How much PrimeCap vs Total Stk Mkt

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Hogan773
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How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

Have gotten great help here on a few other of my questions. Now I am looking at my Mom's IRA at Vanguard. She's mid 70s and single. Right now we are about 65 stocks/35 bonds. I help her with the management of her funds.

The "centerpiece" of her portfolio is VTSAX - Total Stk Mkt Admiral - which is about 40% of overall portfolio. We also have holdings in the Total International, very small in Emerging Mkts, and small in Small Cap Index and Mid Cap Index as I prefer a slight tilt toward mid/small caps.

My question is, PrimeCap. A few years back I somehow decided that PrimeCap was a good thing, and have been buying in yearly in my own account in the PrimeCap Fund. As my Mom is Flagship (just) we are able to buy these funds in her account too, so I bought the max $25K in both PrimeCap and PrimeCap Core, and then also another $25k in Capital Opportunity.

So the questions-

1) People still believe PrimeCap is worth having even though active managed and 45bp-ish ERs?

2) How much is too much of PrimeCap? Meaning, we could keep exchanging $75K per year ($25K each fund) out of Total Stock Mkt and into these PrimeCaps. But while the "closed fund" allure and the ability to get something that others aren't allowed to access (the "VIP effect") might make it seem like this is a good thing to do, my gut is telling me that just because we can, maybe we shouldn't. Said another way, would I really want her portfolio to end up as 65% PrimeCap funds and 35% bonds (with no Total Stock Market Index at all)? Gut feels like I am riding too hard on the talents of PrimeCap?

3) I bought all 3 when we were setting this up last year just to "max out" her ability to buy since it limits to 25K. Depending on the answer to #2, is it worth keeping all 3 funds or should I just whittle down to 1 or 2? i.e. if we would say that $100K in total is maximum to have in PrimeCap's "hands", then I could see whittling down to just 1 or 2 of those funds vs 3, and making sure we are Admiral in the keeper funds too.

Thanks
livesoft
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Re: How much PrimeCap vs Total Stk Mkt

Post by livesoft »

It seems to me that you are biased for PRIMECAP and want to get some confirmation of your feelings.

Instead of PRIMECAP, why not tilt MORE to small-cap value or to international?

I sold all my PRIMECAP years ago.
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

livesoft wrote:It seems to me that you are biased for PRIMECAP and want to get some confirmation of your feelings.

Instead of PRIMECAP, why not tilt MORE to small-cap value or to international?

I sold all my PRIMECAP years ago.
Actually no, not at all. In my personal portfolio I decided to pick up a little PrimeCap because it appeared their performance was quite good over time. My questions are as outlined.....should we stay in PrimeCap at all, and if so, is PrimeCap "better" than an index fund, and if so, is there an upper limit to how much of that "better" you'd still want to hold.

Obviously lots of people like PrimeCap as there is a reason why it's closed.....and I've seen lots of posters saying "can you sell some to me????" as they'd like to get in.....
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Re: How much PrimeCap vs Total Stk Mkt

Post by Grt2bOutdoors »

No more than 5%, if that, in any one actively managed or individual wager. You are betting, however good the track record of Primecap Management Co. of Pasadena, will continue into the long-term. It very well may, but you never know and you certainly don't want to bet your assets total return on a horse that is banking on a limited stable of 20-40 equities to pull you through, do you?

Edit: It's a concentrated portfolio of large cap growth equities. Is it better than an index fund? There will be times it may outperform the total stock market index, right now, i don't believe they are even close to matching the year to date return, but we still have 4 months to go, so who knows?
Last edited by Grt2bOutdoors on Thu Aug 25, 2016 2:39 pm, edited 1 time in total.
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Toons
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Re: How much PrimeCap vs Total Stk Mkt

Post by Toons »

"my gut is telling me that just because we can, maybe we shouldn't. Said another way, would I really want her portfolio to end up as 65% PrimeCap funds and 35% bonds (with no Total Stock Market Index at all)? Gut feels like I am riding too hard on the talents of PrimeCap?"

Trust your "gut"
Move on
Keep It Simple.
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Jags4186
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Re: How much PrimeCap vs Total Stk Mkt

Post by Jags4186 »

With low cost index funds you're guarranteed to outperfrom most funds in an asset class. With PrimeCap you're not.

I'd take the index fund.

P.S.

5% of my portfolio is in PrimeCap :sharebeer
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Taylor Larimore
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Re: How much PrimeCap vs Total Stk Mkt

Post by Taylor Larimore »

Hogan773:

If you can sell Primecap without paying a capital-gain tax, I would exchange it for more Total Stock Market Index Fund (Mr. Bogle's favorite fund).

TSM is much more diversified for greater safety, she will eliminate manager risk, stock overlap, and her portfolio will be easier to manage and maintain for her caregivers and heirs.

Past performance does not forecast future performance.

Best wishes.
Taylor
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sport
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Re: How much PrimeCap vs Total Stk Mkt

Post by sport »

I would not mind using Primecap for the large cap growth portion of my holdings. However, I would only hold it in an IRA, and I would still hold other funds for Value, Mid-cap, and Small-cap. I have held Primecap for a long time and have been most pleased with its performance.
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Re: How much PrimeCap vs Total Stk Mkt

Post by sport »

Taylor Larimore wrote:Hogan773:

If you can sell Primecap without paying a capital-gain tax, I would exchange it for more Total Stock Market Index Fund (Mr. Bogle's favorite fund).

TSM is much more diversified for greater safety, she will eliminate manager risk, stock overlap, and her portfolio will be easier to manage and maintain for her caregivers and heirs.

Past performance does not forecast future performance.

Best wishes.
Taylor
Taylor,
Everything you posted is certainly true. However...

TSM Admiral 5 yr 12.96%
Primecap Admiral 5 yr 14.62%
TSM Admiral 10 yr 7.97%
Primecap Admiral 10yr 9.84

While this outperformance is certainly no guaranteed, it certainly shows some very good results. I am very happy to have owned Primecap and I would recommend holding some of it (not too much) in a tax preferred account.
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

sport wrote:
Taylor Larimore wrote:Hogan773:

If you can sell Primecap without paying a capital-gain tax, I would exchange it for more Total Stock Market Index Fund (Mr. Bogle's favorite fund).

TSM is much more diversified for greater safety, she will eliminate manager risk, stock overlap, and her portfolio will be easier to manage and maintain for her caregivers and heirs.

Past performance does not forecast future performance.

Best wishes.
Taylor
Taylor,
Everything you posted is certainly true. However...

TSM Admiral 5 yr 12.96%
Primecap Admiral 5 yr 14.62%
TSM Admiral 10 yr 7.97%
Primecap Admiral 10yr 9.84

While this outperformance is certainly no guaranteed, it certainly shows some very good results. I am very happy to have owned Primecap and I would recommend holding some of it (not too much) in a tax preferred account.
Maybe this is why I decided a few years back to buy some PrimeCap!

I'm assuming this outperformance is because PrimeCap is focused on Large Growth, which has beaten other sectors in recent times.
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BL
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Re: How much PrimeCap vs Total Stk Mkt

Post by BL »

Do what you will on your account, but please don't push for this for your mother. I suggest simplifying rather than complicating. You are already tilting so that should be more than enough. Three funds is more simple.

The fund may or may not continue to out-yield TSM. She is pretty aggressive already, at least in this account. Is she aware that she can make non-taxable charity donations (QCDs) with some/all of her RMDs, if she has an interest in that?
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

Taylor Larimore wrote:Hogan773:

If you can sell Primecap without paying a capital-gain tax, I would exchange it for more Total Stock Market Index Fund (Mr. Bogle's favorite fund).

TSM is much more diversified for greater safety, she will eliminate manager risk, stock overlap, and her portfolio will be easier to manage and maintain for her caregivers and heirs.

Past performance does not forecast future performance.

Best wishes.
Taylor
It is IRA so we can sell without tax issues

I take the points and appreciate the replies. I agree that putting too much of her portfolio into an actively managed fund with around 130 stocks isn't wise (hence my gut) but it's helpful to get the views of the good people on this board. Part of my question was to see how Bogleheads thought of PrimeCap and whether it was a revered fund that people would grab if they are allowed to, or shunned because it is actively managed, or somewhere in between.

I think I will consolidate into a single fund, either PrimeCap or Capital Oppty, where we can have around 50K in an Admiral so ER is in the 30s. This would be about 5% of her overall portfolio and probably plenty for that strategy. Will put the remainder back into Total SM, and maybe the Mid and Small Index for my "tilt"
Dandy
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Re: How much PrimeCap vs Total Stk Mkt

Post by Dandy »

PrimeCap was a great fund will it continue to be?

My general advice is that once a fund is closed It is better to move on than find a way to buy more. It is difficult for a fund company to close a hot performer and Vanguard seems to do it before the fund tanks. But, the message from those running the fund is that the assets are getting to be too large for them to be invested "properly". Usually that means the risk of overconcentration or selecting stocks that they wouldn't normally invest in. Not saying that is the exact case for PrimeCap but who really knows.

So, I'd say farewell to PrimeCap and go for large and mid cap index funds.
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goingup
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Re: How much PrimeCap vs Total Stk Mkt

Post by goingup »

BL wrote:Do what you will on your account, but please don't push for this for your mother. I suggest simplifying rather than complicating. You are already tilting so that should be more than enough. Three funds is more simple.
I agree with BL here. Dabbling with Mom's portfolio, and flitting in and out of funds will not enhance returns. It's also not great stewardship.
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

goingup wrote:
BL wrote:Do what you will on your account, but please don't push for this for your mother. I suggest simplifying rather than complicating. You are already tilting so that should be more than enough. Three funds is more simple.
I agree with BL here. Dabbling with Mom's portfolio, and flitting in and out of funds will not enhance returns. It's also not great stewardship.
Not "flitting"

Want to talk about stewardship? When I got involved they were with a money manager from Wells, charging 1.25% for the privilege of putting them in a bunch of doggy funds with ERs of 1 to 2 PERCENT. When my Dad passed I very quickly met with the Wells advisor and told them the gig is up....and moved all the money over to Vanguard.

So right there, I've added way more value than any discussion about PrimeCap

When the money came over, I allocated it out to some things that I was familiar with from my own portfolio. PrimeCap was in there.

Now as I have been doing some pruning/simplifying in my own portfolio, I am looking back to hers and re-thinking a few of those assumptions with the good help of others on this board.

I appreciate the advice

So it seems the consensus may be that even keeping 5% of the portfolio in a PrimeCap Admiral fund is really unnecessary.
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

BL wrote:Do what you will on your account, but please don't push for this for your mother. I suggest simplifying rather than complicating. You are already tilting so that should be more than enough. Three funds is more simple.

The fund may or may not continue to out-yield TSM. She is pretty aggressive already, at least in this account. Is she aware that she can make non-taxable charity donations (QCDs) with some/all of her RMDs, if she has an interest in that?

To your comment about QCDs, I will look into that although the reality is that she has been using a fair portion of her RMDs for spending so it may be a moot point. Her current burn is a little higher than what she's getting in Soc Sec and the IRA is her only account (she doesn't have a giant taxable account that she's working down etc)
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Vanguard Target Retirement Income Fund

Post by Taylor Larimore »

The IRA is her only account.
Hogan773:

In my opinion, your mother's solution is obvious: Exchange her IRA funds to a single Vanguard Target Retirement Income Fund (VTINX) designed by Vanguard Experts for retirees like your mother.

Benefits:

* The primary benefit is that your mother will have a portfolio designed by Vanguard experts who know more than we do.

* You will no longer be (and feel) responsible. Otherwise, you will be blamed during periods of underperformance and be tempted to "tinker."

* Vanguard Target Funds are one of only two top-ranked GOLD target funds by Morningstar.

* Simple for your mother to understand and maintain.

* Withdrawals will not unbalance the portfolio. Rebalancing is automatic.

* Simple for caregivers and heirs to understand and maintain.

* Occam's razor: "Entities should not be multiplied unnecessarily."

* Simplicity. Read the link below.
Warren Buffett: "There seems to be some perverse human characteristic that likes to make easy things difficult."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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BL
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Re: How much PrimeCap vs Total Stk Mkt

Post by BL »

Hogan773 wrote:
BL wrote:Do what you will on your account, but please don't push for this for your mother. I suggest simplifying rather than complicating. You are already tilting so that should be more than enough. Three funds is more simple.

The fund may or may not continue to out-yield TSM. She is pretty aggressive already, at least in this account. Is she aware that she can make non-taxable charity donations (QCDs) with some/all of her RMDs, if she has an interest in that?

To your comment about QCDs, I will look into that although the reality is that she has been using a fair portion of her RMDs for spending so it may be a moot point. Her current burn is a little higher than what she's getting in Soc Sec and the IRA is her only account (she doesn't have a giant taxable account that she's working down etc)
That is fine, but if she does give to a church or qualified charity, it might help to use this for that amount. If she itemizes her taxes, it doesn't give any advantage unless she needs to keep the AGI number down.

I think you are doing a great thing here in helping her. Since she has no taxable, you could even suggest a single balanced fund such as Life Strategy Moderate (60/40) or Conservative (40/60), Balanced fund 60/40) (0.08 ER for VBIAX), or Target Date fund (decreases down to 30/70).

If I didn't know much about investing, I would be quite happy to have a single self-balancing fund and avoid a lot of decisions. (I actually do have a single fund in my small IRA and like that I don't have to think about it.)

Deciding what percent of fixed income is probably the biggest decision. She no longer has the ability to generate income like you do, so she can't afford to risk as much, and when she is old (not yet, please) it will be good that it is simple. Also if you were unable to look after it for some reason, it would be good to have it simple. And speaking for myself, the independence it gives would be worth the small cost of the slightly higher ER.

Edit: I see Taylor said it much better than I did!
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Kenkat
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Re: How much PrimeCap vs Total Stk Mkt

Post by Kenkat »

This is really a decision you will ultimately have to make for yourself. Primecap is a good, low cost and low turnover active fund. Low cost and low turnover is what makes for good performance, whether it is an index fund or an active fund. So, in that respect, Primecap is only slightly behind the indexes in terms of overall cost.

Primecap's performance has been excellent. I have held it since 1998 and am very glad that I did. Through that time, the consensus advice to others on the board and the predecessor Morningstar board was to sell it and go 100% index. In retrospect, that advice, if followed, led to lower performance. I would gauge that the current consensus is also to sell Primecap, so that hasn't really changed over the years.

That said, there is no guarantee that this will continue. Its low costs certainly help it quite a bit, but you never know and no one else does either. With an index, you know exactly what you are getting and what you are getting is really very good. So this is ultimately your judgement call.
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Hogan773
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Re: How much PrimeCap vs Total Stk Mkt

Post by Hogan773 »

kenschmidt wrote:This is really a decision you will ultimately have to make for yourself. Primecap is a good, low cost and low turnover active fund. Low cost and low turnover is what makes for good performance, whether it is an index fund or an active fund. So, in that respect, Primecap is only slightly behind the indexes in terms of overall cost.

Primecap's performance has been excellent. I have held it since 1998 and am very glad that I did. Through that time, the consensus advice to others on the board and the predecessor Morningstar board was to sell it and go 100% index. In retrospect, that advice, if followed, led to lower performance. I would gauge that the current consensus is also to sell Primecap, so that hasn't really changed over the years.

That said, there is no guarantee that this will continue. Its low costs certainly help it quite a bit, but you never know and no one else does either. With an index, you know exactly what you are getting and what you are getting is really very good. So this is ultimately your judgement call.
Well said, thanks Kenschmidt.

To Taylor and BL - thanks as well. I'm not sure we'll go the route of Target only, as I'm not convinced that even an aging person really needs to get down to 30/70 stocks v. bonds. And certainly she shouldn't be there today, yet the Target Retirement Income that you cite is 30/70. But in general I think it depends on the portfolio size. If one's portfolio is $200,000 then yes I can see that a major market decline could set you up for real problems if and when you needed some major medical spending, etc. But if you had $10,000,000, then it seems a bit extreme to move to $7,000,000 in bonds just because you're old. Certainly if you had $6.5mm in stocks and 3.5mm in bonds, and the stocks portion fell by 40% in one year, you could live a heck of a long time on 3.5mm in bonds without touching a penny of the stocks side! My mom is not nearly at that higher amount and I am just using it to make a point! (All that said, I do see the benefit of a fund that self-balances such as the ones that BL cited)

I'm not worried about being criticized or second guessed. We don't have that kind of relationship. I'm not "bossing" her into things that she doesn't want to do. She actually understands the logic of things when I explain it. The move to Vanguard and away from Wells was such a huge positive that I've earned some credibility points :) Really kick myself that I didn't push a little harder about 20 years ago and steer my Dad into the LIGHT and away from the DARK SIDE but he was somewhat of a sucker for trusting people yet he didn't have the greatest BS detector, and they found this "good guy" who was a financial advisor and he trusted him and the rest is history. I'm sure the guy was indeed nice, and "good" and everything else, but the whole Financial Advisor system is just so rife with conflicts of interest that it's very hard to do right by your clients in that model.

EDIT: Taylor - I took a few more mins to look at that Target Retirement fund. Seems a bit odd to me. I realize the "set it and forget it" approach that would be helpful to many, but some of the components are questionable. 16% is in the International Bonds fund!?!? I thought the jury was still out as to whether one ever needs foreign bonds for the bond component of a portfolio? (maybe when bonds are 70% of your portfolio then there is merit in it....I'm not planning in having such a high percent of bonds in my portfolio, hopefully ever :sharebeer
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Taylor Larimore
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Total International Bond Index Fund ?

Post by Taylor Larimore »

EDIT: Taylor - I took a few more mins to look at that Target Retirement fund. Seems a bit odd to me. I realize the "set it and forget it" approach that would be helpful to many, but some of the components are questionable. 16% is in the International Bonds fund!?!? I thought the jury was still out as to whether one ever needs foreign bonds for the bond component of a portfolio?
Hogan773:

I appreciate your "Edit."

Are you aware that Vanguard's Total International Bond Index Fund (VTABX) has outperformed Total Bond Market Index Fund (VBTLX) since the foreign bond fund's inception?

So far, Vanguard's Target Fund experts have been right.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Hogan773
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Re: Total International Bond Index Fund ?

Post by Hogan773 »

Taylor Larimore wrote:
EDIT: Taylor - I took a few more mins to look at that Target Retirement fund. Seems a bit odd to me. I realize the "set it and forget it" approach that would be helpful to many, but some of the components are questionable. 16% is in the International Bonds fund!?!? I thought the jury was still out as to whether one ever needs foreign bonds for the bond component of a portfolio?
Hogan773:

I appreciate your "Edit."

Are you aware that Vanguard's Total International Bond Index Fund (VTABX) has outperformed Total Bond Market Index Fund (VBTLX) since the foreign bond fund's inception?

So far, Vanguard's Target Fund experts have been right.

Best wishes.
Taylor
Fair enough. I remember reading some "white papers" from Vanguard BEFORE they established their international bond fund a few years back, where they questioned the real need for investing internationally in the bond portion of one's portfolio. Probably made sense for them to say that at that time, when other competitors had international bond offerings and Vanguard did not. Now I guess their position has changed. Even our beloved Vanguard isn't above talking its own book I suppose :happy

Not surprising that the international bond fund would have been a bit better when a number of foreign countries have been pushed to ZIRP or even NIRP negative interest rates. Also it appears that the international fund has 8+ years duration while the US Total Bond Index is 5.

International bond hasn't been on my radar but I'll do some more research. However my gut is that if we are in a bond bubble here, then arguably the bubbles are even larger in those countries where you have people buying Bunds at negative rates etc. Doesn't feel like the best time to get involved but that's just my gut. Thanks
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Taylor Larimore
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Adding International Bonds to The Three-Fund Portfolio?

Post by Taylor Larimore »

Hogan773:

When I am undecided about adding more funds, I remember Occam's Razor.
"When there is a choice between similar solutions--choose the simplest." **
I have considered adding Vanguard's International Bond Index Fund to The Three-Fund Portfolio. I decided not to for these reasons:

viewtopic.php?f=10&t=88005&start=500#p1837043

There is more than one road to Dublin.

** Read the "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: How much PrimeCap vs Total Stk Mkt

Post by Dead Man Walking »

I generally agree with Taylor on most of his posts; however, I don't place any more confidence in the experts at Vanguard than I do in active management. I own a few actively managed Vanguard funds. I monitor their performance as it compares to the appropriate index funds. When they underperfom over time, I consider trading for the appropriate index funds. The ytd return may lag an index fund; however, I always consider the 3, 5, 10, and 15 year returns before I sell. I track returns for those time periods at Morningstar. This is not rocket science. Investors who don't track their investments are probably better off in one of Vanguard's Target or Strategy Funds. I don't agree with Vanguard's choice of indices or their allocation to those indices in those funds. I'm a size and value tilter. My plan may be flawed.

DMW
larmewar
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Re: How much PrimeCap vs Total Stk Mkt

Post by larmewar »

I really like Wellington, so my Primecap + Cap Opportunity (placeholder) + Od Aggressive Growth is balanced by the equity part of Wellington and some Div Growth. Primecap + TSM is a tilt towards large growth and overweight in Tech and Healthcare. I haven't looked at Primecap Core, but Primecap and Cap Opportunity usually have a lot of overlap.

Lar
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Re: Total International Bond Index Fund ?

Post by naha66 »

Taylor Larimore wrote:
EDIT: Taylor - I took a few more mins to look at that Target Retirement fund. Seems a bit odd to me. I realize the "set it and forget it" approach that would be helpful to many, but some of the components are questionable. 16% is in the International Bonds fund!?!? I thought the jury was still out as to whether one ever needs foreign bonds for the bond component of a portfolio?
Hogan773:

I appreciate your "Edit."

Are you aware that Vanguard's Total International Bond Index Fund (VTABX) has outperformed Total Bond Market Index Fund (VBTLX) since the foreign bond fund's inception?

So far, Vanguard's Target Fund experts have been right.

Best wishes.
Taylor

The Total International Bond Index Fund (VTABX) has only been around since May 2013.
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