A cautionary tale

This is a cautionary tale of how “inertia” can really cost you a lot of money.

I thought everything was on automatic pilot.

I had been funding my Vanguard account for years, and with a few hot years after
the financial crisis, I figured (around 2013) that the market was ready to take an extended breather. I sidelined some money, in some cash and money market accounts within Vanguard and created a short list, of what I called my “rip-cord” list, for investments I wanted to make, when the market pulled back.

Guess what?

The market never really “pulled back”.
At least not significantly enough.

That was a big mistake.

Life happened

Not only did the market slowly churn on higher, soon before that break, I had successfully paid off my mortgage. That was in 2011 and I haven’t added any “new money” to any retirement account since 2012. I was comfortable, and didn’t feel a need, and our immediate expense needs took priority. So the retirement money, while still a significant portion of our net worth, was on the back burner.

Then we found our “dream” vacation home in Maine. You can read more about that here. I was hoping to do an all cash deal for the home, so, with no other sources of capital, we decided to each withdraw $25K from our accounts, and fund the balance of $20K to $30K through savings.

Then my wife lost her job.
Then my sister got cancer and I was a bone marrow match for her.
You get the picture…things roll on.

Granted, this wasn’t my only investment account, and I did quite handily beat the market in 2018, which you can read about here. However, the nature of Vanguard is “mutual funds” that traditionally, discourage investors from moving in and out of funds rapidly. I pretty much thought I was covered, but when the rest of the market was zooming ahead, with 20% annual gains, I started to wonder why I was still averaging just 6.5%

Set goals

Sometimes goals are elusive…even when it means just setting them. People are always skipping around extolling the virtues of “setting goals” but sometimes, I veg out for a couple years. How’s that gonna work? Inertia can be your enemy when investing.

I have 2 big reasons for revisiting this, with a more serious focus.
1. My dream of owning a vacation home is not materializing
2. Since we are a one income family, I have limited resources for new investment money

I’ll talk about this second point first. When you’re “fat & happy” and you see a big balance, you (or at least I have sometimes) can become lazy about maximizing your returns or re-balancing. When you’re not adding new money all the time, then this becomes even more dangerous. I’m starting to think that going to 100% cash, and dollar cost averaging into new funds, might be a good way for me to “wake up” and look at the returns of each fund.
I think people that have come up from modest means might actually be more susceptible to being lulled into complacency, around a larger balance. You start thinking “this is more money than I thought I’d ever have anyway, why should I obsess about it?”

Trust me. OBSESS ABOUT IT?

That brings up an entirely different topic about “the psychology of investing”. Get help, when you need it.

Getting back to “my vacation dream home”, this, as a goal has also become evident, because of my lack of new funds. Over the past year or so, I’ve allowed myself to make early withdraws from one of my own accounts to supplement our income, when absolutely necessary.

While my investment returns have covered those withdraws, the “buying power” of the balances, hasn’t increased, if I need to consider those totals, as a source of funds for my “vacation home”. The total balance needs to grow!! (with increased certainty) Even at 100% cash, earning 2%, I’d still be adding to the year end total.

For this, I’m going to focus on lowering my fees, by fewer trades. Lowering my risk, by making smaller initial investments. I used to agonize over $100 to $500 investment. Now, I’ll invest $5K without FULLY understanding the investment. That’s risky. In summary here, (mainly because of my current circumstances) I’m starting to consider these funds as resources that could be tapped sooner, rather than later.

When you’re employed and adding $10K per year of new money, you can (almost) ignore fluctuations. When you start saying, “I might be pulling out $50K in the next year or two”, you really can’t afford fluctuations, and you really can’t afford to simply “break even”. While it seems obvious. It can be a real “mental shift” hurdle. If that’s being handled for you by a “target fund” or a financial planner, or even by simply sticking with an index fund, then great. If not…you must make the mental adjustment.

Even when I called Vanguard, about 2 years ago, I didn’t get any detailed investment advice that I could use. “Services” and investment advice is how the mutual fund industry plans on growing its’ revenue in the future, so keep an eye out for those costs in the coming years. Since I was frustrated without feeling like I had any good direction, I turned where everyone turns….to Reddit. I received some very helpful advice.

Here’s what I originally posted on Redit

How can I tweak the distribution in my Vanguard funds?

Overall, my portfolio has lagged the market. I think it’s fairly conservative and I do have a small percentage in cash, not shown here, but why is this group of funds not knocking the cover off the ball? Over the last 10 years, my rate of return has been 6.6% (per year).

Below is the ticker, the fund name, and the total % of my portfolio that is invested there….

What do you think?

VBTLX Vanguard Total Bond Market Index Fund Admiral Shares 15%

VDIGX Vanguard Dividend Growth Fund 19%

VDVIX Vanguard Developed Markets Index Fund Investor Shares 4%

VGPMX Vanguard Precious Metals and Mining Fund 5%

VHGEX Vanguard Global Equity Fund 15%

VMVAX Vanguard Mid-Cap Value Index Fund Admiral 9%

VTMGX Vanguard Developed Markets Index Fund Admiral Shares 7%

VTRIX Vanguard International Value Fund 2%

VTTVX Vanguard Target Retirement 2025 Fund 4%

VWNFX Vanguard Windsor II Fund Investor Shares 21%

And here is the detailed reply I received

not sure what market index you think you are lagging since you have a more diversified portfolio than say the S&P500. Your bond holdings by themselves will cause you to trail the S&P (at least in the recent bull market). That being said, the main reason for your underperformance is you are pretty much only in Value stocks. You don’t have a value tilt, but a full on value portfolio. You own pretty much 0% of $AAPL, $NFLX, $FB, $AMZN, $GOOG, which were some of the biggest drivers of growth over the last few years. Looking at a list of the 40 highest returning stocks of 2017, I don’t know that you own any of them. Aside from Microsoft, you are way underweight in the tech sector.

I’m pretty sure Your dividend Growth and Windsor II have a lot of overlap. You should dump one of them and replace it with the Vanguard Technology Fund, US Growth Fund, or Morgan Growth, or even the Growth Index Fund. Even though a lot of tech is possibly over cooked at this point and could see some pullback, if that happens, it probably will pull the rest of the market down with it anyway. I would also dump the 2025 Retirement fund since it just holds a mix of funds you already own, just in different ratios. No need to hold Developed Market index investor shares when you already have the Admiral shares version. You are just paying a higher expense ratio for the same exact thing.
I would dump the precious metals too. It is averaging -8.32% over the last 10 years. I understand some people want the diversification, but I would rather have a REIT if you want to hold something outside of traditional stocks and bonds.

It takes time and discipline

I was really touched by the thoughtful reply and the time this person took out of his day to help me.

I’m going to save my re-balancing efforts for another post, because they’re not complete yet.

You could use a lot of “axioms” to sum up this situation. One that comes to mind is “Penny wise and pound foolish”. I had a lot of funds that held “crossover assets”, and was excluding entire sectors with large growth potential. I had 2 different version of the same account! One had an expense ratio of .17, and the other was .07. That’s just not smart and laziness. When you really have your investments firing on all cylinders, you are minimizing ALL of your costs.

My wife is one of my biggest supporters, so she takes the positive aspect on an event like this. She says, at least you didn’t “lose” it, or it didn’t go down. I’m not quite as easy on myself. Time is something we’ll never get back, and investment time matters, especially when you’re time horizon is shrinking. However, in my defense, having a larger amount in bond holdings does tend to prevent wild swings to the downside. Since interest rates have been so low for so long it really limits the upside.

Most people just don’t realize how much time it takes to manage your investments. That is one of the biggest arguments for doing all this through index funds that simply mirror the markets’ returns. After 5 years of simply breaking even, they’re making a convert out of me. The daily pressures of work and family really require more and more focus today and there is less time for contemplating about your investments. Heck, in simple interest alone, I’ve allowed large sums of money to sit idle, without even making 2% on it. That’s a really big mistake, which I know better, but as I said, inertia is a big enemy, and time moves on.
Below is a simple graph, without revealing the balance, but, it’s evident that these returns have flat lined for 6 or 7 years. OUCH!

Summary take away

In summary, these are all the things that happened to help us “tread water” during the last 5+ years:

1. Not adding new money to investments
2. Withdrawing money from existing investments (for whatever reason)
3. Being invested too conservatively
4. Trading frequently (higher commissions) (Future post)
5. Not holding investments long enough. (Future post)

Like I said earlier, maybe this could be a lot worse, but after years of investing, I know that one of the cardinal sins, is to lose purchasing power.

Here are some short tips:
1. If you “sideline” some money to take less risk…DON’T FORGET ABOUT IT.
2. If you have a windfall, or eliminate a big monthly payment (i.e. pay off your home), Don’t be lulled into complacency about adding new money to your investments.

Your money should always be “working” for YOU, not the other way around.

Time to get back to some basics.