I have always taken care of finances in our family. My wife decided not to own a cell phone or surf the Internet and doesn't care to learn finance. When we are about to take Required Minimum Distributions from our IRAs, it is time to think about the financial future for each of us. When I was about to retire in 1996, my wife had been retired for a long time and had saved up money market funds in her IRA from the time IRAs first became available. We had many discussions concerning moving that money into the stock market to earn a greater return and finally, she gave in and allowed me to move her funds into two Vanguard Mutual Funds (VGHCX & VFINX). After March 2000, the market moved into a secular bear and VFINX as well as VGHCX went nowhere. I had always been a dividend growth investor and dripped my dividends, so the impact of the secular bear market was not as hard on my portfolio. I convinced my wife to roll her Vanguard S&P 500 index fund (VFINX) into the Vanguard Mid-Cap ETF (VO). This mid-cap index represents 39.3% of her total portfolio--11.3% higher than the US stock market average. However, she is comfortable with it. Mid-Cap stocks are more nimble than large cap stocks and grow their assets more quickly. During the .com bubble of 1982-2000 large-cap stocks grew at a slightly faster rate than mid-cap stocks (as represented by SPY vs MDY).
However, when the bubble burst, exactly the opposite occurred. By the time I noticed this, several years of gains had been lost. When diversifying a portfolio, an allocation of 30% should be made to mid-cap stocks and further diversification in small-cap stocks is also warrented. However, when your funds are limited an allocation to large cap stocks may have to suffice until you are able to invest new money. An additional reason that it took so long to increase her diversification was the lack of a mid-cap ETF at Vanguard. (data & charts from Yahoo!Finance)
It can be seen from the chart that VO went through the Great Recession better than the mutual funds VGHCX and VFINX. The yield on this ETF is 1.17%, but the expense ratio is 0.1%. I compared VO to SPDR S&P MidCap 400 (MDY) which was one of the first MidCap ETFs.
The charts are about the same, so I made up a table for comparison:
Dividend Growth Rate
With the above taken care of, I performed a dividend growth study to see how reinvesting the dividends would affect performance (I use $10,000 initial investment on the date of the ex-dividend):
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
I graphed the above spreadsheet for clarity.
As can be seen from the chart, growth from the bottom of the Great Recession was 2.4x or 19.36% per year. This is significant, when one looks at the last 9 years of the secular bear market (2000-2012).
I am of the belief that the secular bear market is over, as witnessed by the nature of the market this year and Mike Broudy's article "A Long Way to Go For Long-Term Investors". However, I think it will be 2017 before main street sees relief from the jobs deficit.
Conclusion: After analyzing both mid-cap ETFs, I selected VO for my wife's IRA. However, RMDs will eat through it in the next 10 years and Social Security and any inheritance that she might receive will be the bulk of her funds in later years. She still has Vanguard HealthCare fund (VGHAX) in a non-IRA joint account. It will be difficult to keep her portfolio balanced according the US Stock Market (as represented on Vanguard.com), but that is what I intend to do. I am also training my daughter in financial matters and she has more aptitude for this than my wife. It is best to have a trained relative in the family when asset transfers are required.
It is critical that one should know what they are investing in before they make the purchase. If you don't feel comfortable with making investment decisions, see a registered investment advisor.