If you own bond mutual funds or ETFs, the most popular benchmark is the Bloomberg Barclays Aggregate Bond Index (AGG), which basically tracks all U.S. taxable investment-grade bonds, including US Treasury government bonds, investment-grade corporates, mortgage-backed bonds, and other asset-backed securities. The largest bond fund in the world is the Vanguard Total Bond Market Index Fund (VBMFX/VBTLX/BND), which tracks a slight variation of this index – the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index.

In an Advisor Perspectives article, Eric Hickman compares the “Total US Bond” index (AGG) to a Treasury Bond-only index and finds that the overall returns are very similar for both, but Treasury bonds perform better during a market drop. Thus, he concludes that Treasury Bonds Are the Only Bonds You Need.

I wanted to save this chart that lists the returns of both AGG and Treasury bonds during the 10 largest S&P 500 drawdowns since 1976. He points out that 8 out of 10 times (and during all top 6 drawdowns), Treasury bonds outperformed the AGG index.

My personal takeaway was that both Total US and Treasury-Only did pretty well. Right now, AGG has ~42% in US Treasuries and 22% in US government mortgage-backed bonds. If you were a professional advisor or a really detailed DIY investor, then yes, there is an argument for Treasuries only. (Because they are all equally creditworthy, you could even build your own ladder of Treasury bonds with zero expense ratio.) But if you hold a “Total US Bond” fund inside your 401k or target retirement fund, I would still be satisfied that it has historically served its purpose as the safer “ballast” of your portfolio. Overall, I would definitely focus more on keeping your expense ratios low, as the numbers above don’t account for the deduction of fund expenses.

Maybe folks are worried about the yield curve, maybe it’s the political drama, or maybe they just feel it in their bones – I’ve been getting more questions about if I think now is still a good time to invest.

Well, here are some articles that may help you feel better:

What if You Only Invested at Market Peaks? by Ben Carlson. What if you were so unlucky as to invest only at the following market peaks (and suffering the subsequent drops)? As long as you kept on saving your money (putting it in cash when not at a market peak), and not selling at all, you would have actually done fine.

Meet Bob.
Bob is the world’s worst market timer.
What follows is Bob’s tale of terrible timing of his stock purchases.

Should You Invest (Or Wait) When The Stock Market Is At An All-Time-High? at Engaging-Data.com. Here is another interesting interactive tool that lets you pick any subsequent time period and see how the distribution of future returns compared if you invested at an all-time high (ATH) during that period. The market tends to spend a lot of time near all-time highs.

The key takeaway is that in the past several generations of investing, the market has done well and most of the time, the market is within 5% of its ATH. If you waited for a large dip to invest, you could be waiting for a long time and you would have missed out on a large amount of the gains.

Finally, here’s an older post to consider: The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown.

I can’t recall the exact source or quote, but I read something along the lines of this in a forum recently:

We don’t really want to hear other people’s opinions. We want to hear our own opinions out of other people’s mouths.

In other words, confirmation bias:

(source: Chainsawsuit.com)

The majority of my portfolio is in low-cost, diversified, passive-managed mutual funds. In order to hear a different take, I read the shareholder letters of Longleaf Partners Funds (Southeastern Asset Management), which are respectable examples of higher-cost, concentrated, actively-managed mutual funds. The managers “eat their own cooking”, meaning they put a substantial portion of their personal net worth into the funds. They have a limited number of holdings, try to avoid asset bloat, and try to outline their positions in shareholder letters.

In their most recent 2nd Quarter 2018 letter [pdf], they share a presentation that explains their position:

Why We Believe Active Long-Term Value Investing in Common Stocks Will Actually Work
Active investing is out of favor; long-term investing (or really, long-term anything) is out of favor; value investing as we practice it is out of favor; and, investing in common stocks is out of favor compared to private equity. Doing all four of these things really makes us the skunk at the party.

Many have given up on active, long-term, engaged value investing in public equities just at the point when we believe it offers the best risk/reward proposition. Indexing’s multi-year momentum has pushed more assets into fewer stocks because they have gone up and left behind an expanding universe of highly competitive, well-governed and managed businesses with unique advantages that are materially underpriced in their publicly traded securities.

They make several interesting points, including the high amount of “closet indexers” out there. (Haven’t there always been a lot of closet indexers though?) I tried to see things from their perspective, but in the end I think their 1% expense ratio is just too high to overcome. It will definitely take a bear market for their performance gap to narrow.

In the meantime, their real problem is that poor relative performance. For every $10,000 invested in their flagship Partners fund 10 years ago, you would have about $18,000 today. If you had put it in a low-cost S&P 500 index fund, you would have about $27,000 today. That’s the difference between 6% and 10% annualized returns over the last 10 years. The extra drag from their ~1% expense ratio accounts for about a quarter of the performance gap.

Longleaf Partners Fund very well might turn things back around. I have no position in any of their funds, but I’ll keep reading their free shareholder letters and watch them try their best to play a very difficult game.

Vanguard made a splash last week when it announced that it will offer commission-free trades on all ETFs in it brokerage accounts. Vanguard ETFs had been free to trade already. Starting in August, they will add nearly 1,800 ETFs from competitors including Blackrock (iShares), Schwab, State Street (SPDR), Powershares, WisdomTree, etc. Also see WSJ article (paywall?).

Pros. It is now cheaper to keep all my assets in only Vanguard accounts. In the past, if I wanted to buy a WisdomTree ETF, I might have held it in external account for cheaper trades. I could buy a Schwab ETF if that flavor is a lot cheaper. I could do some tax-loss harvesting in the same account. Simplicity and convenience are good. (Although, some would argue that it isn’t a bad idea to spread your money across different brokerage custodians.)

This is a bold move meant to disrupt the more limited commission-free ETF lists from other providers including TD Ameritrade, Schwab, and Fidelity. None of their lists include Vanguard ETFs, yet now Vanguard will include all of them. How will this change the competitive landscape? Will others move to match this “deal”?

Cons. Basically… who’s paying for this? Vanguard is known historically for being the “at cost” choice. They paid their employees, did their work, and then charged you what it cost to run the fund. There was no extra profit component for public or private shareholders. You had confidence that when they lowered their expense ratios, that would be a long-term move. Vanguard has never given out big sign-up bonuses or paid for the naming rights of “Vanguard Arena”.

However, in my opinion this move brings them closer to their competitors where they lose money on marketing and promotions and then have to cover that cost by charging a little extra on other things. Vanguard has already increased their ad budget significantly in recent years. I estimate the cost of a stock trade at about $2 per trade. That’s close to what the leanest, high-volume competitors charge when they can’t offset the trade costs with other revenue sources. So basically Vanguard is “paying” $2 a trade and hopefully offsetting that cost somewhere else. This must add up (especially for active traders), otherwise Schwab or TD Ameritrade would have already offer it. Instead, they charge for access to their no-transaction-free platforms.

As a supposed “owner-investor” in Vanguard, I was never asked my opinion on this. Vanguard is basically saying that growth of assets is good for everyone, don’t worry that the money to pay for these trades has to come from your Vanguard ETF and mutual fund holdings. As long as expense ratios only go downward, I suspect nobody will push back too hard.

Vanguard is also heavily pushing their Personal Advisory Services (PAS) at 0.30% of assets. How does the money flow between PAS and their ETFs? If PAS makes more money, does it help lower the expense ratios on my Total Stock Market ETF shares? It’s not very transparent.

In the end, you have to trust that Vanguard is still working for the good of their investors, and not just growing and accumulating a lot of well-paid executives and management. (Owner-investors also don’t know anyone’s salary at Vanguard.) As someone who has seen this sort of more-more-more philosophy in “non-profit” healthcare institutions, I am a little worried. I hope I’m wrong, and this move won’t cost Vanguard investors very much while making ETFs cheaper overall.