One of my friends recently cashed in a variable annuity.
He bought it years ago, before he realized it was a high-cost rip-off. “I want to invest the proceeds,” he said. “What do you recommend?”
He already owned one of Vanguard’s Target Retirement funds. These are complete portfolios of indexes rolled into a single fund. They’re diversified. They charge low fees, and they get rebalanced once a year.
I thought he should add the proceeds to this fund. But he wanted to add some icing to his cake. He liked Vanguard’s U.S. Growth Index. Over the past 10 years, it averaged a compound annual return of 12.46 percent. That would have turned a $10,000 investment into $32,357.
It beat the S&P 500. It also beat value stocks.
Over the same time period, $10,000 in Vanguard’s Value Stock Index would average a compound annual return of just 9.87 percent. It would have grown to $25,632.
High-flying tech companies have pushed growth stocks up. Many people (especially new investors) are rushing in to buy. But plenty of smart investors are moving the other way.
Savvy investors, ironically, think more like rats than people.
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