Regular listeners of the Motley Fool Answers podcast will know that Alison Southwick and Robert Brokamp are full of excellent investing and personal finance advice. But for this episode -- which they are dedicating totally to listener questions -- they've called in reinforcements: Ross Anderson, a certified financial planner from Motley Fool Wealth Management, a sister company of The Motley Fool.
In this segment, they consider the concerns of a listener who's dissatisfied with the returns on her mutual funds, in part because she compares them to the S&P 500. What she wants is the name of an index fund or ETF that is a more appropriate yardstick by which to measure her returns, based on her age and proximity to retirement. They aim to get her on the right track.
A full transcript follows the video.
This video was recorded on Feb. 27, 2018.
Alison Southwick: The next question comes from Janet. "I love your podcast and look forward to it every week." Oh, thanks! "As a part owner of a wine shop in Washington, I especially enjoy Alison's references to our very own Walla Walla wine country." Yay! A city so nice they named it twice.
"My spouse is 70 years old and I am 60 and a pretty aggressive investor. I am still working full-time at a new business I started with a younger partner. This one's a pharmacy to go with the wine shop." That's so Walla Walla.
Robert Brokamp: What a great combo.
Southwick: That's so perfect Walla Walla. "And could continue to work full-time or part-time for the next 10 years. My question is that I frequently get dissatisfied with the returns on my mutual funds because I'm always comparing them to the S&P 500. Can you give me an index or ETF with which to compare my returns that would be appropriate for my age and closeness to retirement?"
Brokamp: Janet, it sounds like you might be asking two questions. There's benchmarking your overall returns, and then given your age and proximity to retirement, but also benchmarking your individual funds.
For the first one, I think it's good to look at just a regular old Vanguard target retirement fund, and for you I would look at the Vanguard 2025 Fund. It's a fund that's designed for people who plan to retire at some point in the next five to seven years. It's currently 65% stocks, 35% bonds. I would compare your portfolio to that.
Based on what you've told me, you're probably doing better because you said you're an aggressive investor, but if you're not, that could be a clue that maybe you should be trying something different if you're not beating that fund. And a target retirement fund does get gradually more conservative as you get closer to that day, which is what most people should be doing.
As for your individual funds, you start by finding out what type of fund it is -- what kind of category -- and then finding an index fund that invests in a similar way. For example, if you have a small-cap value fund, go find a small-cap value index fund from Vanguard or anyone else and just line up those returns. You want to make sure you're making an apples-to-apples comparison.
The truth is, the S&P 500 is a large-cap index fund that's kind of getting growthier because its largest holdings are now Facebook, Microsoft, Apple, and Amazon, and it has done very well over the last few years. Large caps have beaten small caps and midcaps. Growth has beaten value. So, a lot of funds are not looking good compared to the S&P 500.
But these things always turn. It's called the "investment hokey-pokey." Right now, large cap and growth is in. At some point it's going to be out and some of these smaller-cap and value-oriented funds are going to look better.
Ross Anderson: So, if you're looking for an easy way to figure out what each of those funds is comparing itself to, they all have to declare that. If you go to Morningstar.com, the free version of the site [you don't have to have a premium membership to see this], put in the ticker symbol of each fund. They don't tell you what they're comparing their success to, so that's probably the easiest way to see whether this fund is actually beating what it's trying to beat.