Vanguard Fund Comparison

[jexy103]

My husband and I are looking to fully fund our 2016 Vanguard IRAs in the next few days. 90% of my retirement stock holdings are in VTSAX, but last night my husband pointed out another option- VIGAX (large cap growth instead of blend). In looking at the fund comparison, I came across something I don't understand, and I'm hoping you fine folks can help me out.

The attached file shows the average annual performance portion of Vanguard's fund comparison tool. In every metric from YTD to 10-year, the VIGAX has outperformed VTSAX. However, the since inception is lower than VTSAX (same inception date), so it seems like the fund got off to a rocky start those first few years. Is there a way to research why or what the returns were prior to 10 years ago?

Also, the SEC yield is lower on the VIGAX; I believe this is partially due to the expense ratio being 0.09% compared to VTSAX's 0.05%, but I'd like to understand this better.

Our situation, in case it's relevant: We are in our early 30s, and even though we will likely be FI in about 5 years, he plans to finish his 20 years of military service for the pension and healthcare (11 years to go). We are currently DINK, but plan to start a family soon. We have a reasonably high risk tolerance due to job security, time horizon, 60% savings rate, and over $100K in liquid assets (savings and taxable accounts). We have both maxed out our IRAs and 401(k)s (TSPs) for the past two years and expect to do so again this year.

Thank you in advance for your help!

[tj]

Growth has killed Value the past 10 years. If you invested in it 10 years ago you would have been very lucky. Why would you invest in it today though? Do you think the next 10 years can duplicate the previous 10?

Also, the yield is lower on VIGAX because growth stocks have less dividends.

[halfshellmeijin]

Looking at the previous 10 years is not enough time to say index 1 is better than index 2. When individuals on this forum talk about US stocks performing the best historically, or small cap stocks performing better historically they are looking at a much larger historical look back; almost 100 years (at least). Between these two stocks it will be hard to know which one will perform better the next 10 years. But you can be sure they will have similar results (as VTSAX contains the stocks in VIGAX). If you want to back test your allocation you can use https://www.portfoliovisualizer.com/ and use the large cap growth to replace VIGAX. It might not be VIGAX exactly, but it should reflect the type of returns VIGAX would have had over the available back test data (43 years).

In order to pick which one to use you need to look at your strategy. Is there a reason you want to have more growth large cap stocks besides the past 10 years performance? Is there a reason you would want to omit Value, or Mid/Small cap stocks? Do you plan on investing in several other indexes to complete your exposure to the rest of the US stock market? I would think if you want to keep it simple, staying with VTSAX and whatever the other 10% is (bonds?), is probably best. If it were me, and I wanted to keep it simple, I would not be able to justify the 80% increase in expenses because the last 10 years seemed to go well for large cap growth stocks. Therefore, I would stick with the total stock market index.

[MustacheAndaHalf]

According to this Vanguard white paper, earnings divided by price (invert the P/E ratio) explains about 40% of returns when you look at a couple decades or so.  Essentially, if you pay too much for earnings, you don't get as much.
https://personal.vanguard.com/pdf/s338.pdf
Every $100 in VTSAX buys $5.30 of earnings, while $100 in VIGAX buys $4.45 of earnings.  So by the Vanguard white paper, you'd expect more from VTSAX (but future results are 60% undetermined, which is most of it).

Overall I view Vanguard Total Stock Market as a better choice than most funds.  It doesn't bet on growth or value, nor hold small or large cap out of proportion.  If small cap does better than large cap, you could miss out if you invest in a large cap growth fund.  Ultimately just make sure you're investing and using low-expense ratio funds.

[JZinCO]

In order to pick which one to use you need to look at your strategy. Is there a reason you want to have more growth large cap stocks besides the past 10 years performance?

This can't be more emphasized. Your investment policy should tell you what assets to buy and how much.
K.I.S.S.
 How much does your investment policy have you tilting to large cap growth? If so, then compare large cap growth funds against each other (expense ratios, what active buying/selling rules are used, or is it passive, how well does it track, etc).

[jexy103]

Thank you to those who responded! tj and halfshellmeijin, you reminded me of something my Corporate Investments professor taught us last year that I had forgotten - growth and value tend to have similar results over the long-term, pick one and be consistent with it. Mustache+.5 and JZ, I think I'll K.I.S.S. for now with VTSAX.