Do you have a large chunk of your investment dollars in a low cost index fund?
How did you decide on what Vanguard or Fidelity fund was best for your dollars? There’s a good chance you own some equivalent of the Vanguard VTSAX, which track the Standard and Poors 500 Index of most of the largest companies public companies in the USA.
Did you just follow the conventional advice and buy the VTSAX or an equivalent because “everyone says it’s the safest bet for long term wealth building?” Maybe it was a guru like Jim Collins or Jack Bogle or Warren Buffet who recommended this as the best route to riches. It’s hard to argue with those kind of successful investors and of course they have a zillion
sheep, worshipers, followers for good reason. I had know issue with this but curiosity got the best of me when I noticed my tech-heavy individual stocks took a much bigger hit over the past 6 weeks than the S&P 500 index. The little dip felt worse than it really was so I went back and calculated the year to date gains and losses versus the index. It turns out the index was basically flat for the year at one point but my stock holdings were up 5% or more. I consider myself somewhat of an independent free thinker and I hope y’all are too and keep an open mind in considering a different way.
After all, that word independence is sprinkles heavily around the personal finance universe for a reason. You don’t get to financial independence or its cousin FIRE without breaking from convention in a few ways. So I said to myself “Hey, Smidlap, I wonder how the tech-heavy NASDAQ composite index has performed against the S&P 500 over periods of upswings and downswings in the overall stock market.” The NASDAQ composite index is comprised of about 3300 public companies listed on the NASDAQ stock exchange. It is market cap weighted and there is certainly some overlap between it and the S&P 500. Here are some links to the 50 largest companies by market cap in each exchange
The similarities at the top mean that gigantic companies like Apple, Microsoft, and Amazon have a big ripple on both indices when they move up or down. The interesting part is when I looked at the rest of the top 50. In the S&P is found a bunch of companies that have seen mediocre performance during the bull market over the past 10 years or so. I saw Exxon Mobile, Chevron, Verizon, and Bank or America in the top 20. These were the juggernauts of profits and earnings growth of the past as I see it. I’m thinking GE and crappy brick and mortar retailers like Best Buy are in there too. When I looked at the NASDAQ a little closer I found a bunch of companies who were winning business from some of the decliners in the new economy. For my comparison I would rather have the disruptive technology companies who are winners in the new economy than the buggy whip and steam engine makers who are relics of the past.
Here is what I found
- The only significant period when the S&P outperformed in the past 30 years was from the peak of the NASDAQ in year 200 after those speculative tech stock had all gone ape shit until this week (November 2018). The gain of the NASDAQ was 61% in this period vs. 83% for the S&P. So if you happened to invest your lump sum in the NASDAQ at the peak around March 2000 with no prior or subsequent investments you would have lost by 22% to the S&P. What are the odds of that? I’m saying those odds are slim. By the way, doesn’t it seem like either index should be up more than 60 or 80% over the past 18 years!? It might lead you to believe the bull has more room to run in that context.
- The chart at the top of the article shows the comparison for the past 30 years, from 1988 to today. Are you ready for this? The S&P is up a respectable 963% over that time. The NASDAQ is up an astounding 1,870%. So that’s about double the performance of the S&P 500. Is that something that might interest you as an investor? It caught my attention.
- For all the naysayers and volatility cowards you might go ahead and claim the index falls farther from peaks than the more conservative buggy whip index. I looked at the great recession period from October 2007 until March 2009 the two indices were within a couple of percentage points of one another. Besides the dips being more or less equal the gains since 2007 are 177% for the NASDAQ and 86% for the S&P. I know most of y’all are “stay the course” types and would not have sold the dip in the first place. Right? You were buying more.
- I have no idea how the dividends are handled as the S&P yields around 1.8% and the NASDAQ index only around 0.7%. I assume the dividends are included in gains for the index but don’t come and knock on my door if that’s not true.
- One issue if you decided the NASDAQ Composite Index (not the NASDAQ 100 or QQQ, which has done even better) deserved a spot in your portfolio is that Vanguard doesn’t seem to offer a fund for the entire composite. Call up
GodJack Bogle and tell him to invent one immediately and you deserve its superior performance! Send a letter if you can’t find his phone number. The only NASDAQ composite index fund I could find was from Fidelity with the symbol FNCMX and an expense ratio of around 0.3%. You could also look at QQQ which is the NASDAQ 100 (100 largest NASDAQ stocks) and has outperformed the S&P 500 by even more. QQQ has a 0.2% expense ration and a yield or around 0.8%. If I didn’t have the article already written I would have used this one instead but I’m not going back to rewrite it at this point. Y’all get the idea from a lazy blogger with hardly any readers. Just chew it over and think for yourselves. If it helps open up yahoo finance and run some comparisons for different time periods when you think the strategy should have failed. It’s pretty easy to just open up a chart of VTSAX and compare with QQQ, for instance.
OK index investors, it’s your turn. If you decided the VTSAX was right for the bulk of your portfolio does this want to make you do further research? How did you settle on that particular index? Do you think my thesis is full of shit and bound to lose in the end? Let it fly in the comments. I can take it.
note: I don’t personally own any NASDAX indices at this point, but might be talking myself into that soon if I can get it in my 401k.
A gracious reader, Mark, pointed out a mistake I made. The VTSAX is a total stock market index fund and NOT just an S&P 500 fund. I’ll go ahead and say the thesis remains the same in looking at the NASDAQ vs. the S&P instead of VTSAX vs. QQQ (Nasdaq 100). This comparison only goes back to 2001 but since October 1, 2001 until October 1, 2018 QQQ is up 402% and VTSAX is up 191%. Thanks for correcting me on that detail, Mark.
Here’s a link to the Yahoo Finance QQQ vs. VTSAX chart if you want to look at different time periods. QQQ vs. VTSAX chart
Want more information on the comparison? Zach at Four Pillar Freedom writes about it in greater detail in this well written article. If you’re interested should probably read it. My two biggest takeaways are 1. If you invested 10 grand a year in QQQ or SP500 each year since 1972 the QQQ trounced the S&P with a 2017 value of 18 million vs. 12 million respectively. This is how the majority of investors work, with annual contributions versus a lump sum one time investment. 2. The more recent outperformance of the QQQ either means that it’s time for the S&P 500 to catch up or something more fundamental has changed in the new economy. You decide. It looks like it’s hard to go wrong either way as your money is likely to grown in both indices.