Investment philosphy

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Exterous

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Jun 20, 2006
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In the last couple of months there have been significant changes in our investment options. Long story short they have gone from a very narrow selection of funds to a sigificantly wider variety (for example my wife went from having 6 funds available at a small investment company to any fund that Vanguard offers that we meet the minimum for)

I've been educating myself as quickly as possible on this and have found myself over at Bogleheads a lot. The index fund seems to be the prevailing wind but I wanted to try and get some more perspective and thought - who better to ask than a bunch of supposedly wealthy strangers?

So ATOT - how do you invest your millions?
 

sunzt

Diamond Member
Nov 27, 2003
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Do you try to do that with an index fund or otherwise?

you can do with either. depends on the choices in your account. I use a few index funds just to have diversity. Also depends if you're looking for a specific blend or strategy (ie: you're looking for a mix/industry/focus like index fund A, but with less risk and generates more income)

here's an example of implementing that harvard portfolio using index funds and etfs.

http://www.kiplinger.com/tools/investment-portfolio-finder/table.php?portfolio_select=Ivy
 

mshan

Diamond Member
Nov 16, 2004
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Anything labelled an "index fund" is not necessarily a good investment.

You have to know what underlying benchmark is, what expense ratio is, and how long-term shareholder friendly that particular money manager is if you hold the index fund in a taxable account.

Low cost, broad market index fund (S & P 500 was originally recommended by John Bogle, but he now recommends a Total U. S. Stock Market index fund (more diversification, and less portfolio turnover translating into slightly lower hidden trading costs and capital gains payouts costs over time) is specifically what is cornerstone of Bogle buy and hold for the long-term strategy of wealth creation through compound interest.

Plus, a total market index fund (VTSMX) is typically over 99% stocks (many actively managed funds have 5 - 10% cash on hand to cover redemptions and opportunistic buying), which will drag down returns over time (stocks >> bonds > cash over very long periods of time; IIRC, strategic asset allocation can explain something like 92% of returns over very extended periods of time).

No scientific study to back up this assertion, but I don't think you can really appreciate the power of low cost, broad-market index fund (particularly in taxable account because of continued taxation on reinvested capital gains and dividends) till you actually hold that particular fund for at least 20 years and look at total amount of capital you have accumulated, not whether or how much it beat or underperformed market or this or that fund any given year, 3 years, 5 years, or even 10 year period (Bill Miller's Legg Mason Value fund had great 10 year run, and so did Fairholme, but market really turned against their investing style after that). Haven't looked at their performance over 20 or more year time periods, so don't know if, even with recent faltering, they may end up being at top of best performing money managers over 20 or more year time horizon, but you have to have conviction to hold through these trying periods to even capture that long-term outperformance. IF you are U. S. based in dollars, I think it is easier to continue to hold your nose and keep dollar cost averaging into VTSMX if you are young and right now were equivalent of 1972-ish bear market in stocks (looking back 30 or 40 years later, it now looks like it was a great time to buy, though you might have thought very differently then and even a decade after you put money into the market).

If you have a good lump of capital to spread between taxable and tax deferred accounts, and you are truly investing for the long-term (really buy and hold investor, not just saying that and break investment strategy when index fund lags badly in hot market where small core of market is powering way ahead of market as a whole and funds concentrated in those sectors are up 50 - 100% for year and broad market is way, way behind that), dollar cost averaging into VTSMX in a taxable account and holding through early years of retirement as you take required distributions of retirement plans, could give you an additional 10 or 20 years of essentially tax-deferred investing in pure stock class to outpace inflation when you start drawing down those funds.

John Bogle's "tyranny of compound interest" argument is what you really need to understand so you don't sell next time market pundits are again saying buy and hold is dead: http://books.google.com/books?id=ac...nepage&q=tyranny of compound interest&f=false

VTSMX doesn't try and beat market over short-term, it just takes what market gives it, and in process, will, with very low overall risk, beat vast majority of actively managed funds through prism of decades long time horizon (1% management fee and 2 - 3 % hidden portfolio costs (not sure how high number is) because of heavy portfolio trading, to say nothing of not shareholder friendly management (asset gatherers, not creators of long-term wealth for it's shareholders), plus, despite best research and due diligence, unforeseen mistakes and missed opportunities (e. g. Selected American funds shareholder letter in past about horrible mistake of buying AIG when market crashed post Lehman, but also that they could have made up all losses if they had also bought WFC at that time), also means that, especially if you are chasing a momentum type growth money manager, it is very, very hard to predict who will be winner 20 or more years after the fact. They have to beat unmanaged broad market index with no associated costs by 2% or more average annual return just to keep up with the unmanaged index.

And that says nothing about harmful "investing" habits of many individual investors (basically, chasing short-term performance and essentially buying high, selling low, and trying to time market in cash when greatest investing opportunities going forward are presenting themselves): http://selectedfunds.com/downloads/SFSucclInv1211.pdf

Ultimately, unless you truly understand your own investments and the nuances of how your own investing strategy is supposed to create wealth over time (plus honest appraisal of your real tolerance for market volatility and "risk", so to speak), then you are likely to too easily get shaken out of market at wrong times and almost guarantee than you will (badly) underperform market / VTSMX over very extended periods of time.
 
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kranky

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You're already reading at Bogleheads, and I can't recommend anything more useful. Asset allocation, low expenses, and rebalancing are my three-legged stool for investment success.

Borrow the Bogleheads' Guide to Retirement Planning from your library. You'll probably end up buying a copy like I did.
 

Exterous

Super Moderator
Jun 20, 2006
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(Thanks for the detailed post)

You're already reading at Bogleheads, and I can't recommend anything more useful. Asset allocation, low expenses, and rebalancing are my three-legged stool for investment success.

Borrow the Bogleheads' Guide to Retirement Planning from your library. You'll probably end up buying a copy like I did.
(apparently libraries in michigan don't like this book)

Thanks! Thats mirrors everything I have been reading. I am trying to figure out if:
1) I am being swayed by emotions or a first exposure bias (my exposure to 'Bogleheadism' was my first real exposure to more in depth investing)
2) The index funds growing popularity is a response to recent fund mismanangement and the difficulties in selecting a competantly managed fund
3)While everything I have read supports the index fund a large selection of that reading comes from people with a possible bias and their converts (Does John Bogle extol the benefits of the index fund more because he created than instead of its merits and has the recent market issues/rash of poor fund management gained him an inordinary amount of converts)

'Only' averaging market returns doesn't sounds like settling for a bad investment strategy but I am trying to get more perspective
 
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DaWhim

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Feb 3, 2003
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buy it and forget it. years down the road, u will be very surprised with your portfolio.
 

kranky

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Index funds growing in popularity IMHO is because people are more interested in investing and are finding out actively managed funds have no better results - they just cost more. They are learning how much costs matter. A 1% higher expense ratio doesn't sound like a lot - until you realize after 20 years that is 20%! For long term investors, that's enormous.

If actively managed funds had a demonstrable track record of superior performance after factoring in the higher fees, then it would be a trade-off. But that's not the case.

Read up on Modern Portfolio Theory - which defines how asset allocation not only reduces your risk, it increases your return. And see how low costs are so important to success. The great thing about asset allocation/rebalancing is it keeps you from wanting to be a market timer.

Nothing wrong with having some money on the side for speculative investments but I see too many people yanking their entire 401k around based on what they saw on google news, thinking they are beating the system.
 

DaveSimmons

Elite Member
Aug 12, 2001
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Buying and holding index funds forever takes all the emotion and gambling out of it. You no longer try to time the market with your 401k, you just sit back and let your shares increase. During a dip your 401k new dollars buy more shares, during a climb they buy less.

The Vanguard Total <year> index funds are nice because they give you bonds and foreign stocks, not just the total US market. It's a fund made up of their other index funds both stock and bond.

If you pick a year farther out, say Target 2040 even if you are retiring in 2030, you get a lower % of it in bonds and more in stocks.

If you're happy with the mix of index funds in the Target <year> fund that single fund could be all that you need to get for the 401k.


Edit: My own investments are different because I have a fair amount in a non-retirement brokerage account where I pay taxes on the gains. For that I mostly have it in S&P 500 index fund shares as a good growth with low taxes choice. I then have the small-cap and foreign funds in my retirement accounts. If your funds are all in tax-sheltered accounts (401k, IRA) there's no reason to do that.
 
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apac

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My investments are split roughly evenly between
1) 401K in Fidelity Target Retirement 2055
2) My own choice of long term stocks/mutual funds/bond funds
3) My house
 
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