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Goodbye Total Market… Hello Small-Caps

November 8, 2018 by Lazy Man 3 Comments

This has been a difficult week, so I’ve been doing less writing that usual. The good news is that I have quite a few ideas for future articles.

I recently had a bit of an epiphany. For years, I’ve been investing in Vanguard’s Total Market Index (VTI). My philosophy was that holding all the stocks in one low-expense purchase is the way to go. It’s such a boring thought that almost everyone agrees it is a smart move. In fact, half of you have probably stopped reading this. That’s how boring it is.

I still think that investing in the VTI is a good way to go for many, but I’m thinking of switching up my asset allocation.

The “problem” with VTI is that it’s become extremely heavily weighted in a few companies. You can see the holdings here. You have scroll down a bit and look to the right, but you’ll see the top 10 holdings are 18.70% of the total assets. Five the top six companies are tech… the big names like Apple, Microsoft, Amazon, and Google.

I don’t see any of those companies going away any time soon, but it’s a lot of eggs in that very concentrated area.

What if we invested in a different way. What if we looked at Vanguard’s small capital ETF, VB. It’s holdings are here. (Same deal, you need to scroll a bit and look at the right.) The top ten holdings aren’t the popular names. These are small companies after all. One of the things that stands out to me is that the top 10 holdings are only 3% of the index.

If any one of those companies went away, it’s not going to bring it down much at all. So isn’t it more diversified? It also doesn’t feel like all the companies are in the same industry.

Finally, one could make the argument that small companies might have more room to grow earnings and go up.

I’m not sure how I came to this epiphany, but part of it was that I was thinking about the value of buying local. There’s nothing particularly local about buying a small cap index, but the total market has some big companies that probably don’t need my investment. (The small ones would laugh at the fraction of a share purchase as well.) It just feels like I’m investing more in the mom and pop companies when I’m invested in the small caps.

What does this mean for actually investing performance? Probably not much. Over the long haul, the two indexes are highly correlated, so maybe I am overthinking this.

Realistically, I’d still want to have some money in VTI, but I think I might do more of a 50-50 mix instead of the 90-10 that I have now. What are your thoughts? Let me know in the comments.

Filed Under: Investing Tagged With: index funds

A Chink in Index Funds’ Armor?

June 6, 2013 by Lazy Man 5 Comments

I got my July 2013 edition of Money Magazine yesterday and on page 43 there is an interesting article about balancing a lopsided index fund. The idea is that many indexes are weighted by market capitalization which means that when Apple was trading was $700 index funds needed to have a ton of it. As we know now that was the wrong time to buy Apple. In fact, this kind process leads to investing in stocks that may be in a bubble and undervaluing stocks that could be buying opportunities.

So Money Magazine asks the question, “Is it time for you to rethink indexing?” They quickly answer it with a no. Their reason is that indexing has proven to be effective over the long haul and few managers beat the average consistently and when they do it is usually by a small amount. It’s not like betting on Tom Brady to beat Mark Sanchez, where you feel good about it happening over and over again (sorry New York fans, we were there in the early 90s).

I agree with this. Even with this chink in index funds’ armor, I don’t see a better alternative, especially because you can keep index funds expenses low. Money recommends a total market index fund (something that matches Wilshire 5000) and specifically goes with Schwab’s Total Stock Market Index (SWTSX). I’m a Vanguard ETF guy myself, so I go with VTI the differences here are minimal. The next thing they suggest is Vanguard FTSE All-World ex-US ETF. Their theory is that you can “cover a broad spectrum of domestic and foreign stocks” with just those two.

I respectfully disagree.

I had long thought that it was true, but I found it left me with a whole in emerging markets. I was almost all invested in the US (70%) and had 15% in Europe, and about 8% in Asia (China/Japan mostly). The other 7% was spread around mostly Australia, Canada, and South America. (I’m using SigFig.com geographical classifications which seem to break apart some countries, but leave other continents grouped, hence the inconsistency there.)

In order to correct this very lopsided allocation, I added a significant amount of Vanguard’s FTSE Emerging Markets ETF (VWO). It brought my US down to around 55%, my Europe down to about 13% and my Asia up to about 16%. In reality it gave me a lot of exposure to BRIC (Brazil, Russia, India, and China) that I had been largely missing. It wasn’t a ton of exposure, I’m still less than 2% invested in India and Russia each.

Interestingly the article points out that today there’s a worry that these BRIC economies may encompass too much of emerging market index funds. Considering that the article previous seemed to ignore emerging markets completely, this is still better than nothing. The article suggests looking at iShares MSCI Emerging Markets Minimum Volatility (EEMV) that has a third less in BRICS. I can’t think of the appropriate expression off the top of my head, but this I believe this is over-analyzing things. Most people will have BRICs be about 8% of their portfolio, maybe less. If the minimum volatility option moves it to 6%, it’s not the biggest deal. Should you really worry about the 2% difference divided amongst 4 very large countries or the 50% that you put in one country (United States)?

Getting back to the problem of Apple representing a big portion of the US stocks. The article mentions that you can go with PowerShares FTSE RAFI US 1000 (PRF), a mouthful, that doesn’t weigh by market capitalization. However, it is quick to point out that it had bubble problems itself in the past. The best advice that I see from the article is to augment with Vanguard Small Cap ETF (VB). Personally, I have a good amount of this stock, but for a completely unrelated reason, I’ve consistently seen research that small caps perform better over the long haul.

The article ends with a section on bond indexes. I believe that to be a bit more complicated than the equities, although the article has some good guidance. Rather than give away the whole store, I’m going to suggest that you buy the magazine or wait for the article to be available online if you are interested in the bond solution. It’ll probably be worth a couple of dollars to you.

Filed Under: Asset Allocation, Investing Tagged With: index funds

4 Investing Ideas for Your Economic Stimulus Tax Rebate Check

June 14, 2008 by Lazy Man 9 Comments

Today’s post comes from Miranda Marquit. She writes about personal finances for YieldingWealth and edits debt consolidation information for Destroy Debt.

The “economic stimulus” tax rebates have begun arriving, and now people are wondering how to spend them. Instead of blowing all that cash on something you don’t actually need, why not put part — or even all — of that money to work for you through investing? Here are 4 investing ideas for your “economic stimulus” tax rebate check:

  1. Retirement account – If you aren’t putting the maximum amount into your retirement account, why not use that tax rebate check to bring it up to scratch? Even with a modest rate of return (around 7 percent) over 20 or so years, you can make a big difference in the end result if you put the money in your retirement account.
  2. Index funds – In general, the stock market is struggling a bit. This means that now is an ideal time to get in (you know, the old “buy low, sell high”). You can buy more units for your money. And if you choose index funds, you can enjoy instant diversification. Over time, the stock market gains. You can take advantage of that buy getting in now, even though the returns are modest, averaging between 7 and 11 percent.
  3. Cash – This is not going to get you a great return right now. But cash investments (like a high yield savings account or a CD) can be a good way to build your emergency fund. And they are safe, if you use a bank that is FDIC insured. You can pad your “rainy day” fund with an infusion in the form of your tax rebate check. The money will grow (albeit slowly), and offer you a bit of a safety net. Besides, the Fed has to start raising rates again sometime. When that happens your savings account yield will increase, and you can ladder CDs into something with a better return.
  4. Growth stocks – If you’re the type of person who can stomach a little more risk, this might be a good opportunity for you invest in some growth stocks. These stocks are riskier, and you could end up losing the money, but it you choose carefully, you just might parlay your tax rebate check into some serious stimulus for your investment portfolio. One of the more promising sectors is clean tech.

What you choose to do depends on your risk tolerance and your investing style — as well as your individual needs. But no matter your decision, you can put this “found” money to work.

Filed Under: Investing Tagged With: cash investments, debt consolidation, diversification, Economic Stimulus, emergency fund, fdic, growth stocks, high yield savings, high yield savings account, index funds, Investing, personal finances, rainy day fund, rate of return, rebate check, retirement account, safety net, stock market gains, Tax, tax rebate, tax rebates

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