Why bother diversified? Why not all in Index SP500?

[VanWinkle]

I shared it first


and yes, love it....totally cuts through the noise with hard data....shows the power of the stock market compounding ...amazing!

+1

 

[CRLLS]

Thanks pb4uski for the comparison between Total M fund and the SP500. It has strengthened my previous thoughts that there is little difference between them, enough to not be a clear winner over the long haul. Enough to show I should pick either one and not both.

The key indices in daily financial reporting are the Dow and SP500. I have always wondered how many people that have a diversified portfolio and 60/40 AA think that is how their daily earnings and losses respond? At the end of the month/quarter/year do they compare their total investment performance to the Dow or SP500 performance and feel behind? Their personal performance can only come close to the Dow or SP500 if they are 100% in one of those indexes. Anything less than 100% will perform differently. It is hard to determine the right AA/diversification/investment that meets their comfort level when all they hear is Dow and SP500 results on a daily basis.

I'm not suggesting 100% SP500. AA and diversity is for each of us to decide. I am saying that with anything less than 100%, following the daily reports can give a false sense of falling behind the growth curve. One must not fall into that mindset. Easily done if they quit listening.

 

[RetiredAt49]

Second, Warren Buffet's advice to his heirs was to simply invest in the S&P 500 index, so that pretty much answers the OP's question.

I guess that we'll need to agree to disagree whether P/E compression is a real risk to equities. The current P/E is 24.34. The historical mean and median are 16.01 and 14.93, respectively.

While Buffett recommended the 90/10 to his heirs… in subsequence sentences in that 2013 letter and in later years he went on to say that the average investor would outperform nearly all actively managed portfolios if he/she were to invest in low cost S&P 500 index fund(s).

For you and others hung up on P/E ratios being at a certain level or range, again take a look at over a century of data that suggest P/E’s are just a metric and nothing more. Look at NVDA’s P/E ratio just prior to their earnings call last week and then explain how their stock jumped 29% overnight… and still maintains that level today.

 

[Markola]

The blogger Jim Collins at https://jlcollinsnh.com addressed this idea. The simplest path to wealth for a young person, he said, was to work hard, live well beneath your means, and save 50-70% or more of your income into the total stock market index fund VGSAX. At some point in your 30s, the dividend yield would cover your already low expenses, at which point you retire, while your portfolio value explodes upward for the rest of your life, allowing you to increase lifestyle as it does.

 

[Phroig]

With the enormous sum she will inherit 100% in equities would do just fine.

Cash under the mattress would also work. She’ll just need to get a King XL (or several).

 

[Happyras]

Interesting idea to add that column but the column doesn't show for me. Perhaps change the fund descriptions to just tickers and it will show.

I can show it, but decided to wait until there was interest in my point. I added a column showing the minimal expected annual return of ITM covered calls using a conservative return of 7.5% starting in 1993, I also did a column showing the same return starting in 1999 with the average of the two S&P funds starting balance. This is the strategy I follow in this link; https://retirecertain.com/in-the-money-covered-call-strategy/
Its worked for my wealthier friends for years, and provides that low risk return similar to bonds when you expect the market to run flat for some time.

		VG TSM		VG 500		ITM Covered Calls SPY		lost decade options
Year	Inflation	Return	Balance	Return	Balance
1993	2.75%	10.62%	$11,062	9.89%	$10,989	7.50%	$11,000
1994	2.67%	-0.17%	$11,044	1.18%	$11,118	7.50%	$11,825
1995	2.54%	35.79%	$14,996	37.45%	$15,282	7.50%	$12,712
1996	3.32%	20.96%	$18,139	22.88%	$18,778	7.50%	$13,665
1997	1.70%	30.99%	$23,761	33.19%	$25,010	7.50%	$14,690
1998	1.61%	23.26%	$29,289	28.62%	$32,168	7.50%	$15,792
1999	2.68%	23.81%	$36,264	21.07%	$38,945	7.50%	$16,976	$37,604.50
2000	3.39%	-10.57%	$32,429	-9.06%	$35,418	7.50%	$18,250	$40,424.84
2001	1.55%	-10.97%	$28,873	-12.02%	$31,160	7.50%	$19,618	$43,456.70
2002	2.38%	-20.96%	$22,821	-22.15%	$24,259	7.50%	$21,090	$46,715.95
2003	1.88%	31.35%	$29,976	28.50%	$31,174	7.50%	$22,671	$50,219.65
2004	3.26%	12.51%	$33,728	10.74%	$34,522	7.50%	$24,372	$53,986.12
2005	3.42%	5.98%	$35,745	4.77%	$36,170	7.50%	$26,200	$58,035.08
2006	2.54%	15.51%	$41,289	15.64%	$41,827	7.50%	$28,165	$62,387.71
2007	4.08%	5.49%	$43,556	5.39%	$44,081	7.50%	$30,277	$67,066.79
2008	0.09%	-37.04%	$27,424	-37.02%	$27,762	7.50%	$32,548	$72,096.80
2009	2.72%	28.70%	$35,294	26.49%	$35,114	7.50%	$34,989	$77,504.06
2010	1.50%	17.09%	$41,327	14.91%	$40,351	7.50%	$37,613
2011	2.96%	0.96%	$41,724	1.97%	$41,145	7.50%	$40,434
2012	1.74%	16.25%	$48,506	15.82%	$47,656	7.50%	$43,466
2013	1.50%	33.35%	$64,682	32.18%	$62,989	7.50%	$46,726
2014	0.76%	12.43%	$72,721	13.51%	$71,498	7.50%	$50,231
2015	0.73%	0.29%	$72,935	1.25%	$72,391	7.50%	$53,998
2016	2.07%	12.53%	$82,076	11.82%	$80,945	7.50%	$58,048
2017	2.11%	21.05%	$99,355	21.67%	$98,484	7.50%	$62,402
2018	1.91%	-5.26%	$94,132	-4.52%	$94,028	7.50%	$67,082
2019	2.29%	30.65%	$122,983	31.33%	$123,485	7.50%	$72,113
2020	1.36%	20.87%	$148,649	18.25%	$146,018	7.50%	$77,521
2021	7.04%	25.59%	$186,685	28.53%	$187,680	7.50%	$83,335
2022	6.45%	-19.60%	$150,090	-18.23%	$153,468	7.50%	$89,586
2023	1.70%	8.25%	$162,467	9.12%	$167,468	7.50%	$96,305
	AVG	AVG		AVG		AVG
	2.47%	10.96%		11.07%		7.50%

 

[Happyras]

What I tried to show is not a perfect reflection of selling ITM covered calls on SPY, but on average it should return steady positive growth except for extreme dips in SPY. You sell your upside on SPY in favor of this longer term steady return. The short term deeper dips, going below your strike price, should average out within a short period as SPY has a general trend. It is not meant for my kids who have 40 years to invest and hold. Its for those of us who have won the game and have 10 to 20 years to spend it and do not want to loose it, but still want equities as part of their mix.

 

[sterlingmossy]

https://creativeplanning.com/periodic-table/

 

[GaryInCO]

Back to @Enuff2Eat's original question of "why diversify:" as others have said, stocks and bonds tend to move in opposite directions. (2022 was VERY atypical in that regard.) So combining stocks & bonds might lower your returns, but it also reduces the volatility of your account. Many people sleep better with fewer/smaller drawdowns.

Here's a quick comparison between 100% VFINX (SP500) in blue, 60/40 (VFINX/VUSTX) in red, and 40/40/20 (stocks/bonds/gold) in gold. (VFINX and VUSTX are basically the same as SPY and TLT, but with longer history.)

Click here and scroll down to the "Performance Summary" and "Portfolio Growth" sections.

100% SP500 is the winner right now, because of the incredible run-up since 2009. But notice the drawdowns after 2000 and 2008 -- especially since we're in a high-CAPE higher-risk environment now. Like we were in 2000 and 2008. SP500 tends to grow faster, but it also crashes bigger. 60/40 or similar tends to smooth out the bumps a bit. You decide what works for you.

 

[F.I.R.E User]

What about all in for VTSAX and chill?

 

[RetiredAt49]

What about all in for VTSAX and chill?

That’s a solid option. However, because I have a large taxable brokerage account I use VTI (which is VTSAX in ETF format) and VOO and use them as TLH partners. I also have QQQ because I’m a software engineer and feel that the technology sector is going to continue to innovate and perform well in the decades to come.

 

[F.I.R.E User]

That’s a solid option. However, because I have a large taxable brokerage account I use VTI (which is VTSAX in ETF format) and VOO and use them as TLH partners. I also have QQQ because I’m a software engineer and feel that the technology sector is going to continue to innovate and perform well in the decades to come.

VTSAX is mostly technology.

 

[RetiredAt49]

VTSAX is mostly technology.

True but only because many of the technology companies just happen to be some of the largest companies in the US. I like QQQ specifically for the technology sector-specific companies. Also, QQQ’s historical returns have been excellent and greater than VOO or VTI.

YMMW

 

[Koolau]

True but only because many of the technology companies just happen to be some of the largest companies in the US. I like QQQ specifically for the technology sector-specific companies. Also, QQQ’s historical returns have been excellent and greater than VOO or VTI.

YMMW

I just can't imagine having all my eggs in one basket - good track record or not. The more diversity, probably the lower the overall returns - over time. BUT at any given moment, diversity is more likely to protect what you have. I prefer that to the opportunity for higher returns most of the time. It's very much a YMMV situation.

 

[marko]

Oh, to live in a world where the balance is high enough that a 2% T Bill pays all the bills!

 

[almost there]

A: People like to gamble. And try to beat the house.

 

[RetiredAt49]

I just can't imagine having all my eggs in one basket - good track record or not. The more diversity, probably the lower the overall returns - over time. BUT at any given moment, diversity is more likely to protect what you have. I prefer that to the opportunity for higher returns most of the time. It's very much a YMMV situation.

Regarding diversity and having “all eggs in one basket”, VOO is Vanguard’s S&P 500 ETF (and thus 500 individual stocks). VTI is Vanguard’s total US stock market which contains several thousand companies. QQQ has just over 100 technology companies.

Sure, there’s overlap across those 3 ETF’s and given the “weighting”, the “bigger” ones have more exposure. However, holding thousands of individual stocks (with 3 ETF’s) is not “holding all my eggs in one basket”.

 

[Markola]

I just can't imagine having all my eggs in one basket - good track record or not. The more diversity, probably the lower the overall returns - over time. BUT at any given moment, diversity is more likely to protect what you have. I prefer that to the opportunity for higher returns most of the time. It's very much a YMMV situation.

+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?

 

[Spanky]

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.

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

 

[Koolau]

Oh, to live in a world where the balance is high enough that a 2% T Bill pays all the bills!

Years ago, I read a book by Zvi Bodie who recommended (IIRC) to place most of your stash into TIPS. At the time he wrote the book, they were paying 3% over inflation. Had I read the book earlier, I just might have done that. Of course, now, Tips are basically paying inflation IIRC. I haven't looked for a while as I've had little interest.

But, that would be kinda nice - 3% over inflation. I could live on that!

 

[soylentgreen]

That’s a solid option. However, because I have a large taxable brokerage account I use VTI (which is VTSAX in ETF format) and VOO and use them as TLH partners. I also have QQQ because I’m a software engineer and feel that the technology sector is going to continue to innovate and perform well in the decades to come.

What is the Fidelity equivalent of VTSAX (ETF) ?

 

[RetiredAt49]

What is the Fidelity equivalent of VTSAX (ETF) ?

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.

 

[audreyh1]

What is the Fidelity equivalent of VTSAX (ETF) ?

That would be FSKAX. Fidelity doesn’t do ETFs.

 

[target2019]

What is the Fidelity equivalent of VTSAX (ETF) ?

iShares Core S&P Total US Stock Market ETF (ITOT) https://www.fidelity.com/etfs/ishares

 

[Phroig]

That would be FSKAX. Fidelity doesn’t do ETFs.

Also FZROX. Fidelity has several ETFs, just none that track major broad stock indexes.