The Cult of the Vanguard Investor

[Scanner]

I was reading Money magazine this month (sometimes I pick an issue up at the store) and I always like the regular feature where they take 4 or 5 families finances, expose them, and then their pundits come in and recommend a change.

This month, something really jumped out at me. There was an older couple in the "home stretch" as they put it. A lot of their portfolio was in energy DRIPS and consumer stocks.

They then recommended putting them in a "better performer" like Vanguard S & P 500 Index.

Now. . .the last I checked, VFINX has performed a stellar 5.8% the last 10 years (probably nearly most of our investment careers here).

How does the magazine get off callling this a "better performer" and reasoning their recommendation out this way? (okay. . .more diversification for the couple . .but better performance?).

I bet I could have found a CD for 6% in 1997 to match the performance of this fund and not endured any principal risk.

What is with this cult? I realize there is the "since inception" return but 10 years. . .that's an awful long time to be patient. I would know. . .because my wife has been in TRP Blue Chip, which uses the S& P 500 index as a benchmark and she has complained about the size of her Roth vs. my Roth.

So. . .what is with you Vanguard cultists out there? I am all for indexing and all (an ETF is an index almost by definition) but I don't get this slavish devotion to Vanguard.

[sweeps]

The last 10 years have been relatively rough for all mutual funds. It's hard to find many funds willing to advertise their 10-year record. Here is one I found for TIAA CREF. Read it and weep.

I like Vanguard because it is simple, no-frills and cheap. I don't need to pay extra for a flashy mutual fund because (a) I don't trust them, (b) rarely does the performance exceed the indexes over the long term, and (c) I don't like to overpay for things.

Vanguard is like the store brand in the supermarket. Tastes just as good, but it costs half the price as the name brands because they don't blow a lot of money on gimmicks and flashy marketing.

Call it a cult if you like, but I call it wise investing.

[disneysteve]

They then recommended putting them in a "better performer" like Vanguard S & P 500 Index.

Now. . .the last I checked, VFINX has performed a stellar 5.8% the last 10 years

Of course, that fund also has a 5-year average annual return of 11.89%.

With most any funds, you can find a time period during which they didn't do so well. Vanguard is certainly no exception.

I don't consider myself a Vanguard "cultist" though I do have a good chunk of money with them. I also own funds from Janus, Oppenheimer, Cohen and Steers, Heartland and Wells Fargo. I don't think any fund family offers the best funds in every category. For index funds, though, I don't think Vanguard can be beat. Their expense ratios are rock bottom and with indexing, those tenths or hundredths of points can make all the difference.

[Scanner]

https://ww4.janus.com/Janus/Retail/FundPerformance?fundID=5

Sweeps,

Here is my international - for 10 years and since inception, it out-performed the respective index by almost double.

I certainly don't want my comments to be taken as an essay against indexing.

I just question this wisdom of "Let it ride on the S&P" that seems to pervades common-sense financial advice.

I don't know. . .I think for 10 years, I want 7-10% and for the risk incurred, I don't think that's asking a lot. But that's the thing about an index. . .what recourse do investors have? Do you get on the phone with Vanguard and say, "You had better shape up with your stock picking or I'm outta here!" LOL. . .like that would work.

Thank God, I made the play I did with Janus. If I had put most of my portfolio in an indexed American co.'s, we wouldn't have as much assets as now.

Again, I just question the devotion.

Okay, if not the Holy S&P 500 Index, is there a good performing index out there for 10 years?

[sweeps]

Scanner, it seems your beef is with the S&P 500, not with Vanguard. Vanguard just matches the index, that's all.

I would submit that you got lucky with Janus. You could've easily lost your bet, and then we wouldn't be having this discussion. There are TONS of mutual funds out there that underperformed (and in some cases WAY underperformed). You just don't hear about those. They either go away or get merged in with another family fund and the record gets expunged (look up survivorship bias).

As for slicing and dicing particular date ranges for funds, not interested. Someone could pull out the fantastic 5-year record for gold, for example. But then they won't talk about the 30-year record before that.

Stocks outperform ALL OTHER ASSET CLASSES over the long term. That's not 1 year, that's not 5 years, that's not even 10 years. The S&P500 is no different.

[disneysteve]

I just question this wisdom of "Let it ride on the S&P" that seems to pervades common-sense financial advice.

Scanner, it seems your beef is with the S&P 500, not with Vanguard. Vanguard just matches the index, that's all.

Ok, Scanner, which is it? Are you questioning investing in Vanguard funds or are you questioning investing in an S&P 500 index fund? Those are 2 different issues. Your initial post questioned "slavish devotion to Vanguard." Did you really mean slavish devotion to an S&P index fund?

I see nothing wrong with having an S&P 500 fund as one of your core holdings. I think it is a good, well-diversified, low-cost way to gain exposure to that segment of the market. I don't think it should be your entire portfolio, though it might be when you are just starting out and don't have enough in assets to meet minimums on multiple funds. As your assets increase, you should spread your money out to include small caps, internationals and other classes.

[Hypersion]

A good asset allocation should have both a US large blend (S&P 500) and an international fund like your Janus Overseas.

Vangaurd S&P 500 has returned 10.01% over the last 15 years.

[Scanner]

I guess I am equating Vanguard with the S&P 500, since that is their "flagship fund" (much like Janus 20 was their flagship fund).

Okay. . .if you tell me to be patient, I will be - 15 years and it jumps from 5.83 to 10.01. . .that's a big jump. In that 15 years is the bull run of the 90's - record economic expansion in the US.

Now. . .we come full circle and. . .we are back to my "that's history and this is the future" discussion.

It looks like the next 2 years would be another retraction (I don't think I am being a huge "futurist" as Broken Arrow may criticize for preparing for this), a posting of negative numbers is probably 50/50 for the next 2 years. In other words. . .that 5.83, more than likely is going to be 4.45 or something for my wife (since we missed a lot of the 90's bull run). I can't look my wife in the eye and keep saying, "Just be patient - oh, it will all work out with market capitation and all. The market is efficient you know." (even though she doesn't own the S&P. . .just a close cousin).

Yeah, I got lucky with Janus. . .thank God. If I had stuck it in an "efficient" international index, I'd be crying in my beer while my wife cries in her wine cooler. But I could comfort myself that it was efficient and cheap.

[jIM_Ohio]

Indexing works great in up markets. In down markets, well there is risk. I have lots of questions about index funds which are rarely, if ever, answered.

Last 10 years PRFDX has returned me 7.73% and took on less risk than the index. No reason for me to look any further.

[scfr]

They then recommended putting them in a "better performer" like Vanguard S & P 500 Index.

Now. . .the last I checked, VFINX has performed a stellar 5.8% the last 10 years

Isn't looking at the return for the PAST 10 years an awfully narrow way of defining performance? I would think that performance would refer to an investment that has the best chance of meeting the couple's FUTURE needs.

If that couple has a few individual stocks and one of them is the next Enron, then they could be in serious trouble. So yes, DIVERSIFICATION for a couple nearing retirement who seemingly want to stay heavily invested in stocks is indeed a big deal.

[meaghanchan]

Here's the thing. The "past performance not predictive of future returns" small print they have in ads for mutual funds or mutual fund companies isn't there for nothing. Past performance really doesn't have a lot to do with future returns.

Do some managers beat the indicies over long periods? Sure, but not more than randomness predicts. If 1000 people flip coins and 500 get heads, that's not skill, that's luck. If 250 of those people get heads twice on two coin flips, again, you wouldn't say that's skill, you'd say that's about what you'd expect (250 2 tails, 250 1 head, 1 tail, 250 1 tail, 1 head, 250 2 heads). Take that out to the sheer number of mutual funds, flip 10 coins (one for every year) and yes, some will outperform their benchmarks. But is it skill or is it luck?

If you say it's skill, sure, find those funds, invest in them, hope that it keeps up.

If, on the other hand, you say it's luck, then decide what asset classes you want to invest in, and invest in them in the cheapest way possible. I have all my money with Vanguard because my bet is that it is luck. I've read Swensen, Bernstein, Malkiel, etc and the more I read the clearer it becomes to me that the best way to assure you'll get close to market results is to simply invest in indicies that track the markets. That doesn't just mean the S&P 500, mind you- I have international stocks, small and large US stocks, and bonds- and would add REITs if I had a little money to spare.

Now, only the future can tell whether that will be, in hindsight, the right call. But with so many wrong calls that I could make, I fell confident that it will be less wrong than about 80% of choices that I could make. If that makes me a member of a cult, so be it- from the looks of the Vanguard Diehard forums, it's a pretty rich cult.

[Broken Arrow]

I am not sure why you insist that there is cultism involved at all....

I suppose I can see where you're coming from though, because Vanguard has gotten so many recommendations, from so many people, both on this forum and elsewhere... and there isn't always too much explanation as why it's a good idea.... Only that it's what everybody and their uncle is doing it....

The irony here is that I've never been one for the "herd mentality". Ramsey? No. Bach? Not really. Kiyosaki? No way! But I don't draw these conclusions based on what everybody else thinks. I draw them based on the merits of the proposal itself, and it just happens so that John Bogle makes a lot of sense (to me).

Vanguard's business model completely avoids the usual investing pitfalls related to market efficiency, investment expenses, and some legal requirements that could tie a fund manager's hands. That's assuming you are working with scrupulous and competent fund managers. Add it all together and you have a simple but effective form of investing that nets a decent result. It's not always the greatest, but one can certainly spend a lot more time and energy, and still end up a lot worse.

Of course, Vanguard isn't the only ones that offer this, and I've recommended other brokerages in the past, such as Fidelity. Which brokerage doesn't really matter to me so long as they are reputable and the numbers make sense.... Also, if it makes you feel any better, I'm actually not a fan of Vanguard's ETFs.

Perhaps what you're making a case for is actively managed funds versus index funds? We've been around this block before as well, but the truth is, I'm not against actively managed funds at all... provided that it is indeed a good fund. Because, there are plenty of bad actively managed funds out there as well. Ones that unnecessarily under-perform, are managed poorly, or are managed by people who are only interested in making commissions.... And the lemons out there are not always easy to spot.

Finally, I just want to make it clear that I respect everyone on this board, including you Scanner. Really, I do. For that matter, it isn't my policy to single out and criticize anyone. I promise. No agendas, no beef, no interest in mind-share, and no care in the world actually on how other people invest their money. All I do is just... run my mouth about stuff that interests me, and if it should agree or disagree with anyone, well, it's more of an unintended consequence.

[humandraydel]

https://ww4.janus.com/Janus/Retail/F...mance?fundID=5

Sweeps,

Here is my international - for 10 years and since inception, it out-performed the respective index by almost double.

You make the same fallacy that many people make - comparing their fund to an index that doesn't contain nearly as much risk and declaring victory. Janus takes on SIGNIFICANTLY more risk than MSCI EAFE Index, so the comparison isn't all that important.

For example, from the Janus website (Scanner's link):

"Janus Overseas Fund held approximately 13.0% of its assets in Brazilian securities as of December 31, 2007 and the Fund has experienced significant gains due, in part, to its investments in Brazil. While holdings are subject to change without notice, the Fund's returns and NAV may be affected to a large degree by fluctuations in currency exchange rates or political or economic conditions in Brazil."


58% of this fund is small caps. 13% of assets are in Brazil. 30% of assets are listed as in "Other" countries (besides Europe, Pacific Rim) - which may be more emerging markets. The bottom line for me is this fund takes too much risk to be my "international" allocation.

[disneysteve]

Of course, that fund also has a 5-year average annual return of 11.89%.

Okay. . .if you tell me to be patient, I will be - 15 years and it jumps from 5.83 to 10.01. . .that's a big jump.

The average really varies based on the period you look at, which is true of any fund.

5 years - nearly 12%
10 years - under 6%
15 years - 10%

Asset allocation and time in the market, as opposed to market timing, is really what mattters over the long run.

[sweeps]

Good point, HD.

Here's the thing. This isn't a competition -- I'm not in this to beat everyone else. I'm investing to improve life for me and my family. At any given time, there will always be some funds out there that do better than my inexpensive, simple, reliable Vanguard funds. That's okay. I am confident that Vanguard always has my best interests at heart and they won't manipulate their record or trick me with secret fees or loads or do other things that hurt me as an average investor.

If you need to have bragging rights that your fund beat my Vanguard fund by a couple points over a particular time period, then by all means brag. But I'd also be curious about the rest of your holdings that fell short -- no one ever talks about those.

Now, asset allocation is a totally different matter. Obviously choosing Vanguard doesn't have any relevance to whether I choose small cap funds, large cap funds, international funds, or what not.