These Recommended Funds Can Help You Achieve Prosperity

Key Points:

• In spite of a tumultuous 12 months, stock and bond funds/ETFs have surprised non-professional investors, investing pros, and non-investors alike, surpassing almost all expectations.
• But it did not require particular expertise and/or a high degree of maneuvering about to achieve what most would consider outstanding results.
• Instead, a steady slate of almost exclusively low cost funds generally tended to led the way.
• Many years of what might be considered trial and error led to a narrowed down list of mainly Vanguard funds along with a few others to create what has proven to be a highly profitable and diversified portfolio.
• The same slow, winnowing process also suggests a small number of additional funds to add now and in the future.

A Nearly Unbelievable Year for Many Investors

Something strange seems to be spreading in the air and it isn't just coronavirus droplets. Amidst the terrible economic, societal, and personal damage inflicted across the board caused by the pandemic, many investors are apparently impervious to it all, buying stocks and to some degree bonds, as if they too were stricken, instead by a waft of optimism floating through the air, looking through all the blight to brighter days ahead.

Gains in some stock funds/ETFs since the March 23rd lows, less than 2 weeks after President Trump declared the pandemic a national emergency, have been hard to believe. For instance, total return of one of the most widely owned large cap stock funds, Vanguard 500 Index Fund Admiral (VFIAX), have been about 64% over the slightly more than eight month period since. If returns were to keep up this blistering pace, by next March 23rd, the annual return for the fund would be approximately 96%!

Likewise, for bonds, the total return for Vanguard Total Bond Market Index Fund Admiral (VBLTX), the largest bond fund, since its low on March 19, has been 8.7%; at this pace, the 1 year return on March 19, 2021 would be about 13%. The S&P 500 index, which VFIAX mirrors, has never had a calendar year return that great; the last time the calendar year return for VBMFX, which preceded VBTLX, was as great was 25 years ago in 1995. And these two funds are not even the best performing funds over the course of the pandemic (witness most growth funds or long-term bond funds).

While it may be somewhat unrealistic to think fund performance is going to continue at the same rate as from the pandemic bottom of the stock and bond markets, even if we look at merely the current one year returns of the above two funds (17.4% and 7.4% respectively), investors should thank their lucky stars to have held these or similar investments through this 12-month period unlike almost any period preceding it in terms of events that could have derailed returns. Aside from the the worst pandemic in more than 100 years, the period included a continuation of a trade war with China, the impeachment and trial of the President, nationwide protests against the killing of George Floyd, the worst unemployment and recession since the Great Depression, and a tumultuous Presidential election and aftermath.

A Hint at How This Was Possible

What can one make of all this, and, is there any lesson that can be learned from it by investors?

First and foremost, I think, investors should realize that the investment world operates from a pretty dissimilar perspective from the rest of the world. While extremely unsettling real-world events might seem to be good gauges of what to anticipate will impact the stock and bond market negatively, investors seem to live in a world of their own, weighing profits, losses, interest rates and perhaps a few other esoteric things, far more than even the most dire external world circumstances. In that sense, it may be better for mom and pop investors not to dwell on what their daily newspapers, computer news feeds, or nightly news programs tell them. Rather than inferring what the implications of these sources seem to be telling them, it may pay to remain agnostic as to what these events may mean for one's investments.

So you will be well advised, as a fund investor, to leave prognostications to those who wish to trade individual stocks and who wish to be at the forefront against their competition. Some of these stock investors may indeed wind up winning big while many others will wind up losing. Perhaps, by necessity, the split between the winners and losers will approximate 50:50. But as a fund investor, it makes more sense not to get caught up in all this. Your best chance of winning, as master investor Warren Buffett has suggested, is perhaps to mainly invest in index funds and stay the course. While I will never achieve the results of Buffett, who by the way, made his fortune through individual stocks, not funds, below, I will now elaborate on my ever-evolving approach, which is not exactly as Warren Buffett advises the non-professional investor to follow, but winds up in many ways similar.

My Background

First, a short bit of background about me and who I am. I have hardly had any formal training in economics and investing. Prior to beginning my blog-like, free investment newsletter, I had moderately long careers as a psychologist and a computer techical writer. But when I voluntarily retired from working for a living at a typically pre-retirment age, I had already saved and invested enough to anticipate being able to cut the working-world cord.

Today, almost 20 years later, rather than slowly shrinking down my retirement assets, my investments, almost exclusively in mutual funds, have grown three to four times as large as I had when I retired. All the while, I have been able to travel rather extensively while no longer needing to live the life of an eternal saver. So, yes, being a non-professional, non-working investor, I have been able to achieve a high level of life satisfaction and financial security. I believe that, as people sometimes say, if I could do it, so could you. It is never too early, or too late, to start.

My Approach

Personally, I now refuse to engage in many investors' guessing games. Rather, I would prefer to maintain a steady Eddie approach - continue to hold the best fund/ETF investments I can find in terms of reasonable (but hopefully not overheated; see last month's Newsletter) past performance, low expenses, and if appropriate, skilled manager stewardship. Instead of attempting to do the near impossible, that is predict the future, I would rather do what doctors do in the treatment of some medical problems, that is, watchful waiting, as opposed to a more active and on-going intervention.

According to the dictionary, watchful waiting is a policy of taking no immediate action with respect to a situation or course of events but of following its development intently. While some immediate event can have a big effect on an investment, it seems that the immediate event is usually overshadowed by longer term trends that bring an investment's return back to a more typical trajectory. And in the case of most stock fund investments, and bonds too, that trajectory is usually up.

If you look at the performance of the overall stock market since the pandemic started to affect prices in late February of this year, we find an immediate severe drop followed by a reversion to its prior upward performance trends. And while bond market trends may be harder to discern based on immediate events, we can see a similar upward tendency regardless of what's been happening. For example, if we look at the annual total return history for VBMFX near the top of the following web page here, we see that since 2000, the fund has only had small negative returns two times over the last 21 years. (The average annualized total return thru Nov. 2020, has been 4.95% according to data from https://www.portfoliovisualizer.com/ ; in most calendar years, the yearly return did not vary by more than a few percent from the 20+ year average annualized return.

Given these facts, it is most often best to make possible gradual changes to your stock and/or bond fund investments only slowly after careful observation of underlying market dynamics and leave any big changes to professional traders or merely those typical investors who tend to believe, overtly or not, that one can do better (or less worse) than the overall market will likely do based on what may turn out to be short-term events.

It is partially, at least, a result of this broad overview of typical patterns of investment returns that has led me to move away from playing "fund hopscotch" to settle mainly on a list of about 20 funds that appear to give good results regardless of temporary hiccups. While my list of recommended funds is not impervious to the same factors that invariably will affect the markets as a whole, it would appear to be hard to argue that these funds will have significantly poor results so long as one is willing to hold them through what will likely be the inevitable dips that even competing funds will show. And deciphering when to "go to cash" instead of holding on may prove to be successful only for relatively short periods, missing out on the longer term upward trends in the process.

My Recommended Funds

It has been 6 months since I last reviewed the performance of my recommended funds in the June 2020 Newsletter.

The primary criteria for selecting and continuing to hold these funds has been a) good past performance but avoiding overvaluation, b) low expenses, c) manager background, skill, and long-term stewardship if appropriate, d) inclusion of the major investment categories, and e) relatively low taxes incurred from distributions (only within taxable accounts).

The tables below show these stock and bond funds, their performance over 3 periods, and the percentage of out- or under-performance each fund did (+ = better, - = worse) in comparison to the average return in it's fund category over the same periods

Stock Funds

The only new fund since June is Vanguard Total Stock Market Index (VTSAX). The Vanguard Energy Fund (VGENX), included as a recommended fund at that time, has been removed.

Note: You also have the option of investing in the Vanguard index funds shown as ETFs which may be preferred by some investors, although the returns will be nearly identical.

As is shown, the great majority of these recommended stock funds did better than the average fund in their category over all three time periods.

Bond Funds

The only new fund since June is Vanguard Inflation Protected Sec. (VAIPX) .

Note: I live in California so my bond investments in my taxable portfolio are exclusively in a state and Federal tax-free California muni fund; non-California residents would select either a fund specific to their state or, if not available, a national muni fund. Of course, a tax-free return is better than an equivalent taxable one, depending on your tax bracket.

Once again, most of my recommended funds exceed the returns of the average fund in their same category, but only over the one and five year periods.

Additionally, You May Want to Give These Funds A Look

I have had a long history of success with the above recommended funds. As a result, they have become the funds I have the largest positions in.

However, there are some additional funds that, while they aren't among my biggest positions, seem to be quite timely, and generally meet the five criteria I have described above. Over every time period, all of them for which there is data have done better than their category averages. Therefore, I recommend investors consider them for possible future choices.

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Happy Holidays and stay safe!

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