Author Topic: Total Market + Health Care  (Read 3649 times)

LLCoolDave

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Total Market + Health Care
« on: July 06, 2016, 05:53:06 PM »
Hi all, VTI is a large holding for me. I am considering adding the Vanguard health care/biotech fund as well. 10% of my equity AA. I was told that VTI already has 16% health care so it really isn't necessary. Thoughts?

Yes I know that the P/E ratio is 30x and the fund is down 7% this year.

brotatochip

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Re: Total Market + Health Care
« Reply #1 on: July 07, 2016, 03:53:55 AM »
I own Vanguards healthcare mutual fund.  It's been taking a beating this year but it pays great dividends!  I work in healthcare and see first hand how this sector is growing at a massive pace.  It's a volatile fund but if you're in it for the long hall I say go for it.  I also own VTI but it's kind of boring for me...slow and steady wins the race though! 

Scandium

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Re: Total Market + Health Care
« Reply #2 on: July 07, 2016, 01:28:58 PM »
Hi all, VTI is a large holding for me. I am considering adding the Vanguard health care/biotech fund as well. 10% of my equity AA. I was told that VTI already has 16% health care so it really isn't necessary. Thoughts?

Yes I know that the P/E ratio is 30x and the fund is down 7% this year.

Why? What are you hoping to achieve by this?

Parkingmeter

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Re: Total Market + Health Care
« Reply #3 on: July 08, 2016, 08:29:42 AM »
Hi all, VTI is a large holding for me. I am considering adding the Vanguard health care/biotech fund as well. 10% of my equity AA. I was told that VTI already has 16% health care so it really isn't necessary. Thoughts?

Yes I know that the P/E ratio is 30x and the fund is down 7% this year.

Why? What are you hoping to achieve by this?

Personally, I do this to hedge Healthcare costs. If they continue to outpace other sectors, it stands to reason that the stocks will as well. If the inverse happens, your Healthcare costs are going down so under performing isn't as painful.

Scandium

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Re: Total Market + Health Care
« Reply #4 on: July 08, 2016, 09:06:44 AM »
Hi all, VTI is a large holding for me. I am considering adding the Vanguard health care/biotech fund as well. 10% of my equity AA. I was told that VTI already has 16% health care so it really isn't necessary. Thoughts?

Yes I know that the P/E ratio is 30x and the fund is down 7% this year.

Why? What are you hoping to achieve by this?

Personally, I do this to hedge Healthcare costs. If they continue to outpace other sectors, it stands to reason that the stocks will as well. If the inverse happens, your Healthcare costs are going down so under performing isn't as painful.

Ehh, I haven't looked into this, but I'm a bit skeptical. Will increased healthcare costs necessarily mean increased profits for the exact companies in the fund, and higher share prices? Isn't this above-inflation increase already priced in? Will you use the healthcare system enough to offset losses, to take advantage of gains? If I had $100k in healthcare and it underperforms by 3% I'd have to go to the doctor a heckofalot to make up for it..

Laserjet3051

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Re: Total Market + Health Care
« Reply #5 on: July 08, 2016, 10:16:03 AM »
I've been a biopharmaceutical scientist for a long time and I'm tilting towards this sector in my AA. My instincts, which could be wrong, tell me this is likely a good long term invstment. Not yet at 10% AA (of equities) but building a position towards 5-10%. I agree, that investing in this sector can be a hedge towards increased medical/healthcare costs. It's not a 1:1 hedge, given the portfolio holdings of my fund versus where our family spends our health care $s, but its close.  And given the enormous $ we spend yearly on health care, it wouldn't take much at all (for us) to offset a 3% drop in a 100K HC investment fund.

With all the global HC M&As, the industry is, and has been rapidly condensing, at least on the biopharma side. This negatively impacts labor demand, but decreases overhead costs for the firms who more and more contract out the labor at reduced costs, which translates into major savings. Given the complexities of running a biopharma business, whether or not this translates into increased shareholder value, is the central question.

Greenpez

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Re: Total Market + Health Care
« Reply #6 on: July 08, 2016, 02:33:27 PM »
I've been a biopharmaceutical scientist for a long time and I'm tilting towards this sector in my AA. My instincts, which could be wrong, tell me this is likely a good long term invstment. Not yet at 10% AA (of equities) but building a position towards 5-10%. I agree, that investing in this sector can be a hedge towards increased medical/healthcare costs. It's not a 1:1 hedge, given the portfolio holdings of my fund versus where our family spends our health care $s, but its close.  And given the enormous $ we spend yearly on health care, it wouldn't take much at all (for us) to offset a 3% drop in a 100K HC investment fund.

With all the global HC M&As, the industry is, and has been rapidly condensing, at least on the biopharma side. This negatively impacts labor demand, but decreases overhead costs for the firms who more and more contract out the labor at reduced costs, which translates into major savings. Given the complexities of running a biopharma business, whether or not this translates into increased shareholder value, is the central question.

 I agree that there may be some consolidation but, from everything I've heard, the biggest problem for biopharms right now is where to put their products. I think we're going to see a good deal of facility expansion that will offset reduced labor.

Parkingmeter

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Re: Total Market + Health Care
« Reply #7 on: July 09, 2016, 11:16:34 AM »

Personally, I do this to hedge Healthcare costs. If they continue to outpace other sectors, it stands to reason that the stocks will as well. If the inverse happens, your Healthcare costs are going down so under performing isn't as painful.

Ehh, I haven't looked into this, but I'm a bit skeptical. Will increased healthcare costs necessarily mean increased profits for the exact companies in the fund, and higher share prices? Isn't this above-inflation increase already priced in? Will you use the healthcare system enough to offset losses, to take advantage of gains? If I had $100k in healthcare and it underperforms by 3% I'd have to go to the doctor a heckofalot to make up for it..

It's not a perfect hedge, but given how much healthcare profit margins are dictated by legislation (as opposed to commodities, etc, in other industries), I think it's a fairly strong correlation. Also, I wouldn't use an actively managed fund, but instead I use VHT as an index. Yes, indexes aren't perfect, but it's the best thing we've got.

I've used a 5% of equities allocation, and unlike with the rest of my portfolio only a 50% re-balance towards that. (If it grows to 6%, I will sell 1/12th of the value and re-allocate to underperformers, as opposed to 1/6th with a standard re-allocation). I'd revisit the strategy if it really grew significantly out of whack even if this rebalance.

Captain Cactus

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Re: Total Market + Health Care
« Reply #8 on: July 09, 2016, 02:59:31 PM »
What kind of dividend does the healthcare fund produce?

forummm

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Re: Total Market + Health Care
« Reply #9 on: July 10, 2016, 11:07:35 AM »
The healthcare fund had been dynamite the past 30 years because healthcare costs have grown unsustainably during that time. We can't possibly continue this kind of growth. We already spend close to 20% of GDP on it. Eventually something has to change. A lot of the fund is pharma. Last time I checked it was something like 50% pharma and the PE ratio was like 40 (VTI PE is going to be around 20). PE 40 expects big growth. If that growth doesn't happen, the fund performance will tank.

Parkingmeter

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Re: Total Market + Health Care
« Reply #10 on: July 10, 2016, 08:00:24 PM »
What kind of dividend does the healthcare fund produce?

VHT, the vanguard healthcare index, is currently at a 1.28% dividend yield. Nothing amazing.

The healthcare fund had been dynamite the past 30 years because healthcare costs have grown unsustainably during that time. We can't possibly continue this kind of growth. We already spend close to 20% of GDP on it. Eventually something has to change. A lot of the fund is pharma. Last time I checked it was something like 50% pharma and the PE ratio was like 40 (VTI PE is going to be around 20). PE 40 expects big growth. If that growth doesn't happen, the fund performance will tank.

Right, but if that growth doesn't happen, it either means your healthcare costs go down or stay the same. If it does, your small hedge underperforming or even going negative won't impact your ability to maintain your standard of living.

There are four basic scenarios: You hedge health care costs (tilt health care), and health care costs go up. Fortunately, you benefit financially from this so you can handle the increase costs without issue. You don't hedge health care costs, and health care costs go up: uh oh, you have to tighten your belt / find some work.

You hedge health care costs, and health care costs go down. As mentioned above, no big deal. You don't hedge health care costs, and health care costs go down. Hooray, extra money.

If you're retired, does extra money really benefit you? If it did, you'd probably be working. You already had a cautious withdrawal ratio, so there isn't a lot of added security. Benefits are marginal.

Obviously this is oversimplifying things, but I think this sort of quick analysis is pretty useful. I'd rather be in the situations where I hedge healthcare costs, minimizing the risk of rising health care costs for a relatively low opportunity cost.

Scandium

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Re: Total Market + Health Care
« Reply #11 on: July 11, 2016, 08:55:21 AM »
There are four basic scenarios: You hedge health care costs (tilt health care), and health care costs go up. Fortunately, you benefit financially from this so you can handle the increase costs without issue. You don't hedge health care costs, and health care costs go up: uh oh, you have to tighten your belt / find some work.

You hedge health care costs, and health care costs go down. As mentioned above, no big deal. You don't hedge health care costs, and health care costs go down. Hooray, extra money.

Ok, let me get this straight. So if the fund goes up it'll yield enough that it will benefit you so you can pay for increased health care (nevermind that I might not need significant healthcare for many more decades). But if it goes down the hedge is so small it doesn't matter. Uh, what? Do I see an inconsistency here? Either it's too small to make a difference, or it's big enough to do so. It can't be both depending on the outcome!

Also; extending this should I also hedge home repair cost with shares of home depot, and electricity with shares i utilities, and food cost, and... etc?
« Last Edit: July 12, 2016, 08:07:37 AM by Scandium »

forummm

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Re: Total Market + Health Care
« Reply #12 on: July 11, 2016, 12:33:26 PM »
What kind of dividend does the healthcare fund produce?

VHT, the vanguard healthcare index, is currently at a 1.28% dividend yield. Nothing amazing.

The healthcare fund had been dynamite the past 30 years because healthcare costs have grown unsustainably during that time. We can't possibly continue this kind of growth. We already spend close to 20% of GDP on it. Eventually something has to change. A lot of the fund is pharma. Last time I checked it was something like 50% pharma and the PE ratio was like 40 (VTI PE is going to be around 20). PE 40 expects big growth. If that growth doesn't happen, the fund performance will tank.

Right, but if that growth doesn't happen, it either means your healthcare costs go down or stay the same. If it does, your small hedge underperforming or even going negative won't impact your ability to maintain your standard of living.

There are four basic scenarios: You hedge health care costs (tilt health care), and health care costs go up. Fortunately, you benefit financially from this so you can handle the increase costs without issue. You don't hedge health care costs, and health care costs go up: uh oh, you have to tighten your belt / find some work.

You hedge health care costs, and health care costs go down. As mentioned above, no big deal. You don't hedge health care costs, and health care costs go down. Hooray, extra money.

If you're retired, does extra money really benefit you? If it did, you'd probably be working. You already had a cautious withdrawal ratio, so there isn't a lot of added security. Benefits are marginal.

Obviously this is oversimplifying things, but I think this sort of quick analysis is pretty useful. I'd rather be in the situations where I hedge healthcare costs, minimizing the risk of rising health care costs for a relatively low opportunity cost.

I think buying a healthcare index funds as a hedge for your healthcare costs is a bit nutty. A lot of the money flowing in healthcare goes to entities that aren't going to be represented well or at all in the index (like individual doctors, private groups of physicians, "nonprofit" institutions, "nonprofit" insurers, medical device manufacturers, and many foreign firms. In fact, there are only 72 stocks in the fund! All it takes is for medical cost inflation to start matching CPI and the price of the fund should drop by 50% as PEs drop to reflect the new growth expectations.

Our health spending is unsustainable. Something will change at some point to correct that.

Parkingmeter

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Re: Total Market + Health Care
« Reply #13 on: July 13, 2016, 04:43:31 PM »
There are four basic scenarios: You hedge health care costs (tilt health care), and health care costs go up. Fortunately, you benefit financially from this so you can handle the increase costs without issue. You don't hedge health care costs, and health care costs go up: uh oh, you have to tighten your belt / find some work.

You hedge health care costs, and health care costs go down. As mentioned above, no big deal. You don't hedge health care costs, and health care costs go down. Hooray, extra money.

Ok, let me get this straight. So if the fund goes up it'll yield enough that it will benefit you so you can pay for increased health care (nevermind that I might not need significant healthcare for many more decades). But if it goes down the hedge is so small it doesn't matter. Uh, what? Do I see an inconsistency here? Either it's too small to make a difference, or it's big enough to do so. It can't be both depending on the outcome!

Also; extending this should I also hedge home repair cost with shares of home depot, and electricity with shares i utilities, and food cost, and... etc?

I could have worded it a little better: If healthcare costs go down, even though the amount of spending you can sustain goes down, your healthcare costs will have gone down proportionally.

With regards to the other sectors: Are you expecting home repair costs, utilities, and food to exceed 20% of your budget? Most retirees hedge housing costs in general by owning their home, the other major expenditure. (Though admittedly health care isn't a huge cost for everyone, it is a huge potential cost for everyone, especially as they age).
These things are also somewhat more discretionary than health care. You can use less electricity, adapt your diet for less costly food, and DIY some of the home repair/make do (I suppose this doesn't really apply for a super lean retirement plan where you already are minimizing most of these costs). If you have cancer, well, you're spending whatever they tell you the price is. Or dying. Not much of a choice.

I use a small hedge toward health care because it's such a disproportionate cost in the "worst case" scenario: maxing out-of-pocket every year. I do this instead of budgeting toward that expense, which I've seen some people do as a caution.


I think buying a healthcare index funds as a hedge for your healthcare costs is a bit nutty. A lot of the money flowing in healthcare goes to entities that aren't going to be represented well or at all in the index (like individual doctors, private groups of physicians, "nonprofit" institutions, "nonprofit" insurers, medical device manufacturers, and many foreign firms. In fact, there are only 72 stocks in the fund! All it takes is for medical cost inflation to start matching CPI and the price of the fund should drop by 50% as PEs drop to reflect the new growth expectations.

Our health spending is unsustainable. Something will change at some point to correct that.

I hope it does. However, knowing if that's in the next 10 years, next 30 years, or 50 years is a different story. Personally, I prefer to be hedged.

I don't think I'd recommend it for someone who was very early on the FIRE path.I'm rapidly closing in on my FIRE date, so it let's me sleep better at night - much more comfortable with my decision to go with a HDHP.
Basically, I believe a small health care tilt reduces the "failure chance" of my portfolio.


Not to be pedantic, but I do think VHT does include device manufacturers. It doesn't include insurance, though I'm not terribly bothered by that. I'm not aware of a good option for international healthcare tilting, so while in principal I would agree that would be a better diversification, the costs of trying to implement that are unrealistic.

forummm

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Re: Total Market + Health Care
« Reply #14 on: July 14, 2016, 01:40:52 PM »
I meant that VHT doesn't include all device manufacturers. Some are small firms and/or privately held.