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No. of Recommendations: 1
joebedford wrote:
I respectfully disagree. There is no "one size fits all" investing option. You do not know the original poster's age, or goals, or risk tolerance, or desire for "involvement" in their portfolio. To me, that means you do not know enough to make a valid recommendation. If you are invested solely in VTSMX then sure, say so and tell us why. But beware dispensing "investment panaceas". If the original poster was a 60-year-old, with a weak stomach, investing for retirement, then your advice would be horrible IMHO. :-)

galeno wrote:
I respectfully disagree with your disagreement. In this case, this "one size fits all" fits almost everybody that is invested in the stock market. VTSMX is 2/3'd S&P500 index fund and 1/3'd Russel 3000. The appropriate index is the Wilshire 5000 which has over 9000 stocks.

Over every 5 year rolling period, a VTSMX buy and hold investor will beat 80% of all managed money. Over every 10 year period, he'll beat 95% of all managed money. And over every 20 year rolling period, he'll beat 98% of all managed money. This "one size fits all" type of investment is pretty tough to beat.

The toughest decision of the VTSMX investor is how much cash to keep as a percentage of his portfolio. If the guy is a 60 year-old investor with a weak stomach, maybe he should keep more in cash than the 30 year-old investor who's shooting for an early retirement. The 30 year-old risk taker could use 20 to 30% margin and buy more VTSMX.

Personally, I'm not a VTSMX investor because I'm one of those RARE 2 out of 100 investors that actually has beaten VTSMX over the last 20 year period. My investment expenses are far less than the rockbottom 0.6% of assets that VTSMX would actually cost me. But as an extremely sophisticated long-time equity investor, I have no problem recommending VTSMX to any and all investors.


Galeno, I respectfully disagree with your disagreement with joe bedford. Joe's main point is that one size doesn't fit all, and that's absolutely correct.

Indeed, your assertion that a VTSMK investment almost always beats managed money, critically, is only true AFTER TAXES. Many managed funds beat the index on a PRE-TAX basis -- which is precisely what you get with 401(k)s and IRAs. I'm not saying at all that a total market index is inappropriate for the tax deferred accounts of many investors, but realize that you're losing the benefit of those accounts' tax deferral in the process, since the total market fund has such low turnover. Depending on your tax bracket, that may not at all be insignificant. And if you have substantial investments outside your tax deferred accounts, and choose not to have all of your investments in a total market index, then your tax deferred accounts are the absolute worst place to hold market index funds.

(P.S.: I keep my IRA in a REIT index fund, a high-yield bond fund, and two actively managed equity funds that have an extended record of beating the market on a pre-tax basis. My 401(k) is more concentrated in leveraged bond funds, active small cap funds and hedge/special situation funds that wouldn't be available to me (at such small levels) elsewhere. My taxable accounts are a diversified portfolio of equities and market index funds, and the total value of these accounts significantly exceeds that of my tax deferred accounts.)

I think your posting basically ignores the special tax treatment of tax deferred acccounts -- much as Tom Jacobs' article last week did. For a more extended reply, I copy here my earlier reply to Tom:

I wholeheartedly agree with Tom's central assertion that it's a bad idea to have conflicted plan providers offering advice to employees on 401(k) allocation decisions. Nevertheless, I think his article gives the impression that 401(k) plans are generally better served by being invested in index rather than actively managed funds. I do not generally agree.

Although Tom's contention that most actively managed funds do not usually beat the market index is correct, it is correct primarily for returns after transaction costs, which include both management fees AND -- often more crucially -- TAXES. In fact, many actively managed funds have long histories of beating the market indeces, even after management fees are subtracted, on a PRE-TAX BASIS.* But the central distinguishing principle for 401(k)s and IRAs is that you pay no taxes today on dividends or capital gains.

Thus, at least for taxpayers in higher tax brackets, 401(k)s and IRAs are the absolute worst place to hold index funds, because you lose a principal advantage of those funds, namely, that the lower turnover implicit in tracking an index gives a lower tax liability. (This assumes that these taxpayers hold index funds in their taxable accounts, probably a safe assumption for higher bracket taxpayers.)
Instead, 401(k)'s and IRAs are ideal for high yield bond funds, REIT funds, high-dividend stocks and certain actively managed equity funds. Indeed, you might argue that actively managed funds rationally exist primarily for the tax deferred accounts of higher bracket taxpayers, or for the taxable accounts of those taxpayers with low tax liability, much as tax exempt bonds exist primarily for the taxable accounts of higher bracket taxpayers.

I just think that it's important we not overbash actively managed funds in the context of tax deferred retirement accounts. Yes, it's very difficult for managers to beat the market on an after-tax basis; but lots of proven fund managers have beaten the market on a pre-tax basis, which makes actively managed funds a very attractive component of tax deferred accounts for investors without the time, inclination, or sophistication to choose individual securities.

*For example, Vanguard's Windsor Fund returned 14.4% over the 10 years through Dec. 2001, on a pre-tax basis, which beats the S&P's return of 12.94% over the same period; still, after all taxes (assuming the top marginal rates), its return was 10.77%, which loses to the S&P.
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