Author Topic: Looking for advice on index investing: VTSAX? VOO? Something else?  (Read 13024 times)

NestEggChick (formerly PFgal)

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I'm finally wising up about investing. (I won't bother to mention what I did in the past since it's irrelevant here.) I like Jim's advice over at http://jlcollinsnh.wordpress.com/ to invest in just one big index fund that seems to cover a bit of everything. He uses VSTAX.

I just moved everything over to Vanguard and the funds became available for investing today. I was all excited to invest, and then I got stuck. I was looking at VTSAX and VOO. They have the same fees but VOO returns a higher dividend. VOO is basically the S&P 500 while, as far as I can tell, VTSAX is that plus a lot more. I’d love opinions on how to choose one over the other. Or maybe there’s a third choice I should be considering? I'm new to this and I'd love any advice you guys can offer. I'm sure I'm not the only one trying to figure this out!

Thanks for any advice you can give!

Info about the two is here:

https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=4

https://personal.vanguard.com/us/funds/snapshot?FundId=0968&FundIntExt=INT#tab=4

destron

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #1 on: April 17, 2013, 10:13:32 AM »
You might ask yourself, why do you want a higher dividend?

If it is in your Roth IRA, it could be beneficial once in retirement because you do not sell any of your capital ... except, I don't see the difference between selling stock and getting a larger dividend.

If you are in a non-tax preferential account, you have to pay taxes on all of those dividends. Also, be careful because if you are using DRIP, you can screw up tax loss harvesting with an untimely dividend purchase.

Personally, I buy VTSAX.

mikefixac

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #2 on: April 17, 2013, 11:45:44 AM »
Honestly, that might be a question for http://www.bogleheads.org/forum/index.php

Those guys will give you a more informed answer.

Researcher

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #3 on: April 17, 2013, 01:44:48 PM »
Even though VOO pays a higher dividend, the price of the stock is almost double that of VTSAX. Therefore you're paying more per stock price for that higher dividend. Overall it probably evens out.

NestEggChick (formerly PFgal)

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #4 on: April 17, 2013, 01:52:01 PM »
Thanks everyone! You're all making excellent points! These are things I'd heard about, but wasn't necessarily thinking about today (but I should have been!) Time to do some more research :)

NestEggChick (formerly PFgal)

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #5 on: April 18, 2013, 01:55:39 PM »
mikefixac, you were right about Bogleheads. I hadn't thought to post there - thanks for the tip! They were really helpful.

Joel

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #6 on: April 21, 2013, 06:48:59 PM »
I'm curious what Bogleheads had to say?

I'm a huge fan of VTSAX funds though, and have most of my money invested in VTSAX funds at Vanguard.

GreenGuava

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #7 on: April 21, 2013, 07:05:20 PM »
I'm curious what Bogleheads had to say?

I believe this thread is the relevant one (PFGal - I hope you're okay with me having posted this link;  if not, let me know and I'll remove it).   

The short story is that the S&P 500 is a big part (by cap) of the total stock market, and when people want the S&P 500, they generally want it because they want the "whole market" (if you prefer to tilt towards large-caps, there's a better way).

The next point was that you probably should have more than just the domestic stock index fund (whichever you chose) by diversifying in an international fund (I like VTIAX myself) and by having some bonds (the three-fund portfolio).

I'm a huge fan of VTSAX funds though, and have most of my money invested in VTSAX funds at Vanguard.

I'm also a huge fan of VTSAX;  all of my domestic stocks that aren't in my 401(k) are in that fund.  Domestic stocks amount to 49% of my investment dollars, and only about 1/6 of that is in my 401(k).  Between low cost and tax efficiency, it's a great fund for anyone who believes in indexing to use for their domestic stock, no matter where they hold said stocks (tax-advantaged or otherwise).

NestEggChick (formerly PFgal)

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #8 on: April 21, 2013, 07:51:00 PM »
That's the one GreenGuava - you beat me to it! And you gave a great summary, too. I'm still trying to figure out my full plan. I also started this thread about REITs because, while I'm figuring it out, I know I want REITs to be part of my portfolio.

pbkmaine

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #9 on: April 21, 2013, 07:57:57 PM »
If you want an inexpensive, index, diversified, fix-it-and-forget-it option, look at the Vanguard Target Retirement funds. Pick the fund that falls closest to your age 65. Average cost is .17, also known as 17 basis points (100 basis points is one percent). Each of these funds has within it US and foreign stocks and US and foreign bonds, all broadly indexed.

These are "target date" funds, designed to decrease their equity holdings over time. They start out aggressive and become slowly more conservative.  This is the same strategy a professional money manager would use.

The fact that you intend to retire far sooner than the target date should not matter, since these funds are designed to work over your entire life span.

Go to the Vanguard website and you will see information about the funds. These are the funds I recommend to friends, family and clients.  And no, Vanguard does not compensate me.  It's just where I keep my own money. 

GreenGuava

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #10 on: April 21, 2013, 08:02:56 PM »
That's the one GreenGuava - you beat me to it! And you gave a great summary, too. I'm still trying to figure out my full plan. I also started this thread about REITs because, while I'm figuring it out, I know I want REITs to be part of my portfolio.

Glad to be of help :-)

If you want an inexpensive, index, diversified, fix-it-and-forget-it option, look at the Vanguard Target Retirement funds. Pick the fund that falls closest to your age 65. 

Two caveats, if someone following along wants to go with this:  first, they're really only appropriate in tax-advantaged accounts;  there are issues with having these in a taxable account.  Second, defaulting to the one that fits your age is only appropriate if you don't intend to think about asset allocation at all - otherwise, consider getting one that matches your desired asset allocation (regardless of the name on the account).

A related caveat to the first one:  these are only appropriate to tax-advantaged accounts and are meant as all-in-one solutions.  If you intend to treat your entire portfolio as one large one (instead of treating taxable and tax-advantaged separately), these can greatly upset your desired asset allocation if you hold them in tax-advantaged and are trying something else in taxable.  This is particularly bad if you end up with bonds in taxable and international stocks in tax-advantaged.

If all of your investments are in tax-advantaged accounts and you don't want to have to think about them, these are great funds.

pbkmaine

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #11 on: April 21, 2013, 08:11:15 PM »
Not sure I agree about the taxes, GreenGuava. Since Vanguard's target date funds are index funds-of-funds, you should not have a heavy tax burden from them whether you hold them in or out of a retirement plan. That said, I do agree that most people hold them inside retirement accounts.

GreenGuava

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #12 on: April 21, 2013, 09:29:33 PM »
Before I reply, I want to stress that we're optimizing among great choices here.  Making the "wrong" choice in how to deal with a target date fund (especially the low-cost Vanguard ones) is far from a terrible situation. 

Not sure I agree about the taxes, GreenGuava. Since Vanguard's target date funds are index funds-of-funds, you should not have a heavy tax burden from them whether you hold them in or out of a retirement plan. That said, I do agree that most people hold them inside retirement accounts.

Let me explain some tax issues:  first, they maintain the desired asset allocation by selling some of one and using it to buy the other in order to re-balance.  This can produce capital gains taxes that might not be present if one were to re-balance by new contributions (whether actual new money, while in the accumulation phase, or by adjusting where some dividends are re-invested at any time).  Second, bond payments are generally treated as income for tax purposes (that is, at your marginal rate), while qualified dividends are typically taxed at a lower rate.  This makes it more advantageous to use your IRA space to fill with bonds and put some stocks in taxable (if one is going to split among these) rather than maintaining a matching allocation in each account (e.g., 30% bonds in both taxable and IRA).  On top of this, if you are going to have bonds in taxable, you might want to consider something other than total bond market, in order to take advantage of favorable tax treatment of other types of bonds (depending on one's current or expected tax brackets).  The target date funds don't do this.  Lastly, some international stock funds are eligible for a foreign tax credit (offsetting some taxes paid on dividends from companies based in other countries);  this tax credit isn't available if the stocks are held in a fund-of-fund, nor if they're held in a tax-advantaged account.

It's still far better than having a wrap of actively managed funds (which are far worse, tax-wise).

One other, non-tax consideration:  the target date funds never promote to Admiral shares.  If you hold enough in a target date fund, even if it's all in a tax-advantaged account, you're paying more in expenses than you would if you rolled it yourself.  Whether or not the difference is worth the extra effort is not a decision I can make for anyone.  If you're in, say, the 2055 fund (10% bonds, 70/30 split domestic to foreign in stocks), this threshold is just under $16,000.  But even the more expensive version of Vanguard funds are better than most other things out there, so it's not like this is disastrous.

pbkmaine

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Re: Looking for advice on index investing: VTSAX? VOO? Something else?
« Reply #13 on: April 22, 2013, 02:03:24 AM »
Agree on all points. In my experience, many people want simplicity rather than complexity in their investments. That is the great advantage of target date funds.
« Last Edit: April 22, 2013, 02:07:59 AM by pbkmaine »