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Why Staying Fully Invested In Your Funds/ETFs May Not Lead To the Best Results

Summary: My account balances for 5 Vanguard stock funds have doubled over the last 5-6 years. So it made sense to remain fully invested in each. But markets do drop! Taking profits or distributions out on occasional may be the best way to ensure your gains.

This article, unlike most you will see, shows how one individual, namely me, doubled my money in a handful of mutual fund investments over a brief period. What you may find unusual is that, rather than dealing with returns as typically shown in a performance table, I present actual growth of investment dollars from my own investment accounts. In other words, this data isn't hypothetical and only valid under certain assumptions; it's what my investment statements show has actually happened.

Why present such personal data? Data from performance tables assumes several things that are not accurate for all investors. Mainly, they assume one bought and held from one exact date over an exact period going forward. If one bought one or more investments on a somewhat different date, or sold some of that investment before the exact ending date referenced, one's own result would be different. Performance data in tables also assume that you choose to reinvest all your dividends or capital gains back into the fund. If you chose cash payouts instead, your own personal performance results would be different.

There is another reason for presenting personal data of the kind I will present below. A percent figure shown in a table seems to me to be somewhat useless when attempting to visualize what it really means. How soon might you expect to reach your retirement goals, or any goal for that matter? Does a 10% annualized return on an investment, for example, really help you see the bigger picture? Much more relevant might be a figure that shows you how quickly you might be able to double your money to help arrive at some concrete financial objective.

There are several caveats to my data. As my article's title implies, they present results for five Vanguard funds I own that have doubled my investment over relatively short periods of time. How short? Anyone who routinely expects to double an investment in a diversified mutual fund or most ETFs in less than five years is probably being grossly unrealistic so doing so over as little as five or six years should be considered quite an exceptional accomplishment. This is true even if there were to be a continuation of the extreme bull market conditions we have enjoyed for future similar length periods.

Therefore, my results should not be misread to indicate that by picking the same five funds, or even any other five funds, you will easily be able to achieve the same results anywhere near as quickly in the years ahead. In fact, I own many other funds that did not double my investment, at least as quickly. So the data presented below are merely intended to show what might be able to be achieved with some luck, and perhaps, by investing going forward mainly in funds that appear to be undervalued at the time investments are initiated. I'll talk further about making certain types of investment decisions as shown in this type of "money-in" and "money-out" analysis to potentially enhance investment results shortly.

Here, then, are the five funds I invested in, in several cases a little more than five years ago, while the others about 6 years ago, which as of the present time, have resulted in a doubling in value. (Note: in order to protect the privacy of my account valuations, I have assumed that I invested $10,000 in each fund. The actual amount invested in each fund may have been more or less, but the resulting growth of the investments shown is exactly as reported on my account statements. Also note that had I chosen to invest in the four nearly identical Vanguard index-derived ETFs (the Vanguard Extended Market Index ETF (NYSEARCA:VXF), Vanguard Mid Cap ETF (NYSEARCA:VO), Vanguard Small Cap ETF (NYSEARCA:VB), and Vanguard Growth ETF (NYSEARCA:VUG)), the results would have been virtually the same:

1) Vanguard Extended Market Index Fund Admiral (MUTF:VEXAX)
Amount invested: $10,000
Start date: 12/22/2011
Total sales: $1,269
Dividends/Capital gains taken as cash: $858
Present value of account and cash generated: $20,510

Note: Present value of all accounts shown as of Feb. 21, 2017

Amount invested: $10,000
Start date: 12/14/2011
Total sales: 0
Dividends/Capital gains taken as cash: $3,880
Present value of account and cash generated: $23,245

3) Vanguard Mid Cap Index Admiral (MUTF:VIMAX)
Amount invested: $10,000
Start date: 12/17/2010
Total sales: $1,711
Dividends/Capital gains taken as cash: $879
Present value of account and cash generated: $19,956

4) Vanguard Small Cap Index Admiral (MUTF:VSMAX)
Amount invested: $10,000
Start date: 10/08/2010
Total sales: $3,342
Dividends/Capital gains taken as cash: $912
Present value of account and cash generated: $21,996

5) Vanguard Growth Index Admiral (MUTF:VIGAX)
Amount invested: $10,000
Start date: 10/08/2010
Total sales: 0
Dividends/Capital gains taken as cash: $923
Present value of account and cash generated: $22,828

Several comments are useful to help one better understand these results.

First of all, for the purposes of this presentation, I am assuming in the case of each fund that any money taken from a fund was either spent outright or put into a separate non-interest bearing account such as a checking account. In other words, I will assume I did not use such cash generated to invest elsewhere such as by exchanging to another Vanguard fund account. If not otherwise invested, my doubled return is accurately shown as depicted above.

On the other hand, if invested elsewhere, I might have added to my the present value of each $10,000 invested, such as if the money-out dollars went into a bond fund and it grew a few additional percent each year. Of course, if I had directed it to a fund that had a negative return, it would have shrank. But, in the last five or six years, very few Vanguard funds actually lost any money since not only stocks as a whole did extremely well, but bond funds did somewhat well too. So in assuming no return on the money withdrawn from these five funds, the results are possibly more conservative than they otherwise could be.

But suppose no money had been withdrawn from any of the five fund accounts? Might the results have been even better? In this case, the answer is probably yes. Why? Because, again, over most of the extended period, most stock funds were mainly continuing to go up and up. By selling from some of these investments, the chances are I was "settling" for my likely up-to-then gains and missing out on further growth. Same likely would have been true for any dividends and capital gains not reinvested back into each fund. In other words, it would appear that if I did not need the payouts at those particular times, I might always be better off reinvesting.

But such conclusions might only be valid in retrospect. If it had turned out that any of these stock funds had started to lose money as in a bear market, it might have been wise to withdraw some while prices were still high or to choose not to reinvest. And if we wind up experiencing a severe enough bear market going forward, these might still turn out to have been better choices. Here's a brief example:

Suppose in year three of a five year investment period, stocks in general have a negative total return over the following two year period. Any money taken out of a fund, even with a 0% subsequent return, would achieve a relatively better outcome than the money left in the fund during that period. In other words, the money taken out serves as a protection, and really a guarantee, that you will have at least achieved that return.

Actually, it's a lot like the saying "A bird in hand is worth two in the bush." As an investor, will you be satisfied in earning a good return, cashing some out perhaps at times, or not adding to your investment by reinvesting, or will you always assume you can earn the best possible return if the your investment doesn't suffer any negative periods? This is just another way of saying that we cannot always expect the nearly "straight up" type of bull market we have had in recent years.

Also realize that each of the five above investment results are still a work in progress since the present account values shown might never be realized until the entire investment is actually sold. Once again, if we were to experience a new bear market and I felt the necessity to sell under such depressed conditions, I might never achieve the current results shown above in doing a final accounting. It is not impossible to imagine they would wind up showing an account present value of only 80% or less of these figures shown above. That is why, although it's hard to see it now, any money taken out of an investment during a bull market may serve to at least lock in some of these gains.

Another consideration that some may fail to realize is this: Index funds tend to do best in bull markets so perhaps it is not surprising that four out of the five above funds are index funds. Index funds are always fully invested and tend to make the best of the rise in stock prices because they have so little money held outside the market. Managed funds, on the other hand, may likely rely on judgments that factor in whether stocks have possibly become overvalued which might lead to money held back by the manager.

As long as the bull market continues, and coincidentally as we have happening now, investors keep pouring money into the index funds and the stocks that they include, indexes continue to go even higher, usually outpacing any alternate fund where at least some of the portfolio lies proportionally outside the index. But when a large number of investors experience a change of heart for whatever reason and the stocks in the index start to tumble, any money held outside of the indexes has an excellent chance of doing better than the indexes.

As a result, any moves made in anticipation of an end to a bull market, such as by selling off a little of one's profits or choosing not to reinvest back into the fund when prices are extremely high, or perhaps even holding off on some of one's new investments into such funds and instead searching for those that appear relatively less overvalued, could eventually prove to be winning strategy. To paraphrase the above saying: Often is better to actually realize "a bird in hand" than to risk losing it in an attempt to gain a more profitable, but highly likely, more elusive "two birds in the bush."


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