Author Topic: Why not just put it all in the Vanguard 500 Admiral?  (Read 7054 times)

Tom Bri

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Why not just put it all in the Vanguard 500 Admiral?
« on: March 08, 2017, 04:25:20 PM »
I spent an hour or two today looking over the options on Vanguard. I currently have $ in the Vanguard 500 Index Admiral, which I chose because it has good 5 and 10 year returns (yes, I know, past performance...) and low expense ratios.

Now I have a chunk more to add, and I am considering diversifying, but my problem is, when I go back in time and look at returns long term, hardly anything ever beats stocks. I know, having been told again and again, to diversify to avoid risk, but, times when bonds beat stocks are so few and seldom, that I just don't see the point.

I guess I'd like some advice for a low-information investor. I am familiar with the 3-fund idea, but I still can't get around the lower returns that are built into that system, in return for greater supposed safety. How far in time do you have to go for this safety to really be any safer than just shooting for top returns on a large-cap fund, which seems pretty safe to me.

Obviously I am missing something, since it seems all of the smart people who understand this topic disagree with me. What is it? Please help.

tiberius

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #1 on: March 08, 2017, 06:06:20 PM »
It depends how much time you will need the money. If you need it in two years you could have only half the money in there.
US stock prices are expensive at the moment due to quantitive easing and banks playing the stock market rather than lending money to customers.
A free buffet. However, you can't have stocks going up 30% in one year if productivity goes up on 2 or 3%. It isn't sustainable.

So it looks very much like a crash could happen 'soon'. Problem is no-one knows when and everyone is greedy.

I am going with a diversified approach now with 5 asset classes 1 US stocks, 2 Various Non-US Stocks, 3 Bonds, 4 Gold ETF, 5 Real Estate Investment Trusts.
Equal values in each so only 40% in stocks total.
However, it is looking soo likely for a crash I'm thinking of pre-empting the crash and reducing the stock holdings.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #2 on: March 08, 2017, 06:17:17 PM »
Not sure if you question is total market vs. S&P 500 fund, or questioning having anything except 100% stocks.

Nothing really wrong with just doing S&P 500 as your stocks.  It will be a bit less diversified than a total market fund, but also slightly lower fees.  Historically the tracking between S&P 500 and a VTSAX is darn close.

Regarding 100% stocks, it is an option.  After all, everyone is a genius in a bull market.  Go look at what your portfolio would have done in 1965, or 2008 and gut check yourself.  If 50% of your portfolio's value disappeared overnight and took a decade to recover (let along appreciate) would you be OK?  Would you panic sell?  Could you ratchet down spending enough not to eat up too much of your remaining value waiting for the market to come back?  Playing with a spreadsheet or retirement calculator is all fun and games with no emotional rollercoaster.

Having 20-50% bonds means you miss out on the highs, but you might only have dropped 20-40% in 2008 instead of 50%.  If you use the strategy of selling whatever is doing the best you would likely have spent roughly 5 years spending down your bonds and not selling much of your stocks while they were down and been OK.

For retirement the goal is not to maximize the median possible income, but to minimize the chance of starving in the street or having to go back to work at 60 years old with zero stache left.  Having a plan and knowing how much you trust your own behavior is key.

During the 2008 downturn I sold $0 of my 401k and let it ride, and I view this as a natural experiment indicating I can probably trust myself not to panic sell.  How much do you trust yourself?

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #3 on: March 08, 2017, 06:22:57 PM »
US stock prices are expensive at the moment due to quantitive easing and banks playing the stock market rather than lending money to customers.

I'd be interested in learning more. I thought the QE ended years ago and that Dodd-Frank prevented banks from playing the stock market. But, I might be wrong. Please provide a link where I can learn more.

Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #4 on: March 08, 2017, 08:10:18 PM »
I don't panic sell. I rode out 2008 and the one before that with no selling, so that doesn't worry me.

A big stock bust does worry me, but looking back at past busts, they were normally followed within a year or three with a huge gain year. I don't expect a return to 1970s stagflation. A big deflation or inflation seems possible.

SO, if there was a huge bust, and a 50% stock sell-off, I can save myself by having only a 30-40% loss by being half in bonds?

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #5 on: March 08, 2017, 09:31:56 PM »
I don't panic sell. I rode out 2008 and the one before that with no selling, so that doesn't worry me.

A big stock bust does worry me, but looking back at past busts, they were normally followed within a year or three with a huge gain year. I don't expect a return to 1970s stagflation. A big deflation or inflation seems possible.

SO, if there was a huge bust, and a 50% stock sell-off, I can save myself by having only a 30-40% loss by being half in bonds?

Yes, and you can then rebalance shifting money from bonds into stocks that makes it easier to have funds to buy the newly discounted stocks (but don't try to time, unlikely you actually buy at the bottom).


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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #6 on: March 08, 2017, 11:32:20 PM »
I don't panic sell. I rode out 2008 and the one before that with no selling, so that doesn't worry me.

A big stock bust does worry me, but looking back at past busts, they were normally followed within a year or three with a huge gain year. I don't expect a return to 1970s stagflation. A big deflation or inflation seems possible.

SO, if there was a huge bust, and a 50% stock sell-off, I can save myself by having only a 30-40% loss by being half in bonds?

If you were 50/50 stocks/bonds and stocks dropped 50%, you would be down 25% of your portfolio value.  Actually, a little less because the value of bonds go up when stocks go down.  Your 50/50 portfolio would then be unbalanced at 33/66, you would sell some of the bonds and buy (half price!) stocks to get your allocation back where it belongs.  Given you're not given to panic sell I don't think you need to be as conservative as 50/50, but only you can decide what level of risk you want to take. Personally, I'm at 80/20, I get most of the upside of stocks with a little bit of ballast to weather the rough times. 

Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #7 on: March 09, 2017, 09:06:02 AM »
Okay, maybe I am catching on. The value of stocks is that they don't fall in the bust, allowing you to have full-value items to SELL in order to buy cut-rate stocks again, and to live on if that's what you are depending on for daily cash.

Thanks. That makes more sense. Another question?
Current bond funds all look really crappy, with what looks like widespread fears that interest rates will be rising soon. Last year's returns were poor. Is this a 'buy low' opportunity?

And, I know nothing about bonds. Which Vanguard bond funds do Mustachians recommend?

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #8 on: March 09, 2017, 09:35:02 AM »
I think you are still making a mistake looking at the returns of these funds, especially if you are looking at broad market indices. Bond yields are low and have been low with this extra low interest rate environment. You aren't really holding bonds for their growth though; they are there for income and to act as ballast when the stock market dumps. Make sure you pick a fund that is low-fee and well diversified and you should be okay.

I believe the standard recommendation is a combo of Vanguard total bond and vanguard total international bond. You might start thinking about a 60/40 split between the two.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #9 on: March 09, 2017, 11:00:06 AM »
ysette9! Ah hah! That is exactly the point I was missing. Thank you!

So with bonds, you are not looking at appreciation as such. The 'appreciation' you see is actually the rolling over of the income they have earned. Is this correct?

So the value of a bond fund is that it is unlikely to drop much in value (unless massive, worldwide defaults of the issuing governments/companies, in which case we are all screwed anyway), so it tends to maintain value. You can sell it after a big stock crash and buy cheap stocks, and they earn income.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #10 on: March 09, 2017, 11:44:20 AM »
I think you stated it well. I am not an expert here, but my understanding is that bonds provide income and also smooth out volatility. For the income reason you want to keep then in tax-advantaged accounts as much as possible. The volatility reducer component is to help you sleep at night and not bail if the stock market goes south during the accumulation phase and to reduce risk of sequence of returns blowing your nest egg in retirement. If you have a strong stomach and can stay the course, there is a good argument for not holding bonds in accumulation since they just drag down performance, and you will presumably be smart enough to not sell in the dips.

I like the idea of holding more bonds in early retirement and using them as my spending money to avoid selling stocks early if there is a temporary downturn. Since I am still a few years away from FIRE I haven't perfected this idea yet, it is just a collection of random thoughts.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #11 on: March 09, 2017, 03:23:47 PM »
Jumped in and bought VBTLX, the Vanguard Admiral Total Bond Fund.
Still not sold on bonds, but I feel I understand the idea better. My next purchase will be a stock fund, probably not the Vanguard 500 again, but maybe.

Very much appreciate all the simply-worded instruction. Thanks all.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #12 on: March 11, 2017, 05:01:45 AM »
US stock prices are expensive at the moment due to quantitive easing and banks playing the stock market rather than lending money to customers.

I'd be interested in learning more. I thought the QE ended years ago and that Dodd-Frank prevented banks from playing the stock market. But, I might be wrong. Please provide a link where I can learn more.

:D Great question.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #13 on: March 11, 2017, 07:45:09 AM »
Jumped in and bought VBTLX, the Vanguard Admiral Total Bond Fund.
Still not sold on bonds, but I feel I understand the idea better. My next purchase will be a stock fund, probably not the Vanguard 500 again, but maybe.

Very much appreciate all the simply-worded instruction. Thanks all.
I like VDC, seems to have weathered the recession better than total market indices.

I disagree on the bond allocation, diluting a portfolio with assets that have low returns just increases the amount of time I have to sit in a cubicle. No thanks.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #14 on: March 13, 2017, 09:30:50 PM »
I have a graph for this!



Red is the percent of the time having more stocks would provide a better return, the best return purple the percent of the time where having more bonds in your portfolio would have increased your overall return, and blue the percent of the time cash is the best option. As you move along the x-axis, you're looking at longer investment horizons, and the odds of bonds being the best investment decreases. More details on methodology in the original post.
« Last Edit: March 13, 2017, 09:33:56 PM by maizeman »
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Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #15 on: March 16, 2017, 08:02:36 PM »
maizeman, thanks. That's an interesting graph. Bonds actually perform better than my eyeball estimates. I may be undervaluing the effects of the big stock crashes.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #16 on: March 17, 2017, 06:56:06 PM »
How many years before you need to actually depend upon your investments for your livelihood?

Because if it's at least five years out you might want not want bonds yet. 

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #17 on: March 19, 2017, 03:37:38 AM »
Swordguy, it is more than 5 years, but not all that much. I don't plan to go all in on bonds, but a few here and there is not crazy.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #18 on: March 19, 2017, 04:23:18 AM »
It's important to know when you'll need the money.  Going all stocks makes sense when you're 20+ years from retirement, but as you get closer the bonds are helpful to protect against sharp drops.

It would help to know your age and in how many years you plan to retire.  I got confused between you just started contributing versus you plan to retire in a bit over 5 years.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #19 on: March 19, 2017, 07:06:16 AM »
It's important to know when you'll need the money.  Going all stocks makes sense when you're 20+ years from retirement, but as you get closer the bonds are helpful to protect against sharp drops.

It would help to know your age and in how many years you plan to retire.  I got confused between you just started contributing versus you plan to retire in a bit over 5 years.

I find it is more helpful to speak in terms of the risk tolerance of the person than just flat rules for numbers of years. Referring back to the graph above, over 20 year timeframes there is an ~1 in 10 chance that having just stocks won't outperform a portfolio with bonds. At 10 years, the odds are ~1 in 5, at 5 years the odds are ~1 in 4.

So if you can accept a 25% risk to your investment, go all stocks at 5 years. If you cannot tolerate even 10% then you might include some bonds even for extremely long term savings.*

*It also depends on what you consider "risk" I ran another one of these analyses that just looks at the risk that an all stock portfolio will be worth less than what you originally invested over different timeframes.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #20 on: March 19, 2017, 11:46:13 AM »
ysette9! Ah hah! That is exactly the point I was missing. Thank you!

So with bonds, you are not looking at appreciation as such. The 'appreciation' you see is actually the rolling over of the income they have earned. Is this correct?

So the value of a bond fund is that it is unlikely to drop much in value (unless massive, worldwide defaults of the issuing governments/companies, in which case we are all screwed anyway), so it tends to maintain value. You can sell it after a big stock crash and buy cheap stocks, and they earn income.

If inflation goes up, bonds are likely to tank due to rates on new bonds rising. We have been in an amazingly long trend of rates dropping, which benefited bonds.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #21 on: March 20, 2017, 03:52:06 AM »
It's important to know when you'll need the money.  Going all stocks makes sense when you're 20+ years from retirement, but as you get closer the bonds are helpful to protect against sharp drops.

It would help to know your age and in how many years you plan to retire.  I got confused between you just started contributing versus you plan to retire in a bit over 5 years.
I find it is more helpful to speak in terms of the risk tolerance of the person than just flat rules for numbers of years. Referring back to the graph above, over 20 year timeframes there is an ~1 in 10 chance that having just stocks won't outperform a portfolio with bonds. At 10 years, the odds are ~1 in 5, at 5 years the odds are ~1 in 4.

So if you can accept a 25% risk to your investment, go all stocks at 5 years. If you cannot tolerate even 10% then you might include some bonds even for extremely long term savings.*
That ignores context.  A person with high risk tolerance can be 100% stocks early on, but when they retire they may want 50-60% stocks during as they spend their nest egg down.  Exact same person, but different allocations for a different context.

I'd also like to warn people with no risk tolerance that they are underestimating inflation.  Inflation constantly pushes prices upward, typically at the same pace as CDs or even bonds.  Some years bonds pull ahead, but nothing like how stocks outpace inflation.  Fighting inflation really requires a stock allocation.  People with no risk tolerance for stocks are taking an extreme inflation risk, and forgetting some day everything they buy will cost double... and then cost double again...

But back to OP, age and retirement age establish context.  An investor at age 20 can go almost all stocks (5% bonds for good habits), while that same investor reaching age 60 should be easing into their retirement allocation.

Most people aim for a certain amount to retire.  If they go 100% stocks, they can lose enough to make them go back to work - they can spoil their retirement.  Meanwhile, that same allocation can't make them doubly retire - they already have enough.  So it's taking a risk of being forced out of retirement even though someone already has enough.  That's the key idea behind bonds in retirement - preserve wealth and stay retired once you have enough.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #22 on: March 20, 2017, 06:31:27 AM »
It's important to know when you'll need the money.  Going all stocks makes sense when you're 20+ years from retirement, but as you get closer the bonds are helpful to protect against sharp drops.

It would help to know your age and in how many years you plan to retire.  I got confused between you just started contributing versus you plan to retire in a bit over 5 years.
I find it is more helpful to speak in terms of the risk tolerance of the person than just flat rules for numbers of years. Referring back to the graph above, over 20 year timeframes there is an ~1 in 10 chance that having just stocks won't outperform a portfolio with bonds. At 10 years, the odds are ~1 in 5, at 5 years the odds are ~1 in 4.

So if you can accept a 25% risk to your investment, go all stocks at 5 years. If you cannot tolerate even 10% then you might include some bonds even for extremely long term savings.*
But back to OP, age and retirement age establish context.  An investor at age 20 can go almost all stocks (5% bonds for good habits), while that same investor reaching age 60 should be easing into their retirement allocation.
But even in retirement context is important. "Easing into retirement allocation" shouldn't imply that the allocation should stay the same from 60-75 years old; once one is nearing the end of their sequence of returns risk window, things can change, even well within 'retirement'.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #23 on: March 20, 2017, 07:31:09 AM »
I currently have $ in the Vanguard 500 Index Admiral, which I chose because it has good 5 and 10 year returns (yes, I know, past performance...) and low expense ratios.
It would probably make more sense in the long run to buy the funds that have underperformed as they have more upside for the future.

I'd consider adding an international fund like VXUS. As an exmple, my current portfolio is 35% US stocks, 35% International stocks, 10% REITs, 15% Bonds.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #24 on: March 20, 2017, 08:09:04 AM »
It would probably make more sense in the long run to buy the funds that have underperformed as they have more upside for the future.
Well, this sounds slightly better than 'dogs of the dow', but probably not the greatest plan for similar reasons.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #25 on: March 20, 2017, 08:13:49 AM »
It would probably make more sense in the long run to buy the funds that have underperformed as they have more upside for the future.
Well, this sounds slightly better than 'dogs of the dow', but probably not the greatest plan for similar reasons.
Right... just because there is "more upside" with regard to price isn't a great reason to buy. Expectations and guidance indicating shitty future performance are likely already factored into the market's valuation. That's why it's cheap.

Example - It probably wouldn't have been a great idea to have picked up a bunch of Enron stock as it nosedived for "upside"



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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #26 on: March 20, 2017, 06:23:29 PM »
It would probably make more sense in the long run to buy the funds that have underperformed as they have more upside for the future.
Well, this sounds slightly better than 'dogs of the dow', but probably not the greatest plan for similar reasons.
Right... just because there is "more upside" with regard to price isn't a great reason to buy. Expectations and guidance indicating shitty future performance are likely already factored into the market's valuation. That's why it's cheap.

Example - It probably wouldn't have been a great idea to have picked up a bunch of Enron stock as it nosedived for "upside"



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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #27 on: March 21, 2017, 03:00:58 AM »
Index 500 has been good to me for over 20 years.   I have over 500k invested there.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #28 on: March 21, 2017, 03:07:51 AM »
Index 500 has been good to me for over 20 years.   I have over 500k invested there.
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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #29 on: March 21, 2017, 09:04:59 AM »
I spent an hour or two today looking over the options on Vanguard. I currently have $ in the Vanguard 500 Index Admiral, which I chose because it has good 5 and 10 year returns (yes, I know, past performance...) and low expense ratios.

Now I have a chunk more to add, and I am considering diversifying, but my problem is, when I go back in time and look at returns long term, hardly anything ever beats stocks. I know, having been told again and again, to diversify to avoid risk, but, times when bonds beat stocks are so few and seldom, that I just don't see the point.

I guess I'd like some advice for a low-information investor. I am familiar with the 3-fund idea, but I still can't get around the lower returns that are built into that system, in return for greater supposed safety. How far in time do you have to go for this safety to really be any safer than just shooting for top returns on a large-cap fund, which seems pretty safe to me.

Obviously I am missing something, since it seems all of the smart people who understand this topic disagree with me. What is it? Please help.

Once you have experienced a downturn in 2000 and 2008, and felt like you could handle a 100% stock portfolio in that scenario, then you can increase your asset allocation to 100% stocks. Until then, I would err on the conservative side of asset allocation. Just my two cents.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #30 on: March 21, 2017, 05:07:39 PM »
I spent an hour or two today looking over the options on Vanguard. I currently have $ in the Vanguard 500 Index Admiral, which I chose because it has good 5 and 10 year returns (yes, I know, past performance...) and low expense ratios.

Now I have a chunk more to add, and I am considering diversifying, but my problem is, when I go back in time and look at returns long term, hardly anything ever beats stocks. I know, having been told again and again, to diversify to avoid risk, but, times when bonds beat stocks are so few and seldom, that I just don't see the point.

I guess I'd like some advice for a low-information investor. I am familiar with the 3-fund idea, but I still can't get around the lower returns that are built into that system, in return for greater supposed safety. How far in time do you have to go for this safety to really be any safer than just shooting for top returns on a large-cap fund, which seems pretty safe to me.

Obviously I am missing something, since it seems all of the smart people who understand this topic disagree with me. What is it? Please help.

Once you have experienced a downturn in 2000 and 2008, and felt like you could handle a 100% stock portfolio in that scenario, then you can increase your asset allocation to 100% stocks. Until then, I would err on the conservative side of asset allocation. Just my two cents.

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #31 on: March 21, 2017, 08:51:59 PM »
I spent an hour or two today looking over the options on Vanguard. I currently have $ in the Vanguard 500 Index Admiral, which I chose because it has good 5 and 10 year returns (yes, I know, past performance...) and low expense ratios.

Now I have a chunk more to add, and I am considering diversifying, but my problem is, when I go back in time and look at returns long term, hardly anything ever beats stocks. I know, having been told again and again, to diversify to avoid risk, but, times when bonds beat stocks are so few and seldom, that I just don't see the point.

I guess I'd like some advice for a low-information investor. I am familiar with the 3-fund idea, but I still can't get around the lower returns that are built into that system, in return for greater supposed safety. How far in time do you have to go for this safety to really be any safer than just shooting for top returns on a large-cap fund, which seems pretty safe to me.

Obviously I am missing something, since it seems all of the smart people who understand this topic disagree with me. What is it? Please help.
I am 100% stocks.  But you can diversify with equities also. 

S&P 500 is a large-cap fund.  You can consider switching to VTI, which is a total market and will get you small cap exposure.  Or just add the small-cap fund

Also consider international.  look up home country bias.

Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #32 on: March 22, 2017, 01:07:29 AM »

I am 100% stocks.  But you can diversify with equities also. 

S&P 500 is a large-cap fund.  You can consider switching to VTI, which is a total market and will get you small cap exposure.  Or just add the small-cap fund

Also consider international.  look up home country bias.
[/quote]

In what time frame has international beaten US? Certain specific countries have had higher growth rates for relatively short periods, a decade or sometimes two, but it never seems to last. Japan, for example, or the Asian Tigers. All crapped out after a good run.

SuperSecretName

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #33 on: March 22, 2017, 06:28:17 AM »
In what time frame has international beaten US? Certain specific countries have had higher growth rates for relatively short periods, a decade or sometimes two, but it never seems to last. Japan, for example, or the Asian Tigers. All crapped out after a good run.
past performance yada yada yada. It's not just one country, it's the entire rest of the world.

It goes hand in hand with home country bias. If you look at VT by vanguard, the US is only 57%.  There are a lot of people in the rest of the world. 

chuffly

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #34 on: March 24, 2017, 03:30:09 PM »
Also consider international.  look up home country bias.

In what time frame has international beaten US? Certain specific countries have had higher growth rates for relatively short periods, a decade or sometimes two, but it never seems to last. Japan, for example, or the Asian Tigers. All crapped out after a good run.

There's a good chart at the bottom of this link that shows rolling period of outperformance of the MSCI USA Index vs the MSCI EAFE Index (the latter tracks equities in International Developed Countries):

http://www.schwab.com/public/schwab/nn/articles/Three-Reasons-Why-Now-is-Not-the-Time-to-Retreat-from-Global-Diversification



It looks like this Forum software is pretty friendly to including images, so I pulled the image from the article and reproduced it above in this post.

As the chart indicates, there are varying periods where the U.S. and International (Developed) Equities outperform each other.   Very generally speaking, the U.S. has outperformed handily since the tail end of '80s, but up until that point, International Equities pretty much trounced U.S. equities.  Again, that oversimplifies things since, as the chart shows, there were still periods within the binary 1972 - Late '80s and Late '80s - Present time periods I laid out which ran counter to that. 

This is part of the reason that International Equities have likely become such a tough sell, as most of the investable index funds have coincidentally come on-line during the latter period.  So now when folks (who already have home country bias to deal with) go to check the returns of the U.S. and International Funds their 401k plans will let them choose between, they get to see how much their U.S. Fund has trounced the International Fund.  Given that most of us have a pretty ingrained tendency to performance chase and heap that on top of a healthy dose of home country bias, it shouldn't be all too surprising to see so many folks conclude that they "don't need international diversification".
« Last Edit: March 24, 2017, 03:31:59 PM by chuffly »

chuffly

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #35 on: March 24, 2017, 04:54:35 PM »
I should also emphasize that my previous post just compares U.S. equities versus International Developed Markets Equities, which doesn't even take into account another rapidly growing portion of the investment landscape - Emerging Markets.  Even with Emerging Markets undergoing a recent 5 year bear market, they're actually still in the middle of a 14+ year period of outperformance vs. U.S. equities:

Portfolio Visualizer - U.S. vs. EM Equities since 2003

Coincidentally, Larry Swedroe, who is one of the best writers at distilling finance research for the public, has a rather pertinent article out today about the argument for global diversification.  He makes the points that given current valuations, this is a particularly good time to make sure you are diversified internationally:

http://www.etf.com/sections/index-investor-corner/swedroe-when-emerging-markets-outperform

Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #36 on: March 27, 2017, 12:29:13 PM »
Chuffly, good info to have. Thanks.

the_fella

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #37 on: March 29, 2017, 11:11:55 AM »
I don't have enough money to invest in Admiral shares.

RangerOne

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #38 on: March 29, 2017, 12:40:15 PM »
I wouldn't worry about historical returns. Just worry about fund costs and follow your chosen diversification strategy based on your timeline and risk tolerance.

Most diversification strategies with regards to equities involve an international component. Though historically I don't believe you are wrong to note the S&P 500 is the strongest performer.

If you want to look at raw returns current international indexes w/ emerging markets for 2017 are outpacing the S&P 500 by like 1%. I personally like the vanguard argument for trying to make your US and international equity holdings mirror the total market. Which should give you total equity diversification weighted based on each companies overall impact.

Worrying about picking the fund that has performed the best over the last 5 or 10 years is a game that will take you down the road of owning a Value instead of a Growth index. You will just be chasing trends that could change at any given time, you may win you may lose.

FrugalFisherman10

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #39 on: March 29, 2017, 12:57:47 PM »
Okay, maybe I am catching on. The value of stocks BONDS is that they don't fall in the bust, allowing you to have full-value items to SELL in order to buy cut-rate stocks again, and to live on if that's what you are depending on for daily cash.

Thanks. That makes more sense. Another question?
Current bond funds all look really crappy, with what looks like widespread fears that interest rates will be rising soon. Last year's returns were poor. Is this a 'buy low' opportunity?

And, I know nothing about bonds. Which Vanguard bond funds do Mustachians recommend?

I think you got this right later, as you ended up buying the bonds, buy just wanted to make sure we clarified.
"The value of stocks BONDS is that they don't fall in the bust"


Best,
Mike

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #40 on: March 29, 2017, 02:51:26 PM »
I should also emphasize that my previous post just compares U.S. equities versus International Developed Markets Equities, which doesn't even take into account another rapidly growing portion of the investment landscape - Emerging Markets.  Even with Emerging Markets undergoing a recent 5 year bear market, they're actually still in the middle of a 14+ year period of outperformance vs. U.S. equities:

Portfolio Visualizer - U.S. vs. EM Equities since 2003

Coincidentally, Larry Swedroe, who is one of the best writers at distilling finance research for the public, has a rather pertinent article out today about the argument for global diversification.  He makes the points that given current valuations, this is a particularly good time to make sure you are diversified internationally:

http://www.etf.com/sections/index-investor-corner/swedroe-when-emerging-markets-outperform

Chuffly, good articles.

I've been procrastinating about figuring out my international allocation properly.  But after reading these, in any event I got online and moved some of my VTSAX into VEMAX.  The move is less than the total allocation needed (I am skipping some personal details), but a step in the right direction.  Thanks for the nudge.
« Last Edit: March 29, 2017, 02:53:27 PM by Bicycle_B »

MustacheAndaHalf

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #41 on: March 30, 2017, 03:20:24 AM »
But back to OP, age and retirement age establish context.  An investor at age 20 can go almost all stocks (5% bonds for good habits), while that same investor reaching age 60 should be easing into their retirement allocation.
But even in retirement context is important. "Easing into retirement allocation" shouldn't imply that the allocation should stay the same from 60-75 years old; once one is nearing the end of their sequence of returns risk window, things can change, even well within 'retirement'.
I'd like to hear more about that, specifically what changes to asset allocation someone might make when already retired.  What is the motivation and reasons for switching asset allocations while retired?

Tom Bri

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #42 on: April 02, 2017, 05:28:44 PM »
But back to OP, age and retirement age establish context.  An investor at age 20 can go almost all stocks (5% bonds for good habits), while that same investor reaching age 60 should be easing into their retirement allocation.
But even in retirement context is important. "Easing into retirement allocation" shouldn't imply that the allocation should stay the same from 60-75 years old; once one is nearing the end of their sequence of returns risk window, things can change, even well within 'retirement'.
I'd like to hear more about that, specifically what changes to asset allocation someone might make when already retired.  What is the motivation and reasons for switching asset allocations while retired?

Vanguard offers funds specifically for this purpose. You choose the fund that matches your age/years to retirement.

Christaaay

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #43 on: April 04, 2017, 05:14:50 PM »
Wow. This is a really valuable discussion! I've had a little in Emerging Markets for a while but can't say it was a strategic purchase necessarily. This discussion has convinced me to look at my international diversification much more (currently a small percentage of portfolio in VWO).

Also the bond discussion had me curious about the often thrown about quote from Warren Buffett that his portfolio after death will be strictly invested as 90% S&P fund and 10% bonds. Why is everyone so much heavier bonds?

I don't currently have any bonds but now understand the necessity at some point. I'm still trying to work out my 🔥 number and therefore target date as I haven't settled on yearly costs yet since I will likely move internationally to a low cost locale.

moof

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #44 on: April 04, 2017, 05:45:30 PM »
Also the bond discussion had me curious about the often thrown about quote from Warren Buffett that his portfolio after death will be strictly invested as 90% S&P fund and 10% bonds. Why is everyone so much heavier bonds?

I don't currently have any bonds but now understand the necessity at some point. I'm still trying to work out my 🔥 number and therefore target date as I haven't settled on yearly costs yet since I will likely move internationally to a low cost locale.
Buffet appears to have a withdrawal rate WAY under 1%.  Especially at his age and wealth he could put it all in penny stocks or beer for the cans and still die richer than everyone on this board.

My philosophy/plan is that in retirement you really should never have less than 5 years in something pretty stable (bonds+cash).  I would not want my checking account to be in the S&P for example.  If you follow the 4% rule and have 25x spending, 5-10 years is 20-40% in cash and bonds.  That gives you 5-10 years that you can live on cash/bonds if stocks crater like in 87, 00, 08, etc without having to sell stocks at a bottom.  Stocks might not fully recover by time your bonds run out, but you should be well off the lows at least.  You could also be re-balancing through the trough and actually buy more stocks when they are on sale depending on your fortitude.

During accumulation the question becomes how long you are "soaking" the money in stocks before you need it.  Money you will need in 15+ years will almost certainly do best in stocks, even over 10 years stocks have a high chance.  As you approach your date you should be shoving more money into bonds (or re-balancing as needed) so that you have eased into your long term target by your date.

So in short, buy 100% stocks when you are just getting started savings, ease into bonds, and get to you target allocation by time you pull the plug.  Choose an asset allocation not based on the highest, or even average performance, but to assure you have a low chance of ending up old and broke.  Low probability of failure is the goal for your portfolio.

Aggie1999

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #45 on: April 04, 2017, 08:45:36 PM »
Also the bond discussion had me curious about the often thrown about quote from Warren Buffett that his portfolio after death will be strictly invested as 90% S&P fund and 10% bonds. Why is everyone so much heavier bonds?

I don't currently have any bonds but now understand the necessity at some point. I'm still trying to work out my 🔥 number and therefore target date as I haven't settled on yearly costs yet since I will likely move internationally to a low cost locale.
Buffet appears to have a withdrawal rate WAY under 1%.  Especially at his age and wealth he could put it all in penny stocks or beer for the cans and still die richer than everyone on this board.

My philosophy/plan is that in retirement you really should never have less than 5 years in something pretty stable (bonds+cash).  I would not want my checking account to be in the S&P for example.  If you follow the 4% rule and have 25x spending, 5-10 years is 20-40% in cash and bonds.  That gives you 5-10 years that you can live on cash/bonds if stocks crater like in 87, 00, 08, etc without having to sell stocks at a bottom.  Stocks might not fully recover by time your bonds run out, but you should be well off the lows at least.  You could also be re-balancing through the trough and actually buy more stocks when they are on sale depending on your fortitude.

During accumulation the question becomes how long you are "soaking" the money in stocks before you need it.  Money you will need in 15+ years will almost certainly do best in stocks, even over 10 years stocks have a high chance.  As you approach your date you should be shoving more money into bonds (or re-balancing as needed) so that you have eased into your long term target by your date.

So in short, buy 100% stocks when you are just getting started savings, ease into bonds, and get to you target allocation by time you pull the plug.  Choose an asset allocation not based on the highest, or even average performance, but to assure you have a low chance of ending up old and broke.  Low probability of failure is the goal for your portfolio.

I understand having a significant bond portion of one's portfolio if the person is doing the normal retire at 65 and spend down the portfolio in retirement. What I don't understand is how a 20% - 40% bond allocation jives with an early retiree 4% rule where the goal is to not draw into one's capital. The 4% rule means you should be getting 7% on average return on the whole portfolio. The bond portion is not going to have that rate of return. Thoughts?

cheapass

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #46 on: April 06, 2017, 08:57:30 AM »
I understand having a significant bond portion of one's portfolio if the person is doing the normal retire at 65 and spend down the portfolio in retirement. What I don't understand is how a 20% - 40% bond allocation jives with an early retiree 4% rule where the goal is to not draw into one's capital. The 4% rule means you should be getting 7% on average return on the whole portfolio. The bond portion is not going to have that rate of return. Thoughts?

According to cfiresim, using the 4% rule with 100% equities for a 50 year timeline has a 93% success rate. That's pretty good odds. And if I understand it correctly, most of the risk is concentrated in the first 5-10 years of retirement (risk of a big market dip that is irrecoverable and you sell too many shares). In that case you could go get a job at wal-mart and make up the difference for a few years right?
Every single decision you make with money either shortens or lengthens your working career.

ysette9

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Re: Why not just put it all in the Vanguard 500 Admiral?
« Reply #47 on: April 06, 2017, 04:51:18 PM »
Quote
nd if I understand it correctly, most of the risk is concentrated in the first 5-10 years of retirement (risk of a big market dip that is irrecoverable and you sell too many shares). In that case you could go get a job at wal-mart and make up the difference for a few years right?

This is a good argument for what is called the reverse glide path allocation. That means that once you do FIRE you have a higher percentage of bonds/cash in your portfolio and then once you get past the time period of most risk for sequence of returns (5-10 years), then you start easing back into a higher percentage of stocks for growth and longevity. I personally like the idea of this because it also provides some stable spending money during the initial stages of FIRE when you are adjusting and figure out for real what your spending is going to be.
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