Author Topic: Why is Vanguard VGHCX rated high risk?  (Read 5248 times)

FIRE me

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Why is Vanguard VGHCX rated high risk?
« on: January 13, 2016, 10:04:33 AM »
Why is Vanguard Health Care Fund Investor Shares rated at the highest risk, level 5? Is it because it is all in one category (health care in general)?

Since inception, and at all benchmark years (1, 3, 5, and 10) VGHCX seems to handily outperform VTSAX which is level 4 risk.

Given the aging population and ever increasing medical costs, what could cause VGHCX to perform worse than VTSAX?

dandarc

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #1 on: January 13, 2016, 10:10:43 AM »
Is it because it is all in one category (health care in general)?
Yes.

What if, possibly because of the aging population there is a real, successful, push to curtail medical costs?  Or single-payer becomes a reality?

nereo

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #2 on: January 13, 2016, 10:38:37 AM »
Given the aging population and ever increasing medical costs, what could cause VGHCX to perform worse than VTSAX?
a few ideas:
1) as you noted, medical costs have been ever increasing.  Many (myself included) can't see the trend of the last 30 years continue for the next 30, less we price out the majority of the market.
2) The legislature limiting the profitability of these companies.  It's easy to imagine this being done under "reigning in our health-care costs."
3) liability.  Look at what happened to VW recently when they put cheat software on some of their cars.  Imagine what would happen to a large medical company if they were also involved in fraud (for example, knowingly selling tainted medicine). 
4) competition from state-held foreign markets.  To date the FDA has kept this out, but given rising heath-care costs and things like "medical vacations" the FDA could be pressured to allow US hospitals and clinics to purchase equipment from elsewhere.  Imagine a flood of cheap medical equipment and off-label drugs from China instead of name-brand prescriptions costing 10-20x.  There goes Pfizer's gravy train.

MustacheAndaHalf

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #3 on: January 13, 2016, 12:51:26 PM »
Since inception, and at all benchmark years (1, 3, 5, and 10) VGHCX seems to handily outperform VTSAX which is level 4 risk.

Given the aging population and ever increasing medical costs, what could cause VGHCX to perform worse than VTSAX?
Past performance does not indicate future results.  Would you switch to 100% gold right now?  Because gold outperformed the US stock market for the past 15 years... but obviously, gold is risky.  As an individual investment, risk estimates how much the investment can go up or down.  It's not based on out performance or predicting out performance.  Typically "risk" to an investment firm means volatitlity, or how quickly it swings up and down in price.

As the Securities and Exchange Commission puts it:
"As with any investment, a fund's past performance is no guarantee of its future success."
"Generally, the more volatile a fund, the higher the investment risk."
http://www.sec.gov/investor/pubs/mfperform.htm

soccerluvof4

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #4 on: January 13, 2016, 03:05:38 PM »
its more like an ETF when you really thing about it having all the same eggs in one basket. If you believe in it then might not be bad to own a small amount to be overweight the index as I started buying the energy index. You own all those stocks in the VTSAX most likely.

tj

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #5 on: January 14, 2016, 10:32:31 AM »
its more like an ETF when you really thing about it having all the same eggs in one basket. If you believe in it then might not be bad to own a small amount to be overweight the index as I started buying the energy index. You own all those stocks in the VTSAX most likely.

Nope, Vanguard Health Care Fund has exposure to foreign health care companies.

TheAnonOne

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #6 on: January 14, 2016, 11:37:40 AM »
Risk is basically just volatility in investment companies eyes....

I own 10k of this fund, as a small weight to pull my VTSAX holdings over to the healthcare side a bit more.... Good or bad? No clue... Seemed a good idea after a few beers one day when I was putting 10k in the market.

nereo

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #7 on: January 14, 2016, 11:45:27 AM »
Risk is basically just volatility in investment companies eyes....

I own 10k of this fund, as a small weight to pull my VTSAX holdings over to the healthcare side a bit more.... Good or bad? No clue... Seemed a good idea after a few beers one day when I was putting 10k in the market.
While that seems like an awesome way to decide what your asset allocation should be, can I introduce you to the ISP?

TheAnonOne

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #8 on: January 14, 2016, 11:50:36 AM »
Risk is basically just volatility in investment companies eyes....

I own 10k of this fund, as a small weight to pull my VTSAX holdings over to the healthcare side a bit more.... Good or bad? No clue... Seemed a good idea after a few beers one day when I was putting 10k in the market.
While that seems like an awesome way to decide what your asset allocation should be, can I introduce you to the ISP?

:)
Thanks! The post was a bit of a 'jest' though...

Indexer

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #9 on: January 14, 2016, 09:56:05 PM »
Why is Vanguard Health Care Fund Investor Shares rated at the highest risk, level 5? Is it because it is all in one category (health care in general)?

Since inception, and at all benchmark years (1, 3, 5, and 10) VGHCX seems to handily outperform VTSAX which is level 4 risk.

Given the aging population and ever increasing medical costs, what could cause VGHCX to perform worse than VTSAX?


Yes it is a 5 because it is all in one sector. It isn't diversified. Even VDC(consumer staples) is a 5 because it is a sector fund even though consumer staples tend to hold their value pretty well in a recession.

I can think of plenty of reasons VGHCX would perform worse than VTSAX. The most obvious is that too many people are thinking the same way you do. When everyone knows about increasing medical costs and an aging population people start to assume healthcare will do better. Essentially people have driven up the price of healthcare companies past that of the general market.

VGHCX PE ratio= 35.8
SP 500 index PE ratio= 20.9

VGHCX is priced 71% higher compared to earnings than the SP 500. You need a lot of future growth to justify that.

So the market has already priced in the expectation that healthcare will do better. So what happens if health care companies don't significantly outperform everything else?  What would happen if their growth was just the same as everything else? Well since more growth is already priced in if that extra growth didn't happen healthcare would perform poorly compared to the general market.

Past example:  Tech stocks in the late 90s. Everyone assumed they would do well and started ignoring the risks. Healthcare hasn't hit that extreme, but it is the same general idea.

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Re: Why is Vanguard VGHCX rated high risk?
« Reply #10 on: January 17, 2016, 09:38:25 AM »
Risk is basically just volatility in investment companies eyes....

I own 10k of this fund, as a small weight to pull my VTSAX holdings over to the healthcare side a bit more.... Good or bad? No clue... Seemed a good idea after a few beers one day when I was putting 10k in the market.

I opened a Vanguard account and I put 13k into it this week. 2015 and 2016 IRA max with catch up. Down about $250 since purchase (two market days?). Now I need a few beers. LOL.