Small Value
Personally, I invest in US Total Market (VTSAX/VTI) and call it good.
And obviously, I didn't touch on International. So far it's been a dog and I'm happy I reduced international allocation from 40% to 20% many years ago. You'll hear the argument that you'll miss out on a lot of good companies not in the US, but for diversification purposes, US companies derive a lot of their revenue internationally and I doubt that will change. It's probably good enough.
Good luck with whatever you decide.
There's no right or wrong answer. You can either own the market or you can hedge with different assets and rebalance (slice and dice). I used to think the latter would do better, but it's more of a wash than ever. If you go back far enough, you'll see that owning different asset classes did result in better performance, but if you look over the last 20 or so years that benefit is gone. Maybe it'll return, maybe it won't?
| Portfolio Performance (Jan 1972 - Apr 2023) | |||
| Metric | Portfolio 1 | Portfolio 2 | Portfolio 3 |
| Start Balance | $10,000.00 | $10,000.00 | $10,000.00 |
| End Balance | $1,560,138.20 | $1,554,060.75 | $2,506,650.76 |
| Annualized Return (CAGR) | 10.34% | 10.33% | 11.36% |
| Portfolio Performance (Jan 2000 - Apr 2023) | |||
| Metric | Portfolio 1 | Portfolio 2 | Portfolio 3 |
| Start Balance | $10,000.00 | $10,000.00 | $10,000.00 |
| End Balance | $43,004.50 | $44,801.10 | $58,606.13 |
| Annualized Return (CAGR) | 6.45% | 6.64% | 7.87% |
| Portfolio Performance (Jan 2010 - Apr 2023) | |||
| Metric | Portfolio 1 | Portfolio 2 | Portfolio 3 |
| Start Balance | $10,000.00 | $10,000.00 | $10,000.00 |
| End Balance | $47,695.28 | $46,032.06 | $43,695.21 |
| Annualized Return (CAGR) | 12.43% | 12.13% | 11.69% |
Portfolio 1 = 100% US Large Cap
Portfolio 2 = 100% US Total Market
Portfolio 3 = 25% each of US Large Growth, US Large Value, US Small Growth, US Small Value
Personally, I invest in US Total Market (VTSAX/VTI) and call it good.
And obviously, I didn't touch on International. So far it's been a dog and I'm happy I reduced international allocation from 40% to 20% many years ago. You'll hear the argument that you'll miss out on a lot of good companies not in the US, but for diversification purposes, US companies derive a lot of their revenue internationally and I doubt that will change. It's probably good enough.
Good luck with whatever you decide.
If you have enough to live on or have the risk tolerance to take in large market drops, yes just put it all in S&P 500 or total stock market. Big market downturns such as the one in 2000 still scare me so I prefer 50% in stocks and the rest in bonds, gold, cash.
Chuckanut
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
To answer the OPS question in the thread title: Diversification
I sleep better at night knowing that one financial asset extinction event won’t take me with it.
I sleep better at night knowing that one financial asset extinction event won’t take me with it.
My opinion may differ from mainstream thoughts.
The return on investment of a fully diversified strategy is close to negative.
By focusing on S&P500 you have a fair chance of performing better than a lot of other strategies.
If your income as a retiree depends on the up and down of stock markets, I would go with a diversification strategy. If it is independent, I would keep the index funds.
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