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.
Originally posted 2014-01-23 18:42:51.