Mark Johnson

February 10, 2023

Friday Thing #5

I was reading Jack Raines post on When Diversification Dies which covers his simple investment strategy of buying and holding the S&P 500. It's not a crazy investment strategy. In fact, it's arguably the industry standard for buy and hold indexers. Warren Buffet tells the average investor to buy and hold the S&P 500. Jack Bogle, founder of Vanguard, said holding the S&P 500 was sufficient without any international stocks. You'll be hard pressed to find many finance bloggers that say otherwise.

I think this is wrong. Peter Thiel's favorite interview question is "What important truth do very few people agree with you on?". It's a tough question to answer. But saying investing in the S&P500 isn't true index investing is one of my answers.

We invest in an index fund instead of individual stocks because we don't know which stocks will outperform. Data tell us passive investing beats 95% of active management over a 20-year period. If we agree with this, it should hold that we don't know which economies will outperform. The US has for the past 20 years, but there's no law of nature that says this should continue. Developing economies like India and China have outperformed in recent years, and I expect they'll outperform the US in years to come because of reversion to the mean and the additional upside they have with starting with less, but we don't know.

The r/financialindependent subreddit is a little better on this, preaching VTSAX and chill, an index of the entire US stock-market, expanding from 506 stocks from the S&P500 to 3992 stocks to add an extra 20% of stocks by market cap and make up the entire US equity market.

But it's only when I go to the Bogleheads forum that I see discussion expanding to investing in international stocks - and landing on a US and international mix that matches the market weight of the world, VTWAX. The fund invests in all stock markets in proportion to their weight, currently something like 55% US, 45% rest of the world, a mighty 9473 stocks at the time of writing. 

I hear that investing in international stocks introduces currency risk where the holdings might go down in value relative to the currency in your home country which you spend to live your life, and that the 500 companies in the S&P 500 are sufficiently international to not require international diversification, but if I believe in the principles of indexing, I'm holding nine-thousand stocks over five hundred. 

As one Boglehead said when asked which index fund to invest in:

Neither VSTAX nor VTWAX, obviously. VTTUX (Vanguard Total Universe Admiral) is what I bet all my networth on in the next 35 years. And before you ask, yes I’m 100% positive such fund that covers every company in the Universe will be offered by Vanguard in the near future since Earth shall fall and we will all move to Mars :)

About Mark Johnson

Hey, I'm Mark, and I'm passionate about sport and personal finance. If you'd like to read more of my writing, check out financewithmark.com.