• Zach

Investment Philosophy #3: A mistake and a change

Updated: Feb 22, 2019

Thanks to Andrew Hallam for the Better Chart!

One of the main reasons for this blog is to document, warts and all, my financial journey. Today will be about a small wart that was consequently frozen off. In my past post on "Which Index Fund" I wrote how I had read bout Fundamental Index Funds in Andrew Hallam's book. When I posted that about why I had chosen a Fundamental Index Fund over my Vanguard World Stock Index (VT), Andrew actually saw it and took the time to write me several emails correcting a few mistakes I had made, mostly comparing apples to oranges. From what I've found, there is no "worldwide" fundamental index fund, so there wasn't one to really compare to VT. I should have compared the Fundamental Index Fund (PRF) to Vanguard's American Stock Index (VTI). Also, apparently the charts from TD Ameritrade weren't as accurate as those from Morningstar, so he helped me by providing the above chart.

I was a bit confused, because it felt like I had just been following Andrew's own advice about the Fundamental Index Funds, but then I realized I had been reading the first edition of Andrew's book,

"The Global Expatriates Guide to Investing" from 2014. His updated version, "Millionaire Expat" is much less positive about Fundamental Index Funds, relegating the information to two fairly negative paragraphs. This caused me to re-think my strategy, as it was probably based on outdated or wrong information.

One key factor in my decision to move away from PRF was the expense ratio. At 0.39% it was a lot higher than VTI or VT. VTI's expense ratio is a tiny 0.04%, which is like 10x lower than PRF. VT has an expense ratio of 0.1%, which is still very low, but over double that of VTI. The data seems to show that the fund with the lowest expense ratio is the winner over time, so that seemed to be a strong point to move away from PRF.

So I had two options, in my book. 1) Go back to VT. 2) Go to VTI. It seemed clear that VTI was outproducing over VT in the long haul.

VTI (purple) vs VT (black) over the last 10 years

But what about your International component? I can hear you asking! What about being properly diversified? Well, alarmed audience, I will tell you. We live in a globalized world. American companies do business everywhere. JL Collins makes a strong argument that in just by buying VTI (or VTSAX), you are covered for international diversification. So, this is good enough for me. VTI also has an expense ratio of less than half of VT, which is a good indicator or long term success. All that added up made the choice clear. I switched out of PRF and into VTI. AND THERE I SHALL STAY!!!!

I know it's NOT a good idea to switch funds all the time. So I'm making a promise to myself. NO MATTER WHAT I shall hold the VTI line. If I've changed in a year, I will be very upset with my lack of discipline.

I'm still pretty new to this. Besides the $6 trading fee from TD Ameritrade, this decision didn't really cost me anything, as all of these are still just tracking the indexes. The next time I'm touching my account is in September, after I'm back in Dubai and my rent check clears. If I change that, please feel free to beat me about the face and head until I remember my strategy and go back.

If you liked this post, come join the discussion over at The Happiest Teacher Facebook Group! I would love to have your voice added to the discussion! Also, if you're into that Twitter life, come follow me!

Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

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