Index funds

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rramaswa
Posts: 76
Joined: Thu Feb 04, 2021 6:08 pm

Index funds

Post by rramaswa »

Hi Bogleheads,

I have most friends who have given up control of their money to money managers and all are in active management of assets. They pay 1% fees with high expense ratios.
This group is an expert in money management and passionate on providing advice.

Background:

I am 62 year old single with pension 60K per year and dividends around 30k . My target expenses are around 80K. I have no debt.
I have two adult kids ( 32 son , 29 daughter)
Therefore, I would like to leave most my money to legacy.

One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.

I have around 5 million dollars in all my assets all are within index funds.
Some are in target funds and others I have used VTI, VOO, VXUS, VFIDX,BNDX,BND.
I am using 60 % in equity and 40% in Bond.

I do not want to pay high fees to money managers when my rate of return is around 12% for last 12 months.
Am I making a mistake. Should I hire a money manager?
By the way I had bad experience with PAS I used them for 3 years. They did exactly what I am doing no brainer and charged .3% to manage.
All others who I interviewed they tried to sell products on me or push certain investments.
I am not sure they work for you. Given I am single I feel I may be taken for a ride.

Please help me if my thinking off the grid.
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Mullins
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Re: Index funds

Post by Mullins »

Sounds like you're doing fine just as you are. By your own testimony, your friends are the ones who need a course correction, not you.
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retired@50
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Re: Index funds

Post by retired@50 »

rramaswa wrote: Mon Jan 10, 2022 10:04 am One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.
I don't think your friend is correct. ^^^^

A total stock market index fund like VTI will hold all publicly traded securities with very limited exceptions. Mergers, acquisitions, spin-offs, IPOs, and other events that actually eliminate or create new stocks are what change the contents of an index fund. In general, total stock market index funds have very low turnover and don't sell things during market crashes.

I think you're going to be fine. You may not have liked VPAS, but a portfolio full of Vanguard index funds will almost certainly leave you better off than paying a money manager 1% and trying to switch in and out of actively managed mutual funds or ETFs.

Regards,
This is one person's opinion. Nothing more.
Outer Marker
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Joined: Sun Mar 08, 2009 8:01 am

Re: Index funds

Post by Outer Marker »

rramaswa wrote: Mon Jan 10, 2022 10:04 am I have around 5 million dollars in all my assets all are within index funds.
Some are in target funds and others I have used VTI, VOO, VXUS, VFIDX,BNDX,BND.
I am using 60 % in equity and 40% in Bond.
If you post your whole situation here in this format, you're likely to get some suggestions to optimize your portfolio that are as good or better than nearly all money managers: viewtopic.php?f=1&t=6212
Affable at 50
Posts: 157
Joined: Fri Dec 27, 2019 2:34 am

Re: Index funds

Post by Affable at 50 »

rramaswa wrote: Mon Jan 10, 2022 10:04 am Hi Bogleheads,

I have most friends who have given up control of their money to money managers and all are in active management of assets. They pay 1% fees with high expense ratios.
This group is an expert in money management and passionate on providing advice.

Background:

I am 62 year old single with pension 60K per year and dividends around 30k . My target expenses are around 80K. I have no debt.
I have two adult kids ( 32 son , 29 daughter)
Therefore, I would like to leave most my money to legacy.

One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.

I have around 5 million dollars in all my assets all are within index funds.
Some are in target funds and others I have used VTI, VOO, VXUS, VFIDX,BNDX,BND.
I am using 60 % in equity and 40% in Bond.

I do not want to pay high fees to money managers when my rate of return is around 12% for last 12 months.
Am I making a mistake. Should I hire a money manager?
By the way I had bad experience with PAS I used them for 3 years. They did exactly what I am doing no brainer and charged .3% to manage.
All others who I interviewed they tried to sell products on me or push certain investments.
I am not sure they work for you. Given I am single I feel I may be taken for a ride.

Please help me if my thinking off the grid.
You are not making a mistake. The returns of most active managers and active funds do not outperform the market averages once fees are deducted.

The most important thing an investor decides is his/her asset allocation. You’ve settled on an AA of 60/40, which sounds reasonable for someone who has won the game and is saving for legacy purposes. You have also made a decision that you are going to choose index fund products to fill out each assets class, which is the standard Boglehead recommendation.

Stay the Course, ignore the noise, and enjoy life.
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mokaThought
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Re: Index funds

Post by mokaThought »

rramaswa wrote: Mon Jan 10, 2022 10:04 am One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.
Congratulations on doing so well.

If I'm understanding your statement correctly, this depends on the particular index fund you're using. If it's VOO (Vanguard S&P 500), the fund must drop a stock that drops from the S&P 500. If it's VTI (Vanguard Total Stock Market), the fund will basically "hold on for dear life" until the stock liquidates.

Unless you're willing to manage more funds than you already have in order to tilt towards smaller stocks, the risk of an individual stock dropping like this isn't much to worry about. VTI's largest holding is Apple at 5.6%. VTI returned 25.64% in 2021 and has averaged 9.04% since 2001. Moreover, you said you're 40% bonds and have international holdings which don't include any Apples. And note, that's a worst case scenario for an individual company. 60% of 5.6% is 3.36%.

I would worry more about an active manager making wrong moves than an AAPL dropping off the face of the earth. :happy
exodusNH
Posts: 1926
Joined: Wed Jan 06, 2021 8:21 pm

Re: Index funds

Post by exodusNH »

rramaswa wrote: Mon Jan 10, 2022 10:04 am Hi Bogleheads,

I have most friends who have given up control of their money to money managers and all are in active management of assets. They pay 1% fees with high expense ratios.
This group is an expert in money management and passionate on providing advice.

Background:

I am 62 year old single with pension 60K per year and dividends around 30k . My target expenses are around 80K. I have no debt.
I have two adult kids ( 32 son , 29 daughter)
Therefore, I would like to leave most my money to legacy.

One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.

I have around 5 million dollars in all my assets all are within index funds.
Some are in target funds and others I have used VTI, VOO, VXUS, VFIDX,BNDX,BND.
I am using 60 % in equity and 40% in Bond.

I do not want to pay high fees to money managers when my rate of return is around 12% for last 12 months.
Am I making a mistake. Should I hire a money manager?
By the way I had bad experience with PAS I used them for 3 years. They did exactly what I am doing no brainer and charged .3% to manage.
All others who I interviewed they tried to sell products on me or push certain investments.
I am not sure they work for you. Given I am single I feel I may be taken for a ride.

Please help me if my thinking off the grid.
Unfortunately, your friends are the ones who are mistaken. The catch for you is that the information you're getting from them is coming out of the mouths of very well-trained salespeople pretending to be financial advisors. It is in their interest to make investing without them seem scary.

You're doing great! Keep doing it!
Swansea
Posts: 1108
Joined: Sat Feb 13, 2016 5:16 am

Re: Index funds

Post by Swansea »

A friend and I have the same asset allocation. He pays a 1% annual fee for money management.
I use index funds. When we compared performance (not debiting for his expense), it was identical.
khunron
Posts: 121
Joined: Tue Apr 18, 2017 6:29 pm

Re: Index funds

Post by khunron »

You're fine, but I hope you are not the one saying the group are "experts", as they don't sound like it.
Topic Author
rramaswa
Posts: 76
Joined: Thu Feb 04, 2021 6:08 pm

Re: Index funds

Post by rramaswa »

khunron wrote: Mon Jan 10, 2022 12:59 pm You're fine, but I hope you are not the one saying the group are "experts", as they don't sound like it.
I have found this forum extremely knowledgbeable.
I have used Vanguard PAS who are not as good.
Notsobad
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Joined: Sat Sep 02, 2017 6:16 am

Re: Index funds

Post by Notsobad »

The problem is that people choose professional money managers because they are fearful of making a mistake and losing money, or because they are greedy and seek market breaking returns.

If you stick with your current plan many people will beat you every year, some people will beat you over several years, and very few will beat your plan noticeably over the long haul. Most of the managers will eat up any wins with losses and fees over the long run.
02nz
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Re: Index funds

Post by 02nz »

retired@50 wrote: Mon Jan 10, 2022 10:12 am
rramaswa wrote: Mon Jan 10, 2022 10:04 am One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.
I don't think your friend is correct. ^^^^

A total stock market index fund like VTI will hold all publicly traded securities with very limited exceptions. Mergers, acquisitions, spin-offs, IPOs, and other events that actually eliminate or create new stocks are what change the contents of an index fund. In general, total stock market index funds have very low turnover and don't sell things during market crashes.

I think you're going to be fine. You may not have liked VPAS, but a portfolio full of Vanguard index funds will almost certainly leave you better off than paying a money manager 1% and trying to switch in and out of actively managed mutual funds or ETFs.

Regards,
(Bolding mine) Broadly this is correct, although to be clear in a market crash, if the total stock market fund's investors start selling their shares, then the fund would also be forced to share its shares in all the companies to meet redemptions. But as long as you don't panic sell then you still hold the same shares you did before of the underlying individual stocks, which makes the concern expressed by OP's friend a non-issue.
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retired@50
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Re: Index funds

Post by retired@50 »

02nz wrote: Mon Jan 10, 2022 8:54 pm
retired@50 wrote: Mon Jan 10, 2022 10:12 am
rramaswa wrote: Mon Jan 10, 2022 10:04 am One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.
I don't think your friend is correct. ^^^^

A total stock market index fund like VTI will hold all publicly traded securities with very limited exceptions. Mergers, acquisitions, spin-offs, IPOs, and other events that actually eliminate or create new stocks are what change the contents of an index fund. In general, total stock market index funds have very low turnover and don't sell things during market crashes.

I think you're going to be fine. You may not have liked VPAS, but a portfolio full of Vanguard index funds will almost certainly leave you better off than paying a money manager 1% and trying to switch in and out of actively managed mutual funds or ETFs.

Regards,
(Bolding mine) Broadly this is correct. In a market crash, if the total stock market fund's investors start selling their shares, then the fund would also be forced to share its shares in all the companies to meet redemptions. But as long as you don't panic sell then you still hold the same shares you did before of the underlying individual stocks, which makes the concern expressed by OP's friend a non-issue.
True enough. Hopefully the panic selling would be from the people holding the VTI share class, instead of VTSAX, which probably wouldn't require the fund to sell anything. The panic sellers of VTI will be selling directly to the smart panic buyers of VTI, which just might leave the level-headed VTSAX investors out of the fray.

Regards,
This is one person's opinion. Nothing more.
Doctor Rhythm
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Re: Index funds

Post by Doctor Rhythm »

One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.
Either I don't understand your friend's concern, or your friend has a fundamental misunderstanding about how index funds operate. There is very little selling of stocks in an index fund, which is why they tend to be tax efficient compared to active funds where the manager frequently sells one fund to provide the cash needed to buy another fund. Perhaps the scenario is that small cap company ZZZ is a great company whose stock shoots up in price so that it becomes an S & P 500 company. Yes, the small cap index fund would have to sell the stock. However, since you're not a fool, you own the whole market, so you end up acquiring ZZZ in a large cap fund. Or, even better, you own a total market fund so you'll always own ZZZ in proportion to its market cap. If ZZZ price drops like a rock, the fund doesn't sell it until it drops off the low end of the index -- in which case, you'd be hard pressed to call ZZZ a "good stock".
vtsnowdin
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Re: Index funds

Post by vtsnowdin »

At 66 I see you as doing just fine without the "Helpers" help.
I would be sure to have a will properly completed and stored where your children can find it when the time comes and also consider maxing out the gift tax to both of them each year to save on inheritance taxes. I believe the max right now is $5000 per year per person,or per grandchild, relative or not. You will have the fun of watching what they will do with the money and might be able to give them some good advice which is hard to do after you pass.
Edit: to add this link to gift tax information where the limits are $15,000 not $5,000.
They say your memory goes first and I forget what goes next. :oops:
Thanks to Taylor Larimore for the link.
https://turbotax.intuit.com/tax-tips/es ... /L1sFpFeXV
Last edited by vtsnowdin on Tue Jan 11, 2022 1:34 pm, edited 1 time in total.
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sf_tech_saver
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Re: Index funds

Post by sf_tech_saver »

Stick with all things Vanguard and it's hard to go too wrong IMHO.

I self-manage a similar portfolio (~$6M) almost entirely in VTI and then V target-date funds within my 401k as they are the simplest option there.

I'm 44 and use an 85/15 AA as I plan to leave most of it to others so why have lots of bonds if I can live off of some fraction of the dividends at some point. I think you may be a little conservative but the 60/40 portfolio is a classic no-brainer.

My only advice would be to read all of Jack Bogle's books as well and watch some of his videos. Use him as your advisor and you can't go wrong.
VTI is a modern marvel
aristotelian
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Re: Index funds

Post by aristotelian »

Why would you change if DIY has allowed you to amass $5M plus a pension? Don't fix what ain't broke and stop talking about finances with your friends.
JDave
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Re: Index funds

Post by JDave »

You're doing great. I wouldn't change a thing.
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abuss368
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Re: Index funds

Post by abuss368 »

sf_tech_saver wrote: Tue Jan 11, 2022 8:07 am Stick with all things Vanguard and it's hard to go too wrong IMHO.

I self-manage a similar portfolio (~$6M) almost entirely in VTI and then V target-date funds within my 401k as they are the simplest option there.

I'm 44 and use an 85/15 AA as I plan to leave most of it to others so why have lots of bonds if I can live off of some fraction of the dividends at some point. I think you may be a little conservative but the 60/40 portfolio is a classic no-brainer.

My only advice would be to read all of Jack Bogle's books as well and watch some of his videos. Use him as your advisor and you can't go wrong.
Excellent advice. Simplicity works and investors would be wise to listen to Jack Bogle. I have all of his books on my shelf. Currently reading the 10th anniversary edition of “Common Sense on Mutual Funds”.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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arcticpineapplecorp.
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Re: Index funds

Post by arcticpineapplecorp. »

rramaswa wrote: Mon Jan 10, 2022 10:04 am One of my friend told me index funds can be risky given the money manager on each fund will have no choice but to get rid of good stocks within an index
For example Tesla 10 years ago if it was part of an index. The manager will sell it if market were to crash.

Please help me if my thinking off the grid.
it appears Tesla went public 7/2/2010. The CRSP U.S. Large Cap Index added Tesla in June 2013. The Dow Jones U.S. Large-Cap Total Stock Market index followed suit not long after, adding Tesla in September 2013.

So first it depends on what your index fund is tracking as far as when it gets added to the index.

After that, the fund doesn't have to buy or sell more at all.

As the stock price rises it may become a larger share of the index (if it rises more than other companies in the index for instance).

if it falls, it becomes a smaller share of the index.

nothing had to be bought or sold in order for it to make up a larger or lesser share of the market after it was bought initially.

Apple makes up 5.3% of the total market.

if stock pickers bid up the price Apple (more than other stocks) it will become a larger part of the index. If price falls, it will become a smaller part of the index.

It's not the index fund managers that are buying and selling these stocks (by and large). It's individual stock pickers, mutual fund managers (active funds), pension funds, hedge funds and Beardstown Ladies.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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arcticpineapplecorp.
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Re: Index funds

Post by arcticpineapplecorp. »

Notsobad wrote: Mon Jan 10, 2022 8:46 pm The problem is that people choose professional money managers because they are fearful of making a mistake and losing money, or because they are greedy and seek market breaking returns.

If you stick with your current plan many people will beat you every year, some people will beat you over several years, and very few will beat your plan noticeably over the long haul. Most of the managers will eat up any wins with losses and fees over the long run.
this was very well said.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Parkinglotracer
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Re: Index funds

Post by Parkinglotracer »

You are doing what is prudent … stay the course
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