VTI/VTSAX/JL Collins versus QQQ/QQQM, SCHG, VGT, etc

[HankWilliams]

Hi, So I gratefully discovered Mr Mustache, FIRE, JL Collins, VTI, etc back in 2017. I have a LOT of gratitude for connecting with the simplicity (as opposed to buying/understanding individual stocks).

That said, my knowledge/interest of ETF's has expanded over the last 2 years.

Since January, I went down the QQQ/Nasdaq rabbit hole. Holy moly... the growth of growth ETFs like QQQ/QQQM, SCHG, VGT, etc has towered VTI over the last couple of years.

I'm curious if the rest of the FIRE community has considered/switched over to QQQ/Nasdaq tech heavy ETFs. Yes, they're more volatile, but as a buy and hold investor, I LOVE buying the dip and believe tech, social media, Nvidia, Apple, Google, and human's ADDICTION to gadgets (and addiction to taking on debt) is going to make tech THRIVE... regardless of politics, culture wars, and noise.

Thanks for your thoughts.

[Heckler]

Can you make the same graph for the dot-com bubble (or dot-com boom) was a stock market bubble that ballooned during the late-1990s and peaked on Friday, March 10, 2000?  Of course, graph the crash and recovery as well.  QQQ (or Nasdaq equivalent) vs VTI would enough.

I'm honestly curious, but can't be bothered.

[markpst]

I'm curious if the rest of the FIRE community has considered/switched over to QQQ/Nasdaq tech heavy ETFs. Yes, they're more volatile, but as a buy and hold investor, I LOVE buying the dip and believe tech, social media, Nvidia, Apple, Google, and human's ADDICTION to gadgets (and addiction to taking on debt) is going to make tech THRIVE... regardless of politics, culture wars, and noise.

Thanks for your thoughts.

I'm perfectly content with VTI as is. Currently the "Magnificent Seven" make up at least 25% the ETF due to cap weighting. I think you have to be careful leaning hard into tech, those valuations are based on some lofty future earnings expectations. I'm maybe 45% VTI (mostly large cap), 20% developed international, 15% mid cap, 15% small cap, 5% emerging markets, a little in REIT, and then I'm down to one individual stock. International is looking pretty good this year after underperforming the last decade.

Around 2000 or so, I put my $2,000 IRA for that year into a technology growth fund. It dropped to $400 within a year.

[VanillaGorilla]

Sure, it was easy to outperform the market with a tech tilt in the last 15ish years.

However, if you're trying to fund your retirement from a tech portfolio, you're taking on a lot of risk.

The fundamental appeal of a total market fund is not wild outperformance, it's that a TSM fund offers sufficient returns for most people to meet their goals (FIRE), while offering steady enough performance with sufficiently low volatility that the odds of a retiree getting wiped out during a market downturn is sufficiently low for most people to stomach.

QQQ went from about $109 to $23 during the 2000 crash. That would wipe out someone trying to fund a 30+ year retirement.

That's the rationale behind the Simple Path To Wealth. Instead of constructing an elaborate portfolio with a combination of high risk assets and low risk assets, just buy the market and put your energies toward living life.

And finally, even a TSM portfolio is too much volatility for many people to handle, even on these boards, so if you're going to hold higher risk assets then be darn sure you've got the stomach for it.

[Heckler]

QQQ went from about $109 to $23 during the 2000 crash. That would wipe out someone trying to fund a 30+ year retirement.

And 15 years till recovery. Ouch.

Top was definitely in.

[blue_green_sparks]

QQQ went from about $109 to $23 during the 2000 crash. That would wipe out someone trying to fund a 30+ year retirement.

And 15 years till recovery. Ouch.

Top was definitely in.

I find that most people (except for true lone-wolf investors) who take on more than the average risk will often be more vocal about justifying their decisions online. It is human nature to feel more at ease when you get group concurrence. On the grand scale of investments there are many prospects riskier than QQQ. I have one friend, a swing trader who worked the leveraged QQQ funds (short and long sides) for years. He made out very, very well.


   

[VanillaGorilla]

More thoughts on the subject:

If your goal is to quickly reach FIRE then the most important factor is your savings rate. Go Curry Cracker wrote a post about this a long time ago.

Your savings are more important than you investment returns if you're "only" going for 25x a modest spend. If you're going for replacing your income rather than your spending, then higher returns become more compelling.

This relates to one of the classic investing fallacies: evaluating portfolios by their static return (that is, the return on a lump sum invested at once) rather than compounding returns generated by investing regularly over a long period of time. Since 2016, investing monthly, QQQ has a CAGR of 82.8% where VFINX has a CAGR of 78.8%.

Compare to a lump sum invested in 2016 returning 18% vs 14% respectively. 30% more vs 5% - your savings are a better return than the market will ever provide.

So if your goal was to save $1M by saving $100k a year starting in 2016, VFINX would have gotten you there about half a year later than QQQ. If your goal was $2M the difference would have been about a year.

You can play around with analyses like this yourself using various online tools - I used https://www.portfoliovisualizer.com/ for these numbers, which is why I could only go back to 2016.

Edit: I forgot how much I like doing this - it's quite staggering to recognize how little asset allocation matters. Say you have a 60% savings rate and are hell bent on achieving FI starting in 1996. Despite the big crash in 2002, you get to your goal of 25x expenses in a brief 11 years! And a 100% equity portfolio performs identically to a 60/40 or even 100% bond portfolio!

[Turtle]

I have one year’s worth of Roth IRA contributions in QQQ.  So it’s not a giant chunk of the portfolio, but if it really takes off there won’t be any additional tax implications.

[ChpBstrd]

The Nasdaq 100 is more volatile than the S&P500, although there is a lot of overlap. I chose QQQ for much of my options collar strategy (and small cap IWM for the rest) because I felt that I could swing for the fences if I had my downside covered. When you have both your downside and your upside capped, it becomes a matter of exploiting optimism in the options market to lock in more upside than downside.

[vand]

More thoughts on the subject:

If your goal is to quickly reach FIRE then the most important factor is your savings rate. Go Curry Cracker wrote a post about this a long time ago.

Your savings are more important than you investment returns if you're "only" going for 25x a modest spend. If you're going for replacing your income rather than your spending, then higher returns become more compelling.

This relates to one of the classic investing fallacies: evaluating portfolios by their static return (that is, the return on a lump sum invested at once) rather than compounding returns generated by investing regularly over a long period of time. Since 2016, investing monthly, QQQ has a CAGR of 82.8% where VFINX has a CAGR of 78.8%.

Compare to a lump sum invested in 2016 returning 18% vs 14% respectively. 30% more vs 5% - your savings are a better return than the market will ever provide.

So if your goal was to save $1M by saving $100k a year starting in 2016, VFINX would have gotten you there about half a year later than QQQ. If your goal was $2M the difference would have been about a year.

You can play around with analyses like this yourself using various online tools - I used https://www.portfoliovisualizer.com/ for these numbers, which is why I could only go back to 2016.

Edit: I forgot how much I like doing this - it's quite staggering to recognize how little asset allocation matters. Say you have a 60% savings rate and are hell bent on achieving FI starting in 1996. Despite the big crash in 2002, you get to your goal of 25x expenses in a brief 11 years! And a 100% equity portfolio performs identically to a 60/40 or even 100% bond portfolio!

I agree, and have often thought this is one of the cruel ironies of the maths of FI.


For high savers it matters much less their compounding rate, while for those who need to play the long game (often those who just don't earn enough) over a typical 35-40yr working career that extra 2-3% of compounding from a stock heavy portfolio will make a huge difference to them... and of course, risk tolerance and asset allocation often inversely reflect this, where high savers having more risk appetite and invest in stocks, while people who struggle to save often just stack cash.

[ChpBstrd]

Maybe this is the gist:

1) Stocks become overvalued and melt down periodically, like they did in 2000-2003.

2) A Mustachian has a 15-20 year accumulation phase, and a 30-40 year retirement phase.

3) A melt down would be more consequential to portfolio survival during retirement phase as opposed to the accumulation phase because (a) working income has been cut off, and (b) larger sums are usually at stake, and (c) the portfolio must recover while being drawn down.

4) More volatile index funds like QQQ usually suffer worse drawdowns than less volatile index funds like VTI.

1 & 2) Therefore, a melt down period is twice as likely to occur during retirement as during the accumulation phase, because the retirement is twice as long.

1 & 3 & 4) Portfolio survival strategies mostly need to focus on reducing volatility during the retirement phase.

Conclusion: Invest in more volatile index funds like QQQ during accumulation phase, when being hit by a melt down is both less likely and less consequential. Invest in less volatile funds like VTI during retirement phase, when being hit by a melt down would be both more likely and more consequential.

And of course if you could find some sort of gauge that could show when stocks are at risk from being overvalued, that could be a helpful decision tool even in accumulation phase.

[AJDZee]

And of course if you could find some sort of gauge that could show when stocks are at risk from being overvalued, that could be a helpful decision tool even in accumulation phase.

ChpB, do you find the Shiller cyclically adjusted P/E is too long of a time horizon that it's less useful than S&P500 P/E? Just curious why you chose that one to link.

[ChpBstrd]

And of course if you could find some sort of gauge that could show when stocks are at risk from being overvalued, that could be a helpful decision tool even in accumulation phase.

ChpB, do you find the Shiller cyclically adjusted P/E is too long of a time horizon that it's less useful than S&P500 P/E? Just curious why you chose that one to link.

I was torn between the two. We've had debates and discussions elsewhere on this forum about whether the steady rise in valuations is something to be concerned about (portending lower returns and SWRs in the future), or just a reflection of changing times. The case for changing times includes accounting rule changes, improved macroeconomic management tools, lower corporate taxes, higher corporate margins, and sector changes like the asset-light tech and financial sectors becoming so much bigger components of the overall stock market.

All these details make me want to step out of the weeds and back to fundamentals. At a fundamental level, we investors are buying a stream of future earnings. The exact amount of earnings we are buying is currently unknowable, but the trailing twelve months or trailing ten years usually offer a solid guide. We can chart the PE or CAPE of the past and evaluate the quality of purchase decisions made in the past at different valuations, and make inferential guesses about how such decisions will work out in the future ahead.

That said, I'm not a fundamentalist. Periods of fast economic growth can more than justify decisions to purchase stocks at dear prices, and many stocks are cheap for very good reasons. A DCF spreadsheet is all a person needs to see how much of the value of an asset is driven by estimates about the growth of earnings.

Working backward, high valuations suggest the market is optimistic about growth. If you are not similarly optimistic (e.g. you notice we are already at full employment and the government is actively sabotaging the economy) then maybe QQQ is not for you.