Month: January 2019

Evaluating Funds Part II: Nothing Middling About Mid Caps

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.


The last time we spoke about funds, we went over the options for index funds for the S&P 500. I then teased the possibility of more than just the bluest of blue chips and the largest of the large caps to help juice the total returns of your investment portfolio.

So here we go…

Think of the smaller companies out there that will eventually grow bigger and may become large caps over time. Who wouldn’t want to capture the (possibly) double digit growth year after year of such companies? And rather than hunt for these companies yourself spending dozens to hundreds of hours of research, there’s a far more efficient (both in time and cost—material and opportunity) way to steer some of this growth into your long term portfolio.

Welcome to mid cap index funds…

Believe it or not, there are funds that track the vast array of companies in the US that range from $2 billion to $10 billion in value. That sounds like a stratospherically high value for a company,so surely you would have heard of these companies. But, in reality, unless you follow the market closely, you would not have. Red Hat, Autodesk, Amphenol, ONEOK Inc, and Roper Technologies are some of the better known mid cap companies If you haven’t heard of these, there’s no chance you would have hears of the lesser known mid cap companies.

There is/was virtually an industry standard of mid cap index funds—-the highly regarded

Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) which is apparently so highly regarded that Vanguard closed the fund to new investors due to the massive influx of capital flowing into it (or crazy fat stacks of cash as the kids call it). Therefore, we must now focus on other mid cap index funds.

Here they are:

  1. Vanguard Mid Cap Index Fund Admiral Shares (VIMAX) Vanguard Mid CAp ETF (VO) traded at $182.91 as of the end of 1/22/19. The ten year return has been 13.87% annually on average. (This translates to $10,000 being invested in 2008 growing to $36,640.22 today.) There is a dividend (always greatly appreciated) of 1.8%.The expense ratio is a highly favorable 0.05% (meaning $5 per $10,000 invested). Of note, there is a $3,000 minimum initial investment after which any amount of  money can be invested in the fund.
  2. Vanguard Mid Cap ETF (VO) traded at $147.69 as of the end of 1/22/19. The ten year return has been 13.87% annually on average. (This translates to $10,000 being invested in 2008 growing to $36,639.71 today.) There is a dividend (always greatly appreciated) of 1.84%.The expense ratio is a highly favorable 0.05% (meaning $5 per $10,000 invested). Of note, there is no minimum initial investment for this fund.

And that’s about it…

Yes, there are other mid cap index funds.

No, I cannot recommend them.

The top few non-Vanguard mid cap index funds are (expense ratios in parentheses) are the Dreyfus Mid Cap Index Fund (0.50%), the Fidelity Spartan Mid Cap Index Fund Investor Class (0.22%), and the Columbia Mid Cap Index Fund Class A (.0.45%). Feel free to click the links and see the specifics of each of these funds.

But, realize this before you take the plunge into any of these funds, you’re paying 400%-1,000% more for the same product with the hopes of the same returns. Would you pay four times as much for the same house? Would you spend ten times as much for the same car?

If not, then why are spending so much more on your index fund? As stated before (and likely many more times in the future), equities are the only item where people often spend far more than they need to—often willingly and stubbornly refusing to change to something cheaper as if recognizing a mistake and correcting it is a sin rather than a virtue like we would be urged (and even celebrated for) to do at work.

Bizarre, but true…

When comparing the above returns to what the S&P 500 would have done by itself, keep in mind that the average total return for the S&P 500 dating from January 2008-December 2018 was 7.185%. (This improves dramatically to 12.603% if you started putting the money at the end of 2008 in December of that year after the financial crisis had hit fully and the market had already sunk significantly with more to come until it hit bottom in March 2009.)  

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

The Passing Of A Giant

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

I was ready to discuss the other thoughts I had on index funds and then I heard the news. As physicians, we know better than most that dying is past of life. We all know that death is unavoidable, inescapable, and despite what most Americans want—-an option that cannot be indefinitely deferred. We even expect it sooner than later in some of our patients—or even our family or friends.

None of that makes it easier.

It’s even odder when the death is someone we never met, but yet greatly affected our lives.

Enter John (Jack) Bogle.

If greatness is defined by changing something so dramatically that it’s impossible to envision what it would be like without said person’s contributions, then John Bogle would be immensely great.

John Bogle, like so many pioneers before him who were ridiculed, did two MASSIVELY important things that can never be redone now.

1.) He invented the index fund.

Yep.

Before him, it didn’t exist. Once he introduced it, he was savaged for it as “experts” were telling everyone how this would be no way to make “real money”.  The experts assured us (as they always do) they were right and nothing new was going to disrupt that paradigm. If the last few decades has taught us anything, it’s these two things—experts are often wrong particularly when predicting the future and those who disrupt an entire industries will build billion dollar industries.

2.) No one argued for low(er) fees and costs on funds for the average retail investor than John Bogle forcing low cost alternatives in the funds he offered thus forcing fund fees down across the industry and keeping them low(er) over the decades.

Of course, his investment house is now the largest mutual fund family in the entire planet with over five TRILLION US dollars under management.

Here is a fitting tribute to the investing legend:

“Mr. Bogle had legendary status in the American investment community, largely because of two towering achievements: He introduced the first index mutual fund for investors and, in the face of skeptics, stood behind the concept until it gained widespread acceptance; and he drove down costs across the mutual fund industry by ceaselessly campaigning in the interests of investors. Vanguard, the company he founded to embody his philosophy, is now one of the largest investment management firms in the world.”

So, here is to John (Jack) Bogle, founder of both Vanguard and the indispensably important index fund,  who died last week at age 89 for both making and saving literally BILLIONS of dollars for all of us average Joe and Jill investors like you and me.

Well done and thank you greatly, sir.

Dead at age 89, but whose spirit will live on forever.

RIP

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Evaluating Funds Part I: Indexing Index Funds

Evaluating FundsPart I: Indexing the Indexes

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Everyone who is everyone states you should be invested in index funds. (In fact, the great Warren Buffett said the average investor should have 90% of their savings in a S&P 500 index fund (hello, SPY!) and 10% in short term bonds.. They capture vast swaths of the stock market for a very low fee and require no work or ongoing monitoring/tracking on your part.

No fuss, no muss.

Hard to beat that.

I know you know what an index fund is since…ahem…we discussed it earlier (and, if you don’t know, you were either not following the blog at the time [you’re forgiven] or you’re just a jerk with a bum memory.)

But what exact index fund will you be piling your money into?

There are actually dozens as most every fund family has one or several.

Realize that the point of an index fund is that it is not actively managed (ie, a fund manager, analysts, etc.) and is designed to follow whatever index it is supposed to (ie, S& P 500, etc)—no better, no worse—all for a low fee.

And the last part is the one to focus on—the fee.

The sainted Jeremy Siegel researched which funds did best from 1926-2010 (this was looked at since 2010 and still held true) and found only one thing mattered in terms of best returns: the fee you’re paying in exchange of holding the fund. In short, the best returns are from the funds with the lowest fees. It’s truly that simple when comparing apples to apples (eg, index fund vs index fund, actively managed fund vs actively managed fund, etc).

So, ALWAYS, keep that in mind when shopping for funds.

(It makes sense right? When you shop, you don’t look at two exactly identical items and think “Yeah, i should definitely buy the more expensive one.” Only in the stock market do people often pay for the more expensive item…and it’s the exact same people who brag how great they are at finding a bargain.)

One more thing before we dive into which exact index fund we should buy into.  .

What index are you exactly hoping to track?

The S&P 500 or the entire stock market?

Though the S&P 500 comprises 90% of the capitalization of the entire stock market, there are thousands of other stocks that may be worth investing in that are not in the S&P 500.

So…index investing…a little more complicated than advertised, huh?

The difference in any given year between the S&P 500 and the total stock market could be significant, but in the long term (particularly 20 years or beyond which is likely everyone’s retirement horizon) there is no difference other than in down years where the total market could be more negative than the S&P 500.

Realize that being more negative in any down year leads to worse long term returns as time is wasted trying to gain back what you lost in subsequent years rather than make actual gains. Diversification is designed not to maximize gains, but rather minimize losses.

So, most of us will likely pick a low fee (lowest fee, ideally) S&P 500 index fund.

Which ones are those?

Here we go…

SPY: The SPDR S&P 500 ETF started  on 1/22/1993 at $45 =/share and is now trading at 258.98 as of close on 1/11/19. It has a dividend yield of 1.97% and an expense ratio of 0.09%.

VOO: The Vanguard S&P 500 ETF started on 9/9/2010. It opened at inception at $101.78 and is now trading at $237.84 (as of close on 1/11/19). The dividend yield is 1.99% and the expense ratio is 0.04%.

IVV: The iShares Core S&P 500 ETF started on 5/15/2000 at $142.78 and closed on 1/11/19 at $260.38.  The dividend yield is 2.21% and the expense ratio is 0.04%.

These are by far the three best known and largest S&P 500 index funds. The hold all of the 500 stocks in the S&P 500 and precisely track it.

Then there are three others worth noting from three of the biggest mutual fund companies that closely mimic the S&P 500, but do not necessarily exactly mirror the S&P 500 as they may not have all the stocks there within and may even actually have stock in them that are not in the S&P 500. (Ergo I am not a big fan. If I’m buying an index fund, then I want an index fund and one that actually tightly tracks what it is supposed to and does it on the cheap.)

SWPPX: The Schwab S&P 500 Index Fund began on 5/19/1997 debuting at $13.07 and closed at $39.70 on 1/11/19. The dividend yield is 2.21% with an expense ratio of 0.03%.

PREIX: The T. Rowe Price Equity Index 500 Fund began on 3/30/1990 debuting at $10 and closed at $69.23 on 1/11/19. The dividend yield is 1.93% with an expense ratio of 0.23%.

(Yikes! Isn’t this supposed to be an index fund—cheap, right? Wrong in this case.).

FXAIX: The Fidelity 500 Index Fund began on 5/4/2011 (the baby of the group) debuting at $47.50 and closed at $90.26 on 1/11/19. The dividend yield is 2.21% with an expense ratio of 0.03%.

There are numerous others that are even newer or smaller, but on any of them focus on two things:

  1. Is it truly an index fund or just mostly one with some other stocks thrown in for good measure?
  2. What is the expense ratio (fee) for this fund you’re looking at? All the returns should essentially be the same, so paying more for an index fund is stupid.

So there you have it…

These are the index funds in a nutshell.

Based on just the expense ratio of the “pure” index funds, the best options are VOO and IVV. If you own Vanguard funds of other kind, then go with VOO. IF you own iShares funds of other kinds, then go with IVV. Do this just for the sake of simplicity if nothing else. Plus there may be advantages with keeping it all in one fund family such as your own broker/concierge-like services once you reach a certain threshold of money with that fund family.

But, wait—is that it?

Just pile all your money in a S&P 500 index fund and move on with the rest of your life?

Maybe.

It could be that simple if you’d like and your risk tolerance is OK with it. You’re as diversified as anyone with owning tiny pieces of 500 companies, so that’s not an issue.

But, let me suggest something else for you as an index fund investor wanting to fuel great returns over the next 10, 20, or 30 years for you and your family…next time.   

Sarcastic Reader: This guy has really gotten good with the tease. Kudos, PWT guy.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Happy Happy Birthday!!

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Happy One Year Anniversary to Physician Wealth Thyself! I have no idea what the future will bring for this blog or me personally, but the last year has been fun and rewarding. It’s been great reviewing well known information, exciting to unearth new nuggets, and terrific to interact with others. I’d like to thank each and every one of you for giving me a small part of your week(s) and for your ongoing interests. Please let me know what I could be doing better.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…