Why not just VTSAX?

[calmloki]

We are a 65ish childfree couple who are very simpatico with our spending habits, which are modest. Pretty security oriented, which resulted in our paying off our rental properties as fast as possible. Result was that we ended up with paid off rentals that throw off more than we spend annually. The excess cash went into things like PenFed CDs and savings accounts that were then tapped to make property loans.

At the moment we have a 3% PenFed CD for more than a year's spending that matures 12/18. Maybe 1/2 year's expenses in various savings accounts, and the rest of the cash lent out. The interest income from the loans is a bit less than the rental income, but still enough to pay our annual expenses. Our little dabs of social security were taken at 62, I'm newly on medicare and she's about to join me. The cash is snowballing.

Last year we decided to get back into the stock market - I am imagining about 1/3 of our assets in rentals, a 1/3 in loans, and a 1/3 in the market. We don't need any more cash flow, and the penalty for excessive income that we are charged in higher Medicare costs and taxes offends me a bit.

She has an ex-coworker broker who always has great ideas when they talk - she has 5-15k investments in things like Costco, J&J and Alibaba and loves to track them daily. I feel like a homerun or flop in any of those stocks is kinda meaningless in the big picture - not enough invested to have a major impact on our lives.

Last year we put a couple years living expenses into the market. About 1/3 into foreign, about 1/3 in VTSAX, and the rest in Explorer fund and funds right down the middle of the style box. I'm thinking simpler yet and just going with VTSAX. Don't feel like I need a bond component - that is met by CDs and land contracts and to a lesser extent property loans. VTSAX graph isn't as smooth as Wellesly, but has better performance over time. I'm looking to stash cash where it can grow for years without our attention. I'd like it to do better than CD growth - or taxfree munis.

Thoughts?

 

[tuixiu]

I guess it depends on "for years" means on horizon, and your opinion on the occasional debate over whether one needs more exposure to foreign equities or global nature of VTSAX is sufficient.

 

[calmloki]

I guess it depends on "for years" means on horizon, and your opinion on the occasional debate over whether one needs more exposure to foreign equities or global nature of VTSAX is sufficient.

Ah yes. For years could mean pretty much anything. About 18 months ago I switched off and she kicked me back on. No advance notice, just a "hit by a bus" moment. Doesn't make me feel as invulnerable as prior times. Her Mom went into her 90s, so there is a potential 30 year timeframe. The property loans could all pay off within the month - in fact 70% of them are expected to pay off within 6 months. All the tenants could move or we could have multiple fires or something dire could happen with the rentals - but we've weathered 30 years of rental vagaries so far. We are used to driving our own boat and responding to life, but I'm putting more and more of the rental business in the hands of another and am trying to trade sharpness and speed for a ticket on the national economy engine. 5-10 years? never need to use it? Dunno.

We do still have about 20% VEU after our most recent VTSAX purchase, but I'm not at all sure it is needed. If the US economy goes kerschitt I don't have plans to move to Portugal and live on the VEU. Also I feel like most big US companies are fairly global already, and besides, why would I want to bet against our country?

 

[nash031]

The question of "why not" is answered with "it depends." It depends on your tolerance for market risk, which can be mitigated by diversifying not just the market cap, but also the markets themselves.

VTSAX is great, but all your eggs are in one very large, domestic equity basket. You roughly have 80% large cap, and 20% small- and mid-cap exposure for US stocks via the Total Stock Market fund. Most "boglehead" followers believe you need ~20-40% international equity exposure for diversification, with some going even to 50% or more (Rick Ferri is doing this now). I aim for about 30% using Vanguard's total international.

So, of my 85% equity, 70% is aimed at VTSAX (and similar 80/20 splits for other large/small cap funds), and the other 30% is Total Int'l and TSP's I fund.

Finally, many believe that US equities are overvalued right now, and International may be a better value. So take that FWIW (which may not be much.)

As to why bet against the US? Because the US doesn't always "win."

 

[inquisitive]

If you are going to go with one fund, I would go with a total world index fund instead of VTSAX.

I don't understand what "betting" has to do with anything. I don't spend energy hoping that the market will go up and don't pay attention to it every day. I recognize that there will be bull markets and bear markets and sometimes I will lose money, sometimes perhaps a lot, but in the long run my return will be higher by investing.

 

[Animorph]

If you don't mind some foreign (it will look better one of these years), something like VFORX (Vanguard Target Retirement 2040) gives you one fund with more diversification. A later date gets you closer to all equities. Or VT (an ETF) gives you total world equities in one fund and should trade free at Vanguard. VTSAX should be fine, I just prefer more international exposure.

 

[CCdaCE]

Nice to have something to rebalance against. Bonds, Emerging Markets, something relatively uncorrelated.

Check out Total Stock Market (VTSAX) vs. Emerging Market (VEMAX) the last 5 years:

http://www.google.com/finance?chdnp...dms=0&q=MUTF:VTSAX&&ei=EEawVKHvD8mQqwGPm4GgCg

It's just a question if you can tolerate the difference in performance for that long. What if Total Stock Mkt (VTSAX) acts like Emerging Markets (VEMAX) did for the last 5 years?

I second the Target Retirement suggestion. Pick the one that has your preferred mix of funds. Might have to switch it for something else in 15-20 years, but, it'll take of itself in the meantime. Unless you want to mess with it, but, it also prevents you from messing with it. "Just leave it alone!" My retirement is split between All World Ex-US and VTSAX, hers is all Target Retirement fund.



-CC

 

[Midpack]

Last year we put a couple years living expenses into the market. About 1/3 into foreign, about 1/3 in VTSAX, and the rest in Explorer fund and funds right down the middle of the style box. I'm thinking simpler yet and just going with VTSAX. Don't feel like I need a bond component - that is met by CDs and land contracts and to a lesser extent property loans. VTSAX graph isn't as smooth as Wellesly, but has better performance over time. I'm looking to stash cash where it can grow for years without our attention. I'd like it to do better than CD growth - or taxfree munis.

Thoughts?

Comparing [performance] of a balanced fund (Wellesley is about 40:60 stock:bonds) to a 100% stock fund like VTSAX makes no sense at all, two different asset classes. VTSAX is meant to provide a broad domestic equity fund as a (major) part of your AA. A balanced fund is potentially a portfolio in itself, over the long term it should have lower returns and less volatility. Risk vs reward, as always...

 

[calmloki]

Comparing [performance] of a balanced fund (Wellesley is about 40:60 stock:bonds) to a 100% stock fund like VTSAX makes no sense at all, two different asset classes. VTSAX is meant to provide a broad domestic equity fund as a (major) part of your AA. A balanced fund is potentially a portfolio in itself, over the long term it should have lower returns and less volatility. Risk vs reward, as always...

I guess that's the thrust - with several income streams do I need to use a balanced fund, or do the thousands of stocks in VTSAX provide enough diversification and balance given our rental and loan/interest income. Wellesley shows less deviation, but does that really matter in my case?

 

[Ready]

I would at least have some of your equity exposure in VTIAX. The US market is very high right now, and the international markets have not performed as well lately. Based on reversion to the mean, it's likely we will see the opposite at some time in the future. If international exposure makes you nervous, keep the percentage low - maybe 20%. I keep 30% of my equities in VTIAX and 70% in VTSAX.

 

[Sue J]

Rather than a Target Retirement Fund have you considered Vanguard's Life Strategy selections?

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

I also don't need a bond portion but VTSAX felt a little roller coaster-ish. I went with LifeStrategy Growth (80/20) in a ROTH IRA which felt better.

I am teeny tiny small potatoes in investing and using my ROTH IRA to learn about investing and how I feel about it. I need to not look every day.


Sent from my iPad using Early Retirement Forum

 

[Midpack]

I guess that's the thrust - with several income streams do I need to use a balanced fund, or do the thousands of stocks in VTSAX provide enough diversification and balance given our rental and loan/interest income. Wellesley shows less deviation, but does that really matter in my case?

It's definitely a little trickier with income and property that is legitimately part of your net worth.

Still comes down to how much income are you planning on from your portfolio? If your income needs are fully met by your various income streams, you can invest your remaining portfolio assets in anything, from very risky to very conservative or anything in between.

But if you need additional income from your portfolio, determine what AA meets your needs and risk tolerance and invest accordingly.

Wellesley is meant to serve as something akin to 40% VTSAX and 60% VBTLX. If you want 100% equity in your portfolio, and you don't want any international equity exposure, VTSAX is one of several popular options.

 

[calmloki]

I am appreciating all the input. Last year I bought about 1/3 foreign VTIAX and took a small drubbing - sold it mid December and rolled it all into VEU. The $3000 writeoff against income this year will be appreciated. Then VEU did a little bump up and I looked good. Got lucky again and bought a fairly goodly amount of VTSAX after some CDs matured and I put most of the money into VTSAX just before it went up a couple points. Still have some of the CDs that matured the 5th to invest, and a larger amount matures the 25th of the month, so I'm seeking other viewpoints.

Really not counting on market investments for income - though I look wistfully at the low tax rate, we are used to and competent with the rentals and property deals - I've no such confidence or competence in the market. I'm looking for a repository for funds where they can grow without adding substantially to our annual tax bill. If we did need the money at some future point it would be easily accessible, and just because I'm wired that way I'd like it to do well.

 

[pb4uski]

If you go simple (nothing wrong with that) I would go with a 70/30 mix of Total Stock and Total International Stock rather than all Total Stock. That is my equity allocation.

 

[NW-Bound]

Common wisdom says that a pure equity portfolio will perform better than a balanced portfolio in the long run, but is that really true?

It was eye opening for me to see that in the really long run, meaning 20 years and more, they all end up at the same point. See below the comparison of VFINX (S&P500), VWINX (Wellesley), and Dodge & Cox Balanced (DODBX). All 3 fund performances are with dividend reinvested.

I did not plot VTSAX because it did not exist back in 1980, but the difference with VFINX is not significant. Similarly, I could not plot FBALX (Fidelity Balanced Fund) because it did not exist in 1980. But if plotted from its inception in 1986, it ran neck-to-neck with the other balanced funds.

It looks like in the long run, it did not matter much between the above choices.

What I see is that when equities get a long bull run, watch out for "reversion to the mean" because nothing can grow like Jack's Beanstalk.

 

[Sunset]

If you consider your rentals like bonds and your loan amounts like bonds, then going totally vtsax (or vti etf) would beef up your stock AA.

Sounds to me like you need to get some investment like stocks, that give off some dividends, so you can pay 0->15% tax rate on something...

 

[samclem]

It was eye opening for me to see that in the really long run, meaning 20 years and more, they all end up at the same point. See below the comparison of VFINX (S&P500), VWINX (Wellesley), and Dodge & Cox Balanced (DODBX). All 3 fund performances are with dividend reinvested.

Not to nitpick, but Wellesley is lagging VFINX by over $100K right now according to your chart, or about 22%. That's a hunk of change. It has lagged considerably more at previous times during the window, and there's nothing saying it won't lag again (or, possibly, lead--but that's less likely over an extended period). Having a big chunk of bonds does degrade performance (on average), but having a smaller amount degrades performance less and reduces volatility.

See the black line. Over the entire time period (1950-2009), 20% bonds reduced annual returns by about 4% compared to 100% stocks, but significantly reduced portfolio volatility.

 

[inquisitive]

Common wisdom says that a pure equity portfolio will perform better than a balanced portfolio in the long run, but is that really true?

It was eye opening for me to see that in the really long run, meaning 20 years and more, they all end up at the same point. See below the comparison of VFINX (S&P500), VWINX (Wellesley), and Dodge & Cox Balanced (DODBX). All 3 fund performances are with dividend reinvested.

I did not plot VTSAX because it did not exist back in 1980, but the difference with VFINX is not significant. Similarly, I could not plot FBALX (Fidelity Balanced Fund) because it did not exist in 1980. But if plotted from its inception in 1986, it ran neck-to-neck with the other balanced funds.

It looks like in the long run, it did not matter much between the above choices.

What I see is that when equities get a long bull run, watch out for "reversion to the mean" because nothing can grow like Jack's Beanstalk.

This time period includes the 2008 market crash, which was the biggest correction since the Great Depression? If you had selected a different 30 yr period, I'm guessing the difference would be more pronounced. Even after that it looks like stocks have increased their lead (from then until now).

 

[inquisitive]

I am appreciating all the input. Last year I bought about 1/3 foreign VTIAX and took a small drubbing - sold it mid December and rolled it all into VEU. .

What will you do if VTSAX takes a big drubbing?

 

[NW-Bound]

Not to nitpick, but Wellesley is lagging VFINX by over $100K right now according to your chart, or about 22%. That's a hunk of change. It has lagged considerably more at previous times during the window, and there's nothing saying it won't lag again (or, possibly, lead--but that's less likely over an extended period). Having a big chunk of bonds does degrade performance (on average), but having a smaller amount degrades performance less and reduces volatility.

See the black line. Over the entire time period (1950-2009), 20% bonds reduced annual returns by about 4% compared to 100% stocks, but significantly reduced portfolio volatility.

Yes, balanced funds lag pure stock right now, but from 1980 to 2003 then again to 2009, they all met up at the same point. A few years from now, will we be surprised to see that happening again?

The "Efficient Frontier" curves vary drastically from decade to decade. In the decade of 1950's stocks way outperform bonds. In the decade of 2000s, the reverse is true.

Over 60 years of 1950-2009, yes, stocks do better. We do not know if the next 60 years will be the same. And what happened prior to 1950? Actually, I do not care about the next 60 years because I will be dead. But the wavy look of the stock curve suggest that the next dip will be sometimes within my lifetime.

Anyway, as a self-professed market timer, I look at the market volatility as a challenge to make some extra money. I was trying to point out to people that a pure stock portfolio is not a sure way to make you more money than a balanced fund. If it does, the extra gain is fleeting.

This time period includes the 2008 market crash, which was the biggest correction since the Great Depression? If you had selected a different 30 yr period, I'm guessing the difference would be more pronounced. Even after that it looks like stocks have increased their lead (from then until now).

But the time period of 1980-2014 also includes one of the fantastic bull runs of the stock market, meaning 1983-2000. My point was that it then gave it all up, and the balanced funds caught up with it in 2003, and again in 2009. Can anybody bet that it will not happen again in a few years?

But again, as a market timer, I try to use "Tactical Allocation" and do not keep my AA constant anyway.

 

[calmloki]

What will you do if VTSAX takes a big drubbing?

In a perfect world: sell it all, buy a similar fund low, and use the tax writeoff against capital gains on a property sale. As it is the rentals are mostly depreciated out, which means the tax man thinks anything we get for them is pure taxable profit. That makes selling them without an offsetting loss unattractive when they are renting quite profitably. A "loss" like that would have the effect of moving the profit from the higher tax rentals to lower tax stocks.

Reality would probably be quite different - We/me sold about all our stock holdings late in 2012 because I was sure there would be a huge sale on stocks early in 2013. Our cash sat in the Vanguard settlement account through 2013's 30% rise and earned us .... nothing. Sell low/buy high? Really want to do what worked for us with real estate - just hold for a long long time.

 

[samclem]

Yes, balanced funds lag pure stock right now, but from 1980 to 2003 then again to 2009, they all met up at the same point. A few years from now, will we be surprised to see that happening again? . . .

Anyway, as a self-professed market timer, I look at the market volatility as a challenge to make some extra money. . . .
But again, as a market timer, I try to use "Tactical Allocation" and do not keep my AA constant anyway.

Well, if we start with the asumption that we can know in advance whether stocks or bonds will do best in the coming period, it removes any need to discuss the merits of balanced funds, 100% stocks, or 100% bonds. Picking any of these and sticking with it would be foolish: it would be much better to just load up on what is going to do best, sell when it has reached the top, and buy the next winning category. But--about that starting assumption . . .
If we >don't< assume we can effectively "tactically allocate", then over longer time periods (20+ years) in general having a heavier dose of stocks leads to higher overall average annual returns. Bonds are useful for reducing volatility. I'm always cognizant of the need to distinguish between "volatility" and "risk", because to me they are very different. Long-term failure of my portfolio to keep up with inflation is a bigger "risk" (to me) than annual ups and downs in account balances, so I have a lot of stocks and very few bonds. But, over time, having 20% or so in bonds has reduced volatility a lot with fairly small impact on total returns. A major characteristic of the chart (both the "overall time period" black line and the colored decade lines) is the "horizontility" near the 100% stock ("S") end of the line: Adding 20-30% bonds didn't drag down total returns much, but did significantly reduce volatility. This generally applied whether stocks led (50's, 60's, 80's, 90s) or lagged (2000's) bonds for the decade (exception: the 1970s, when neither did well).
Correction to my previous typo: a 20% allocation to bonds reduced annual returns over this time period by about 1% on average (from 11% to 10%), not 4%.

 

[target2019]

Why not just VTSAX?

You can use the Vanguard web app at:

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

and change the allocation in three different modes. Look for 3 smallish icons at top right of the chart.

 

[inquisitive]

In a perfect world: sell it all, buy a similar fund low, and use the tax writeoff against capital gains on a property sale. As it is the rentals are mostly depreciated out, which means the tax man thinks anything we get for them is pure taxable profit. That makes selling them without an offsetting loss unattractive when they are renting quite profitably. A "loss" like that would have the effect of moving the profit from the higher tax rentals to lower tax stocks.

Reality would probably be quite different - We/me sold about all our stock holdings late in 2012 because I was sure there would be a huge sale on stocks early in 2013. Our cash sat in the Vanguard settlement account through 2013's 30% rise and earned us .... nothing. Sell low/buy high? Really want to do what worked for us with real estate - just hold for a long long time.

That's an interesting idea about using the loss but it presupposes that you are planning on selling property anyway, right? If you did not want to sell anything, then holding 1 nondiversified fund would mean you are willing to stomach the ups and downs that comes with it. Theoretically you can increase your return by holding another noncorrelated asset that has the same long-term expected return as VTSAX but you have to weigh that benefit against holding international stocks.

I am a real estate and a stock investor and I treat the 2 independently. I hardly use any ideas in common because they are really both different, and require different ways of thinking.

 

[calmloki]

That's an interesting idea about using the loss but it presupposes that you are planning on selling property anyway, right? If you did not want to sell anything, then holding 1 nondiversified fund would mean you are willing to stomach the ups and downs that comes with it. Theoretically you can increase your return by holding another noncorrelated asset that has the same long-term expected return as VTSAX but you have to weigh that benefit against holding international stocks.

I am a real estate and a stock investor and I treat the 2 independently. I hardly use any ideas in common because they are really both different, and require different ways of thinking.

Our original plan involved selling everything right around real estate crash time. then we thought selling a place/year. then as prices continued to fall we thought screw it - let's just have someone run them. At present we are open to selling, but needn't do so and doing so would have big tax consequences. I'm trying to move our income and assets into "safe without attention" mode.

A long conversation last night finds her unwilling to change what has worked for us in the past - constant attention, as evidenced by her wanting to check fund prices daily. I feel checking constantly without acting is just wasted stress and stomach acid. She feels I'm acting cavalier by being willing to buy shares any old time rather than when they are "a good deal". I look at a 10 year chart and feel the important thing is to have bought, she looks at daily returns and sees buying at 2% less or more, thus making 2% greater or less return overall.

We talked about VEU, correlation, and buying cheap - she pointed out VEU is actually down 12.5% in seven years. Exactly why did I think buying VEU NOW was a good idea? Was losing money the goal? Errr... uhm....

Regarding correlation - I remember an awful lot of people singing the blues around here regarding the funds they thought weren't correlated but that were falling anyway last big crash. The phrase "the US catches a cold and the world sneezes" sticks in my head. I really am wondering if our rentals aren't an adequately uncorrelated asset - or maybe I should just drink my cocoa and pull up my lap rug - her Costco style picks outweigh her Alibabas...