Vanguard - Everything about Investments in Index Funds

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Investment Premise

You often read that, on the average, investments in actively managed mutual funds do not beat index funds. Is this true?

Investment Observation

This chart shows the red average of all growth mutual funds. The green line is the Vanguard S&P 500 Index fund (VFINX) . It has a lower Standard Deviation (SD=, green, left, center screen) than the average growth fund. At the same time, the red annualized return of  Growth AVG is 12.97%, about the same as VFINX's 12.56% (color-coordinated performance values to the right). All values are adjusted for the reinvestment of dividends and capital gains without taxes.

Investment Conclusion

Owning several typical US-based growth funds is likely to produce more risk without significantly more return than a single S&P 500 fund.

Investment Premise

This discussion  builds on the chart above.

You often read that diversification is important. One way to diversify is to own a both growth and value mutual funds. Is this true?

Investment Observation

This chart shows the yellow average of all value mutual funds. The Value AVG has a lower Standard Deviation (SD=, yellow, left, center screen) than the Growth AVG and VFINX. At the same time, the yellow annualized return of  Value AVG is 12.86%, about the same as VFINX  and Growth AVG (color-coordinated performance values to the right). 

However, it is apparent by just looking at the chart that Value funds only outperform in bear markets, while Growth funds are favored in bull markets.

Investment Conclusion

Over the long run, owning a value fund is likely to reduce risk without significantly increasing return. However, owning growth funds during bull markets and switching to value funds during a bear market is a strategy that should be tested.

Investment Premise

This discussion  builds on the charts above.

Is it possible to know when to trade from a Growth to a value fund using simple techniques?

Investment Observation

This chart shows trading between the Growth and Value AVG. The yellow S/Y= measurement in the lower left shows that this charts trades 1.55 times per year. The red Ann= value in the lower right shows that the red/green composite line in the lower chart has an annualized return of 16.05%. This is significantly better than the 12.97% and 12.86% returns of the Growth and Value AVG. The yellow SD= value shows volatility of the composite line to between the volatilities of the AVGs.

Trades take place where shown by the red and green tic marks except that the trades are delayed 10-days from each tic mark, thus if the trading signal  reverses within the 10-days (whipsaw), the prior trade is ignored This eliminates many of the closely spaced tic marks. 

Investment Conclusion

Over the long run, owning growth funds during bull markets and switching to value funds during a bear market does produce significantly better returns. The number of trades per year is well within the trading limitations of Vanguard and all other fund companies.

Investment Premise

This discussion  builds on the charts above.

Is it possible to actually trade from a growth to a value fund using the simple techniques above.

Investment Observation

This chart shows trading between the Vanguard Value Index Fund and the Vanguard Growth Index fund since inception in 1992. The yellow S/Y= measurement in the lower left shows that this charts trades 1.22 times per year. The red Ann= value in the lower right shows that the red/green composite line in the lower chart has an annualized return of 13.48%. This is significantly better than the 10.47% and 11.68% returns of the VIGRX and VIVAX. The yellow SD= value shows volatility of the composite line to between the volatilities of the AVGs. 

Investment Conclusion

Over the long run, owning growth funds during bull markets and switching to value funds during a bear market has produced significantly better returns. The number of trades per year is well within the trading limitations of Vanguard and all other fund companies.