Tom’s Take on Index In/vesting vs Active Management
Transcript:
Easan Arulanantham:
What is there a time and place for, you know, index investing, rather than like an active strategy?
Tom Vaughan:
Yeah, that’s kind of the two, the two different concepts. And let me just describe those really quickly. So active management, and you can have active management in different types of vehicles, you can have active management in what’s called a mutual fund, you know, where they’re buying stocks and bonds, and you got a manager that is in charge of that or group of managers that’s trying to, you know, research and pick the best ones. And that tends to be more expensive, because you got to pay for that management. And then you have this concept of the index, which really started back in 1975, was started by Vanguard, John Bogle. And so the concept there is they would just buy the first one really was just buy the S&P 500, you know, so there’s no manager, there’s no real thought about it. Whenever the Standard and Poor’s changes a stock, you know, they have their own screening system, then they change it on the index. And so you have now though, filled in a whole bunch of gaps in between active management and true passive management, you have some of these indexes that are rebalanced every quarter, you know, and there’s a whole bunch of different things that happened.
But yeah, actually, one of the things, you know, in my opinion, if you’re trying to build money, and you don’t have a lot of money yet, would be to take a look at something like the vanguard total stock market index. It’s the ticker symbol is VTI, for the exchange traded fund, and we use this, we have a big position there, I really like it. And what they do is buy almost every stock on the US stock market. And it gives you a great diversification. You don’t have international there, but you can also if you wanted to add the vanguard total, you know, international stock market, VX us as a symbol, we don’t have a big exposure to that right now. But it is something that’s starting to move right now. So it’s something we’re looking at, but we do have it, but nonetheless. So those are like two stock market pieces that you could use, you know, if you wanted some, you know more bond in there to bring down the risk, you can use the vanguard total bond market index, which is BND. And if you wanted international bonds, you can use the vanguard total bond, international bond index, BNDX. So those four pieces, right, you can make a really simple portfolio with a very, very small amount of money, even hundreds of dollars, and then just keep adding to it and building it up.
Over time. You know, as you start to get more and more assets, things get more complex. And there’s more things that you can do. But yeah, when you’re first starting off, actually the index concept, and especially, in my opinion, the vanguard index concepts, those four ETFs would be a great place to start, you can usually pay, you know nothing to buy them, the internal costs on these indexes are really, really, really low. I mean, they’re, they’re, you know, the cost is negligible. And you can buy, I think there’s over 3500 different stocks in the vanguard total stock market index, that’s essentially the whole US stock market, you can buy all of that, with one purchase, aligned by capitalization for free at most places where they don’t have any ticket charges to buy that. So I really like indexing, I think it has, you know, a place in the portfolio, we’ve been doing at least some version of indexing since the 90s. You know, we’ve been pretty early in that. And really, it’s been fantastic. I love love that now, I still think there’s a place when you’re when the size of your portfolio gets big enough, you know, that kind of 200 $500,000 to really diversify out into some other areas, including some actively managed areas, which still can work. But I would start with the indexing.
Easan Arulanantham:
So you’re saying there’s like a young investor in their 20s easiest way is kind of just have it in an index fund, they kind of set it and forget for a while, just let it grow?
Tom Vaughan:
Yeah, just have that monthly deposit and keep going. Yeah. Especially if you’re able to add to it. That’s super powerful, right? Yes, that that would be a really strong strategy. I mean, Warren Buffett says the same thing. He talks about just buying the s&p 500 which you can do through Vanguards, you know, vo vo O is the ticker symbol. And so yeah, no, I think that’s a really, really great way to go. Now. You know, if you’re really into it, and you really want to get into it, there’s a lot you can do. A lot of these people that start out and Robin Hood last year didn’t start with that much money. And you know, they’re they’ve been doing all kinds of different strategies. But if you’re just looking to kind of build some assets and you’re really interested in other things in your life, then those indexes that I just give you would be a great place to start and a really good place to just set it and forget about as you said, just keep adding to them and, you know, you don’t need to really pay somebody like me up until a point where you really get you know, more complex, you know, you get at 250 500,000 then there’s things you can do with the portfolio that are that are worth looking at.