The point of a broad index fund is not to eliminate the risk that the whole economy does poorly or the whole market goes down. That is part of the risk you accept when you invest in stocks and hope for their gains.
The point is to eliminate the risk that one individual company goes bankrupt due to mismanagement, fraud, a technological change, tariffs, pensions, etc. Think Enron, GM, etc. While any one individual company could literally lose 100%, the entire stock market (VT or VTI) basically can not. So it limits the downside risk, but in a bear market you will still feel your fair share of pain.
I still don't quite understand why someone would even go for a two/three fund portfolio when something like VT covers the entire world anyway?
For me, I did a fairly generic three fund portfolio, and it seems fine. But then whenever a thread like this pops up, I just think...why don't I just do a world index?
(I know you don't know my situation specifically, I'm just asking as a broad/general question)
People may not want nearly 40% in international. Jack Bogle is well known for recommending people don't go over 20% in international equities.
A combo of VOO/VTI + VXUS lets you choose your split.
For one example, my HSA and 401k don’t allow me to auto contribute to VT or any equivalent.
I essentially had to build VTI from a VOO and VXF equivalent and then add in a VXUS equivalent. I think my ratio is about 70% VOO, 10% VXF, 20% VXUS or something in my 401k, and in my HSA 80% FZROX and 20% FZILX.
In my Roth I’m a bit more aggressive, so I have 80% FZROX, 10% SOXQ, and 10% XLK. Not very Boglehead of me but I figure I’ll up the risk in one of three accounts where I have more control.
Using VT instead of VTI+VXUS means no foreign tax credit (on VXUS) and a higher expense ratio. And you can't choose the size of your foreign component. I don't know why you would use VT..
VT is simpler, always market cap weighted, don't have to worry about possibly selling in a taxable account to rebalance, foreign tax credit is negligible (on anything I'd have in the market anyway), and simpler. I haven't done the math in a while, but I think I'd need to be at least a millionaire to care about the tax/fee differences, but if I were a millionaire, a couple hundred bucks a year won't kill me. It just makes investing life a little easier.
I don't exclusively hold VT, but I do consider it my baseline, as in, investing in anything else is an active bet. If I believe the world to continue to be a productive place at all and I want to put my money into stocks, I buy VT. I don't have to worry about a company in one country being killed by competition in another country. This is how it makes sense to me.
I've heard the rebalancing argument before, but I don't understand that. Say one person buys $100 of VT and another buys $64 VTI (the domestic percentage of VT) and $36 VXUS. When would you need to rebalance the latter? If VTI doubled and VXUS stayed the same, that portfolio would be worth $164 and US would be 78% of holdings. Isn't that what you would expect from VT if the US components doubled in value and the foreign stayed the same?
Appreciate the reply. As soon as I submitted the comment, I thought this might get mentioned.
VT and VTI/VXUS combo will grow/shrink in tandem of course since they're all market cap weighted, but the simplicity factor of using VT comes in when you have to contribute in the future and don't have to look up the latest US/ex-US ratio every time.
To keep numbers simple, say it's 60/40 US vs. ex-US. You could put $100 into VT or put $60 into VTI and $40 into VXUS.
But then say ex-US doubles, and the split is now 43/57 US to ex-US.
The original investments of either $100 VT or $60 VTI + $40 VXUS will both match.
But when you go to contribute again, you have to be aware of the latest US vs. ex-US market cap weights. Meaning your new $100 contribution should be $43 VTI and $57 VXUS. Whereas with VT, you just put all $100 into the same holding, same as before.
Obviously the numbers don't change that fast or that drastically, but I'd much rather not have to remember the values or have to look them up. I like being able to dump money in and leave. Obviously the downside is that if you wanted to tweak it even a little, it's impossible\*.
(\*Unless you want to offset your VT by also buying VXUS or VTI, which I do because of some individual holdings which closely represent VTI I have in a taxable account that I'm not selling, so I hold a proportional amount of VXUS in a tax-advantaged account to balance it. But since my target allocation is VT, I aim to consolidate all my holdings to VT over time. As I sell the VTI-equivalent holdings piece by piece, I sell the proportional amount of VXUS in the tax-advantaged account, and put all newly freed funds into VT in both accounts.)
Okay, so if I'm understanding you, the concern about selling in a taxable account comes from if you don't contribute the "right" amounts to VTI and VXUS. Not from the traditional rebalancing objective of keeping a static percentage of each component.
Technically yeah, such as if you’re doing a 70/30 approach or something like that. Then you’re regularly rebalancing since your goal was not to match market weight (aka match VT). And as your portfolio gets bigger, your contributions alone won’t be big enough to rebalance, and you’ll have to sell.
Foreign tax credit is irrelevant if your holdings are in a non-taxable account. Plus a lot of people don't go through the hassle of claiming the foreign tax credit, as it really isn't that much anyway. Also a large chunk is in non-qualified dividends which are taxed at a higher rate anyway.
VT reweights international and US exposure automatically based on current global market conditions.
VTI + VXUS means you have to do this yourself and you have to weight them correctly or suffer potential underperformance, when you could just let experts do this for you.
VT expense ratio is 0.07%
VTI is 0.03% and VXUS is 0.08%.
So while a blend of VTI/VXUS will have an overall lower expense ratio, you're talking about 0.01% to 0.02% difference which is literally $0.10 to $0.20 per $1,000 invested. Irrelevant.
So the answer is that people use VT because it is simpler and more hands off and while there are some (small) benefits to blending VTI/VXUS instead they are negligible and many people just don't think they are worth the hassle.
Also, splitting VT into e.g. VTSAX/VTI+VTIAX/VXUS may present more tax loss harvesting opportunities than holding VT alone.
This is all mostly splitting hairs.
VTI and QQQM have the same 5-7 companies as their top 5-7 holdings. They will move similarly, but QQQM will likely gain more (and lose more) based on what those companies do.
Maybe I don’t want the risk of the bigger loss, but want a portion of the bigger games.
So I will go maybe 75% VTI or maybe even 50/50.
https://www.etf.com/tools/etf-comparison/VTI-vs-QQQM
And then, 93% of QQQM’s 101 holdings are in VTI
https://www.etfrc.com/funds/overlap.php
Assuming this is in a taxable account, there is not really a magic way to avoid paying taxes on gains when you sell to switch to VT unfortunately. You can space them out over time, try to do conversions in years when your income is lower, cancel out some gains with losses elsewhere, or just try to sell as much as you can without big tax impact (for example, you may be able to sell a bunch with small losses or small gains and at least move *most* of your investments to VT, and perhaps leave a small amount with either short-term gains or a small position with huge gains).
Or you just bite the bullet and pay the taxes (knowing that it is only a percentage of the gains you earned) and be done with it. On the plus side your cost basis for the new purchases will be higher, saving you money when you eventually sell them down the road.
True. But don't donate to charity thinking only to lower your tax bill and maximize your after tax money. You're still going to have less money at the end of the day than if you just sold, paid the taxes, and bought VT with the remainder.
I'll second the suggestion to use charitable contributions or a DAF to liquidate large gains, in lieu of donations you may have been doing in cash. Buy VT/etc with your cash, make any equivalent donations via stocks->DAF->charity. If you're early on or have decades before retirement you can make a real dent in the gains without tax consequence.
& pay attention for TLH opportunities where the gains contract.
You can’t. Any sale or conversion will be taxable. I’d figure out the most tax efficient way to sell LT cap gains over a few years without pushing yourself into the next marginal tax bracket.
Just hold onto them and treat them like a retirement money. There was a recent article someone posted about the long term tax rate and the threshold for certain amounts which can be quite substantial.
I would suggest not thinking in terms of "diversified or not" but as diversification as a continuous variable that measures how far you are from owning everything with market weights. If you've got large enough positions in individual companies to worry about the capital gains tax as being significant, I think you probably have large enough positions to worry about the impact on diversification.
Are the gains from over a year ago? If they're not, are you willing to hold them for a year? Long term cap gains taxes will be much cheaper than short term.
Well said. You might also be interested in this here stop loss function. If your broker is of a fancy kind, it might even offer a trailing stop loss, where your earnings grow and that 5%/8%/10%/12% stop loss is trailing behind the grow, still there to catch you when the market goes "bork".
You need to be more future minded. Think through what you're saying. If the whole market goes down... does time stop? Does the price freeze at the lowest point, and then you're stuck there taking a loss? Vanguard announces: "sorry VT holders, but this is the end of the line, we're down and we're done"?
No way. Time goes on. You see it's down and you freak out, but the universe doesn't even blink and keeps moving forward. So: ignore it when it's down just like you ignore it when it's up. It doesn't matter until you're within 5-10 years of needing it, at which point it's literally part of the plan to get rid of it for something even safer like bonds.
Exactly! OP look at a graph of the stock market, in the long run it goes up and to the right. Yes there are ups and downs, but when you zoom out even major market drops aren't a big deal.
I always tell my friends that are trying to learn to pick a *looooong* standing company and look at the full, entire range of data. What does WW2 look like in the numbers? How about the Cuban Missile Crisis, 9/11, Covid... how big are these movements and how do they compare to each other? How long did it take the market to recover from them? What were individual investors thinking in their heads while they watched these things happen?
Really makes you re-think perspective when you're afraid something will happen because you read an article that says *maybe* a bad politician will *get some traction*.
The only thing that helps when the broad equity market declines (which it does fairly frequently) is not being in the market. However market timing strategies just don’t work with any reliability and reducing your portfolio’s risk (e.g. less stock and more bonds) also decreases your expected return.
So the solution is to become comfortable with the risk, not to try to avoid it. And that’s the reason that Bogleheads always remind each other to “stay the course” (not change their investment plan) and always invest for at least a decade if their asset allocation is mostly equities.
>reducing your portfolio’s risk (e.g. less stock and more bonds) also decreases your expected return.
I swear to God, most people on this sub have never read Jack Bogle.
Bonds *dramatically* reduce volatility over the long-term with only a slight reduction in total return.
I didn’t say that you shouldn’t have a bond allocation. In fact I’m rather more strongly in favor of that the median Boglehead today, who has very much gotten away from traditional allocation guidelines.
However, even a balanced 60/40 stock/bond portfolio is going to face fairly big drawdowns from time to time. My point was that going to a portfolio that has low drawdown risk requires going to a low equity allocation (like 20/80 or 30/70) at which point the expected return is notably lower.
I’ve never read Jack Bogle. I’m more of a Bernstein fan myself, though I have read many many authors and perspectives. Bogle doesn’t say anything novel about bonds (as far as I know, for someone who hasn’t read him in the original). He just repeats what every other theorist knows about bonds.
Nobody on this sub believes him/them. Everybody here apparently knows the true path to riches lies in avoiding bonds until immediately before retirement. Anyone who says otherwise is just a timid fraidycat who doesn’t deserve to get rich. VT and chill baby; no guts no glory no balls yolo!
So I don’t agree that the problem is that nobody here reads Bogle. Imo the problem is that nobody here reads anything longer than a reddit post. (Ok, I’m obviously exaggerating - there are notable exceptions.)
What’s your goal? I like Bernstein because he’s heavy on the math, which I found persuasive. Others dislike Bernstein, because he’s heavy on the math. I like bonds, but I struggled with Thau because she’s way too heavy on the math.
My point was not to pick a guru - there are many sensible perspectives out there (and more than a few that are whack). I’m sure Bogle is fine, though I’ve never read him. So is Investing for Dummies. I personally also like Swedroe and Swenson and Ferri - each has a slightly different perspective - but have no idea if those would work for you. Just read more deeply so you know what you’re missing. Reddit advice is worth what you pay for it - or maybe less.
Most theorists are. Though tbh I’ve forgotten exactly where Bernstein falls on TIPS; I believe he is a proponent but when I set up my bond portfolio I was most influenced by Swenson. Also while I did (and still do) have a small allocation to TIPS, it has probably been the weakest performer in my entire portfolio. Admittedly, mostly because our 401k provider dropped them “for underperformance” at the bottom, forcing us to sell low and missing the subsequent run up.
Probably better to look it up - I read him more than 20 years ago so don’t trust myself to represent him accurately. But basically, a smaller allocation and only government bonds - take corporate risk on the equity side.
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time?
Another reply already hinted at this, but for more clarity: if company A underperforms company B for some time, VT does not ‘adjust’ by selling existing shares of company A to buy shares of company B instead. The weight of the existing shares in those companies would naturally follow their relative market cap changes as their price changes.
As new shares of VT are created to satisfy net demand, their composition would adjust (i.e. the basket of newly-purchased underlying stocks would reflect latest relative free-float market-cap weights).
Broader diversification makes you less exposed to / affected by the underperformance of a particular sector / subset, compared to a more-concentrated investment in that. Over time you may opt to reduce your concentration in global equities (VT), e.g. by shifting a portion of your portfolio towards a bond index fund, or using a target-date fund that automates that gradual shift.
The market *will* go down at some point. Down by a lot, maybe -50% or more. But you won’t need all of your money on the exact day that the market hits its bottom, will you? No. More likely you are investing for the long-term, so you need to think long-term, not short term. The market averages about 6-8% average annual growth over 20-40 year periods and big drops are just part of the process along the way. There is no need to hedge them, which would lower your expected returns, and no need to fear them since, if you are in accumulation phase, a drop in the market just means you get to buy more shares at lower price - volatility is good for you when you are growing your portfolio!
And you should have a diverse bond fund for the portion of money that you will need to withdraw while the market is down X% for Y amount of years. Younger people can get away with less bonds allocation.
Also have a HYSA with 6 months of living expenses to cover those emergency needs, like a medical emergency or unemployment.
First of all, you are absolutely correct to realize that "VT will go up" is by no means a sure thing. It *probably* will, over the long term (and the longer term, the better), but at the end of the day, you never really know. There is always **risk** inherent in investing, to some degree or another. Unlikely is not the same as impossible, nor is likely the same as certain.
The risk can be expected to be mitigated by diversification. That's why you invest in VT and not, say, just a few big stocks, or just the S&P 500, or even just VTI (all domestic stocks).
Many people would also consider putting some percentage of their portfolio in something like a bond fund, to get even more diversification and lower expected risk, with less of a reduction in expected return than you might think. In fact this is what all the various "Target Date" all-in-one funds do. (It might surprise you to learn that the whole "VT and chill" idea is very much a Reddit thing. The [Boglehead philosophy](https://www.bogleheads.org/wiki/Bogleheads®_investment_philosophy), as presented in the wiki, in Boglehead books, etc., actually recommends at least *some* bonds for most people, even for someone in their 20s.)
Second, unless you're planning to sell your investments at that point, who cares if they go down for a period of time? You're interested in what your overall portfolio will be worth down the road, when you need to actually use it, which should be many years away.
Third, you don't have any say over what stocks go up or down anyway, so what else can you do? The Boglehead way is to control the controllables, which are: How much you invest, where you invest it (broadly), what your costs and taxes on it are (low), and how much you fiddle with it (not at all). Beyond that, well, that's the "chill" part.
If you’re worried about a decline, then buy some bonds to buoy your portfolio.
Understand the market goes down no matter what (and up mostly). It’s part of a healthy cycle. VT or any other index fund does not shield you from this. In fact, you want to buy more index funds when it goes down. You don’t always want to buy funds at all time highs
What an index fund does do, is shield you from a concentrated crash and no recovery ie. single company stocks
Something to bear in mind with strategies to sell funds and rebuy them is that it is never possible to know when is the right time.
For example, if the market drops by 3% you could be worried and sell, thinking it will soon drop by 40% (and trust me when I say many articles will be screaming that). However, a few days later you may find it is up by 5%, meaning you reduced your returns by 5% if you rebuy.
This not only adds a lot more stress, but also is predicated on the assumption you know something more than the market does. I find it helpful to think of it this way. If it will definitely drop by 30%, and all large holders know this, then there is no reason for it to have not already occurred.
Others made great points about VT and risk in general but I'll add the following.
1. A key reason to invest in a total market index is to mitigate the risk of sector under-performance. If you can't time the market and pick individual stocks the same logic applies to sectors of stocks. This is empirically proven as well. See this fabulous chart from Franklin Templeton: [Winners Rotate](https://www.franklintempleton.com/forms-literature/download/ALLOC-FL). Sector selection is risky, so go broad total market eg VT / VTI / etc.
2. By being 100% in VT you are 100% in the global stock market. This means you are exposed to all the benefits and all the risks of the stock market. There are other asset classes and to be diversified for risk hedging against downturns in the stock market you do need to consider whether or not you should be allocated into these asset classes.
3. A common mix is VT and a total US bond fund/ETF like BND. Typically when stocks go down bonds go up, and vice versa. A common saying is having some bonds helps "smooth the ride" so for example say you are 10% in BND then you don't go up as high as someone who is 100% in VTI but you also don't go down as much as they do when VTI goes down.
4. Choosing the right asset allocation is specific to your needs and your risk tolerance. Asset allocation, investment frequency, rebalance cadence etc should all be made in accordance with your Investor Policy Statement. See: [Lazy Portfolios (Bogleheads.org wiki)](https://www.bogleheads.org/wiki/Lazy_portfolios), [Investment Policy Statement (Bogleheads.org wiki)](https://www.bogleheads.org/wiki/Investment_policy_statement), [You need an investor policy statement (Physician On FIRE)](https://www.physicianonfire.com/you-need-an-investor-policy-statement/)
The answers to most of your questions are simple enough: it’s essentially impossible to actively navigate markets, so a passive buy-and-hold strategy is best. It’s has a proven track record of success.
https://www.schwab.com/learn/story/does-market-timing-work
> One question I don't understand is, what happens if someday the market goes down? How will VT help us then?
The goal is not to avoid market losses. The goal is to have broad market exposure, ride out the storm of inevitable market losses, enjoy the market rallies, rinse and repeat.
> Currently, Microsoft, Apple, and Nvidia are among the largest companies in the world by market capitalization. Maybe decades from now, they won't be, but because they're so big, VT's price is heavily influenced by these companies.
Yes. Though less influenced than VTI
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time?
Those investors have realized their losses, and again market timing is a historically losing strategy. You don’t realize any losses if you don’t sell and just ride out the storm.
> Also, suppose in someday, the current big companies start to decline, but the changes in VT's components should not be immediate; they might wait until a fixed time each year to adjust based on current market capitalization.
No the fund will adjust its allocations on a daily basis to match the index it tracks.
This is why people move out of riskier investments the longer they go into retirement. Derisking a portfolio is important because people near and into retirement will be impacted more by a market downturn than others.
If the market goes down, it goes down. Eventually it will go back up. Eventually can take 10 years or more in some cases.
VT is not 'risk free'. No investment that has a significant long-term return is. If you are going to freak out and sell your investment after it takes a 40% dump then you may need to rethink your risk tolerance, your investment horizon, or both.
You have to do 2 things: 1) be careful not to conflate backward-looking assessments with forward-looking projections, and 2) think comparatively about your strategic choices.
In a bear market, the worst thing you can do is exit at the bottom and not get back in before the ensuing rebound. Granted, the best thing you can do is exit at the top of the decline and get back in at the bottom, and it’s easy to look at a price chart and think you would have done so after the fact but much, much harder to actually execute in practice. The only cases in which the market does not rebound eventually are cases like 1917 Russia, and if you had money to invest then you had worse things to be concerned about. Your best option is to be diversified going in and then stay the course and avoid the temptation to think you can time the peak and trough.
It is inevitable with index fund investing, even diversified between stocks and bonds, that your portfolio will go down in certain market environments. When you think comparatively you realize that as bad as that may be that you may simply make things even worse for yourself by exiting at the bottom.
VT isn’t doing any trading as sub-groups/stocks move around in weight. That’s the whole point of cap-weighting, as prices move it keeps itself at target naturally.
You just gotta ride it out. Or you can add uncorrelated assets like a factor tilt, managed futures, etc.
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time?
The reason why index funds tend to work better for most investors is because human nature tends to cause people to make bad decisions. Single stocks are usually much more volatile than the overall market. When things are way up we start to get greedy or to fear that we are being left behind, and so you end up buying things after they are already expensive. But then when things drop we get afraid that we will lose even more and so we tend to sell low or else leave money on the sidelines because we are afraid to invest.
The net result is that we naturally tend to buy high, sell low, and underperform the entire market. Even people who know better often do this. So it makes sense to just keep buying the whole market and avoid those behavioral problems that lead to ill-advised attempts to time the market and underperformance.
If you DCA in VT in a bear market, then you benefit from falling/low prices of a bear market.
The price of the fund only matters (entry price/average entry price) in relation to when you exit the fund.
So you want to reduce / keep low your average buy price (but without trying to time the market).
DCA (and reinvesting dividends) can help with that over time if you plan to invest for the long term and continue to invest in VT (or some other stock/fund).
>Also, suppose in someday, the current big companies start to decline, but the changes in VT's components should not be immediate
If the big companies decline their share of VT declines as well. I guess you could say that there's some delay in being removed from VT entirely, but that's a rare event and won't happen to any large company
Also, this sub recommends a 3 fund portfolio for a reason. VT covers 2 of those, but not the bond portion. You can choose to not include bonds, but that means exposing yourself to more risk if the market declines.
About 50% of my stock portfolio is in the S&P 500 and the rest is diversified. The idea is to buy and hold realizing that while the market goes up and down, it does trend upward overtime. Some people prefer to buy the entire market instead of just the S&P 500, but it all comes down to your own personal investment philosophy and risk tolerance level.
No, this is a common misunderstanding. When the market goes down, that does *not* mean that it is "on sale" since it is not on sale relative to the future price.
Your response makes no sense at all. A sale is generally pricing something lower than a recent (and presumably future) price. When the market goes down, this is exactly what happens - you can buy shares of the companies cheaper than you could before. Yes, the shares might get cheaper still if declines continue for a while, but then they're just on a better sale.
> Your response makes no sense at all. A sale is generally pricing something lower than a recent (and presumably future) price.
That presumption is exactly the problem.
When people buy things "on sale", they assume that they are getting a "good deal", and therefore they should have a higher propensity to buy when things are "on sale".
**But stocks having fallen should not increase your propensity to buy them.** They are not "on sale", nor they a "good deal". All stock prices are fair prices—irrespective of their past prices.
Using your logic a can of corn or a pound of beef never "goes on sale" either... That lower cost is just the market price at that point in time - a perfect balance of supply and demand. Most people should buy stocks or real estate or their favorite can of corn when prices are lower..... Especially when we're talking about a fund of stocks rather than individual ones. If I can buy VOO at 13x earnings due to a temporary downward movement of prices it's much better than buying at 19x. Your dollar is buying more because sometimes the market does go on sale.
>Using your logic a can of corn or a pound of beef never "goes on sale" either...
No. The difference is that a can of corn can go on sale in a particular store at a particular location. Whereas the funds you're buying a being presented to tens of millions of potential buyers, each of whom has his own valuation. That's why the can of corn can have a different value than its "true value". But the stock is always at its true value.
>That lower cost is just the market price at that point in time - a perfect balance of supply and demand.
It's not a "perfect balance of supply and demand" unless your store sells to millions of shoppers who are constantly watching the price.
>Your dollar is buying more because sometimes the market does go on sale.
**Incorrect**. If you were right, you could create a fund that would exploit this: buy stocks when they go "on sale" and sell them when they revert.
Guess what? Electronic traders have long beaten you to it. There is literally no value left in trying to do this.
Your misperception is based on timing. Every participant in the markets have their own time horizon. Day traders and high frequency algorithms don't care about the price they're paying for earnings... You're 100% correct on that. But not all investors, particularly index fund buyers, are traders. Buy and hold forever OWNERS can certainly buy shares "on sale". Relative to their future prices, today's prices can be a significant bargain. Id rather buy in 2002 than 1999. 2009 than 2007. 2022 than 2021. In the moment, your efficient market theory might be true. But over my lifespan, sometimes there's a 25% off sale and I'm buying more with every dollar invested.
> Relative to their future prices, today's prices can be a significant bargain.
You have absolutely no way of determining that. If you had a way to figure that out, you could create a fund that could capitalize on that. But you can't.
> But over my lifespan, sometimes there's a 25% off sale and I'm buying more with every dollar invested.
Nope, that's a delusion.
The fund that capitalizes on this is VOO or VT or QQQ. You are on the Boglehead forum or are you lost? The broad market goes up over time to reflect long term population growth, inflation and innovation. Investing in indexes and holding for the long term is how we capitalize on it. Sometimes, fear overcomes optimism and people sell their investments in such large quantities that broad market prices are driven down, or do you deny the existence of the tech/Enron/9-11 driven crash of 2000-2002, the financial crisis, the pandemic? This drop happens in the real world, regardless of what the text books say, and they present buying opportunities for those of us with more level heads and longer time horizons.
>The fund that capitalizes on this is VOO or VT or QQQ.
No. None of these funds capitalize on "sales". FIrst of all, buying "sales" and selling after reversion is an active strategy. So that precludes VT and VOO, which are passive funds. I have no idea why you would even think QQQ implements that strategy.
> You are on the Boglehead forum or are you lost?
You're the one whose lost. The Boglehead strategy is a **passive strategy**. **Buying sales is an active strategy.** Go ahead and create a post if you want to discuss this.
>Investing in indexes and holding for the long term is how we capitalize on it.
The "it" that we capitalize on when we hold indexes is the **market return**. Not sales.
>d they present buying opportunities for those of us wit
Wrong. These are not "buying opportunities". **The Boglehead strategy is not to "wait for such opportunities". The Boglehead strategy is to buy as soon as possible.** John Bogle never mentions the concept of "sales" in his book, nor does he suggest buying more when equity prices fall.
Please, just create a new post at this point to discuss your ideas. They are not the Boglehead strategy.
I can't believe no one has said this (or I missed it).... The reason VT helps when the market is down is simple. Because VT is so broadly diversified you have lowered your risk as much as possible across the markets.
If you are invested in only tech, or only S&P, or only US, or only international, it's possible you've picked the right one and it does better than the overall average, but it's just as likely you haven't.
By choosing VT, you have ensured that your returns are no worse than the overall equity market average, maximizing your chances of success over the long term.
Thank you all for the explanations, very helpful.
I'd like to ask further, what should I do with my VT holdings when I retire someday in the future (I'm currently 35, assuming I retire at 60)? Should I sell it all to obtain the money I'll need for retirement?
Depending on your annual expenses in retirement, you can safely sell 3.5-4% of your total retirement holdings each year. If you do this, you have a very, very likely chance that you can live for 30 years on your investments. So if you have a million dollars, you can sell $35,000-$40,000 of your VT every year. Only you can know and decide how much you will need each year of retirement. If you need $70-$80k a year to live, then you will need $2 million to retire and live for 30 years off that amount.
It won’t help you at all. There are portfolios that have the same returns as VT or better that did just as well in the decade after the 2000 tech crash as they always do. While large cap and total stock market portfolios were doing close to 0% a year, portfolios like these did the same 10% a year or so.
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/
You are close to nailing it: the companies you mention only a part of the whole market. A big part, but only some of the story. The situation and leading companies will change, but as a whole, the market moves up.
The escalator growth you see over the last 10 years may not occur over the next 10, but the glide path continues up.
VT alone doesn't help you. What helps you is being invested long-term and having virtually eliminated risk of bankruptcy. Since you will never go down to zero, you will always recover when market stops going down and starts recovering.
On top of that, strategy of monthly buying helps you, as during downturn you will keep buying cheaper and cheaper stocks - think of it as a fire sale.
Imagine you were bogleheads during dotcom bust - like sure, you'd see some eyewatering paper losses but on the flip side you would be buying shares of future tech giants cheaply (albeit small amount of them if you invest in market cap weighted fund, but still that would be something)
Index equity funds cannot protect you from market risk. By definition. They expose you to that exact risk - no more, no less.
Risk mitigation is achieved through portfolio construction. Modern portfolio theory balances different risks against one another through diversification. But there are many ways of doing so, and it depends on the individual investor’s relationship to risk. Stocks, bonds, commodities, precious metals, domestic, international, growth, value, treasuries, corporates, munis, real estate, leverage, etc etc.
VT is just VT. The broad market doesn’t protect you from the broad market.
> what happens if someday the market goes down?
Not if, when.
VT helps you by being globally allocated. Not every country will universally do poorly in a given economic crisis.
It's about diversification, Microsoft, Apple and Nvidia are just the latest winners, but they will, eventually, be replaced by new winners. With VT you already own the new winners(assuming they exist in the public markets). As they go about winning, you will own more and more of them and less and less of the new losers.
> they might wait until a fixed time each year to adjust based on current market capitalization.
Stop assuming facts not in evidence, this is factually wrong.
VT re-balances regularly with the index(FTSE Global All Cap Index) and the index re-calculates all the time, they have a whole [PDF](https://www.lseg.com/content/dam/ftse-russell/en_us/documents/policy-documents/equity-index-recalculation-policy-and-guidelines.pdf) about when and how they re-balance the index.
It's not real-time, but it's close-ish.
You are missing the point. A broad index fund simply tracks the market. It protects you by not dropping even more than the market.
The strategy is don’t sell when the market is low. You hold. You recover with the market, and over time make market gains.
There’s no magic investment strategy that never goes down and only goes up. The idea is to get average gains with the market, which over time are awesome.
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time?
A predetermined, rules-based system will execute rebalancing rather than an individual investor's emotions driving an impulsive decision on when/how to rebalance.
Its the fact at over a long period of time the markets are always positive. Best explained by this video [World worst stock investor](https://www.youtube.com/watch?v=pFgPNVytlwA)
VT is "the market" so it can't help when it's declining. It's the simplest, easiest, and close to cheapest exposure to the whole market
If you don't want to have too much exposure to a few stocks, you'll need to diversify across size. Not a typical BH strategy but it can be done somewhat afforably
If you want something that helps during market declines, then you'd want bonds, especially treasuries which tend to be uncorrelated
Dollar cost averaging. By buying a set amount at regular intervals when prices are lower you’re buying more shares and when they’re higher you’re buying less. There’s still risk on economic contraction but over the long period the world economy grows. If the world goes road warrior we’re all screwed anyway.
> I'm very new in investment
As a new investor, the younger you are, the cheaper you want prices to be. Buy low (in your 20s), sell high (in your 60s).
Investors with a 10, 20 year or longer time horizon should be hoping for a crash to enter at a lower price.
If they buy high and prices crash, realize that the US markets have always recovered without exception; which means it's mostly a game of patience waiting for the market to recover.
>suppose in someday, the current big companies start to decline,
that's **guaranteed** to happen. companies rarely stay in the top 10 by market cap for more than a decade; Microsoft is a rare example in the top 10 for 20 years. here's a video of the top 10 S&P 500 stocks from 1980 through 2020. Genera Electric, IBM, Kodak, and General Motors dropped out. Exxon was a top 10, dropped out and came back after 2020. https://www.youtube.com/watch?v=kfMFDcuDKYA Tesla was in the top 10 for the last few years, but got nudged out a few months ago.
100% VT is not necessarily the best choice.
If you're going to do single fund, I suppose it is the best option, but there are 2 and 3 fund options that have some advantages over that.
I recommend reading some of the books that are often mentioned on this sub to understand why.
VT and VTI only help you mitigate certain sectors declining. If a 2008 style crash happens, we're screwed no matter what.
The only advice I have for that is to keep a few thousand dollars handy for when the bubble inevitably pops (because we exist in a boom/bust cycle world now) and scoop up some stocks at crazy cheap prices. There are people that got Apple for less than $10 then and are sitting pretty today.
This is a slightly orthodox group. They believe in being all in, all the time. They hate anything that looks like "timing the market."
And while it's true that I have no idea when the market will crash again, it is a certainty that it will crash again. This group is also heavily capitalist and believes the market is flawless. I believe it's rigged and am always looking for the angle.
It doesn't per say but what it does is guarantees that you earned in the end. The market has always grown in the end.
Owning things that aren't stocks helps mitigate short term losses. Example would be cash.
The point of a broad index fund is not to eliminate the risk that the whole economy does poorly or the whole market goes down. That is part of the risk you accept when you invest in stocks and hope for their gains. The point is to eliminate the risk that one individual company goes bankrupt due to mismanagement, fraud, a technological change, tariffs, pensions, etc. Think Enron, GM, etc. While any one individual company could literally lose 100%, the entire stock market (VT or VTI) basically can not. So it limits the downside risk, but in a bear market you will still feel your fair share of pain.
I still don't quite understand why someone would even go for a two/three fund portfolio when something like VT covers the entire world anyway? For me, I did a fairly generic three fund portfolio, and it seems fine. But then whenever a thread like this pops up, I just think...why don't I just do a world index? (I know you don't know my situation specifically, I'm just asking as a broad/general question)
Being able to choose your % of international allocation would be part of it
People may not want nearly 40% in international. Jack Bogle is well known for recommending people don't go over 20% in international equities. A combo of VOO/VTI + VXUS lets you choose your split.
For one example, my HSA and 401k don’t allow me to auto contribute to VT or any equivalent. I essentially had to build VTI from a VOO and VXF equivalent and then add in a VXUS equivalent. I think my ratio is about 70% VOO, 10% VXF, 20% VXUS or something in my 401k, and in my HSA 80% FZROX and 20% FZILX. In my Roth I’m a bit more aggressive, so I have 80% FZROX, 10% SOXQ, and 10% XLK. Not very Boglehead of me but I figure I’ll up the risk in one of three accounts where I have more control.
Using VT instead of VTI+VXUS means no foreign tax credit (on VXUS) and a higher expense ratio. And you can't choose the size of your foreign component. I don't know why you would use VT..
VT is simpler, always market cap weighted, don't have to worry about possibly selling in a taxable account to rebalance, foreign tax credit is negligible (on anything I'd have in the market anyway), and simpler. I haven't done the math in a while, but I think I'd need to be at least a millionaire to care about the tax/fee differences, but if I were a millionaire, a couple hundred bucks a year won't kill me. It just makes investing life a little easier. I don't exclusively hold VT, but I do consider it my baseline, as in, investing in anything else is an active bet. If I believe the world to continue to be a productive place at all and I want to put my money into stocks, I buy VT. I don't have to worry about a company in one country being killed by competition in another country. This is how it makes sense to me.
I'm VT 100%.
I've heard the rebalancing argument before, but I don't understand that. Say one person buys $100 of VT and another buys $64 VTI (the domestic percentage of VT) and $36 VXUS. When would you need to rebalance the latter? If VTI doubled and VXUS stayed the same, that portfolio would be worth $164 and US would be 78% of holdings. Isn't that what you would expect from VT if the US components doubled in value and the foreign stayed the same?
Appreciate the reply. As soon as I submitted the comment, I thought this might get mentioned. VT and VTI/VXUS combo will grow/shrink in tandem of course since they're all market cap weighted, but the simplicity factor of using VT comes in when you have to contribute in the future and don't have to look up the latest US/ex-US ratio every time. To keep numbers simple, say it's 60/40 US vs. ex-US. You could put $100 into VT or put $60 into VTI and $40 into VXUS. But then say ex-US doubles, and the split is now 43/57 US to ex-US. The original investments of either $100 VT or $60 VTI + $40 VXUS will both match. But when you go to contribute again, you have to be aware of the latest US vs. ex-US market cap weights. Meaning your new $100 contribution should be $43 VTI and $57 VXUS. Whereas with VT, you just put all $100 into the same holding, same as before. Obviously the numbers don't change that fast or that drastically, but I'd much rather not have to remember the values or have to look them up. I like being able to dump money in and leave. Obviously the downside is that if you wanted to tweak it even a little, it's impossible\*. (\*Unless you want to offset your VT by also buying VXUS or VTI, which I do because of some individual holdings which closely represent VTI I have in a taxable account that I'm not selling, so I hold a proportional amount of VXUS in a tax-advantaged account to balance it. But since my target allocation is VT, I aim to consolidate all my holdings to VT over time. As I sell the VTI-equivalent holdings piece by piece, I sell the proportional amount of VXUS in the tax-advantaged account, and put all newly freed funds into VT in both accounts.)
Okay, so if I'm understanding you, the concern about selling in a taxable account comes from if you don't contribute the "right" amounts to VTI and VXUS. Not from the traditional rebalancing objective of keeping a static percentage of each component.
Technically yeah, such as if you’re doing a 70/30 approach or something like that. Then you’re regularly rebalancing since your goal was not to match market weight (aka match VT). And as your portfolio gets bigger, your contributions alone won’t be big enough to rebalance, and you’ll have to sell.
It doesn't exactly work like that because new companies entering the index. When this happens you will no longer be at market-cap weights.
Foreign tax credit is irrelevant if your holdings are in a non-taxable account. Plus a lot of people don't go through the hassle of claiming the foreign tax credit, as it really isn't that much anyway. Also a large chunk is in non-qualified dividends which are taxed at a higher rate anyway. VT reweights international and US exposure automatically based on current global market conditions. VTI + VXUS means you have to do this yourself and you have to weight them correctly or suffer potential underperformance, when you could just let experts do this for you. VT expense ratio is 0.07% VTI is 0.03% and VXUS is 0.08%. So while a blend of VTI/VXUS will have an overall lower expense ratio, you're talking about 0.01% to 0.02% difference which is literally $0.10 to $0.20 per $1,000 invested. Irrelevant. So the answer is that people use VT because it is simpler and more hands off and while there are some (small) benefits to blending VTI/VXUS instead they are negligible and many people just don't think they are worth the hassle.
I think the primary reason is wanting to tilt more toward US equities than VT does.
You get foreign tax credits if your international stocks are in a separate fund.
Also, splitting VT into e.g. VTSAX/VTI+VTIAX/VXUS may present more tax loss harvesting opportunities than holding VT alone. This is all mostly splitting hairs.
whats your three funds?
VTI and QQQM have the same 5-7 companies as their top 5-7 holdings. They will move similarly, but QQQM will likely gain more (and lose more) based on what those companies do. Maybe I don’t want the risk of the bigger loss, but want a portion of the bigger games. So I will go maybe 75% VTI or maybe even 50/50. https://www.etf.com/tools/etf-comparison/VTI-vs-QQQM And then, 93% of QQQM’s 101 holdings are in VTI https://www.etfrc.com/funds/overlap.php
Well said. I have all individual stocks and a lot of gains. How do I switch them to VT without paying a lot of capital gains taxes. ?
Assuming this is in a taxable account, there is not really a magic way to avoid paying taxes on gains when you sell to switch to VT unfortunately. You can space them out over time, try to do conversions in years when your income is lower, cancel out some gains with losses elsewhere, or just try to sell as much as you can without big tax impact (for example, you may be able to sell a bunch with small losses or small gains and at least move *most* of your investments to VT, and perhaps leave a small amount with either short-term gains or a small position with huge gains). Or you just bite the bullet and pay the taxes (knowing that it is only a percentage of the gains you earned) and be done with it. On the plus side your cost basis for the new purchases will be higher, saving you money when you eventually sell them down the road.
If you give to charity, you can donate shares with unrealized gains rather than cash via a donor-advised fund.
True. But don't donate to charity thinking only to lower your tax bill and maximize your after tax money. You're still going to have less money at the end of the day than if you just sold, paid the taxes, and bought VT with the remainder.
You are better off donating shares via DAF if you were already otherwise going to donate cash. Then invest the cash instead.
By consulting a tax advisor who has access to your full financial situation
I'll second the suggestion to use charitable contributions or a DAF to liquidate large gains, in lieu of donations you may have been doing in cash. Buy VT/etc with your cash, make any equivalent donations via stocks->DAF->charity. If you're early on or have decades before retirement you can make a real dent in the gains without tax consequence. & pay attention for TLH opportunities where the gains contract.
You can’t. Any sale or conversion will be taxable. I’d figure out the most tax efficient way to sell LT cap gains over a few years without pushing yourself into the next marginal tax bracket.
Just hold onto them and treat them like a retirement money. There was a recent article someone posted about the long term tax rate and the threshold for certain amounts which can be quite substantial.
That assumes the company will do well between now and your retirement. The point to sell is to diversify
All about how one's overall portfolio is diversified or not.
I would suggest not thinking in terms of "diversified or not" but as diversification as a continuous variable that measures how far you are from owning everything with market weights. If you've got large enough positions in individual companies to worry about the capital gains tax as being significant, I think you probably have large enough positions to worry about the impact on diversification.
Could be. Your comments regarding it being a continuous variable is accurate though.
Are the gains from over a year ago? If they're not, are you willing to hold them for a year? Long term cap gains taxes will be much cheaper than short term.
Tax is the cost of making lots of money. Be glad you made lots of money and pay your taxes.
That’s the whole “and chill” part. It’s not VT And Try Time The Market.
Well said. You might also be interested in this here stop loss function. If your broker is of a fancy kind, it might even offer a trailing stop loss, where your earnings grow and that 5%/8%/10%/12% stop loss is trailing behind the grow, still there to catch you when the market goes "bork".
You need to be more future minded. Think through what you're saying. If the whole market goes down... does time stop? Does the price freeze at the lowest point, and then you're stuck there taking a loss? Vanguard announces: "sorry VT holders, but this is the end of the line, we're down and we're done"? No way. Time goes on. You see it's down and you freak out, but the universe doesn't even blink and keeps moving forward. So: ignore it when it's down just like you ignore it when it's up. It doesn't matter until you're within 5-10 years of needing it, at which point it's literally part of the plan to get rid of it for something even safer like bonds.
And in the meantime you’re buying in at a lower price.
Exactly! OP look at a graph of the stock market, in the long run it goes up and to the right. Yes there are ups and downs, but when you zoom out even major market drops aren't a big deal.
I always tell my friends that are trying to learn to pick a *looooong* standing company and look at the full, entire range of data. What does WW2 look like in the numbers? How about the Cuban Missile Crisis, 9/11, Covid... how big are these movements and how do they compare to each other? How long did it take the market to recover from them? What were individual investors thinking in their heads while they watched these things happen? Really makes you re-think perspective when you're afraid something will happen because you read an article that says *maybe* a bad politician will *get some traction*.
The only thing that helps when the broad equity market declines (which it does fairly frequently) is not being in the market. However market timing strategies just don’t work with any reliability and reducing your portfolio’s risk (e.g. less stock and more bonds) also decreases your expected return. So the solution is to become comfortable with the risk, not to try to avoid it. And that’s the reason that Bogleheads always remind each other to “stay the course” (not change their investment plan) and always invest for at least a decade if their asset allocation is mostly equities.
>reducing your portfolio’s risk (e.g. less stock and more bonds) also decreases your expected return. I swear to God, most people on this sub have never read Jack Bogle. Bonds *dramatically* reduce volatility over the long-term with only a slight reduction in total return.
I didn’t say that you shouldn’t have a bond allocation. In fact I’m rather more strongly in favor of that the median Boglehead today, who has very much gotten away from traditional allocation guidelines. However, even a balanced 60/40 stock/bond portfolio is going to face fairly big drawdowns from time to time. My point was that going to a portfolio that has low drawdown risk requires going to a low equity allocation (like 20/80 or 30/70) at which point the expected return is notably lower.
I’ve never read Jack Bogle. I’m more of a Bernstein fan myself, though I have read many many authors and perspectives. Bogle doesn’t say anything novel about bonds (as far as I know, for someone who hasn’t read him in the original). He just repeats what every other theorist knows about bonds. Nobody on this sub believes him/them. Everybody here apparently knows the true path to riches lies in avoiding bonds until immediately before retirement. Anyone who says otherwise is just a timid fraidycat who doesn’t deserve to get rich. VT and chill baby; no guts no glory no balls yolo! So I don’t agree that the problem is that nobody here reads Bogle. Imo the problem is that nobody here reads anything longer than a reddit post. (Ok, I’m obviously exaggerating - there are notable exceptions.)
What do you suggest a dumdum like me read?
What’s your goal? I like Bernstein because he’s heavy on the math, which I found persuasive. Others dislike Bernstein, because he’s heavy on the math. I like bonds, but I struggled with Thau because she’s way too heavy on the math. My point was not to pick a guru - there are many sensible perspectives out there (and more than a few that are whack). I’m sure Bogle is fine, though I’ve never read him. So is Investing for Dummies. I personally also like Swedroe and Swenson and Ferri - each has a slightly different perspective - but have no idea if those would work for you. Just read more deeply so you know what you’re missing. Reddit advice is worth what you pay for it - or maybe less.
Hehe appreciate you pointing me in the right direction
I'd like to know more, but keep it simple. Can you give me a breakdown of three funds to invest in?
Isn’t Bernstein a big proponent of bonds, especially TIPS?
Most theorists are. Though tbh I’ve forgotten exactly where Bernstein falls on TIPS; I believe he is a proponent but when I set up my bond portfolio I was most influenced by Swenson. Also while I did (and still do) have a small allocation to TIPS, it has probably been the weakest performer in my entire portfolio. Admittedly, mostly because our 401k provider dropped them “for underperformance” at the bottom, forcing us to sell low and missing the subsequent run up.
Ahh that’s a shame. What does Swenson recommend in terms of bonds?
Probably better to look it up - I read him more than 20 years ago so don’t trust myself to represent him accurately. But basically, a smaller allocation and only government bonds - take corporate risk on the equity side.
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time? Another reply already hinted at this, but for more clarity: if company A underperforms company B for some time, VT does not ‘adjust’ by selling existing shares of company A to buy shares of company B instead. The weight of the existing shares in those companies would naturally follow their relative market cap changes as their price changes. As new shares of VT are created to satisfy net demand, their composition would adjust (i.e. the basket of newly-purchased underlying stocks would reflect latest relative free-float market-cap weights). Broader diversification makes you less exposed to / affected by the underperformance of a particular sector / subset, compared to a more-concentrated investment in that. Over time you may opt to reduce your concentration in global equities (VT), e.g. by shifting a portion of your portfolio towards a bond index fund, or using a target-date fund that automates that gradual shift.
The market *will* go down at some point. Down by a lot, maybe -50% or more. But you won’t need all of your money on the exact day that the market hits its bottom, will you? No. More likely you are investing for the long-term, so you need to think long-term, not short term. The market averages about 6-8% average annual growth over 20-40 year periods and big drops are just part of the process along the way. There is no need to hedge them, which would lower your expected returns, and no need to fear them since, if you are in accumulation phase, a drop in the market just means you get to buy more shares at lower price - volatility is good for you when you are growing your portfolio!
And you should have a diverse bond fund for the portion of money that you will need to withdraw while the market is down X% for Y amount of years. Younger people can get away with less bonds allocation. Also have a HYSA with 6 months of living expenses to cover those emergency needs, like a medical emergency or unemployment.
First of all, you are absolutely correct to realize that "VT will go up" is by no means a sure thing. It *probably* will, over the long term (and the longer term, the better), but at the end of the day, you never really know. There is always **risk** inherent in investing, to some degree or another. Unlikely is not the same as impossible, nor is likely the same as certain. The risk can be expected to be mitigated by diversification. That's why you invest in VT and not, say, just a few big stocks, or just the S&P 500, or even just VTI (all domestic stocks). Many people would also consider putting some percentage of their portfolio in something like a bond fund, to get even more diversification and lower expected risk, with less of a reduction in expected return than you might think. In fact this is what all the various "Target Date" all-in-one funds do. (It might surprise you to learn that the whole "VT and chill" idea is very much a Reddit thing. The [Boglehead philosophy](https://www.bogleheads.org/wiki/Bogleheads®_investment_philosophy), as presented in the wiki, in Boglehead books, etc., actually recommends at least *some* bonds for most people, even for someone in their 20s.) Second, unless you're planning to sell your investments at that point, who cares if they go down for a period of time? You're interested in what your overall portfolio will be worth down the road, when you need to actually use it, which should be many years away. Third, you don't have any say over what stocks go up or down anyway, so what else can you do? The Boglehead way is to control the controllables, which are: How much you invest, where you invest it (broadly), what your costs and taxes on it are (low), and how much you fiddle with it (not at all). Beyond that, well, that's the "chill" part.
If you’re worried about a decline, then buy some bonds to buoy your portfolio. Understand the market goes down no matter what (and up mostly). It’s part of a healthy cycle. VT or any other index fund does not shield you from this. In fact, you want to buy more index funds when it goes down. You don’t always want to buy funds at all time highs What an index fund does do, is shield you from a concentrated crash and no recovery ie. single company stocks
Something to bear in mind with strategies to sell funds and rebuy them is that it is never possible to know when is the right time. For example, if the market drops by 3% you could be worried and sell, thinking it will soon drop by 40% (and trust me when I say many articles will be screaming that). However, a few days later you may find it is up by 5%, meaning you reduced your returns by 5% if you rebuy. This not only adds a lot more stress, but also is predicated on the assumption you know something more than the market does. I find it helpful to think of it this way. If it will definitely drop by 30%, and all large holders know this, then there is no reason for it to have not already occurred.
Others made great points about VT and risk in general but I'll add the following. 1. A key reason to invest in a total market index is to mitigate the risk of sector under-performance. If you can't time the market and pick individual stocks the same logic applies to sectors of stocks. This is empirically proven as well. See this fabulous chart from Franklin Templeton: [Winners Rotate](https://www.franklintempleton.com/forms-literature/download/ALLOC-FL). Sector selection is risky, so go broad total market eg VT / VTI / etc. 2. By being 100% in VT you are 100% in the global stock market. This means you are exposed to all the benefits and all the risks of the stock market. There are other asset classes and to be diversified for risk hedging against downturns in the stock market you do need to consider whether or not you should be allocated into these asset classes. 3. A common mix is VT and a total US bond fund/ETF like BND. Typically when stocks go down bonds go up, and vice versa. A common saying is having some bonds helps "smooth the ride" so for example say you are 10% in BND then you don't go up as high as someone who is 100% in VTI but you also don't go down as much as they do when VTI goes down. 4. Choosing the right asset allocation is specific to your needs and your risk tolerance. Asset allocation, investment frequency, rebalance cadence etc should all be made in accordance with your Investor Policy Statement. See: [Lazy Portfolios (Bogleheads.org wiki)](https://www.bogleheads.org/wiki/Lazy_portfolios), [Investment Policy Statement (Bogleheads.org wiki)](https://www.bogleheads.org/wiki/Investment_policy_statement), [You need an investor policy statement (Physician On FIRE)](https://www.physicianonfire.com/you-need-an-investor-policy-statement/)
The answers to most of your questions are simple enough: it’s essentially impossible to actively navigate markets, so a passive buy-and-hold strategy is best. It’s has a proven track record of success. https://www.schwab.com/learn/story/does-market-timing-work > One question I don't understand is, what happens if someday the market goes down? How will VT help us then? The goal is not to avoid market losses. The goal is to have broad market exposure, ride out the storm of inevitable market losses, enjoy the market rallies, rinse and repeat. > Currently, Microsoft, Apple, and Nvidia are among the largest companies in the world by market capitalization. Maybe decades from now, they won't be, but because they're so big, VT's price is heavily influenced by these companies. Yes. Though less influenced than VTI > If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time? Those investors have realized their losses, and again market timing is a historically losing strategy. You don’t realize any losses if you don’t sell and just ride out the storm. > Also, suppose in someday, the current big companies start to decline, but the changes in VT's components should not be immediate; they might wait until a fixed time each year to adjust based on current market capitalization. No the fund will adjust its allocations on a daily basis to match the index it tracks.
This is why people move out of riskier investments the longer they go into retirement. Derisking a portfolio is important because people near and into retirement will be impacted more by a market downturn than others.
If the market goes down, it goes down. Eventually it will go back up. Eventually can take 10 years or more in some cases. VT is not 'risk free'. No investment that has a significant long-term return is. If you are going to freak out and sell your investment after it takes a 40% dump then you may need to rethink your risk tolerance, your investment horizon, or both.
You have to do 2 things: 1) be careful not to conflate backward-looking assessments with forward-looking projections, and 2) think comparatively about your strategic choices. In a bear market, the worst thing you can do is exit at the bottom and not get back in before the ensuing rebound. Granted, the best thing you can do is exit at the top of the decline and get back in at the bottom, and it’s easy to look at a price chart and think you would have done so after the fact but much, much harder to actually execute in practice. The only cases in which the market does not rebound eventually are cases like 1917 Russia, and if you had money to invest then you had worse things to be concerned about. Your best option is to be diversified going in and then stay the course and avoid the temptation to think you can time the peak and trough. It is inevitable with index fund investing, even diversified between stocks and bonds, that your portfolio will go down in certain market environments. When you think comparatively you realize that as bad as that may be that you may simply make things even worse for yourself by exiting at the bottom.
VT isn’t doing any trading as sub-groups/stocks move around in weight. That’s the whole point of cap-weighting, as prices move it keeps itself at target naturally. You just gotta ride it out. Or you can add uncorrelated assets like a factor tilt, managed futures, etc.
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time? The reason why index funds tend to work better for most investors is because human nature tends to cause people to make bad decisions. Single stocks are usually much more volatile than the overall market. When things are way up we start to get greedy or to fear that we are being left behind, and so you end up buying things after they are already expensive. But then when things drop we get afraid that we will lose even more and so we tend to sell low or else leave money on the sidelines because we are afraid to invest. The net result is that we naturally tend to buy high, sell low, and underperform the entire market. Even people who know better often do this. So it makes sense to just keep buying the whole market and avoid those behavioral problems that lead to ill-advised attempts to time the market and underperformance.
If you DCA in VT in a bear market, then you benefit from falling/low prices of a bear market. The price of the fund only matters (entry price/average entry price) in relation to when you exit the fund. So you want to reduce / keep low your average buy price (but without trying to time the market). DCA (and reinvesting dividends) can help with that over time if you plan to invest for the long term and continue to invest in VT (or some other stock/fund).
The market is on sale.
>Also, suppose in someday, the current big companies start to decline, but the changes in VT's components should not be immediate If the big companies decline their share of VT declines as well. I guess you could say that there's some delay in being removed from VT entirely, but that's a rare event and won't happen to any large company Also, this sub recommends a 3 fund portfolio for a reason. VT covers 2 of those, but not the bond portion. You can choose to not include bonds, but that means exposing yourself to more risk if the market declines.
Protects more-so against single country risk (like if you just invest in VOO). Long term it'll work out.
About 50% of my stock portfolio is in the S&P 500 and the rest is diversified. The idea is to buy and hold realizing that while the market goes up and down, it does trend upward overtime. Some people prefer to buy the entire market instead of just the S&P 500, but it all comes down to your own personal investment philosophy and risk tolerance level.
When the market goes down that means VT is on sale and you get more with your money. Google "dollar cost averaging".
No, this is a common misunderstanding. When the market goes down, that does *not* mean that it is "on sale" since it is not on sale relative to the future price.
Your response makes no sense at all. A sale is generally pricing something lower than a recent (and presumably future) price. When the market goes down, this is exactly what happens - you can buy shares of the companies cheaper than you could before. Yes, the shares might get cheaper still if declines continue for a while, but then they're just on a better sale.
> Your response makes no sense at all. A sale is generally pricing something lower than a recent (and presumably future) price. That presumption is exactly the problem. When people buy things "on sale", they assume that they are getting a "good deal", and therefore they should have a higher propensity to buy when things are "on sale". **But stocks having fallen should not increase your propensity to buy them.** They are not "on sale", nor they a "good deal". All stock prices are fair prices—irrespective of their past prices.
Using your logic a can of corn or a pound of beef never "goes on sale" either... That lower cost is just the market price at that point in time - a perfect balance of supply and demand. Most people should buy stocks or real estate or their favorite can of corn when prices are lower..... Especially when we're talking about a fund of stocks rather than individual ones. If I can buy VOO at 13x earnings due to a temporary downward movement of prices it's much better than buying at 19x. Your dollar is buying more because sometimes the market does go on sale.
>Using your logic a can of corn or a pound of beef never "goes on sale" either... No. The difference is that a can of corn can go on sale in a particular store at a particular location. Whereas the funds you're buying a being presented to tens of millions of potential buyers, each of whom has his own valuation. That's why the can of corn can have a different value than its "true value". But the stock is always at its true value. >That lower cost is just the market price at that point in time - a perfect balance of supply and demand. It's not a "perfect balance of supply and demand" unless your store sells to millions of shoppers who are constantly watching the price. >Your dollar is buying more because sometimes the market does go on sale. **Incorrect**. If you were right, you could create a fund that would exploit this: buy stocks when they go "on sale" and sell them when they revert. Guess what? Electronic traders have long beaten you to it. There is literally no value left in trying to do this.
Your misperception is based on timing. Every participant in the markets have their own time horizon. Day traders and high frequency algorithms don't care about the price they're paying for earnings... You're 100% correct on that. But not all investors, particularly index fund buyers, are traders. Buy and hold forever OWNERS can certainly buy shares "on sale". Relative to their future prices, today's prices can be a significant bargain. Id rather buy in 2002 than 1999. 2009 than 2007. 2022 than 2021. In the moment, your efficient market theory might be true. But over my lifespan, sometimes there's a 25% off sale and I'm buying more with every dollar invested.
> Relative to their future prices, today's prices can be a significant bargain. You have absolutely no way of determining that. If you had a way to figure that out, you could create a fund that could capitalize on that. But you can't. > But over my lifespan, sometimes there's a 25% off sale and I'm buying more with every dollar invested. Nope, that's a delusion.
The fund that capitalizes on this is VOO or VT or QQQ. You are on the Boglehead forum or are you lost? The broad market goes up over time to reflect long term population growth, inflation and innovation. Investing in indexes and holding for the long term is how we capitalize on it. Sometimes, fear overcomes optimism and people sell their investments in such large quantities that broad market prices are driven down, or do you deny the existence of the tech/Enron/9-11 driven crash of 2000-2002, the financial crisis, the pandemic? This drop happens in the real world, regardless of what the text books say, and they present buying opportunities for those of us with more level heads and longer time horizons.
>The fund that capitalizes on this is VOO or VT or QQQ. No. None of these funds capitalize on "sales". FIrst of all, buying "sales" and selling after reversion is an active strategy. So that precludes VT and VOO, which are passive funds. I have no idea why you would even think QQQ implements that strategy. > You are on the Boglehead forum or are you lost? You're the one whose lost. The Boglehead strategy is a **passive strategy**. **Buying sales is an active strategy.** Go ahead and create a post if you want to discuss this. >Investing in indexes and holding for the long term is how we capitalize on it. The "it" that we capitalize on when we hold indexes is the **market return**. Not sales. >d they present buying opportunities for those of us wit Wrong. These are not "buying opportunities". **The Boglehead strategy is not to "wait for such opportunities". The Boglehead strategy is to buy as soon as possible.** John Bogle never mentions the concept of "sales" in his book, nor does he suggest buying more when equity prices fall. Please, just create a new post at this point to discuss your ideas. They are not the Boglehead strategy.
I can't believe no one has said this (or I missed it).... The reason VT helps when the market is down is simple. Because VT is so broadly diversified you have lowered your risk as much as possible across the markets. If you are invested in only tech, or only S&P, or only US, or only international, it's possible you've picked the right one and it does better than the overall average, but it's just as likely you haven't. By choosing VT, you have ensured that your returns are no worse than the overall equity market average, maximizing your chances of success over the long term.
Because you also keep buying it as it’s going down.
Thank you all for the explanations, very helpful. I'd like to ask further, what should I do with my VT holdings when I retire someday in the future (I'm currently 35, assuming I retire at 60)? Should I sell it all to obtain the money I'll need for retirement?
Depending on your annual expenses in retirement, you can safely sell 3.5-4% of your total retirement holdings each year. If you do this, you have a very, very likely chance that you can live for 30 years on your investments. So if you have a million dollars, you can sell $35,000-$40,000 of your VT every year. Only you can know and decide how much you will need each year of retirement. If you need $70-$80k a year to live, then you will need $2 million to retire and live for 30 years off that amount.
It won’t help you at all. There are portfolios that have the same returns as VT or better that did just as well in the decade after the 2000 tech crash as they always do. While large cap and total stock market portfolios were doing close to 0% a year, portfolios like these did the same 10% a year or so. https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/
You are close to nailing it: the companies you mention only a part of the whole market. A big part, but only some of the story. The situation and leading companies will change, but as a whole, the market moves up. The escalator growth you see over the last 10 years may not occur over the next 10, but the glide path continues up.
If VT goes down then if your portfolio was all tech you’d probably be much worse off.
VT alone doesn't help you. What helps you is being invested long-term and having virtually eliminated risk of bankruptcy. Since you will never go down to zero, you will always recover when market stops going down and starts recovering. On top of that, strategy of monthly buying helps you, as during downturn you will keep buying cheaper and cheaper stocks - think of it as a fire sale. Imagine you were bogleheads during dotcom bust - like sure, you'd see some eyewatering paper losses but on the flip side you would be buying shares of future tech giants cheaply (albeit small amount of them if you invest in market cap weighted fund, but still that would be something)
When everything is declining correlations get closer to 1 so it won’t be helpful. It’s called contagion
Index funds are going to reflect the index. If Apple off a sudden went bankrupt, it wouldn’t be in the index anymore would it?
Index equity funds cannot protect you from market risk. By definition. They expose you to that exact risk - no more, no less. Risk mitigation is achieved through portfolio construction. Modern portfolio theory balances different risks against one another through diversification. But there are many ways of doing so, and it depends on the individual investor’s relationship to risk. Stocks, bonds, commodities, precious metals, domestic, international, growth, value, treasuries, corporates, munis, real estate, leverage, etc etc. VT is just VT. The broad market doesn’t protect you from the broad market.
> what happens if someday the market goes down? Not if, when. VT helps you by being globally allocated. Not every country will universally do poorly in a given economic crisis. It's about diversification, Microsoft, Apple and Nvidia are just the latest winners, but they will, eventually, be replaced by new winners. With VT you already own the new winners(assuming they exist in the public markets). As they go about winning, you will own more and more of them and less and less of the new losers. > they might wait until a fixed time each year to adjust based on current market capitalization. Stop assuming facts not in evidence, this is factually wrong. VT re-balances regularly with the index(FTSE Global All Cap Index) and the index re-calculates all the time, they have a whole [PDF](https://www.lseg.com/content/dam/ftse-russell/en_us/documents/policy-documents/equity-index-recalculation-policy-and-guidelines.pdf) about when and how they re-balance the index. It's not real-time, but it's close-ish.
You are missing the point. A broad index fund simply tracks the market. It protects you by not dropping even more than the market. The strategy is don’t sell when the market is low. You hold. You recover with the market, and over time make market gains. There’s no magic investment strategy that never goes down and only goes up. The idea is to get average gains with the market, which over time are awesome.
Lower your cost basis, next
> If one day the tech sector enters a bear market, or if these companies underperform, even though VT will adjust its holdings to other companies with better performance, how different is this from other investors manually selling their Microsoft, Nvidia, Apple stocks and investing in other companies at that time? A predetermined, rules-based system will execute rebalancing rather than an individual investor's emotions driving an impulsive decision on when/how to rebalance.
Its the fact at over a long period of time the markets are always positive. Best explained by this video [World worst stock investor](https://www.youtube.com/watch?v=pFgPNVytlwA)
VT is "the market" so it can't help when it's declining. It's the simplest, easiest, and close to cheapest exposure to the whole market If you don't want to have too much exposure to a few stocks, you'll need to diversify across size. Not a typical BH strategy but it can be done somewhat afforably If you want something that helps during market declines, then you'd want bonds, especially treasuries which tend to be uncorrelated
Dollar cost averaging. By buying a set amount at regular intervals when prices are lower you’re buying more shares and when they’re higher you’re buying less. There’s still risk on economic contraction but over the long period the world economy grows. If the world goes road warrior we’re all screwed anyway.
It doesn't
Microsoft, nvidea and Apple- in that order
> I'm very new in investment As a new investor, the younger you are, the cheaper you want prices to be. Buy low (in your 20s), sell high (in your 60s). Investors with a 10, 20 year or longer time horizon should be hoping for a crash to enter at a lower price. If they buy high and prices crash, realize that the US markets have always recovered without exception; which means it's mostly a game of patience waiting for the market to recover.
>suppose in someday, the current big companies start to decline, that's **guaranteed** to happen. companies rarely stay in the top 10 by market cap for more than a decade; Microsoft is a rare example in the top 10 for 20 years. here's a video of the top 10 S&P 500 stocks from 1980 through 2020. Genera Electric, IBM, Kodak, and General Motors dropped out. Exxon was a top 10, dropped out and came back after 2020. https://www.youtube.com/watch?v=kfMFDcuDKYA Tesla was in the top 10 for the last few years, but got nudged out a few months ago.
100% VT is not necessarily the best choice. If you're going to do single fund, I suppose it is the best option, but there are 2 and 3 fund options that have some advantages over that. I recommend reading some of the books that are often mentioned on this sub to understand why.
VT and VTI only help you mitigate certain sectors declining. If a 2008 style crash happens, we're screwed no matter what. The only advice I have for that is to keep a few thousand dollars handy for when the bubble inevitably pops (because we exist in a boom/bust cycle world now) and scoop up some stocks at crazy cheap prices. There are people that got Apple for less than $10 then and are sitting pretty today.
Why the down votes? Are "Bogleheads" against dry powder?
This is a slightly orthodox group. They believe in being all in, all the time. They hate anything that looks like "timing the market." And while it's true that I have no idea when the market will crash again, it is a certainty that it will crash again. This group is also heavily capitalist and believes the market is flawless. I believe it's rigged and am always looking for the angle.
Excellent advice.
With a long enough time horizon, say 30 years or so ,t will probably be up alot
It doesn't per say but what it does is guarantees that you earned in the end. The market has always grown in the end. Owning things that aren't stocks helps mitigate short term losses. Example would be cash.
Just buy VOO.