Vanguard Healthcare Fund [Portfolio help]

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jackietreehorn
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Vanguard Healthcare Fund [Portfolio help]

Post by jackietreehorn » Fri Sep 05, 2014 8:16 am

Hello all,

Long-time lurker, thanks for all the advice.

His 401k:
Vanguard Target Retirement 2040

Her Roth IRA:
Vanguard 3-Fund Portfolio (80/20)

His Roth IRA:
Vanguard US Small Cap Value and Vanguard US REIT
(This account is split 50/50 and makes up for 6% of total portfolio)

My question is this, would it be reasonable to add Vanguard's Healthcare fund (VGHCX) to His Roth IRA for diversification reasons? Most of the info I've found on this site is years old and I haven't read many posts about this fund, recently. From my research, this fund seems to behave differently from my current portfolio and has performed consistently well.

Thank you

ieee488
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by ieee488 » Fri Sep 05, 2014 4:16 pm

I wouldn't.

I don't see how purchasing healthcare fund is "diversifation".
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sdsailing
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by sdsailing » Fri Sep 05, 2014 4:30 pm

It would not be for diversification. Obviously it has performed well in the past. If you realize that what you are doing is adding risk with the hope of increased gains, and want to do that, you could add it as a small percentage. But don't fool yourself as to the reason, i.e. It is not diversification.

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ruralavalon
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by ruralavalon » Fri Sep 05, 2014 4:38 pm

jackietreehorn wrote:My question is this, would it be reasonable to add Vanguard's Healthcare fund (VGHCX) to His Roth IRA for diversification reasons? Most of the info I've found on this site is years old and I haven't read many posts about this fund, recently. From my research, this fund seems to behave differently from my current portfolio and has performed consistently well.
Just my two cents.

That would not add diversification; health care is already covered in total stock market funds.

"Behave differently?" Actually Total Stock Market Index and Health Care have a correlation of: 84.

"Performed consistently well?" Yes it has done well in the past. Past performance is not a guarantee of future results.

Don't be trying to guess which market sector will outperform the market next.


Keep the allocation small, if you want to add this risk
Last edited by ruralavalon on Fri Sep 05, 2014 4:50 pm, edited 1 time in total.
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Carl53
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by Carl53 » Fri Sep 05, 2014 4:49 pm

Once upon a time, back in the 80s and early 90s, VG health fund was my retirement fund and it did very well. Now, I still hold some, less than 10% of my retirement holdings, mostly because I would hate to miss out on it doing well if it did well. This year it is doing pretty well again, but I'm not sure that I'd go that route for one just starting out. I would suggest that if you/he were converting TIRAs to Roth, you could convert equal amounts to this and other more or less conservative options (each to its own Roth account) with the intent to only keep the best (highest value) and recharacterize the rest. I used the health care fund as one of my choices to do this for this year. Thus far it is in second place, although had I made the conversion on January 1, it may have been in first place.

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Kevin M
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by Kevin M » Fri Sep 05, 2014 5:00 pm

You might find this post relevant: Bogleheads • View topic - Why is REIT only sector fund recommended in slice & dice?
I've linked to a reply in that thread that most directly relates to your question, but you might find reading the entire thread useful.

Some view REITs as a separate asset class, while others view it simply as a stock-market sector. I've never heard anyone suggest that healthcare is a separate asset class, but if viewed simply as a sector, then perhaps it would deserve as much consideration as a separate portfolio holding as REITs.

Some view small-cap value as a separate asset class or sub-asset class, while others simply view it as a small slice of the total stock market. Either way, note that healthcare has a lower correlation than small-cap value to US total stock market (at least over the period all can be viewed in PortfolioVisualizer). So if correlation of less than 1 to total US stock market is your only criterion, then healthcare could be considered a better diversifier than SCV.

There is academic research that supports small and value as proxies for distinct risk factors (distinct from "the stock market" risk factor, commonly referred to as "beta"). This is sometimes used as justification for "tilting" to small-cap value stocks. I've never seen similar research that justifies healthcare as a systematic risk factor.

Many "Boglehead authors" suggest considering tilting to small-cap value stocks and REITs. I don't believe any suggest considering tilting to healthcare.

Kevin
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Christine_NM
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by Christine_NM » Fri Sep 05, 2014 5:17 pm

You may not get much encouragement for a Roth of several specialty funds. The problem is, they tend to cancel each other out and with higher ERs the Roth will do no better in the long run than the 3 fund portfolio.

I'd pick one asset class/specialty (SV, REIT or Healthcare) and add to it until it's large enough to make a difference. I don't think it really matters which one. Some would say stop at SV.

I had only a few years to do a Roth, from 1998 to 2005. So I took a chance and bought 100% Healthcare. I was lucky. The rest of the portfolio is like yours, mostly total-fund approach. It is nice to have a fund with personality to keep things interesting. But not a whole bunch of little ones.
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dickenjb
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by dickenjb » Fri Sep 05, 2014 5:29 pm

No, it would not add diversification, it would overweight health care which you already own at market weight.

You have a great portfolio now.

Resist the urge to tinker with it.

dgdevil
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by dgdevil » Fri Sep 05, 2014 6:10 pm

I say: Yes.

And the cheaper VHT offers more diversification than VGHCX via more companies (311 vs. 89), although the ETF's top 10 is more top-heavy (45% v s 37%).

And, while it is only a few percentage points, it seems both the Vanguard Retirement 2040 fund and VTSMX are underweighted in healthcare (11-12%) vs. the S+P500 (14%) and Russell 2000 (13.4%).

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Re: Vanguard Healthcare Fund [Portfolio help]

Post by sschullo » Fri Sep 05, 2014 6:28 pm

Yea, I used to have another "great" sector, technology. Don't go to any sectors.
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jackietreehorn
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by jackietreehorn » Fri Sep 05, 2014 7:35 pm

Guys/Girls,

Thanks so much for the responses. I can tell by the replies that most of your intelligence is over my head.

As far as my comment on diversity, from the charts I've seen, it appeared that there have periods when the S&P dropped and healthcare stayed the same, and vice versa. I understand healthcare is not a different asset class, but a specialty sector. I was looking at it as more of an "extra paw for a cat to land on it's feet." Although I see the error in my judgement, I sort of viewed healthcare as a necessary sector. People keep dying, babies keep being born kind of thing.

Also, I'm familiar with the argument that SC and REITS are not "weighted proportionately" to what their value in the economy is. I was thinking maybe this is similar with healthcare.

Thanks again for all the help. Be good.

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sometimesinvestor
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by sometimesinvestor » Fri Sep 05, 2014 8:45 pm

I agree with the comments that you should not make a big bet on health care and agree thai a health care fund does not increase diversification. As noted it increases your risk . In this I am not different from other commenters. Where I differ is that I think its ok to invest in such a fund. Health care has outperformed for about 25 years because of macro trends such as ageing of the baby boomers. This trend will come to an end but it is not clear when. One possibility is to determine in what year the population over 65 peaks. If that is soon perhaps avoiding healthcare as a sector is best. If the year is lets say 2025 then it is reasonable to speculate for 6 or 7 years.I think I would limit this investment in a separate health care fund to 5-7%of the money you have in stocks and don't try to guess whether to go in or out of the sector .

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Toons
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Re: Vanguard Healthcare Fund [Portfolio help]

Post by Toons » Fri Sep 05, 2014 9:06 pm

From the Vanguard website
"Returns may vary widely from year to year, so this fund should be considered complementary to an already diversified portfolio with a long-term time horizon."

Taking that into account and you are ALREADY diversified,I wouldn't rule out purchasing the fund for a long term horizon,which for me would be 20 years or longer :happy
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