Estimating TSM returns on another "lost decade"

[rj.phila]

hey folks, im wondering if anyone can help me figure this out. i'd like to calculate what the returns, due to dividend re-investment, would most likely look like on the Vanguard Total Stock Market Index fund(VTSMX) in the event that 10 years from now, the dow looked exactly like it does now. they say that the brunt of the growth on index fund investments is due to the dividend reinvestment over X-period of years. can anyone help me with that? thanks.

[kv968]

It's hard to say since companies generally raise their dividends so the yield on the ETF would go up over time. However if you just take the current yield of 1.63%, a $10,000 investment would be worth about $11,767 in 10 years. A gain of 17.7%. If you take deduct the 0.18% expense ratio, it would be worth about $11,557 or a 15.6% gain.

So let's hope the dividends and the fund goes up in the next decade

[humandraydel]

It's hard to say since companies generally raise their dividends so the yield on the ETF would go up over time. However if you just take the current yield of 1.63%, a $10,000 investment would be worth about $11,767 in 10 years. A gain of 17.7%. If you take deduct the 0.18% expense ratio, it would be worth about $11,557 or a 15.6% gain.

So let's hope the dividends and the fund goes up in the next decade

The return is better than this because you are ignoring the fact that your dividends are buying cheaper shares during the down years. If you had invested in the Vanguard 500 Index Mutual Fund in March 2002, $10,000 would have grown to $14,960 after 10 years.

[kv968]

The return is better than this because you are ignoring the fact that your dividends are buying cheaper shares during the down years. If you had invested in the Vanguard 500 Index Mutual Fund in March 2002, $10,000 would have grown to $14,960 after 10 years.

I was ignoring the fact that you're buying cheaper shares in down years because I was assuming that the fund would be flat the entire time since the OP wanted to know what would happen if the fund went nowhere in 10 years. I know that's unrealistic but it's the only way to do it.

I agree that it could possibly be worth more since you would buy more in down years but who's to say there'll be down years? What if the index was basically up the entire decade but then fell back to even at the end? You'd then have been buying shares at an inflated price to the end value and would have lost money. It was just easier to keep the fund flat the entire time so basically you were reinvesting funds quarterly with a 1.63% yield.

[KTP]

If you are sure it is going to be flat for the next 10 years, you can increase your return by 3 or 4% a year by selling out of the money covered calls on TSM.

Add that to the dividend and you are looking at a 10 year return of around 70% in a flat market.

[rj.phila]

this is great help, folks. thanks. i'm obviously trying to explore the idea of TSM as an investment vehicle, divorced from the valuation of DJIA. it sounds like it's still a pretty decent investment, eh?

[humandraydel]

I was ignoring the fact that you're buying cheaper shares in down years because I was assuming that the fund would be flat the entire time since the OP wanted to know what would happen if the fund went nowhere in 10 years.

Fair enough. I read too much into the question and had assumed OP was interested in the more "complex" situation where it goes up and down - otherwise, it's a fairly simple calculation.

[kv968]

Fair enough. I read too much into the question and had assumed OP was interested in the more "complex" situation where it goes up and down - otherwise, it's a fairly simple calculation.

If you'd like to do the more "complex" situation, by all means feel free

[kv968]

this is great help, folks. thanks. i'm obviously trying to explore the idea of TSM as an investment vehicle, divorced from the valuation of DJIA. it sounds like it's still a pretty decent investment, eh?

Can't really go wrong with TSM especially as far as diversification goes.

However, what do you mean by "divorced from the valuation of the DJIA"?

[rj.phila]

Can't really go wrong with TSM especially as far as diversification goes.

However, what do you mean by "divorced from the valuation of the DJIA"?

what i meant was to disregard the increase/decrease in the DJIA, and subsequently the valuation of your investment, and JUST look at the yield. since a loss or gain is really only realized if you actually SELL an instrument, it seems worthwhile to at least consider the "yield only" perspective of an investment such as TSM.

[kv968]

what i meant was to disregard the increase/decrease in the DJIA, and subsequently the valuation of your investment, and JUST look at the yield. since a loss or gain is really only realized if you actually SELL an instrument, it seems worthwhile to at least consider the "yield only" perspective of an investment such as TSM.

Gotcha. However you do realize that the TSM isn't the same as the DJIA?

Actually if you were to invest in DIA (Dow Jones SPDR) which currently yields 2.32% compared to the 1.63% offered by VTSMX you'd be even better off if neither went anywhere. If the DIA was to stay flat for 10 years, on a $10k investment you'd have $12,608 for a 23.1% return before expenses.