Mid-October 2020 performance update
At the end of last month, I mentioned that I would be including a second comparison portfolio in Stoney Point’s performance updates (besides the SPY ETF). That second comparison portfolio would be based on a recommendation from the “Bogleheads”—that is, devotees of the investment philosophy embodied by the so-called “index” mutual funds introduced to investors by Jack Bogle and Vanguard decades ago. In particular, I mentioned that I would be including a comparison portfolio proffered by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf in The Bogleheads’ Guide To Investment (a book blessed by Jack Bogle himself, in as far as he wrote the forward) as “A Young Investor’s Asset-Allocation” and considered appropriate for a typical young investor. Per Larimore, et al., that portfolio comprises (1) domestic large-cap stocks, (2) intermediate-term bonds, and (3) domestic mid-cap stocks (I swapped out #3 with international stocks last month to capture some advice from other corners of the Bogle-sphere, see, e.g., here).
I think it’s worthwhile to say a little more about the Bogleheads’ index-investing philosophy and, in particular, why I’m including it as a comparison portfolio for Stoney Point’s Prime and Select models along with the S&P 500. In a nutshell, I interpret the Bogleheads’ investment philosophy to encapsulate, broadly speaking, the basic premise of passive index fund investing: that the most efficient portfolio is a perfectly diversified “market” portfolio. (Here, the notion of a portfolio being maximally efficient refers to maximizing expected excess returns for a given level or volatility, i.e., risk, or, equivalently, minimizing risk for a given expected excess return). Put simply: it’s really hard to beat the market, and most professional investment managers fail to do that once you include fees, especially over long periods of time. It’s worth noting that this premise is generally consistent with some of the earliest and most influential asset pricing theories and is also supported by a huge empirical literature finding that investors are often better off paying low fees and getting the “market return” than paying higher fees to some manager who probably can’t beat the market anyway.
But don’t take my word for it, here’s what the Bogleheads themselves say in the introduction to their book, describing Vanguard founder Jack Bogle:
What Jack Bogle has made possible for the individual investor is truly extraordinary. Thanks to his creation of no-load, low-cost, tax-efficient mutual funds, millions of investors enjoy significantly greater returns on their investment dollars than they otherwise would have. His introduction of the first index fund for retail investors was labeled Bogle’s Folly by its detractors. Today, that same fund, Vanguard’s 500 Index fund, is the largest mutual fund in the world. Thanks to Jack Bogle, more of each investor’s money is put to work for them instead of going into the pockets of brokers, fund managers, or the taxman. For the everyday investor this translates into items such as nicer homes for families, college educations for children, more enjoyable retirements for seniors, and more money to be passed on to loved ones and causes they care about. Although a few other investment fund families have joined the low-cost revolution, it was Jack Bogle who sounded the bugle and led the charge, and it’s Vanguard that continues to lead the way.
So why am I including the Bogleheads portfolio in the performance updates going forward? Clever readers may have noticed I’m using the term “comparison portfolio” instead of “benchmark” in this post to describe the portfolio. I may not always clearly make that distinction in future posts (so please forgive me in advance!), but I’m doing it now to convey the technical point that I’m not claiming the Bogleheads portfolio will be of comparable riskiness to Prime and Select portfolios. As I mentioned in the September performance update and discuss further below, the Bogleheads portfolio includes a 20 percent allocation to bonds, which by itself might reasonably lead to an expectation that the portfolio will be less risky and generate lower returns over the long term than either the Stoney Point portfolios or the S&P 500 (which are all-equity portfolios). The Bogleheads portfolio is, however, arguably a salient and plausible alternative investment portfolio for readers of this site, so it’s worth considering how Stoney Point’s portfolios stack up against it. Such is my aim going forward. It will simply be important to recall that the Bogleheads portfolio is likely less risky than the Stoney Point portfolios and the S&P 500 and therefore should, in principle, generate lower returns. To the extent that’s true, comparing the returns of the Bogleheads portfolio to these portfolios can seem a bit unfair to the Bogleheads, so, in the interest of transparency and clarity, we’ll be presenting some information periodically about how all of these portfolios compare on a risk-adjusted basis using Sharpe ratios.
One other quick, but important note about all this: at the end of last month I mentioned that I may play a little bit with the asset allocation for the “Bogleheads” portfolio. It wasn’t immediately clear what Larimore, et al. were recommending for a specific implementation of the “Young Investor’s Asset-Allocation” portfolio, as they only listed broad asset classes. Taking another look at the Larimore, et al., book, however, they do in fact offer a recommended portfolio for a “[y]oung [i]nvestor” based on specific Vanguard index mutual funds: a portfolio comprising an 80 percent allocation to Vanguard’s Total Stock Market Index Fund (VTSMX) and a 20 percent allocation to Vanguard’s Total Bond Market Index Fund (VBMFX). Going forward, I’m going to be using that portfolio as my representation of the Bogleheads’ expert recommendation, with one modification: mutual funds only trade once per day after the market close, unlike stocks and ETFs, so instead of VTSMX and VBMFX, I’m going to use their ETF analogues, VTI and BND, respectively, which will enable me to look at market-open and intraday pricing. Looking at market-open prices will be important because I’ll calculate the performance of the Bogleheads portfolio assuming re-balancing back into an 80-20 allocation at the beginning of each month (at the open price) for comparability with the re-balancing frequency of the Prime and Select portfolios.
Without further ado, below are some mid-month performance charts (current as of the close on October 16) so you can see what the structure of these tables will look like going forward.
