Please pause for a moment to reflect on that profit. An investor who plunked down $100,000 when the stock market was outrageously overvalued and just let his money sit there during an epic collapse of the global financial system now has $182,400. Whatever the next 13 years has in store for us, that passive port- folio is the way to invest. Here’s why it performed, and should continue to perform, so well.
You own everything
By owning three funds—Vanguard Total Stock Market (VTSAX), Van- guard Total Bond (VBTLX), and Vanguard Total International (VTIAX)—you own virtually all the stocks in the U.S. market, much of the bond market, and a broad selection of stocks from developed and emerging markets in the rest of the world. During the “lost decade” this portfolio did well, in part because while even pets.com was going belly up, bonds, international stocks, and small (non-tech) company shares held up fairly well. I don’t know what the savior will be in the coming years, but that’s the beauty of this portfolio: I don’t have to.
You keep more
These three funds charge an average fee of about 0.1%. That’s one dollar for every $1,000 invested. The average mutual fund charges about $13 per $1,000, and many charge far more. The difference may not sound like much, but in a year when you gain 5%, it amounts to nearly 20% of your return. Compounded over the decades, the extra gains really add up. A 30-year-old couple with a $100,000 portfolio would earn an extra $500,000 by retirement just by investing in the lowest-cost funds.
You get the total return
One common mistake is to assume that the numbers you see in the headlines rep- resent investors’ profits. In fact, thanks to dividends, investors can, and should, do better. The stocks in the S&P 500, for example, yield around 2%. So if you see that the S&P 500 is up, say 10% for the year, your total return should actually be 12%, minus expenses. This mistake is so widespread that Allan Roth, a Colorado financial advisor, believes money managers cite the index return without dividends to make their performance look better by comparison. Reinvested dividends account for 40% of the stock market’s return over the long term. Make them work for you.