Via Bogleheads, yesterday Vanguard started the trading of a new investment that attempts to track the entire global stock market in just one fund. Dubbed the Vanguard Total World Stock Index Fund, here are some details from an older press release:
The new fund will seek to track the performance of the FTSE All-World Index, a float-adjusted, market capitalization weighted index designed to measure the equity market performance of large- and mid-capitalization stocks worldwide. The fund will invest in a broadly diversified sampling of securities from the target benchmark, which comprises more than 2,800 large- and mid-cap stocks of companies in 48 countries.
The current balance is about 41% US and 59% International. The ETF version (VT) features an expense ratio of 0.25% but has to be bought in a brokerage account. The mutual fund version (VTWSX) can be bought and sold for free at Vanguard ($3k minimum) and has an expense ratio of 0.45%, along with a 0.25% purchase fee and a 2% redemption fee on shares redeemed within 2 months of purchase.
Although you could basically replicate this fund with the proper mix of the Total US Stock Market ETF (VTI) and FTSE All-World except-US ETF (VEU) funds at a lower expense ratio, you’d also be subject to double the commissions when buying and selling. Besides, I think it’s just cool that you can now passively invest in the entire world with one ETF. For example, if China eventually becomes 25% of the world’s stock market value, then 25% of this fund would be invested in China without you having to lift a finger. If somehow India or Russia explodes instead, then you’ll still hold their share.
How could this fit in to your investment plan? More posts about asset allocation information here.
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Interesting vehicle, though I’m staying away from index funds. They have become the Ford Taurus and Toyota Camry of the investment world. They do ok, but eventually they will become staid and lose value. In the indexes case I am highly doubtful that indexes will be match their historical returns over the next 10 years. Plus, I prefer to be more active.
@Chad: Staying away from index funds? You’re drinking the cool-aid. Best of luck with that.
Yeah Chad, I’d check to see if there’s something in your water. You are no Warren Buffett, and even HE invests in Index Funds.
I just read about this in Money Mag, and def. intrigued by it! It almost makes me dig up my stimulus check from my emergency fund and drop it in there…looking forward to seeing how well it does.
I actually think that most people think just like Chad. In addition the past 10 years have been terrible for index funds. SO guess ,what, maybe index funds are the place to b for the next 10 years.
As for the new fund, the only negative will be if the fund does not include an emerging market like Vietnam for example, that could be the next big thing ( I am not specifically picking on Vietnam, you can substitute it for whatever country that would be excluded).
“They do ok, but eventually they will become staid and lose value”
Chad – do you have any evidence to back up this claim? Please share.
On the contrary, over the long haul, index funds have a greater chance at doing well due to (a) their lower cost and (b) they don’t rely on a manager/team picking the best stocks (noone will get it right forever..).
When I say lose value, I don’t mean that they will be negative. I just don’t think they will be able to hit a historical return of 7-10%.
Why? Every new investment strategy that comes along eventually gets to be to popular and creates new behvior. Take Dogs of the Dow for instance. This worked really well for a while. However, as more and more people started to use this strategy, it lost some of it’s effectivness. This is because behvior changed and pulled some of the inefficiencies out of the market. Same with index funds. Everyone can’t get rich, it’s theoretically impossible. Thus, whatever the most popular strategy is has a decent chance of being the worst.
I will pick my own stocks and select a few managed funds to produce a higher return.
When I say lose value, I don’t mean that they will be negative. I just don’t think they will be able to hit a historical return of 7-10%.
Why? Every new investment strategy that comes along eventually gets to be to popular and creates new behvior.
I will pick my own stocks and select a few managed funds to produce a higher return.
Does your 7%-10% expectation apply to international or emerging markets indexes? Are you just talking about US indexes? Do you know there are hundreds of unique indexes and index funds out there? Many financial advisors suggest putting up to 50% of your stocks in companies outside the US, and their prospects are different.
What you describe about faddish strategies is MUCH more like actively managed mutual funds than index funds. For example, the Legg Mason Value Trust (LMVTX) run by Bill Miller “Beat the S&P 500” for 15 years in a row…then lost 40% of its value over the last 18 months! The problem was that LMVTX was overweight the fashionable financial stocks and the credit landscape changed. Ten years ago the same could be said of technology stocks–before the dot com meltdown. In the 1970s-1980s Fidelity Magellan fund was the place to be, but then it became just so-so.
The purpose of an index is NOT to beat the market but also NOT to fall behind the market either. Most active managers do fall behind the market once transaction costs and management fees are counted. So, in the end you have a 100% chance of doing “ok” versus everyone else if you use an index fund while you have a 70%-90%+ chance of doing worse than everyone else with active mutual funds.
If you pick right individual stocks you’ll beat the market, but if you pick average to bad stocks you’ll do worse than an index. My bet is you are going to be just average.
OK – Please let me know what is the *next* investment strategy will outperform, and *also* let me know when to get out *before* they lose their effectiveness (inefficiencies lost).
I think that vast majority of folks overestimate their ability to *over the long haul* hand pick winning stocks/funds. I mean, if the pros on wall street can’t do it consistently, what makes you think average joes like us can? (no disrespect to you personally)
Lets just looks at domestic equity index funds (e.g. VTSMX), over 10 years it’s ranked in the top 30% of it’s category. That means that 7 out of 10 mutual funds did *worse* over this period, that’s not very good odds if you ask me. Plus, I don’t know about you but my horizon is 30+ years not 10 years, and over a longer period it’s even *less* likely that you’ll be able to pick winners ahead of time plus consistently knowing when to get in/out at the right times over the long haul.
I don’t have any problem with low cost active funds or holding a few individual stocks in general, but in my opinion to think you can *consistently* outsmart the market consistently for the next 10, 20, 30+ years is reaching a bit far.
I’m amazed why the vast majority of investors don’t see this.
Good luck! 🙂
“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money” – Warren Buffett
Here’s a philosophical question: What if everyone indexed? Yes, I mean EVERYONE (unrealistic, but it’s a thought experiment). Then there would be no market, because there would be no trading, and our investments would be stagnant. Is this correct? Am I missing something? Or is this what Chad’s trying to get at?
Is it any wonder there are so many Bogleheads on this blog?? 🙂
Smart folks!!!
I’d double the KoolAid comment, but there will never cease to exist, those that swear they’re gonna top the market. God love those folks……..it’s their losses that make indexer’s money. 😉
I like the idea, but just ‘cuz I’m SOOOOOOO cheap, I’d probably still do VTSMX and VFWIX to accomplish the same thing for less. (???)
All the data I’ve seen says that index funds beat managed funds 70 to 80% of the time. With those numbers I will be doing index funds.
Fred said it better than I did. I guess that’s what being tired does to me. The more people that index the flatter the market gets for the stocks the indexes own. Sure, there will be few killers added to the indexes, like Google, but most will just be cranking out a 1-2% dividend with 3-4% growth for an average return of 5-6% over the next 10, 20 or 30 years. I’ll rely on myself, as opposed to blind trust and luck with an index.
I would rather take a shot at being the next Buffett (21.5%) or picking the next Peter Lynch (29% annual return for Magellon Fund). I want to retire when I’m 50, not 65. In all likelyhood if I don’t beat the market I will only be behind by a little, so if I work a few years past 60 I can make it up.
Index funds are pushed by the financial “gurus” not because they are good, but because it lowers their risk. They don’t have to make recommendations.
@ Chris – Then why does Buffett manage his own money? There are gems out there, you just have to find them.
@ “Mo” Money – I’m not just talking about blindly picking mutual funds. You have to be active to get a good return. That’s why Buffett gives the index fund recommendation. Most people really don’t want to be active in their investment decisions.
@ Chad – I can’t speak for Buffett obviously but he certainly has more resources than the rest of us for finding those “gems”. However, he’s just one man, maybe it’s luck, maybe skill, maybe both – but just because he can beat the market successfully doesn’t imply that we can.
I recommend you read Larry Swedroe’s comments on Buffett and Berkshire Hathaway on question #2 here:
http://www.moolanomy.com/347/ask-the-expert-with-larry-swedroe-december-2007-issue/
Or here:
http://www.washingtonpost.com/wp-srv/business/longterm/quinn/columns/040400.htm
@Chad
I’m not sure where you get the idea that you will be only behind by a few years. Picking the wrong fund manager can easily cause you to never be able to retire. It’s been shown that in any given year, the majority of fund managers underperform the S&P 500. It’s also been shown that if a fund manager outperforms the S&P 500, he/she becomes even less likely to do so the following year, and the year after that, and the year after that.
What makes you think you have the secret sauce to finding these fund managers? Only a handful ever outperform the market over the long run. There are gems out there, yes. And if you get lucky, you will outperform the market. But if the fund managers themselves can’t do it consistently even with their teams of people with degrees in financial analysis looking at market trends all day, then what makes you think you can?
Also, I’m not sure why you think index funds are pushed by financial gurus. If anything it’s the other way around. The financial industry has no interest in pushing index funds on people. If investing were made simple, then people would have no need to be shelling over 1% in management fees and paying up the wazoo in front-end / back-end loads and brokerage fees.
I think Chad (and Fred to a certain extent) fundamentally misunderstand index funds and the stock market.
When you buy an index fund, it’s the same as buying proportional pieces of stock directly. There is no limit to what you can buy in an *open-ended* fund. So the laws of supply and demand (what makes things like the dogs of the dow come and go in value) don’t apply. You buying an index fund doesn’t make the price go up for me. And me getting out of it doesn’t make the price go down. (Though 1/200th of my share of an index might be in a specific stock, and that stock will go up.) On the other hand, the stocks neglected by index funds (not sure if there are many of them any more) like ultra-ultra-small-caps will have more room for growth.
And interesting question Fred, Stocks are more than just supply and demand. If there were like residential houses, nobody would make any money because nobody would be trading… stagnation, etc. But profit in stocks comes from two areas: speculation (active trading) and company income. So rather than houses that you live in, they’re commercial buildings that you rent out. You won’t make as much money, but there’s still lots of income to be had from growth. What if everybody owned their own business? Would everybody be out of a job?
PS: ONE of the reasons Buffett manages his own money is because he’s “active” — he generally buys the companies and makes changes / installs his own people / etc. So you’re not only buying his stock-picking advice by buying into BERK, but also his management skills. so even in a world without trading, he’d make more than others. I would argue that he also picks stocks well, but that’s because he’s methodical and patient.
James
@ James – PS: You’re completely wrong about Buffett. Most of the time he keeps management and rarely makes changes to the company. He says it point blank on CNBC’s special. He specifically looks for good management.
I do not “fundamentally misunderstand index funds and the stock market.” Your explanation of the “fundamentals” leaves a little to be desired. I don’t even know where to refute it, because I can’t tell what you are talking about.
@ Kevin – The “financial” gurus I’m talking about are the idiots in magazines like Money. All they do is mention indexing. When was the last time one of those guys made any real money?
What makes me think I have the secret sauce? 7 years of good decisions. Like my decision last fall to go 100% cash. I made a paltry 3% in money market funds waiting for a good entry point. Today the market is down 20% (per CNBC) from it’s high last October and Vanguard’s vaunted S&P 500 index is down 11.75% as of yesterday. If I take my money and put it under a mattress the index fund has to make 17% just to catch me. But, it won’t be under a mattress.
I knew I would be flamed for my position, and I’m glad I was. It helps prove I’m doing the right thing. Challenging conventional wisdom is how Buffett, Soros, Rodgers, Lynch, etc. always made money. Buffett did it just last year by buying railroads.
I got flamed last year (not on this site) for saying that renting is better than buying in the current market, and that turned out well. This seems very similar. No one is open to the idea that indexing is a poor way to go, because everyone does it. Thus, if it’s poor, the decision to do it was poor. This means the decision has to be defended, as the initial comment is viewed as a personal attack. I never intended it as a personal assault, but the responses to my initial comment (Don & db) were.
Fred wrote: Here’s a philosophical question: What if everyone indexed? Yes, I mean EVERYONE (unrealistic, but it’s a thought experiment). Then there would be no market, because there would be no trading, and our investments would be stagnant. Is this correct? Am I missing something? Or is this what Chad’s trying to get at?
First, define “Index.” Every index is an arbitrary construction involving a subset of businesses on Earth. Any index is a bet on the overall performance of a SECTOR or ASSET CLASS. There is not world-wide-index-of-gold-stocks-bonds-cash-oil-and-the-rest. The S&P 500 happens focus on large US companies. If you bet on a China index you are betting that the Chinese economy will grow larger. If you choose to not invest/short a real estate index then you may feel that that sector will contract. There’d still be a lot of movement between indexes.
The purpose of investing is to provide money to people or groups that will put it to good use and return more money to the stakeholders. If we all indexed we’d have a socialized economy with greater equality of outcome but less efficiency (e.g., something like France where unions dominate and firing anyone is difficult). Some groups/nations actually do prefer this type of collective approach.
However, all of this is esoteric. The relevant question is whether you, as a private individual with probably average investing skills, outside hobbies, a family, and a day job, can do better than indexing. If you have the time and skills to be a pro have at it. Check back in 20 years and tell us how you did.
Chad wrote: Index funds are pushed by the financial “gurus” not because they are good, but because it lowers their risk. They don’t have to make recommendations.
In contrast, active management is pushed by financial “gurus” who take as much as 1/3 of your profits (a 2% management fee has a huge impact on profit), and take your money even when their performance is average or poor. Active managers like to drive Porsches and Ferraris earned from fees. Active management is also pushed by financial salesmen who make a profit every time you buy or sell (take a look at the fees they charged in the days before “discount brokerages” and the web).
I never said I advocated 100% managed funds. I do about 20% myself. I use them for areas I don’t know very well (ex. Vietnam).
Also, I’m not arguing that you don’t have to pay attention to fees or that the brokers weren’t thieves before the internet brokers. All I’m saying is index investing is past it’s prime. Go ahead and get 5-6%, but I want more and have gotten more.
Flame on gentlemen.
1% difference in management fee can make a huge difference in 30 years because of compounding. ($1000 * 1.08^30 = $9317 vs $1000 * 1.09^30 = $12,172, that is a 30% difference.)
@Chad: I applaud you for keeping your cool in the face of such criticism. You and Fred are right in one sense, those of us who index rely on others (who want to pick stocks) to define the market. I do think probably 80% of us could index without breaking things though.
I actually believe that some people can pick stocks with success. I have friends who clearly can’t although they don’t seem to realize that themselves. And it might be worth some underperformance for the entertainment value of doing it yourself. We pay for other forms of fun.
Our skepticism isn’t necessarily misplaced. There’s no reason to think there are as many winners as there are losers. A lot of us could take small losses to benefit a very few winners. Lots of us would like to be among the few, but we are mostly among the many.
@Don – Thanks. I love a good discussion, and if that requires a little emotion from one of the sides, I’m cool with it.
No, your skepticism isn’t misplaced, but it’s easier than guys like Larry Swedroe make it out to be. Yes, I read the link. It’s the same old stuff. Some of you think that I choose to actively manage my money because I don’t know the “information” on index funds. I choose to actively manage my money precisely because I know all the info posted in these comments and by guys like Swedroe.
About Swedroe: His knowledge of Buffett is just plain wrong. Swedroe states:
“He provides them with economies of scale, lower cost of capital and the benefits of his managerial wisdom. And when he takes large positions in companies he often gets a board seat. So perhaps his great returns are more a result of his managerial skills than his investment skills, or some combination of both.”
The economies of scale and cost of capital is true, but the managerial comments are completely wrong. Buffett has said time and again he buys companies with good management because he doesn’t know the business and needs them to manage it for him. He then cuts them loose and only has marginal contact with them.
Concerning Mr. Swedroe’s comments that indexing beat Berkshire over a ten year period: First, we don’t know the 10 year period, as Mr. Swedroe doesn’t tell us that, but it’s probably the preceding 10 years. This means that Buffett is trying to get his historical 21.5% return while managing $180 billion dollars. It’s just not possible, as that dollar amount is too big. There aren’t enough good investments available for someone managing that kind of money. It’s an impossible task when you actually own whole percentages of the U.S. economy. The real test would be to give Buffett $100 million and allow him to use it anonymously, and then compare his performance to indexing.
By the way, Buffet’s 21.5% annual return includes the 10 year down period Mr. Swedroe was talking about. Buffett crushes the indexes even after his worst period is included.
Mr. Swedroe also stated, “So we know that Buffett had delivered great returns in the past but we don’t know that he will in the future.” The same can be said for index funds and for every investment. Past performance is no guarantee of future performance. This is extremely basic, and he misses it.
Also, Mr. Swedroe’s entire argument that institutional investors outsmart individual investors is wrong. Individual investors lose because they sell into situations like the current panic in the stock market, after they bought into the euphoric run up last summer and fall. It’s emotion that causes individual investors to make bad decisions, not a lack of information. You can listen to the same quarterly conference calls as the analysts and get the same financial statements. The information gap between individuals and institutional investors is very very narrow, if it exists at all. The real gap is in emotion. The individual investor is using their money, while institutional investors are using other people’s money.
Of course, many individual investors couldn’t tell the difference between a balance sheet and a cash flow statement. These people should not be investing in individual stocks.
@Chad – The only comment I have left I think is this. You say:
Actually, although I find the Swedroe books all about the same, and pretty repetitive, I would say he gets the concept of risk across, even for indexing, across better than most.
When I read your paragraph, however, it feels like you suggest that indexing is just the latest investment fad that will fade (when it ultimately has its chance to underperform as all investments eventually do). I could agree to this extent: recently lots of “custom” indexes based on some selection criterion (i.e. dividend weighted indexes and similar) have become popular and then done precisely what you say.
This really shouldn’t be possible for the kinds of cap-weighted indexes that Bogle focuses on. His argument doesn’t require faith in the efficient market hypothesis. He just makes a plain common sense argument that a person who owns a cap-weighted portion of the “entire market” must receive “average” returns. They can be average losses, of course, but there’s really no danger of underperforming. In that sense, I would count your implication as incorrect. The traditional cap-weighted indexes aren’t really a fad.
Does anyone have anything useful in regards to VTWSX or are you going to continue to waste time arguing about index funds in general? ;-p
I am with Chad on this topic. Of course, in my 401K acount I invest only in Vanguard index funds because my 401K (like most other 401Ks) does not permit one to pick individual stocks.
In my personal account, I do not pick mutual funds but rather trade actively in stocks, call and put options (I hear quite a few gasps from the readers). As long as you have a large portfolio, Wells Trade and Bank of America permit free trades so my trading costs are ZERO. I do spend significant time (at least 12 hrs/week) following the markets so it is not for everyone. The current volatile climate is great for trading and if we were in a normal bull market I might not trade so frequently.
I love it. I am all about the index funds and now that there is one that follows the entire world is incredible. I may have to rethink my portfolio allocations to include a world wide fund.
For ppl who DON’T want to actively manage and want to use Index funds *AHEM*, I think VTWSX could be a great product.
I would like to learn more about how VTWSX:
1. Splits re different sectors and business sizes
2. Splits by country
3. Changes 1 or 2 above?
I suppose these are tied to the component indices that they base this new funds on, but they are still valid questions to ask of “passively” managed index I think.
WOW. This is cool. I will have to by some of this.
Chad, John: What type of trading system do you use? Swing trading? CANSLIM? I think that if a person doesn’t have the time and/or interest to swing trade, use CANSLIM, or something similar, they should just put their money in a diverisfied mix of index funds.
I don’t have a trading system, as I’m not a trader in the traditional sense. Usually when I buy I plan on holding for a fairly long time(depends on how well the comany does and if their prospects remain bright). However, I do make broad decisions about the economy, as I have found that I’m fairly good at spotting big trends (housing, internet bubble, etc.).
Time is necessary to do it.