Why The Vanguard Total World Stock Index Fund Is A Good Investment




Vanguard Total World Stock Index Fund (VTWSX). This fund, split up into over 5,300 stocks, is one of the best all-weather beast funds that exists. The fund’s imperative is to basically say, “Hey, we are going to take the most dominant American firms, and combine them with the most dominant companies that run the world outside the United States. We’ll tilt towards the biggest and baddest, and own everything else, too.”

Imagine a baseball team that pepetually consisted of a prime Stan Musial, Ty Cobb, and Willie Mays in the outfield, Lou Gehrig at first, Rogers Hornsby at second, Honus Wagner at short, Brooks Robinson at third, Hank Aaron at DH, and Bob Gibson at the mound.

You’re getting that kind of All-Star with the top holdings in Vanguard’s Total World Stock Index Fund: Apple. Exxon. Google. General Electric. Microsoft. Johnson & Johnson. Chevron. Wells Fargo. Nestle. Procter & Gamble. And as you work your way further down the list, you see even more of the usual suspects: Coca-Cola, Wal-Mart, Royal Dutch Shell, AT&T, Disney, Visa, and so on.

This fund is a collection of the world’s cash gushers. There would be absolutely nothing wrong with going through life not thinking about investing, and keeping a sizable portion of your net worth in a fund like this. It consists of many of the businesses that are heavily profiled on this site otherwise.

Why then, don’t I close up shop here on this site and go the indexing route? Well, even though the fees are still low at only 0.35% of total assets, it still means you have to pay $3,500 in fees over ten years for every $100,000 invested (and that does not take into account the presumed growth of the fund, which would take the fees higher).

And plus, I would want to reconfigure the proportions of the assets held. If I were constructing a portfolio with the imperative to only buy companies that will be earning sustainable profits forty years from now, Apple and Microsoft wouldn’t make the cut—IBM is the only tech tower that has managed to last over a century, and there is a reason why—product profits aren’t stable in a “buying shares of this company will create intergenerational wealth” kind of way. While Hershey could still be selling the same chocolates twenty years from now and be a profitable company, you can’t say the same thing about Apple and Microsoft—you need savvy management to maintain long-term relevance. I’d feel much better with a block of Coca-Cola, General Mills, and Colgate-Palmolive leading the way.

The other thing that is preferable about the do-it-yourself approach is that you get to choose the growth tilts that you find desirable. Say you notice that Visa has no preferred stock, no pension, and no debt on its balance sheet, and it is growing long-term earnings in the 15% range still. You might want to make that a bigger holding than what you would find if constrained to an index fund.

The ultimate benefit, though, of owning something like the Vanguard Total World Stock Index Fund is that you have “growth offsetters” built into the model that helps ensure you continue to slog forward, even if some of the companies in the index fall upon the water-to-the-face slap that is the bottom of the economic cycle. When Bank of America, Wachovia, and Lehman Brothers were crumbling, you had Wal-Mart, McDonalds, and Conoco Phillips pumping out growing dividends and net profits elsewhere in the portfolio.

While Bear Stearns was collapsing throughout the financial crisis, Apple’s stock price was the Ferrari cruising down the highway on a sunny day, rising from $80 per share in 2008 to over $400 in 2011 as the company used a period of economic catastrophe to increase its honest-to-god underlying profits from $4.8 billion in 2008 to almost $26 billion in 2011. And if Apple is the domino collapsing in the 2030s, then some of the other high-grade assets will be there to do the heavy lifting.

Over the long run, a fund like this is one of the few no-brainer ways to increase your purchasing power by three, four, or five percentage points above the inflation rate experienced in the United States over the long haul. If you don’t like studying individual companies or have an affinity for business ownership, it is a nice short-circuit way to build wealth if you don’t want to put in the leg work that building wealth with individual companies normally entails.

Personally, I’d rather do-it-myself to avoid the fees, have a lower general concentration of banking and tech companies, and individually select companies with growth and value characteristics that are better than the typical stock in the index. On balance, I’d think that the earnings quality of a portfolio that consisted of Coca-Cola, PepsiCo, Colgate-Palmolive, Johnson & Johnson, Brown Forman, Procter & Gamble, Hershey, General Mills, Exxon Mobil, Clorox, McCormick, Chevron, Nestle, Visa, Mastercard, Philip Morris International, and Wal-Mart would have stabler and more consistent profits over the long run. If you build a portfolio like that, everything you own is a cash machine. It’s like taking the Vanguard Total Stock Market Index and removing the riff raff. But for people that value the idea of building wealth without having to put in the time to study individual companies necessary to do so, then the Vanguard Total Stock Market Index is a great place to find a collection of the companies frequently mentioned on this site without having to pay much in the way of fees to do so.

 

 

 

 

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3 comments
rabbithutch
rabbithutch

There are lots of ways to save and invest. Some prefer index funds, others like rental properties. Some like blue chip dividend portfolios, others seek value stocks. You could follow the Bogleheads, or Mr. Money Mustache, or JLCollins, or Dividend Mantra or, of course, T.M. McAleenan Jr. I don't know which is best – I don't think anyone does. I do know that it is critical to actually follow a solid strategy, or a mixture of solid strategies. Saving and investing, consistently and regularly, while keep spending down is the key.

FWIW, I have most of my investments outside of my 401(k) in Vanguard, with those mostly in Total Stock (admiral) and Total International (admiral). The World Total Stock Index appears to basically be a merging of those two funds. I don't think you can go wrong investing in any of the above Vanguard index funds.

I have recently become interested in dividend investing after reading blogs mentioned above – including this one. I plan to continue investing in Vanguard Index funds, while shifting a percentage of my resources to invest in a dividend producing stock portfolio. I think following both plans compliment each other. You get total growth, diversification, etc. through the index funds (at fairly low expense), and solid dividend income from the stock portfolio (with only the transaction costs).

As with life, I think moderation is key. I personally admire portfolios like the one on this blog – and am building one myself. I just am not comfortable solely pursuing such a strategy at the exclusion of all others. I feel much more comfortable with a simple mixture of investments -- Vanguard index funds as the greatest percentage, complimented with dividend producing stock, and possibly some rental real estate down the road.

That is my two cents. I enjoy the blog, and appreciate you pointing out other great ways to invest outside of traditional dividend investing.

scchan_2009
scchan_2009

Some of the Vanguard's ETF and funds are indeed excellent place for "the non-enterprising investor" (as used by Benjamin Graham) - low cost, diversity, and easy to understand objectives and policies. I own a portfolio of hand-picked stock and index ETFs. Statistically, typical individual investors can't out-preform index or broad-based funds before expenses (investing individual stocks still have expenses through trading fees and stamp duties (latter does not apply to US; nearly all European and Asian governments impose stamp duties or security transaction taxes). Anyway, it is always more fun to be more "enterprising" :-).


PS: In investing index or very broad-based funds and ETFs, always read the small text. Some of the "index funds" have small text says that the manager has the right to trade derivatives.

scchan_2009
scchan_2009

@rabbithutch If one reads Graham's, Buffett's, and Lynch's writings, they all stress the importance of discipline in successful investing. The greatest mistake in investing (and pretty much anything in life) is to let emotion to win over common sense and facts.

I am not sure would Tim be the next Warren and Peter (- laugh - but who knows? - wink -), but Tim will get good and reasonable return in the medium and long term. In fact, investing is not a competition. Investing is part of managing your own finance to achieve reasonable results that suits one's need. The problem is that people are either scared out of stocks or play as it is gambling (though I understand why many have the former mindset). To be honest, the mass media and social network (including SA - laugh) are guilty in fomenting such mentality.