- Jun 9, 2014
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You're perusing the fund lineup for a 401(k) or IRA and your eyes come across a pair of well-known offerings, Vanguard Index 500 and Vanguard Growth & Income.
Rather than throw all your money into one basket, you rationalize it might be better to diversify by putting money into each fund.
Are you accomplishing your goal?
Below are the current top 10 holdings for each fund beginning with Index 500.
Not surprisingly, funds with similar investment objectives, and esp if they're from the same family where managers share data, tend to share similar holdings. Rather than further diversify, you're further concentrating your holdings.
1) Check the investment objective. If two funds categorize themselves as "large cap blend" or "growth and income," they probably have a lot of fund overlap.
2) Look at the stat R-Squared. This will tell you how positively correlated the fund is to a certain index that can explain its movements.
Vanguard Index 500 being a clone of the underlying index has an R2 of 100.00. Vanguard Growth & Income is rated 99.38. Almost all of its movements can be explained by the S&P 500. That's a poor complement to Vanguard Index 500.
Diversification isn't just about putting money into several buckets. It's about putting money into unalike buckets -- buckets that are said to be negatively correlated.
Rather than throw all your money into one basket, you rationalize it might be better to diversify by putting money into each fund.
Are you accomplishing your goal?
Below are the current top 10 holdings for each fund beginning with Index 500.
Not surprisingly, funds with similar investment objectives, and esp if they're from the same family where managers share data, tend to share similar holdings. Rather than further diversify, you're further concentrating your holdings.
1) Check the investment objective. If two funds categorize themselves as "large cap blend" or "growth and income," they probably have a lot of fund overlap.
2) Look at the stat R-Squared. This will tell you how positively correlated the fund is to a certain index that can explain its movements.
Vanguard Index 500 being a clone of the underlying index has an R2 of 100.00. Vanguard Growth & Income is rated 99.38. Almost all of its movements can be explained by the S&P 500. That's a poor complement to Vanguard Index 500.
Diversification isn't just about putting money into several buckets. It's about putting money into unalike buckets -- buckets that are said to be negatively correlated.