Copper-Bottomed (the Vanguard Effect)

Each of us has a different ability to live with uncertainty (risk) and so our investments will be different:

  Remember each of us has different goals and needs, and our asset allocation should fit us and our family. If you have questions about your asset allocation, or your retirement plan investments, I’d be pleased to assist.

  Vanguard mutual funds and ETFs (exchange-traded funds) continue to perform as expected.  I expect each Vanguard fund or ETF, for each ten-year period to be in the top 1/3 before taxes based on low cost, and they ought to be in the top 1/4 (stock funds) after income taxes. Some individual funds have not met this standard. The comprehensive Vanguard Balanced Index Fund is, in effect, comprised of 60% Total Stock Market Index Fund and 40% Total Bond Market Index fund. Note that for the last 10 years this fund is in the top 21st percentile of balanced funds; Vanguard continues to perform well overall. The Vanguard High Yield Corporate Bond fund takes significantly less risk that the average “high yield” (also known as “junk bond”) fund. 

The Vanguard High Yield Corporate Bond fund takes significantly less risk that the average “high yield” (also known as “junk bond”) fund.  The Vanguard fund, which takes less risk, continues to rank highly in the rankings over the last ten-year period. Over the last ten years, the Vanguard fund has captured most of the excess of junk bond returns over good quality bond returns—meeting my expectation.  I continue to believe that, for tax-deferred accounts, this fund is a reasonable, additional diversification and comprises some of my personal bond holdings.

If you have questions about your investment asset allocation, please contact me.

The article below is excerpted from one which appeared in the June 21st edition of The Economist magazine, (the subtitle of which was “Stock investors ignore world-changing news. Rightly.”):

“Missile warfare has erupted in the Middle East. On June 13th, as the bombs began to fly, the S&P 500 futures fell by 1.6%. But as the hours passed, the stockmarket steadily climbed. The index has now recovered to around 6,000, a hair’s breadth from an all time high.

Such movements reflect a new market mantra: ’Nothing ever happens.’ The phrase emerged from the depths of 4chan, an online forum, more than a decade ago, and has become a popular meme among youngish investors. On the face of it, the saying seems wildly out of place in an era of both trade war and conventional conflict. But consider the long list of recent events that at first seemed to have epoch-making potential, only to fizzle out, and it appears more reasonable. Examples include China’s anti lockdown protests, the Wagner Group’s rebellion in Russia, and skirmishes between India and Pakistan. Xi Jinping and Vladimir Putin are still in charge. Nuclear war has been avoided.

And so cynicism prevails, dips are bought and markets continue to climb. Retail investors are getting into the act, too. They have piled into stocks, buying $20 billion-worth, net over the last three months. Crisis, what crisis?

The head-in-the-sand approach is a more sophisticated strategy than it first appears and not just because headlines tend to go over the top. As far back as 1988, a paper by [three MIT and Harvard university professors], sought to establish what really moves stock prices. The trio looked at almost five decades of world-changing events, from Japan’s attack on Pearl Harbour in 1941 and the Cuban missile crisis of 1962 to the Chernobyl nuclear meltdown in 1986. They were surprised to discover that the volatility of returns (as measured by the standard deviation) on the day of an important news event, was less than three times as large as on an ordinary day. Several of the biggest one-day falls identified by the authors occurred on days without an obvious news-related spark.

…changes in the global economy are blunting events that would once have caused turmoil. The oil shock in 1973 and the start of the Gulf war in 1990 both had a sustained impact on stockmarkets. Today, however, America is an exporter of energy owing to the shale revolution. This keeps its economy insulated from global affairs. Indeed, climbing global oil prices incentivize more exploration and production in America, boosting spending. America matters, above all else, for global stockmarkets.

The momentum of markets can be relentless. Shares tend to grind higher over time as consumers spend, entrepreneurs innovate and companies grow. Earnings per share for American firms have risen by over 250% or so over the past 15 years. For any event to have a meaningful impact, at least for longer than a few days, it must harm such dynamism.

Even President Trump’s tariffs—which unlike lots of geopolitical risks, have a direct and meaningful impact on the bottom line of many firms—have not been enough to break the growth engine that has powered American stock markets beyond all competition. Expected earnings of firms in the S&P 500 over the next 12 months are…very narrowly above where they were before Mr. Trump’s ‘Liberation Day’ announcement.

Of course, an event of sufficient scale to rattle markets may be on the way. That would upset dip- buyers. But what appears to be a witless stampede into stocks, even in moments of international tension and conflict, is really an appreciation of the power of capitalism. The news that matters tends to come from the real economy or financial system—not the world’s battlefields.”

Smartt comment: None of the above should be read as implying that there has been a repeal of the risk of loss in financial markets, especially the stock market We protect ourselves from having to sell stock when stock is “in the tank” by owning bonds as well as stock. If you wonder if your investments could better protect you from future market risk, please do not hesitate to contact me.