Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

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MrCheapo
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Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by MrCheapo »

I've got quite a bit of money to dollar cost average into the market over the next 5 years.

Normally I'd dollar cost average into index funds but I was looking at my returns over the last 10-20 years and the active managed funds I have matched and even out-performed the index funds sometimes by a lot. So I was going to dollar cost average into the SP500 and some growth funds as well. Thoughts on which ones?

In particular the strategic equity fund matched for the most part the SP500
The mid cap growth fund VMVAX beat it by a lot for the best part of a decade.

Any other suggestions of actively managed funds to complement the SP500? I like the above two because they are mid and small caps.
Last edited by MrCheapo on Tue Jul 27, 2021 8:52 pm, edited 1 time in total.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Dollar Cost Average Into?

Post by grabiner »

Past performance should not be the reason you choose a fund. Half of all funds will beat the index before expenses, and at Vanguard, with low expenses, almost half will beat the index after expenses, but it won't be the same half in the future that it was in the past.

Rather, you should choose a fund because its investment philosophy fits your needs. I used to hold the Windsor fund, not because it had done well (although it had), but because it was the best way for me to get the value exposure I wanted; at the time, Windsor offered better value exposure than Value Index. (I now get my value exposure from Vanguard Factor Value ETF.)

Also, you need to use the proper benchmarks when evaluating fund performance. Vanguard Mid-Cap Growth (VMGRX, not the mid-cap value index VMVAX) has underperformed a mid-cap growth index over the last decade, which is its benchmark. Whether it outperforms a large-cap blend index such as the S&P 500 depends primarily on whether growth outperforms value and mid-caps outperform small-caps.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Dollar Cost Average Into?

Post by MrCheapo »

Of course, I was just a bit surprised to see an actively managed fund could beat the SP500 fund over a decade.

I chose the two I mentioned because they complement the SP500 by being mid/small cap focused.
grabiner wrote: Tue Jul 27, 2021 8:38 pm Past performance should not be the reason you choose a fund. Half of all funds will beat the index before expenses, and at Vanguard, with low expenses, almost half will beat the index after expenses, but it won't be the same half in the future that it was in the past.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Dollar Cost Average Into?

Post by grabiner »

MrCheapo wrote: Tue Jul 27, 2021 8:46 pm Of course, I was just a bit surprised to see an actively managed fund could beat the SP500 fund over a decade.

I chose the two I mentioned because they complement the SP500 by being mid/small cap focused.
And if your current holdings are in the S&P 500, it does make sense to complement the S&P with a mid-cap or small-cap fund. You can use Extended Market Index, which holds everything not in the S&P 500, or an active fund in the same niche.

Again, I have done this both ways. When Vanguard's international index funds were all large-cap, I added International Explorer for small-cap, because it was less expensive than the existing ETFs. Then, when Vanguard added its own international small-cap ETF, I used that instead. (This had the further benefit that I could hold the ETF in my taxable account, freeing up room in my Roth IRA for other things; International Explorer had to be in the Roth IRA because of the high tax cost.)
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by GLState »

VMVAX is a mid cap VALUE fund, not a growth fund and trailed the total return of VOO by quite a bit. The mid cap GROWTH fund beat VOO by a bit but has lower Sharpe and Sortino ratios than VOO. Are you sure you're looking at the Total Return of the S&P 500 and not just return based on price?

If today was 2018 or before, you would want to buy the mid cap value fund rather than the growth be cause was outperforming.
Last edited by GLState on Tue Jul 27, 2021 9:19 pm, edited 2 times in total.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by retired@50 »

Duplicate. See post above by GLState.

Regards,
Last edited by retired@50 on Wed Jul 28, 2021 1:27 pm, edited 1 time in total.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by Elric »

MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.
Just to be clear, is this money you have available now, but plan to spread out investing, or do you anticipate getting this money over the course of the next five years?
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by MrCheapo »

Elric wrote: Tue Jul 27, 2021 9:21 pm
MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.
Just to be clear, is this money you have available now, but plan to spread out investing, or do you anticipate getting this money over the course of the next five years?
I have it now. About $400K.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by grabiner »

MrCheapo wrote: Tue Jul 27, 2021 9:27 pm
Elric wrote: Tue Jul 27, 2021 9:21 pm
MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.
Just to be clear, is this money you have available now, but plan to spread out investing, or do you anticipate getting this money over the course of the next five years?
I have it now. About $400K.
If you have the money now, dollar-cost averaging it in over five years does not make sense, as you will miss out on an average of two and a half years of stock-market returns.

The reason for voluntary dollar-cost averaging is psychological, not financial; if you are greatly increasing your stock-market risk, you may want to do that gradually. So it is reasonable for new investors, or investors with huge windfalls, to dollar-cost average over about six months. The expected cost of averaging over six months is only three months of market returns, since you average half the money invested over the time; the cost of going all-in and then pulling out if the market crashes in the first month may be greater. But the longer your averaging time, the greater the cost, and the less the psychological benefit; will you really be much better prepared for a bear market in five years than in one year?
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by RickBoglehead »

S&P 500 plus the other funds equals... Total Stock Market.

DCA is a great strategy if someone wants lower returns than lump sum investing. https://www.bogleheads.org/wiki/Dollar_cost_averaging

The Boglehead philosophy is to avoid managed funds. Past performance doesn't indicate future performance. Some, including myself, own a managed fund or two. We invested in Primecap decades ago, and it was so good they closed it to new investors.

Really little purpose in stating why you want to do something that a forum views as the opposite of what it espouses, except to stir the pot, IMO. I don't go on the EV forum and talk about the gas guzzler I am going to buy. :oops:
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Dollar Cost Average Into?

Post by nisiprius »

Don't choose based on past performance. If you want to depart from the total market, you ought to have some bedrock, fundamental convictions about the categories of stock you prefer and are willing to commit to, and be able to say why. And not just because they did well. Past performance is a test, not a reason.

Just for the record, there is a statistical risk factor known by the same "quality" (which I think is misleading) and there are products that invest in stocks that load heavily on the "quality factor," such as iShares QUAL and the Vanguard Quality Factor ETF, VQTY. It isn't actively managed. I don't think this is what you mean by the word quality, I would not count on this ETF outperforming, Vanguard does its best to warn off individual investors from choosing these factor ETFs, and I think they would be a bad idea.
MrCheapo wrote: Tue Jul 27, 2021 8:46 pm Of course, I was just a bit surprised to see an actively managed fund could beat the SP500 fund over a decade.
It shouldn't surprise you.

Part of the problem with investing is that financial data is badly behaved and doesn't settle down to an average the way you intuitively expect it to. For whatever reason, financial assets experience ups and downs and periods of outperformance and underperformance that last for periods of, let's say five to fifteen years. One of the traps people fall into is that these seeming "cycles" are so obvious in charts of past data that it is almost impossible to believe that you can't predict them and time the market.

The Legg Mason Value Trust beat the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005. Every single year. Naturally that meant that a lot of investors put money into it, and most of it went during the later years of that period. And it meant nothing, because in just catastrophic three years it lost back all of those gains. In theory from 1991 through 2009 it matched the S&P 500, but it actually represented huge losses overall because almost all the money in the fund had one into it while it was up.

Source

Blue line: Legg Mason Value Trust, now renamed Clearbridge Value, outperforming
Image

Blue line: Legg Mason Value Trust collapsing
Image
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by ruralavalon »

MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.

Normally I'd dollar cost average into index funds but I was looking at my returns over the last 10-20 years and the active managed funds I have matched and even out-performed the index funds sometimes by a lot. So I was going to dollar cost average into the SP500 and some growth funds as well. Thoughts on which ones?

In particular the strategic equity fund matched for the most part the SP500
The mid cap growth fund VMVAX beat it by a lot for the best part of a decade.

Any other suggestions of actively managed funds to complement the SP500? I like the above two because they are mid and small caps.
MrCheapo wrote: Tue Jul 27, 2021 9:27 pm
Elric wrote: Tue Jul 27, 2021 9:21 pm
MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.
Just to be clear, is this money you have available now, but plan to spread out investing, or do you anticipate getting this money over the course of the next five years?
I have it now. About $400K.
Don't choose funds based on past performance. If you look at performance at all look at longer than just 10 years.

In selecting funds strive for a combination of both broad diversification (to reduce risk) and low expense ratios (to increase your net returns). Use index funds when possible.

As others have mentioned Vanguard Mid-Cap Value Index Fund Admiral Shares (VMVAX) is not an actively managed fund, and is a value fund so not fully diversified.

A S&P 500 Index Fund is an excellent choice for investing in U.S. stocks. For a little more diversification in U.S. stocks you could use a total U.S. stock market index fund, or add an extended market index fund.

Don't string out your investment of the $400k, I suggest investing all at once. Investing in a lump sum has worked out better about 2/3 of the time.

The compromise solution is part in a lump sum and part in stages. For example 50% in a,lump sum now, and the rest at 10% per month over the next 5 months.

Five years is far too long to delay. You run the risk of market prices being higher later.

It was always my policy to invest wherever I had money available to invest.

Are you already making maximum annual contributions to all available tax-advantaged accounts (401k, 403b, 457b, TSP, IRAs)?
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by MrCheapo »

Thanks, you are right, it is psychological but in a different way than you mention. I'm due to retire in 5 years and our pensions will cover our living expenses and other pre/post-tax retirement funds are substantial. So thanks to Vanguard and Boglehead mentality I've "won the game" and my psychological mind-set is I don't need to play aggressively anymore. By DCA rather than going all in I give myself some freedom to buy a new boat (if I become interested) or put down a deposit on a holiday home if I find one etc. Doing a lump sum takes that all away.
grabiner wrote: Tue Jul 27, 2021 11:07 pm
MrCheapo wrote: Tue Jul 27, 2021 9:27 pm
Elric wrote: Tue Jul 27, 2021 9:21 pm
MrCheapo wrote: Tue Jul 27, 2021 8:26 pm I've got quite a bit of money to dollar cost average into the market over the next 5 years.
Just to be clear, is this money you have available now, but plan to spread out investing, or do you anticipate getting this money over the course of the next five years?
I have it now. About $400K.
If you have the money now, dollar-cost averaging it in over five years does not make sense, as you will miss out on an average of two and a half years of stock-market returns.

The reason for voluntary dollar-cost averaging is psychological, not financial; if you are greatly increasing your stock-market risk, you may want to do that gradually. So it is reasonable for new investors, or investors with huge windfalls, to dollar-cost average over about six months. The expected cost of averaging over six months is only three months of market returns, since you average half the money invested over the time; the cost of going all-in and then pulling out if the market crashes in the first month may be greater. But the longer your averaging time, the greater the cost, and the less the psychological benefit; will you really be much better prepared for a bear market in five years than in one year?
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by ruralavalon »

MrCheapo wrote: Wed Jul 28, 2021 11:19 amThanks, you are right, it is psychological but in a different way than you mention. I'm due to retire in 5 years and our pensions will cover our living expenses and other pre/post-tax retirement funds are substantial. So thanks to Vanguard and Boglehead mentality I've "won the game" and my psychological mind-set is I don't need to play aggressively anymore. By DCA rather than going all in I give myself some freedom to buy a new boat (if I become interested) or put down a deposit on a holiday home if I find one etc. Doing a lump sum takes that all away.
If nearing retirement or considering a boat or vacation home then consider a more conservative asset allocation, meaning the split between stocks and fixed income.

Then lump sum into the desired asset allocation. For example if 50/50 then 1/2 into a very tax-efficient stock index fund, and 1/2 in a combination of fixed income investments like I bonds, CDs, bond funds.
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Dollar Cost Average Into?

Post by pkcrafter »

Thanks, nisiprius, this is an excellent example of typical market behavior.

Paul


nisiprius wrote: Wed Jul 28, 2021 6:43 am Don't choose based on past performance. If you want to depart from the total market, you ought to have some bedrock, fundamental convictions about the categories of stock you prefer and are willing to commit to, and be able to say why. And not just because they did well. Past performance is a test, not a reason.

Just for the record, there is a statistical risk factor known by the same "quality" (which I think is misleading) and there are products that invest in stocks that load heavily on the "quality factor," such as iShares QUAL and the Vanguard Quality Factor ETF, VQTY. It isn't actively managed. I don't think this is what you mean by the word quality, I would not count on this ETF outperforming, Vanguard does its best to warn off individual investors from choosing these factor ETFs, and I think they would be a bad idea.
MrCheapo wrote: Tue Jul 27, 2021 8:46 pm Of course, I was just a bit surprised to see an actively managed fund could beat the SP500 fund over a decade.
It shouldn't surprise you.

Part of the problem with investing is that financial data is badly behaved and doesn't settle down to an average the way you intuitively expect it to. For whatever reason, financial assets experience ups and downs and periods of outperformance and underperformance that last for periods of, let's say five to fifteen years. One of the traps people fall into is that these seeming "cycles" are so obvious in charts of past data that it is almost impossible to believe that you can't predict them and time the market.

The Legg Mason Value Trust beat the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005. Every single year. Naturally that meant that a lot of investors put money into it, and most of it went during the later years of that period. And it meant nothing, because in just catastrophic three years it lost back all of those gains. In theory from 1991 through 2009 it matched the S&P 500, but it actually represented huge losses overall because almost all the money in the fund had one into it while it was up.

Source

Blue line: Legg Mason Value Trust, now renamed Clearbridge Value, outperforming
Image

Blue line: Legg Mason Value Trust collapsing
Image
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Re: Thoughts on Quality Actively Managed Vanguard Funds To Complement SP500?

Post by JSPECO9 »

I wouldn't own any actively managed funds unless I really had to. But I guess if I did for whatever reason I really like Vanguard Dividend Growth Fund (VDIGX). Rules based, low turnover, low expense ratio, good management.
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