index ETFs or ("crowded") index fund questions?

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Topic Author
toughmarshmellow
Posts: 11
Joined: Wed Mar 13, 2019 12:56 pm

index ETFs or ("crowded") index fund questions?

Post by toughmarshmellow » Tue Jan 14, 2020 3:00 pm

I am looking to invest in 3+ fund portfolio (goal is to keep simple – only rebalancing needed), and eventually begin making quarterly retirement withdraws – probably at 2%. I know generally about the 3 Boglehead fund portfolio, but have some questions.
A) Given that people have crowded into Vanguard and other low-cost growth index funds over the years – is this the place to be for someone who is somewhat contrarian in viewpoint? I’m thinking that there are few places to go, but at least I should be looking at a “value” (rather than growth) index low-cost fund instead. Or, does it matter really?
B) Is it better to be in indexed ETFs rather than mutual funds? I understand that low-cost index type ETFs are more liquid than mutual funds and the fees are similar?
C) I’m thinking to buy into these investments with a portion each month over the next 6 months to 1 year rather than all at once. Does that make sense, or should I do it over say 5 years instead or all at once? Market is pretty high right now in my thinking…
D) I’m at retirement age, so a single target date fund doesn’t seem to make sense for me, but am I missing something of benefit here?
D) Any specific index fund ETFs and mutual funds for a simple portfolio for me to consider running in PortfolioAnalyzer would be appreciated. Or, better yet, if anyone has some model portfolio links I can analyze that would be awesome!
E) Finally, where do you keep the “emergency fund” invested – ST laddered CDs? Or just bank accounts at <1%? And is this usually around 1 year of expenses?
Thanks and all the best in 2020!!!

UpperNwGuy
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Re: index ETFs or ("crowded") index fund questions?

Post by UpperNwGuy » Tue Jan 14, 2020 3:14 pm

Don't be contrarian. You'll be more successful at investing if you follow the advice of this forum. Read the wikis.

joeschmo
Posts: 41
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Re: index ETFs or ("crowded") index fund questions?

Post by joeschmo » Thu Jan 16, 2020 5:10 pm

I'll test my understanding by writing some replies and seeing how people correct me. :-)
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
I am looking to invest in 3+ fund portfolio (goal is to keep simple – only rebalancing needed), and eventually begin making quarterly retirement withdraws – probably at 2%. I know generally about the 3 Boglehead fund portfolio, but have some questions.
A) Given that people have crowded into Vanguard and other low-cost growth index funds over the years – is this the place to be for someone who is somewhat contrarian in viewpoint? I’m thinking that there are few places to go, but at least I should be looking at a “value” (rather than growth) index low-cost fund instead. Or, does it matter really? The pure indexer's view is that if there were a benefit to being contrarian in any way, it would already be priced into the market, so it doesn't help to try to be different. You could always allocate a small piece as play money for non-indexed betting.
B) Is it better to be in indexed ETFs rather than mutual funds? I understand that low-cost index type ETFs are more liquid than mutual funds and the fees are similar? My understanding is that ETFs are better in taxable accounts, except for Vanguard, where their funds do tax tricks to get the same benefit without an ETF.
C) I’m thinking to buy into these investments with a portion each month over the next 6 months to 1 year rather than all at once. Does that make sense, or should I do it over say 5 years instead or all at once? Market is pretty high right now in my thinking… I'm facing the same concern as I rebalance toward international and also eliminate some higher-cost investments that an advisor had me in. Vanguard research (https://personal.vanguard.com/pdf/ISGDCA.pdf) suggests it's better to go all in immediately, but if that thought paralyzes you, better to go gradual than not at all.
D) I’m at retirement age, so a single target date fund doesn’t seem to make sense for me, but am I missing something of benefit here? TDFs aren't so tax efficient on the bond side but there are TDFs that are for already-retired people.
D) Any specific index fund ETFs and mutual funds for a simple portfolio for me to consider running in PortfolioAnalyzer would be appreciated. Or, better yet, if anyone has some model portfolio links I can analyze that would be awesome! The wiki has good resources for this.
E) Finally, where do you keep the “emergency fund” invested – ST laddered CDs? Or just bank accounts at <1%? And is this usually around 1 year of expenses? Personally I am still (irrationally?) distrustful of markets, so I keep a lot more in cash, but rationally I should have just a few months of expenses. Ally offers > 1% savings; I don't think it's worth spending a lot of energy chasing CDs and locking up money. Better to tilt more toward stocks if concerned about returns, I think.
Thanks and all the best in 2020!!!

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nisiprius
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Re: index ETFs or ("crowded") index fund questions?

Post by nisiprius » Thu Jan 16, 2020 5:23 pm

Crowding into an index fund is like diluting water. It makes no sense to talk about it. Adding water to water does nothing. You can dilute an acid, you can dilute an alkali, but you can't dilute water. Total market indexing is the only strategy that cannot be crowded, because when you buy an index fund, it does not change the balance of stocks that is available to other investors. Only 2% of the stock market is small value, so if 10% of the market want to hold 20% small value, they will use it all up and drive up the prices. But buying an total market index fund does not change the relative abundance of available stocks.

There could be a concern that Vanguard has gotten too big too quickly and hasn't been able to keep with its own growth. I haven't seen this personally, but if it is a concern, then, shrug, the answer is obvious. Open your account with some firm other than Vanguard. And if you are worried about their ability to manage humongous funds and ETFs, then use index funds and ETFs from some other company: Fidelity, Schwab, iShares, whatever. (For the record I am currently 100% invested in Vanguard index funds and I hold them at Vanguard, but that's not any strong conviction on my part; it's like Coke versus Pepsi or McDonalds versus Burger King. I would jump ship from Vanguard the first day they really tick me off, but so far they haven't and I haven't.)
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
toughmarshmellow
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Joined: Wed Mar 13, 2019 12:56 pm

Re: index ETFs or ("crowded") index fund questions?

Post by toughmarshmellow » Fri Jan 17, 2020 6:48 pm

Thank you for the comments! Always appreciated.

petulant
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Re: index ETFs or ("crowded") index fund questions?

Post by petulant » Fri Jan 17, 2020 7:01 pm

nisiprius wrote:
Thu Jan 16, 2020 5:23 pm
Crowding into an index fund is like diluting water. It makes no sense to talk about it. Adding water to water does nothing. You can dilute an acid, you can dilute an alkali, but you can't dilute water. Total market indexing is the only strategy that cannot be crowded, because when you buy an index fund, it does not change the balance of stocks that is available to other investors. Only 2% of the stock market is small value, so if 10% of the market want to hold 20% small value, they will use it all up and drive up the prices. But buying an total market index fund does not change the relative abundance of available stocks.

There could be a concern that Vanguard has gotten too big too quickly and hasn't been able to keep with its own growth. I haven't seen this personally, but if it is a concern, then, shrug, the answer is obvious. Open your account with some firm other than Vanguard. And if you are worried about their ability to manage humongous funds and ETFs, then use index funds and ETFs from some other company: Fidelity, Schwab, iShares, whatever. (For the record I am currently 100% invested in Vanguard index funds and I hold them at Vanguard, but that's not any strong conviction on my part; it's like Coke versus Pepsi or McDonalds versus Burger King. I would jump ship from Vanguard the first day they really tick me off, but so far they haven't and I haven't.)
The issue is, we all know Pepsi is terrible and Coke is much better, especially when you think about the "Diet" versions. So what are you really saying about Schwab?

Anyway, I agree--generic index funds are the good bet for an investor like OP.

GAAP
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Re: index ETFs or ("crowded") index fund questions?

Post by GAAP » Sat Jan 18, 2020 12:48 pm

toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
I am looking to invest in 3+ fund portfolio (goal is to keep simple – only rebalancing needed), and eventually begin making quarterly retirement withdraws – probably at 2%. I know generally about the 3 Boglehead fund portfolio, but have some questions.
A) Given that people have crowded into Vanguard and other low-cost growth index funds over the years – is this the place to be for someone who is somewhat contrarian in viewpoint? I’m thinking that there are few places to go, but at least I should be looking at a “value” (rather than growth) index low-cost fund instead. Or, does it matter really?
Do you know what Asset Allocation you want? I get the impression that you're not certain.
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
B) Is it better to be in indexed ETFs rather than mutual funds? I understand that low-cost index type ETFs are more liquid than mutual funds and the fees are similar?
Define "better". If you want to move overseas, you will want ETFs that can be owned overseas. "More liquid" probably really means that ETF's trade immediately, instead of at the end of the day. If you want to rebalance immediately and manually, you will want ETFs. If you're willing to let it happen at the end of the day automatically, then you want mutual funds. The only truly valid comparison of an ETF vs a Mutual Fund for lquidity and cost with identical holdings would be Vanguard -- where those are just different share classes of the same fund. Everything else would implicitly include assumptions about how similar the funds are.
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
C) I’m thinking to buy into these investments with a portion each month over the next 6 months to 1 year rather than all at once. Does that make sense, or should I do it over say 5 years instead or all at once? Market is pretty high right now in my thinking…
Where is the money coming from? Is it all in taxable space, or tax-advantaged space? The market is high now (and may or may not go down) -- so anything you sell to do this will give you more cash to do it with. If you sell now and wait, the market may do even better and you lose out. Basically, if it makes sense to do it, just do it.
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
D) I’m at retirement age, so a single target date fund doesn’t seem to make sense for me, but am I missing something of benefit here?
Simplicity -- for you and your heirs. viewtopic.php?f=10&t=287967
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
D) Any specific index fund ETFs and mutual funds for a simple portfolio for me to consider running in PortfolioAnalyzer would be appreciated. Or, better yet, if anyone has some model portfolio links I can analyze that would be awesome!
Back to the AA question... PV has a fair number of model portfolios by asset class. Analysis with specific funds is limited to the lifetime of the newest fund.
toughmarshmellow wrote:
Tue Jan 14, 2020 3:00 pm
E) Finally, where do you keep the “emergency fund” invested – ST laddered CDs? Or just bank accounts at <1%? And is this usually around 1 year of expenses?
I don't -- my definition of "emergency" includes only things I shouldn't expect. Many/most of the things that people call "an emergency" should be expected. Medical expenses (copays, coinsurance, out-of-pocket) should be expected. Vehicle depreciation and associated repair/replacement should be expected. Job loss generally qualifies -- depending on the situation. I'm retired, so it doesn't apply to me.

I do reserve a portion of my portfolio for those large items -- essentially taking it out of play for withdrawal decisions.

I manage cash flow to generally be a month ahead of expected needs in the checking account. I use money market for what little cash/cash-equivalent remains, staying fully invested as long as possible. I don't believe in "buckets" that effectively become glidepath AAs over time.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

Topic Author
toughmarshmellow
Posts: 11
Joined: Wed Mar 13, 2019 12:56 pm

Re: index ETFs or ("crowded") index fund questions?

Post by toughmarshmellow » Wed Jan 22, 2020 9:03 pm

GAAP, Appreciate the response. My expected current "retirement" allocation will be 25% VTI (US total mkt growth&value) 20% VMCIX (375 stock mid cap) 25%VAIPX (infl protection) and 30% BND (55 equity 45 bonds). However, I'm re-reading the 3 Fund Primer today and may tilt back to it for initial simplicity - although I do like my 4 fund approach. Being single, I should be able to absorb more risk so, although not overly aggressive, I am including mid caps to increase risk/reward and the equity allocation to 45 v 40%. As well, given my reading and the responses, it seems best to go "all-in" now rather than doing over time into this allocation. I know it is impossible to time the markets.
In terms of taxable vs non-taxable, I have several accounts with different brokers presently. My initial plan is simple to sell everything and simplify into the above allocation and funds (I will later consolidate accts, but it's important to me to take a 1st step now). I will use the non-taxable accounts for BND and VAIPX to the extent that I can. It's likely I will be a little short in those accounts, and will resolve that initially with a couple of muni funds I already own in taxable accounts. VTI and VMCIX (if use this as may use VTIAX (int'l) re: 3 fund portfolio) will be in taxable accounts. My EFs will be held in laddered CDs, but given their abysmal %s right now, I am considering your comment as I'm costing myself a lot of potential interest earnings.

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