A Vanguard Fund Strategy to Double Your Nest Egg
Reprinted courtesy of MarketWatch.com.
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Sound Mind Investing, The Independent Advisor for Vanguard Investors, MoneyLetter and other mutual-fund newsletters all want to sell you their own versions of “beating the market” using very simple combinations of Vanguard funds.
Simplicity sells. Wall Street knows it, and the newsletter industry knows it. Total market index funds manage billions of dollars of retirement assets, simply replicating the entire stock market with no attempt at stock selection or management.
Simplicity in itself isn’t all bad. I’m in favor of keeping things simple enough that you can manage and understand them. But too often, simplicity leaves too much money on the table for others to pick up. You can have that money for yourself. In fact, it’s easy.
I think you should want your portfolio to be sophisticated instead of simple, easy instead of difficult, inexpensive instead of expensive — and perhaps most important, profitable for you instead of profitable for others. If that’s what you want, I’ll show you how to get it.
A good place to start is to give up any idea that there’s a magic solution, whether it’s for sale or not.
- The bad news is that there is no magic.
- The good news is that, therefore, you don’t have to pay anybody for it.
Implicit in almost every newsletter sales pitch is the notion that there exists a “secret sauce” that gives “in the know” investors a special edge. But when you look carefully, you will find that in reality, the newsletters’ secret sauce has only one significant ingredient: diversification.
Let me show you a better idea.
Every sales pitch promises to let you beat the market. To see what that means, let’s start with a universal benchmark, the Standard & Poor’s 500 Index, often regarded as a good proxy for “the market.”
How simple is it to beat that?
Simplicity doesn’t get much simpler, when you’re putting together an all-equity Vanguard portfolio, than this one from my friend Allan Roth, a CBS MoneyWatch columnist: Own the Total Stock Market Index fund VTSMX +0.13% and the Total International Stock Index fund VGTSX -0.12% .
In the 10 years ended last June 30, those two funds returned, on average, 8.1%. The S&P 500, for the same period, returned 7.4%. So if beating the market is all you want, you see it’s simple.
But if you’re willing to spend a little time, probably an hour or two at most, to structure your portfolio, I think you can expect to beat the market by two full percentage points instead of just 0.7 percentage points. Sometimes you will do better.
Over the past 10 years, a number of Vanguard-oriented newsletters added some of that extra return — but not all of it. Compared with the S&P’s 7.4% return:
- The Vanguard Venturesome portfolio from Moneyletter ($129 for a one-year subscription) returned 8.4%;
- The Just The Basics portfolio from Sound Mind Investing ($79 for 12 issues) returned 8.8%;
- The Independent Advisor for Vanguard Investments ($100 for one-year subscription) returned 9.1% in one portfolio and 9.4% in another.
Those recommendations were available to paid subscribers.
My Vanguard strategy
But starting in 2003, instead of buying any subscription, you could have followed my all-equity Vanguard recommendations. These are essentially unchanged from the late 1990s:
Invest in nine no-load Vanguard funds. Allocate 10% each to 500 Index VFINX +0.03% , Value IndexVIVAX -0.24% , Small-Cap Index NAESX +0.49% , Small-Cap Value Index VISVX +0.31% , REIT IndexVGSIX -0.37% , Developed Markets Index VDMIX -0.09% , FTSE All-World ex-U.S. Small Cap Index VFSVX +0.23% , and Emerging Markets Stock Index VEIEX -0.57% —and the final 20% to International Value VTRIX +0.03% .
In the 10 years ended June 30, my recommendations, as independently tracked by The Hulbert Financial Digest, returned 9.6% annually. That is 2.2 percentage points higher than the S&P 500, which by the way makes up 10% of my recommended portfolio.
Beating the market by 2% over 10 years: Is that a big deal, or just a yawner? I’ll give you the facts, and you decide.
On a $100,000 portfolio over 10 years, that extra performance is worth $45,901 ($250,095 at 9.6% vs. $204,194 at 7.4%).
A typical investor will have money in the market for at least 40 years, including pre-retirement and postretirement periods. Over that long span, a $100,000 portfolio would grow to $3.91 million at 9.6% vs. only $1.74 million at 7.4%.
This seemingly small difference in return is equally significant to younger investors accumulating assets. If you started with $5,000 and added that same amount every year for 40 working years, a return of 7.4% would give you a portfolio worth $1.19 million. If instead you earned 9.6%, you would wind up with $2.18 million — nearly twice as much.
All that extra return isn’t entirely free. You would have to spend a few hours to set up your portfolio in the beginning and perhaps an hour a year to rebalance things.
Let’s say the total time required is 50 hours. If the payoff for your time totaled $990,000, that’s a pay rate of $19,800 per hour. If that rate is not worth your time and trouble, I apologize for taking up your extremely valuable time.
The returns won’t be the same in the future, of course. But I am very confident that the results of good diversification will continue to have an enormous payoff.
Now you know how to get that payoff for yourself.
Richard Buck contributed to this report.