Layout:
Home > Does Index Fund = Eggs in One Basket?

Does Index Fund = Eggs in One Basket?

January 3rd, 2008 at 03:17 pm

As of now, my plan is to put 80% of my retirement in Vanguard's Total Stock Market Index Fund. That particular fund tracks every single American stock on the market. I plan to put the remaining 20% in Vanguard's Total International Stock Index Fund, which is a broad international fund spread among Europe, Asia, Africa, and some emerging markets.

This strategy comes straight from Suze Orman, and it makes a lot of sense to me. Suze makes the point that I can invest $300 per month for 15 years starting at age 25 and it will be worth more than a million dollars when I am 70. This assumes an average return of 8%, which is quite reasonable.

Now, I just finished Howard Dayton's _Your Money Map_. He has quite a different take on investing. I love Howard Dayton's advice, and I am following the Crown Money Map, which I would suggest everyone go check out at www.crownmoneymap.org

As I was saying, he has a different take on investing, or at least I think he does. It seems much more conservative. Basically, he advocates keeping 25% of your retirement in liquid or semi-liquid form by way of CDs, money market funds, etc. The remainder is put in index funds with more being put towards higher-risk investments as your money grows and eventually into a variety of different things such as real estate, etc. While this doesn't seem to offer the outstanding returns of Suze's approach, it does seem more diverse and safe.

Suze Orman's strategy is far simpler: just put it all in a broad index fund. I like the idea of just throwing $300 per month into an index fund for the next fifteen years and retiring a millionaire, but I don't know if that is putting all of my eggs in one basket.

You may be asking, "How is investing in a fund that tracks every stock on the market putting your eggs in one basket?". Well, that's what I am asking. Is investing in ONE fund, whether it tracks the whole market or not, not being diversified enough? In light of the mammoth financial problems the U.S. is facing now and will be facing in the future, is there any way to protect myself? Should I simply throw all of my money into the whole market and hope for the best?

P.S. Today was another snow day! Woo!

11 Responses to “Does Index Fund = Eggs in One Basket?”

  1. merch Says:
    1199374966

    25% in cash for retirement is too conservative for you, in my opinion.
    Index funds usually have low fees. I like the 80 – 20 split. Each year you should review the split to make sure that it’s 80 –20. So next year it might be 70-30. You would need to adjust your contributions next year to realign to the 80 – 20 allocation.

    The theory is you sell some of your winners and allocate that to your “under performing” sectors. Now there is a correlation between the US market and foreign markets, you might want to think of 70-20 split and putting 5 in emerging markets and 5 in real estate fund.

    Good luck and Orman sounds good to me.

  2. Broken Arrow Says:
    1199377661

    Suze's advice is barebones, but it should work!

    About the only thing easier is to put everything in Vanguard's target retirement fund, and then you can forget about the minimal work of re-balancing it as well.

    Howard Dayton's advice would be better suited for someone closer to retirement....

    "The theory is you sell some of your winners and allocate that to your 'under performing' sectors. Now there is a correlation between the US market and foreign markets, you might want to think of 70-20 split and putting 5 in emerging markets and 5 in real estate fund."

    I'm don't like debating in blogs, but I can't fully agree with this. Selling under performing anything assumes that you know it will under perform. By what information will you rely that on? You're talking about chasing performance here now, and it's contrary to Keeping It Simple.

    Not only that, but you're also talking about running with the dogs based on Sectors. Why sectors? It's good if you want to make sure you're diversified, but if you're chasing performance, I don't see why it has to be sectors exactly.

    Then again, if you know what you're doing, that's fine. But it's not exactly the kind of advice to give someone who may not have the current skills and interest to do so. Even for something that's suppose to be based on simple technicals.

    Last but not least, the Dogs of the Dow strategy has yet to be proven quite on the same level as the index fund investing. It's the proverbial hare versus the rabbit, and based on recent data, it looks like the hare is taking a nap right now.

    Also, are you referring to sectors or markets?

    Finally, I would debate that there is indeed a correlation, but it's not what some people may think. The reason why the correlation seems inverse is because many countries have a lot of economic potential that they are just now realizing.

    I would argue that while there is indeed a correlation, that correlation is direct, not inverse! The US has many investments abroad (even we investors have our money abroad in these international funds), but likewise, many countries are invested in us. In today's global economy, if one market suffers, it can ripple out towards the other markets!

    Anyway, back to the author, I think Suze's advice is just fine, but if you want to keep it simple, I would also highly recommend looking into Vanguard's target retirement fund, and just calling it a day.

  3. merch Says:
    1199386704

    The theory is that different markets/sectors fluctuate in cycles. The common is that equity and fixed income move in different directions. When a recession hits money moves towards safer income producing investments (read treasuries). In good times, growth stock take off.

    A truly diversified portfolio should have exposure to large and small cap, international and domestic, and other sectors (real estate, commodities, currency, etc.). Since all of these have different cycles, you get peak and valleys at different times.

    Let’s simplify. I have 2 funds (large cap and small cap). I put 80% in large and 20% in small. Bad times start to hit. People still need to but P&G products and large cap company can battle the storms better then growth companies. At the end of the year, my funds might look like 85% large and 15% small. What I should do is sell my large and buy small to get my ration back to 80/20.

    What I am saying here that when large caps are performing, the small caps are under performing and I am selling my winner to buy my loser. It’s kind of like dollar cost averaging but the next level.

    International vs US: The markets themselves tend to move in union. If the US market is up, European and other developed markets follow suit. The difference occurs when the central banks raise or lower rates at different times. This causes the currency markets to fluctuate and hence the mutual fund price in US dollars

    I agree with BA. Put it in a target fund and you’re done. If you have interest beyond dollar cost averaging and want to start creating your own investment strategy, I would start with crafting a diversified retirement account using mutual funds and having the discipline to rebalance.

    It all depends where you want to go. That will answer how complex or simple you want to make it.

  4. Aleta Says:
    1199387296

    I also have a target fund and think that it takes care of the diversification you were talking about. Every fund within the target fund is an index fund. It exposes you to even international index funds. You can get the one closest to the year of your retirement or you can be more agressive and choose one 10 or 15 years beyond your retirement years. This is what I first did with Vanguard and then moved it closer to my retirement date when they changed their allocations. Vanguard is good because the fees are low. I put in one amount each month and it goes into the fund. It is so easy and I have slept better at night with this fund. You can see when they change the allocations. There are times that they may have a small amount in cash. Everything depends upon the market. There is also one within the fund that is for inflation protection which mine doesn't have an allocation there. Check it out. It's a great solution. Yes, I agree that the Vanguard Total Stock Market Index is a great fund. This is something that you could invest in as a taxable fund outside of your retirement fund. Although your retirement fund has a large percentage in this fund.

  5. EnglishTeacher Says:
    1199392534

    Thank you to merch, Broken Arrow, and Aleta for the quality comments. You all really helped me! Thanks so much!

  6. Broken Arrow Says:
    1199408480

    Merch, I see what you're getting at now, and I agree diversification isn't a bad idea at all. I think my only opposition is to chase after performance in a retirement fund. And yes, I am well aware that bonds have an inverse correlation to the market. Big Grin Perhaps it was all just a miscommunication.

    In any case, Vanguard's target retirement funds uses different percent allocations of index funds that include their total stock market, their international index fund, even an emerging market index fund, and eventually index bond funds. So, honestly, this is the simplest answer in my opinion.

  7. koppur Says:
    1199409909

    Hello. This is actually a reply to a post you left me earlier. I am an editor for a publishing company in Boston that does text books for kids learning spanish or for spanish speaking kids learning english. Smile

  8. Aleta Says:
    1199467902

    There is one more bit of information that most people don't know and it is that you can invest in Target Retirement Funds without it being an IRA. They could just become taxable funds to add to your retirement fund. The great thing about these funds are their low fees. I learned this recently when I spoke to a rep from Vanguard. Broken Arrow is right about the Total Stock Market being a large part of the Index fund of the target retirement. My target retirement fund did better than my Total Stock index fund and that was because of the bonds.

  9. Lylic Says:
    1199928464

    Check out Vanguard's Target Retirement 2050 Fund (VFIFX).

    72 % in Total Stock Market Index Fund
    10% in Total Bond Market Index Fund
    18% in European, Pacific and Emerging Markets

    The Vanguard Total Stock Market Index is -4.52% YTD 2008, while the Target 2050 is only -3.49% (due to more balanced assets)

  10. Aleta Says:
    1199971314

    I've been noticing the same thing with my retirement fund. It even did better at the end of year than the total stock index fund did. That's because of the bonds and the exposure to european and pacific stock index funds; It's pretty much done for you, so it is easy. I've come to appreciate the fact that I changed my retirement year because my near now which is 15 years younger than my older one is doing way over $1,000. better. You can't afford to lose so much money as you are getting closer to retirement and this is why they set up these allocations as they are.

Leave a Reply

(Note: If you were logged in, we could automatically fill in these fields for you.)
*
Will not be published.
   

* Please spell out the number 4.  [ Why? ]

vB Code: You can use these tags: [b] [i] [u] [url] [email]