Diversification: Finally doing its job.

[Markola]

After YEARS of feeling stupid for not owning anything but the S&P 500 index fund, things are changing. In addition to domestic stocks, we own significant index fund allocations of domestic bonds, international stocks and bonds, alternatives, and home equity. About the only major asset classes I don’t own are gold and cash, though I’m rethinking the cash one lately.

So far in 2025, my stubborn Boglehead tendencies are finally paying off a little.

After swan diving since the 2022 Fed rate increases intended to mop up the 2020 fire hose of Fed money printing, the Vanguard Total US Bond Market Fund (VBTLX) is up 1.9% YTD. Maybe the fall 2024 Fed rate cuts are finally kicking in.

More remarkably, after decades of relative lethargy, international stocks have a pulse. Just over two months into this year, Vanguard Total International Stock Index Fund (VXUS) is up 7.53%. Domestic stocks are going the other direction.

Of course, things can and will change throughout 2025, but it’s also possible these are emergent trends. Some active investors will say, “Meh, when a trend emerges I’ll pile in,” forgetting that the biggest moves in any market are dependent on already being invested for just a day or two per year when things move big. That knowledge is why diversified investors endure years of mediocrity in big portions of our portfolios: We know change happens fast and we want to be prepared for anything.

Like spring after a long winter, it’s nice to see long dead grass turn green.

 

[imjustawarrior]

One nice thing about diversification is you are likely to have at least one winner to gloat over. The downside is you also have at least one loser to cry over. But hopefully the reduced volatility helps one sleep better at night.

 

[Koolau]

I guess the question (to me) would be "What is it that you hope to accomplish by a given change and what are you willing to risk to accomplish it?"

I have decided to stay reasonably diversified which means I WILL have some losers every year. Nor will I be "all in" in this year's big winner (whatever that may be).

But even if I had a clue of what might be the year's "big thing(s)" I'm not willing to increase my risk to go for it. What's the point? I don't really need a huge win (though it would be nice!)

I think I'm typical. I fear a loss more than I crave a win. So I stay diversified and get mundane results (some winners, some losers) that are positive most years.

Oh, and you mentioned you're in neither cash nor gold. I am in both and they did pretty well for me last year (gold and silver - IOW PMs) were up roughly 35% last year. That and Megacorp stock were my big winners. Who knew at the start of the year?

Diversification. I guess that's my watchword. YMMV

 

[Al18]

The YTD performance of FXAIX (SP500 Index), FSPSX (Intl Index) and FSGGX (Global Ex-US Index). FXAIX is down 1.6%, FSPSX is up 9.2% and FSGGX is up 6.4%

 

[OldShooter]

IMO it's a little early to declare victory, but the talk of the dollar's demise as the principal reserve currency has always been in the back of my head as a potential big booster for investments outside the US. Overall a bad thing for the US, but good for diversified investors at least.

 

[Markola]

Some say, “Diversification is ‘worse-ification.” Ok, but that’s just not me. That thinking leads to concentration in Mag 7 tech stocks. I’ve been doing this long enough to recall when Phillip Morris and then Exxon headed the S&P 500, which is to say, again, things change. I’d rather own the casino than be a gambler on lucky number 7.

 

[OldShooter]

Some say, “Diversification is ‘worse-ification.”

William Bernstein: “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine.”

William Bernstein: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

 

[MichaelB]

William Bernstein: “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine.”

William Bernstein: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

I feel this is an overgeneralization. For some people and institutions the objective is to get rich, or at least make a lot of money, and they can achieve that by taking risks.

If the objective is to not get poor, the best option is a well diversified portfolio.

 

[Koolau]

I feel this is an overgeneralization. For some people and institutions the objective is to get rich, or at least make a lot of money, and they can achieve that by taking risks.

If the objective is to not get poor, the best option is a well diversified portfolio.

My objective is to not get poor and not spend a lot of time doing it.

 

[Chuckanut]

My next dog is going to be name ‘Diversification”. I am a big fan of it.

In my mind while the S&P500 is certainly more diversified than owning 10, 15 or even 20 stocks, the best diversification is the US Total Stock Market Index fund.

I am still watching International index funds since I got rid of them a few years ago. No doubt that action has contributed to any good performance we have seen recently.

 

[Koolau]

My next dog is going to be name ‘Diversification”. I am a big fan of it.

In my mind while the S&P500 is certainly more diversified than owning 10, 15 or even 20 stocks, the best diversification is the US Total Stock Market Index fund.

I am still watching International index funds since I got rid of them a few years ago. No doubt that action has contributed to any good performance we have seen recently.

Yes, and then I add in the All World ex-US for more diversification.

 

[SnowballCamper]

You're going to need a lot more than 2% over two months to recover the 16.8% drop over the last five years. Maybe this is the beginning of the "bond fund recovery" with decreasing rates, but we won't know until it happens. I just started DDs brokerage account with her and we got a 4.5% 3 year brokered CD for her bond allocation, and skipped the bond funds.

I think inflation is on its way, and thus higher interest rates, but maybe stagflation too. Who knows.

I'm glad to finally see some strength on the international markets. It's been a while. The Callan Periodic Table is a good go to check on the recent history of diversification.

 

[Al18]

The past 3 years, the average SP500 fund looks more like a growth fund. If you put $1000 in the fund, you’re only investing penny’s in the bottom 400 companies. For more diversification, invest in RSP, the equal weight SP500 fund.

 

[PlayinwithFIRE]

Give him a break, he's been waiting a long time to claim a victory

PWF

 

[Markola]

Give him a break, he's been waiting a long time to claim a victory

PWF

 

[youbet]

In my mind while the S&P500 is certainly more diversified than owning 10, 15 or even 20 stocks, the best diversification is the US Total Stock Market Index fund.

My portfolio is also dominated by a TSM fund. But, I noticed that the historical difference in performance between a TSM fund and an S&P 500 fund is minuscule. TSM funds' exposure to small and mid caps is very small. I added an additional exposure to small and mid caps with an TSM "completion" fund which holds the TSM minus the S&P 500.

 

[Stormy Kromer]

Diversification. My FA sold me on this about 30 years ago, it took 36 pages to print off my portfolio between the different stuff he sold me.

If I had invested it all in one fund, the Vanguard SP 500 I would have at least twice the money I have now. I did the math, its actually more. Makes me feel bad.

Bonds are a boat anchor no matter how you look at them. I've never met a happy bond holder. Because #1 they didn't get enough return or #2 they bought a high return and it got called. And they get taxed higher than capital gains like a stock fund. #3 the bond defaulted and they got $0 on their safe investment (Lehmean Bros etal)

Bonds safer than stocks ? I remember during a previous president's term about 23 years ago, he chose to have stocks paid before bond holders in a teacher's pension during an insolvency. I'll never trust bonds again. And International funds. International funds........ does anybody believe that International funds will beat the US long term ? I don't. And if you do believe it, which country is going to do it? Because an International Fund is going to have all the looser countries too. Buy the country that you think you will win because the other 100 countries in the fund will drag it down. Good luck, the last 30 years of diversified International investing haven't worked for me.

Rant over.

Except for this.

Advice to a young person. Buy the SP 500 index every month for 30+ years on your own, without a FA and their managed funds taking 2% a year, and you'll be ahead of 99% of everyone. Including the people trying to sell you their portfolios. Go to VG or Schwabb and set it til you're 60. You'll be loaded. And you won't have to listen to experts or worry about a thing.

 

[OldShooter]

Diversification. My FA sold me on this about 30 years ago, it took 36 pages to print off my portfolio between the different stuff he sold me.

If I had invested it all in one fund, the Vanguard SP 500 I would have at least twice the money I have now. I did the math, its actually more. Makes me feel bad.

WADR, remember that almost any broad market fund is far more diversified than any stock portfolio that is practical for an individual investor to hold. From memory:

S&P 500 fund: 500 stocks. duh.
Total US Market fund: 3,600 stocks
Total World Fund: 7,000 stocks

So the fact that the S&P 500 is one of the winners is a win for diversification and, obviously, a loss for your FA's home-made stock market hash, whatever it might have been.

 

[pb4uski]

...I remember during a previous president's term about 23 years ago, he chose to have stocks paid before bond holders in a teacher's pension during an insolvency. ...

Huh?

 

[sengsational]

@Stormy Kromer I agree that putting it all on the large cap US is hard to beat on simplicity and also a pretty conservative bet. And I like that it's such an obvious/common strategy for workers, there's always people buying, giving it some buoyancy.

 

[audreyh1]

My portfolio is also dominated by a TSM fund. But, I noticed that the historical difference in performance between a TSM fund and an S&P 500 fund is minuscule. TSM funds' exposure to small and mid caps is very small. I added an additional exposure to small and mid caps with an TSM "completion" fund which holds the TSM minus the S&P 500.

I also added mid cap and small cap index funds along with the TSM index. However I’ll probably let them dwindle over time in the interest of simplicity. They also pay slightly higher distributions compared to the TSM.

 

[Markola]

Diversification. My FA sold me on this about 30 years ago, it took 36 pages to print off my portfolio between the different stuff he sold me.

If I had invested it all in one fund, the Vanguard SP 500 I would have at least twice the money I have now. I did the math, its actually more. Makes me feel bad.

Bonds are a boat anchor no matter how you look at them. I've never met a happy bond holder. Because #1 they didn't get enough return or #2 they bought a high return and it got called. And they get taxed higher than capital gains like a stock fund. #3 the bond defaulted and they got $0 on their safe investment (Lehmean Bros etal)

Bonds safer than stocks ? I remember during a previous president's term about 23 years ago, he chose to have stocks paid before bond holders in a teacher's pension during an insolvency. I'll never trust bonds again. And International funds. International funds........ does anybody believe that International funds will beat the US long term ? I don't. And if you do believe it, which country is going to do it? Because an International Fund is going to have all the looser countries too. Buy the country that you think you will win because the other 100 countries in the fund will drag it down. Good luck, the last 30 years of diversified International investing haven't worked for me.

Rant over.

Except for this.

Advice to a young person. Buy the SP 500 index every month for 30+ years on your own, without a FA and their managed funds taking 2% a year, and you'll be ahead of 99% of everyone. Including the people trying to sell you their portfolios. Go to VG or Schwabb and set it til you're 60. You'll be loaded. And you won't have to listen to

Actually, I agree with a lot of this comment. I used to automatically DCA 100% into stock index funds for much of my career, and my holdings did grow a lot. But my portfolio dropped about 50% a couple of times, and I started to understand the downside protection of bonds as I got older.

This is not just about math. One has to sleep at night, according to one’s own risk tolerance, which is one of the reasons I’m appreciating my many asset classes and particularly my bonds right now: I know I have several years of living expenses there, which might even grow, if the SHTF and the govt responds again with the money printer and rate cuts.

And I do still focus on accumulating risk assets for growth. Maybe the bond bucket gives me the confidence to go out on the risk curve elsewhere.

YMMV.

 

[Free To Canoe]

These are times that try men's souls...
I have had international equity diversification for 17 years now. I was convinced by Bernstein and others that the diversified portfolio will out perform the US market. This may be true in the long long run but I will not live to see it. It has been a failure if the goal was to out perform the S&P500. The goal of not to get poor is still in play although, as pointed out it may be a little early to claim victory.

 

[audreyh1]

While working I was all stock. I didn’t add a fixed income component until right before retiring.

 

[Markola]

While working I was all stock. I didn’t add a fixed income component until right before retiring.

That’s the ideal for a career hard stop. However, I recall many people here who wanted to retire in downturns but had OMY Syndrome because their large stock allocations were in the basement.

Working less was a goal of mine since before I started working. I spent summers with my retired, frugal grandparents as a kid and liked how they drank coffee each morning while the rest of the world scrambled off to work. That’s when I first got the idea. So I had a long, gradual glide path, which I’m still on in semi-retirement at 59. DW too, and our portfolio has evolved in tandem to reflect that. One year at a time and so far, so good. Just back from a month in Palm Springs.