On July 1, 2015, after writing three introductory articles on core Vanguard ETFs, I introduced The ETF Monkey Vanguard Core Portfolio. Rather than rehashing the fundamental theory and assumptions behind the portfolio here, I will allow readers to review as little or as much as they wish of that original piece.
One of the decisions I made at the time was to actually build and track the portfolio in Google Finance. This would allow me both to evaluate its performance as time went on, as well as to actually run it as if it were my own portfolio, including choosing when and how to rebalance the portfolio.
Following Up On a Reader's Comment
In hindsight, the decision and effort to build and track the portfolio has yielded some great benefits. It has led to several follow-up articles, as well as allowing me to put into practice some theoretical ideas in a real-world portfolio. One of the decisions I made was to purposely incur trading commissions on every trade, to gauge my performance even for an investor who did not have a Vanguard account, and thus could not trade the ETFs commission-free.
Interestingly, it also gave me the tools to evaluate a reader comment on that third rebalancing effort. Here is a quote from that comment:
Fine article, Monkey, but, as Thoreau would say, "Simplify, simplify." While holding only three positions makes good sense, for just a little less net YTD apportioned gain between the Monkey Portfolio, I maintain my core position in VGSTX, Vanguard STAR, which has yielded around +1.93% YTD versus the Monkey +2.00%.
The comment sufficiently intrigued me that I decided to dig into the question a little further. While I was not immediately familiar with the symbol the reader featured, I am a big fan both of Vanguard products in general as well as anything that can offer good results to any investor, even one who has a relatively modest amount to invest.
I quickly found that this was the ticker symbol for the Vanguard Star Fund Inv (MUTF:VGSTX).
As it turns out, VGSTX is what Vanguard calls an "all-in-one" fund. Basically, this is a mutual fund that is comprised of a portfolio of other Vanguard funds, such that it becomes a "one-fund option" for investors who wish to have a professionally managed portfolio diversified across multiple asset classes. One beauty of this approach is that VGSTX has a relatively modest minimum investment of $1,000. As a firm believer that the markets exist for the benefit of everyone, not merely the wealthy, I applaud this sort of product.
Let's take a little closer look at VGSTX:
There is a lot to like here. You will notice that the fund covers both domestic and foreign stocks as well as bonds and short-term reserves. Thus, it offers small investors both great diversity as well as a reasonable safety net, in the form of the short-term reserves, to weather market storms. The portfolio information on the fund explains that Vanguard uses various tools to rebalance the fund at appropriate intervals to maintain the desired weightings in each asset class.
So, How Did The ETF Monkey Vanguard Core Portfolio Do?
Ah, but now we get back to the question that I was most interested in. How might my humble effort have performed when compared to this "all-in-one" Vanguard Fund?
As it turns out, not too badly. In this graphic, produced from my portfolio tracking page in Google Finance, the blue line represents my portfolio and the red line represents VGSTX. As you can see, the period covered is July 1, 2015, the inception date of The ETF Monkey Vanguard Core Portfolio, through the date this article was written. Have a look.
This proved to be a fairly interesting graphic for me to examine. As can be seen, my portfolio initially lagged VGSTX into August, about the time of my first rebalancing effort. Then, it basically made up ground such that the two were virtually even at year-end. In 2016, however, my portfolio has clearly pulled ahead, both during the initial downturn to open the year, and even more dramatically following my second rebalancing effort on February 11.
I wanted to be sure the red line in my graphic represented VGSTX fairly. So, I went back on the historical pricing page for this Vanguard fund and looked up 6/30/15. Here it is:
VGSTX closed at $23.74 on April 14, the last day for which pricing is available as I write this. That represents a decline of 4.85% from the 6/30/15 price of $24.95, which is right in line with what is shown on the above graphic. So, I feel quite comfortable that the performance I am displaying is accurate.
Needless to say, this leaves me quite happy with the performance of my portfolio.
Possible Reasons and Takeaways for the Investor
So, what might be some possible reasons for this? Are there some takeaways here for the small investor?
Before I go any further, I wish to be clear that none of my comments are meant as bragging. I might perform this analysis a year from now and come out on the short end. Nonetheless, there are two themes I wish to feature:
- Low Expenses - In my initial article on The ETF Monkey Vanguard Core Portfolio, I calculated that, given the relative weight of each of the 3 ETFs in the portfolio, the overall expense ratio of the portfolio was a miniscule .07787%. That's right, just a hair under .08%. In contrast, VGSTX carries an overall expense ratio of .34%, according to the latest data from Vanguard. That is still a wonderful expense ratio when compared to what a lot of folks are paying in their 401k accounts, where expense ratios north of 1.00% are still commonplace. Still, it is a full quarter percent higher than my portfolio. I don't think this can be repeated enough. Low expenses equal market returns that ultimately make it into your pocket, not someone else's pocket.
- Systematic, Disciplined Rebalancing - As I featured above, it would appear that my three rebalancing efforts had a positive effect on the results of my portfolio. But that leaves a nagging question. Did I just get lucky? Is it that I am some sort of genius when it comes to timing the market, and perhaps you feel "I couldn't do as well?" Well, there may be a measure of luck in my efforts in the sense that, for example, I nailed it pretty accurately back on February 11. If I had rebalanced on February 1, or February 24, the results would not have been quite as good. So, I will yield that point. But, at the end of the day, I was simply trying to make my best judgments in line with the principles I espoused in this article I wrote for Seeking Alpha as well as a minor follow-up article that I wrote for my personal blog on viewing each of your asset classes as a form of "currency". If you are capable of building a fairly simple Excel or similar spreadsheet, or have someone who can help you, you can track the basic math needed to do this for yourself. In the pictures I use to document my transactions in my rebalancing articles, you can easily see a simple layout for doing this.
Summary and Conclusion
I thank my reader for sharing his (or her) comments. Further, as I featured above, I am in no way hoping to dissuade anyone for whom using a fund such as VGSTX is a nice option. If, for example, you wish to make small, regular, incremental investments, the .34% expense ratio may be offset by your savings in trading commissions. It is factors like this that lead to the conclusion that there is not necessarily one "right answer" for everyone.
At the same time, if you are able to trade ETFs commission-free, as I do in the three implementations of my 2016 model portfolio, perhaps the ideas I share in this article can even be of some use to this type of investor.
Lastly, I hoped to document that, with a little effort, perhaps, just perhaps, you may be able to do a little better than settling for an "all-in-one" fund.
Whatever your circumstances, thanks for reading, and I wish you...
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Disclosure: I am/we are long VTI, VEU, BND.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.