Reader Question
I'm curious if you have seen the "Gone Fishin'" Portfolio and what your take is on the suggested asset allocation. I have decided that Vanguard is the best place for my retirement fund, due to its low cost philosophy. I'm just not sure what strategy to follow. I followed the Dave Ramsey plan to get out of debt, and took a look at his investment strategy, 25% in 4 funds: • Growth and Income Funds • Growth Funds • International Funds • Aggressive Growth Funds I then came across the "gone Fishin'" Portfolio and found it interesting, but am unsure of it's real world advantages. The Gone Fishin' strategy suggest an asset allocation as follows: Vanguard Total Stock Market Index (VTSMX) – 15% Vanguard Small-Cap Index (NAESX) – 15% Vanguard European Stock Index (VEURX) – 10% Vanguard Pacific Stock Index (VPACX) – 10% Vanguard Emerging Markets Index (VEIEX) – 10% Vanguard Short-term Bond Index (VFSTX) – 10% Vanguard High-Yield Corporates Fund (VWEHX) – 10% Vanguard Inflation-Protected Securities Fund (VIPSX) – 10% Vanguard REIT Index (VGSIX) – 5% Vanguard Precious Metals Fund (VGPMX) – 5% I have also been considering the simple Vanguard target retirement fund. I'm young, and I've got about 35 years until retirement, so what is your take? how would you allocate your money? Which strategy do you follow, if any.
My Reply
I haven't seen Gone Fishin' portfolio before, but what you listed looks quite reasonable. The most important thing by far is that it's rock-bottom cost (thanks to Vanguard) and very well diversified. It is quite aggressive, with only 20% of the portfolio is truly "safe" holdings of Vanguard Short-term Bond Index (VFSTX) and Vanguard Inflation-Protected Securities Fund (VIPSX). This means expected returns from it are high compared to safer options. But it also means that you must have very even temperament to not panic when the next crisis hits -- and it will hit sooner or later, such is the nature of the beast -- and you see your portfolio value rapidly decline in value by 20% or 30% or even 40% or more! When that time comes you must be prepared to ride it out and not sell after the plunge. Ideally, you would even add to your investments, but at the very least you would at least hold on to them. If you are able to do that, have a good emergency cash stash (say, 12 months of expenses), and, ideally, have in-demand job skills then there's absolutely nothing wrong with holding such a portfolio.
I could nitpick about some components of this portfolio (e.g. I think 15% in small cap -- in addition to the small cap holdings of VTSMX -- is far too much relative to other equities), but ultimately it'd be like arguing about who will win the Super Bowl in 2020. The key characteristics of this portfolio are solid: low cost and diversification. Its aggressive allocation may well be right for you, with 35 years to go to retirement and, hopefully, the right mental make-up and financial situation to ride out the inevitable swings in the markets. You may also want to read http://www.longtermreturns.com/2012/03/vanguard-lifestrategy-funds.html to learn about a simple one-fund approach to accomplish essentially the same thing as Gone Fishin' and other multi-fund passive portfolios strive for. VASGX LifeStrategy fund would be expected to deliver more or less identical returns to Gone Fishin', for example.
By the way, while Dave Ramsey gives solid common sense advice on getting out of debt you would do well to never listen to him for investing advice once you actually are out of debt. Some of his points are good (don't own individual stocks), but overall it's a pretty terrible advice with nonsensical division of "growth", "growth and income" and "aggressive growth" all the while saying to not own any bonds or even mentioning costs, which are probably the most important thing when it comes to investing. The Gone Fishin' portfolio or any number of other low-cost passive index portfolios is a far superior approach.
Thank you for your prompt response to my inquiry. I really appreciate your simple common sense approach to investing, as that's how I want to live. I don't even really want to look at my investments as I know they will go up and down. I simply want to set it up, add some money each month, rebalance as needed, and get on with life. Quick question, what's the difference between the life-strategy fund (VASGX) and the target retirement funds (VFFVX, VFIFX)? Also, regarding expenses, would I be paying more for an all-in-one fund, or by buying funds individually. In other words is the sum of expenses for buying individual funds greater than, less than, or equal to buying a fund of funds? On another note, as I read Dave Ramsey's book, he mentioned always hiring an advisor, which made me wary of his investing advice. Very in line with the advice you just gave.
ReplyDeleteGlad to help. The LifeStrategy and Target Retirement funds are extremely similar. The only real difference is that LifeStrategy always holds the set percentages of the three core funds for their duration while Target Retirement varies these percentages (by decreasing stocks and increasing bonds) as you near the "target" date. Either would be a fine choice. I personally prefer LifeStrategy with its set percentages which let me stay a bit more in control of what I hold, but that in no way means Target Retirement funds are inferior. Just a (very slightly) different philosophy of asset allocation.
DeleteAs to costs, yes, you could shave around 0.07% annually in costs by holding individual components of LifeStrategy or Target Retirement funds rather than the fund of funds. You would also be able to allocate less tax-efficient funds (i.e. bonds) to tax-sheltered accounts while more tax-efficient funds (equities) to taxable if you don't have much tax-sheltered space. Though that last advantage is a lot less obvious now with near record-low bond yields -- it will be more pronounced if and when the yields go up.
On the flip side, LifeStrategy or Target Retirement funds provide automatic re-balancing which could very possibly overcome the ~0.07% annual difference in expenses and then some. Or at least it would save you time you would spend doing the re-balancing yourself (not that doing so is particularly difficult or time-consuming).
When considering LifeStrategy vs. Target Retirement vs. something like Gone Fishin' using Vanguard mutual funds we're really splitting hairs. One of them will end up better than the others by some tiny fraction of one percent. But (assuming you stick with the plan for the long term and not panic when the next crisis hits) any and all of them will be far superior to virually all non-Vanguard alternatives over your investing lifetime.
Sounds like the target retirement is what we want then. We have plenty of "tex sheltered" space in our investment plan, and the completely hands off approach will be a huge asset. As you put it, the time saved will be more than worth the .07% savings. Not to mention the very low $1000 to open, and additional investments starting at just $100 makes it ideal to start with and to hold on to for a very long time. Thanks for working through this with us!
ReplyDeleteYou're welcome. Sounds like you have a great plan.
DeleteThank you for the great discussion. I've been using this portfolio for about five years, through the ups and downs. It's always nice before my big annual contribution and redistribution to see a little positive press before you commit another chunk of your hard work away!
ReplyDeleteIn the end, I agree completely with the sentiment given here: for the majority of personal investors, the real key is maintaining your nerve and not constantly searching for that magic bullet investment!
Absolutely! As John Bogle, the founder of Vanguard, put it: "the greatest enemy of a good plan is the dream of a perfect plan". All investors should formulate their own "good plan" and stick to it for at least decades, if not for life. Gone Fishin' certainly fits the "good plan" criteria.
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