Total Stock and Total Bond Market(s) at Vanguard

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yousha
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Total Stock and Total Bond Market(s) at Vanguard

Post by yousha » Thu Aug 09, 2018 8:28 am

My question is this: I am aware that the Total Stock Market and Total Bond Market at Vanguard covers most all equities and bond companies. My question is this: Would it be justifiable, if one wants, to purchase additional funds in both markets to supplement the total stock and bond markets, such as mid cap and small cap funds or GNMA and short term investment grade funds in the total bond funds OR it is inappropriate duplication to do so.

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KlingKlang
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by KlingKlang » Thu Aug 09, 2018 8:38 am

Total Stock Market and Total Bond Market at Vanguard do not cover all equities and bond holdings but they do cover a large, representative sample of them. Some investments, such as US Treasury Inflation Protected Securities, are absent. There are various views on whether overweighting in certain categories such as value and small cap value stocks is beneficial. Small overweights should probably be described as experimental rather than inappropriate.

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Taylor Larimore
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Taylor Larimore » Thu Aug 09, 2018 8:51 am

yousha wrote:
Thu Aug 09, 2018 8:28 am
My question is this: I am aware that the Total Stock Market and Total Bond Market at Vanguard covers most all equities and bond companies. My question is this: Would it be justifiable, if one wants, to purchase additional funds in both markets to supplement the total stock and bond markets, such as mid cap and small cap funds or GNMA and short term investment grade funds in the total bond funds OR it is inappropriate duplication to do so.
yousha:

Jack Bogle answers your question:
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "The odds of outpacing an all-market index fund are, well, terrible.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

megabad
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by megabad » Thu Aug 09, 2018 9:28 am

yousha wrote:
Thu Aug 09, 2018 8:28 am
My question is this: I am aware that the Total Stock Market and Total Bond Market at Vanguard covers most all equities and bond companies. My question is this: Would it be justifiable, if one wants, to purchase additional funds in both markets to supplement the total stock and bond markets, such as mid cap and small cap funds or GNMA and short term investment grade funds in the total bond funds OR it is inappropriate duplication to do so.
There are some sections of the market that are not included in VG Total Stock Mkt Ind and VG Total Bond Mkt Ind, but in your specific example there would be quite a bit of overlap. You might own additional funds as you suggested if you wanted to tilt more to certain sectors in the market (which is not an inherently boglehead philosophy, though many on this forum tilt). As to whether this is justifiable, that is up to you to determine.

MotoTrojan
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by MotoTrojan » Thu Aug 09, 2018 9:35 am

It isn’t necessary but is often done.

Example, I hold Total US plus additional small-value via VIOV to tilt in that direction. It’s common for people to hold Total International as well as additional Emerging Market, etc. Total funds should usually be used to fill your taxable allocation since the tilts are often less tax-efficient and do best in tax-advantaged accounts, if possible.

yousha
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by yousha » Thu Aug 09, 2018 9:38 am

What particular sections are not covered in the total Stock and Total bond Market(s).

2015
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by 2015 » Thu Aug 09, 2018 12:54 pm

I never find adding unnecessary complexity for it's own sake justifiable. I apply this principle to all aspects of my life.

megabad
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by megabad » Thu Aug 09, 2018 1:40 pm

yousha wrote:
Thu Aug 09, 2018 9:38 am
What particular sections are not covered in the total Stock and Total bond Market(s).
In VG Total Stock Market Index, any company that is not in the CRSP Total Market Index and any company that VG believes is not necessary in order to provide index tracking within a reasonable margin of accuracy. In practice this means that there are discrepancies between the actual total market and the index toward the very small company end of the index. Ironically, VG Total Stock Market Index actually owns more holdings than are in the current index according to VG's website.

One of the most commonly mentioned exclusions from Total Bond Market is junk bonds, but it should also be noted that Total Bond does not own every single high quality bond in the US market either. Therefore there are large numbers of bonds that are not represented. In practice the collection is still indicative of the index and market as a whole though.

Most people consider these differences in the noise if you goal is to mimic market performance.

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Phineas J. Whoopee
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Phineas J. Whoopee » Thu Aug 09, 2018 1:46 pm

yousha wrote:
Thu Aug 09, 2018 9:38 am
What particular sections are not covered in the total Stock and Total bond Market(s).
Hi yousha.

The first point is not to fixate on a fund's name. Its name can mean one thing to someone, and another thing to someone else.

Any index fund follows an index, so it depends on what the index specifies.

Vanguard's Total Bond Market Index Fund, VBMFX, follows the Bloomberg Barclays US Aggregate Index. Critics, give me a moment to finish please.
Bloomberg Barclays US Aggregate Index Factsheet on page 1 wrote:The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
...
The definition of the index simply doesn't include TIPS, below-investment grade securities, small issues, floating-rate issues, municipal bonds, and others. Don't read the word "Total." Read the index fact sheet I linked.

Thank you, critics, for giving me a moment. In fact, Vanguard's fund follows the float-adjusted variant of the index, as documented on p. 5.
Bloomberg Barclays US Aggregate Index Factsheet on page 5 wrote: Float Adjusted
Adjusts par amount outstanding of bonds for holdings of central governments that are publicly available.
Vanguard's Total Stock Market Index Fund, VTSMX, follows the CRSP US Total Market Index.
CRSP's main page about the US Total Market Index, in its first sentence, wrote: Nearly 4,000 constituents across mega, large, small and micro capitalizations, representing nearly 100% of the U.S. investable equity market, comprise the CRSP US Total Market Index.
Because Vanguard's Total Stock Market Index Fund is so big it's impractical to hold all of the smallest-capitalization stocks, because the fund could become the majority shareholder, which is illegal.

In addition, the CRSP index only covers listed stocks, that is, those officially traded on a stock exchange, which is a special kind of market. There are over 10,000 US corporations with publicly tradable stock that do not meet the exchanges' strict criteria for inclusion. In aggregate, despite their numbers, their total share of US stock assets is minuscule.

That's why it's important not to get stuck on fund names like total.

Have I been helpful? If not please say so and I'll try again.

PJW

yousha
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by yousha » Thu Aug 09, 2018 2:59 pm

Thank you all so much. Of course these excellent replies and they were extremely helpful raises the point mentioned earlier about "tilting". As I understand it, some investors that follow the Boglleheads philosophy would not engage in "tilting", let's say overweighing small caps by buying this additional index, while others following this Bogleheads philosophy would...though said an earlier blogger would not admit so. Any opinions?

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Phineas J. Whoopee
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Phineas J. Whoopee » Thu Aug 09, 2018 3:11 pm

The Bogleheads investment philosophy says nothing about tilting, for or against.
PJW

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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by pkcrafter » Thu Aug 09, 2018 5:02 pm

yousha wrote:
Thu Aug 09, 2018 2:59 pm
Thank you all so much. Of course these excellent replies and they were extremely helpful raises the point mentioned earlier about "tilting". As I understand it, some investors that follow the Boglleheads philosophy would not engage in "tilting", let's say overweighing small caps by buying this additional index, while others following this Bogleheads philosophy would...though said an earlier blogger would not admit so. Any opinions?
yousha, when I read your original post I suspected you were thinking about tilting. So first, total stock market holds the market weight of small caps - 9%. If you want to add more, then it's considered tilting, but how much more? It's pretty easy to double the market weight by simply adding 10% more. Most tilters would go higher than that, but the more you tilt, the more tracking error you will experience.

The problem is the small cap premium, which resides mostly in small value, does not come easy. If it did there would not be a premium. Investors who try tilting have to be very disciplined and unfazed by stretches of 5 years or more were the small premium simply does not show up. That's not easy to do when an investor who held the 3 fund and got the returns the 3-fund then tilted to get higher expected returns, but instead watches his fancy tilted portfolio underperform the 3-fund portfolio he used to hold. Five years is a long time to wait and most can't do it.

So, if you really want to tilt, be sure you are mentally prepared to think in decades, not dog years, which is more in line with investors patience to hold a losing portfolio. :happy

GNMA funds. Vanguard is better (a bit less risky) than most others.

https://obliviousinvestor.com/how-do-gnma-bonds-work/

If you want to add short term investment grade bonds, that's fine. St. term reduces overall duration, which means it will adjust to interest rate changes faster than total bond, but investment grade is a bit higher risk than total bond - AA rating for TBM, A for St term bond.
Total bond gained 5% in 2008
St term investment grade lost 4.7%.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

yousha
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by yousha » Thu Aug 09, 2018 5:23 pm

Thanks Paul. I do appreciate your time and effort. I believe, I will stick with a non-tilting program.

Nowizard
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Nowizard » Fri Aug 10, 2018 11:51 am

We overlap/duplicate by having most of our stock funds in Vanguard Total Stock Market but my wife wishes to hold a significant amount in an actively managed fund she chose. It is well regarded but largely duplicates TSM both in holdings and returns.

Tim

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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by passiveTiger » Fri Aug 10, 2018 12:53 pm

yousha wrote:
Thu Aug 09, 2018 2:59 pm
Thank you all so much. Of course these excellent replies and they were extremely helpful raises the point mentioned earlier about "tilting". As I understand it, some investors that follow the Boglleheads philosophy would not engage in "tilting", let's say overweighing small caps by buying this additional index, while others following this Bogleheads philosophy would...though said an earlier blogger would not admit so. Any opinions?
Tilting is active management - or at least an attempt at it. Someone who tilts thinks that they can improve their fund portfolio return by adjusting a market weighted index for a certain factor like small-cap or value or both (https://www.bogleheads.org/wiki/Fama_an ... ctor_model). Burton Malkiel in "A Random Walk Down Wall Street" shows how growth and value performance tend to persist in long period iterations. Over 70 years, Malkiel states value outperforms growth by 50 basis points (0.50%) in the edition before the yellow cover one, but he leaves it to the reader to decide whether value is inherently better than growth or an inevitable growth outperformance iteration that evens its performance with value has not occurred yet.

Personally, I think tilting is just investor boredom. Making money in funds with reliable low cost performance that exceeds a plurality or outright majority of other options is not exciting enough so some investors need factor ETFs and practice all types of voodoo to spice things up.

By the way, I do not criticize Vanguard for offering factor ETFs and various index slice funds and ETFs. People that want those things are going to buy them anyway, so Vanguard might as well sell them to those people.

Despite those referring themselves to as Bogleheads, a lot of them here do not follow him strictly - e.g., http://www.investmentnews.com/article/2 ... nal-stocks. They were originally known as "Vanguard Diehards" and that is probably a more accurate description of them.

stvyreb
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by stvyreb » Thu Aug 16, 2018 2:30 pm

I am wondering if there are others who are using VG TBM or IT Index (in both taxable and tax-deferred accounts) whom include other shorter term Index funds to try to acheive an overall duration of less than 5 years as per Mr. Bernstein's books:

http://www.efficientfrontier.com/ef/997/maturity.htm

stvyreb
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by stvyreb » Thu Aug 16, 2018 2:56 pm

I know this is a question without 1 answer, however I can't help noticing that the corporate portion:

https://investor.vanguard.com/mutual-fu ... file/VBILX

40/50% is A quality and below ; is that a concern?

Is there an index that is just higher quality ? Aa and above ? or is this just going to be a function of all bond indexes

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Earl Lemongrab
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Earl Lemongrab » Fri Aug 17, 2018 12:27 pm

stvyreb wrote:
Thu Aug 16, 2018 2:30 pm
I am wondering if there are others who are using VG TBM or IT Index (in both taxable and tax-deferred accounts) whom include other shorter term Index funds to try to acheive an overall duration of less than 5 years as per Mr. Bernstein's books:
Well, I have a bond index fund in the Megacorp 401(k) that is very similar to the Vanguard Total fund. My fixed income has been that and stable value in a 50/50 mix. I don't shoot for any particular duration. I'm not even sure how to calculate it.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Taylor Larimore
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Taylor Larimore » Fri Aug 17, 2018 12:55 pm

https://personal.vanguard.com/us/FundsInvQuestionnaire?cbdInitTransUrl=https%3A//personal.vanguard.com/us/funds/toolspost_id=4072191 wrote:
Thu Aug 16, 2018 2:56 pm
I know this is a question without 1 answer, however I can't help noticing that the corporate portion:

https://investor.vanguard.com/mutual-fu ... file/VBILX

40/50% is A quality and below ; is that a concern?

Is there an index that is just higher quality ? Aa and above ? or is this just going to be a function of all bond indexes
stvyreb:

I would not worry about the quality of Vanguard Total Bond Market Index Fund. It's worst annual loss was -2.66% in 1984. It gained +16% in 1985.

In 2008 TBM gained +5%, meanwhile the S&P 500 Index Fund plunged -37%.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

2015
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by 2015 » Fri Aug 17, 2018 1:48 pm

passiveTiger wrote:
Fri Aug 10, 2018 12:53 pm
yousha wrote:
Thu Aug 09, 2018 2:59 pm
Thank you all so much. Of course these excellent replies and they were extremely helpful raises the point mentioned earlier about "tilting". As I understand it, some investors that follow the Boglleheads philosophy would not engage in "tilting", let's say overweighing small caps by buying this additional index, while others following this Bogleheads philosophy would...though said an earlier blogger would not admit so. Any opinions?
Tilting is active management - or at least an attempt at it.

...

Personally, I think tilting is just investor boredom.

...
This. Boredom coupled with overconfidence, the most insidious of all biases. In all decision-making, and particularly in investing, no one can fool us to the degree that we can and do fool ourselves. Keeping things simple reduces likelihood of self-inflicted harm.

Cop51
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Re: Total Stock and Total Bond Market(s) at Vanguard

Post by Cop51 » Fri Aug 17, 2018 1:50 pm

I tilt 5% Small cap 5% REIT for my equity portion.

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