The subject of today’s article is one that could be argued one way or the other, and to be honest I’m not 100% sure I’m completely for one side of the debate or the other, but simply being presented with a specific implementation has been something that’s helped me, so I’ll lay it out here in hopes that it’ll help someone in a way similar to how it’s helped me so far, even if it’s not a black and white situation.
The subject is diversification in investing, and all the choices that diversification brings.
In the past I’ve written a little about the benefits of consolidating what you invest in to reduce the “mental overhead” required to stay in the know on all your investments so you can take action as appropriate to maximize your gains (or reduce your losses) - read about that here.
If you’ve done any amount of research on how you should be investing you’ve likely come across advice that you need to own US based stocks, and International stocks, and small caps and mid caps and developing markets and so on and so on.
Each “group” has its own advantages and disadvantages that may leave you feeling great when you have them and dumb when you don’t (and unfortunately the reverse is also true - you may end up feeling great not having them and dumb when you do).
Such is the nature of investing - there’s risk and reward, generally the higher the risk the higher the potential reward.
Knowing where and how to be diversified can be, and is/was (at least for me) a bit overwhelming.
I’ll admit that it’s one of the things that stopped me from investing earlier on in my life when I could and should have - I got into a state of analysis paralysis and because I didn’t know exactly what to do, I did the easiest thing - nothing - missing out on a decent amount of time I could have put compounding to work for me.
So, what’s the point of this article?
While I was going through a recent book on finances and investing, the author addressed the subject of diversification - specifically diversifying into international markets - in a way I hadn’t previously thought of.
Most of the “research” I’ve done, as mentioned above, advises to invest in both US and International companies - that way if the US companies falter for some reason, you have exposure to other companies that may not face the same hardships causing US companies to falter, and therefore your portfolio will do better.
In spite of this general consensus to diversify, the author was a strong proponent of investing in a single fund - the Vanguard Total Stock Market fund (the symbol for the ETF version of this fund is “VTI”).
(As an aside, the author didn’t just have VTI, but that was the only investment he advocated for in the “stock” portion of a portfolio - the “bond” portion was a separate single fund, but the “bond” portion is outside the scope of this article).
The author proposed that you don’t really “need” to invest in non-US companies, if you’re investing as he does - in VTI.
I was a little surprised by this at first as it seems counterintuitive - VTI is a conglomerate of US-based companies, so you’re “putting all your eggs into one basket” - the US basket.
My initial confusion was quickly replaced with understanding as the author explained the reasoning for his strategy, highlighting something I hadn’t really considered.
If you’re investing in VTI, you’re investing with a reasonable weight in many large companies - companies that have a large portion of their revenue from international endeavors.
As such, if a US-specific hardship were to be faced by these US companies, it’s not improbable that the international “arms” of these companies would continue performing well.
Even though this fund in “US-only”, due to the global reach of many of the companies in the fund, it’s providing you with the benefits of diversification into non-US markets - without the overhead of owning a separate fund (or funds).
Similarly, by investing in a total market fund, you’re gaining exposure to small and mid-size companies without the mental overhead and decision making of choosing separate funds.
For him (and to a degree, for me) the benefits in the simplicity of investing in “one thing” (really you’re investing in almost 3700 things since VTI is a conglomerate of about 3700 companies) outweighed the drawbacks of a potential better combination of various stocks and ETFs that could be obtained, but would require research, buying, selling, managing, etc. overhead.
Beyond the ongoing simplicity and reduced mental overhead of investing in a “single” thing, the real “benefit” (and the thing I think many other people can benefit from - my reason for writing this article) is/was the elimination of the analysis paralysis when trying to decide what to invest in.
By following this strategy and investing in a single fund like VTI, one can avoid much of the analysis paralysis (and the pitfalls of “doing nothing”) and enjoy the benefits of a fairly well-performing, fairly diversified investment with less mental overhead right from day zero in their investment journey - allowing them to get started sooner than they otherwise would and thus allowing compounding to work longer for them.
So, while this isn’t investment advice - if you’re on the fence about investing, perhaps just stuck not knowing what to do because there are so many options, consider copying the strategy of the author mentioned above - investing solely in a total stock market fund like VTI - knowing that in doing so you’ll be getting a “good” annual return, exposure to “big” companies, international exposure, and also exposure to small and medium “up and coming” companies.
At the end of the day, whatever you choose to do, I think you’ll find yourself best served by getting started as soon as possible - the longer your money is invested, the longer it has to compound and work for you, hopefully increasing your overall returns much more than if you start later in life.
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