WHAT IS THE SMI JUST-THE-BASICS STRATEGY?
Just-the-Basics (JtB) is the epitome of simplicity and low maintenance. It is a simple diversification strategy that uses just four Vanguard index funds. Sometimes simplicity pays off SMI's 100% stock JtB portfolio takes just minutes per year to update yet has outpaced the market over the past decade. For an overview of how this strategy works, visit the Just-the-Basics page in the Visitors section of our website.
WHY DOESN'T JtB BEAT THE MARKET BY A WIDER MARGIN?
Because it's not really designed to beat the market it's designed to match the market. In JtB, you stop trying to beat the market. In exchange, you get the freedom of not having to do anything with your investments for a whole year at a time. The strategy runs on autopilot. If you want to beat the market, you'll need to get more actively involved, by either adopting the Enhanced Just-the-Basics variation of Just-the-Basics, or by switching entirely to the actively managed Fund Upgrading strategy SMI offers. Neither requires much additional time, but it is important you be at least willing to check your investments monthly or quarterly with these other strategies. JtB is the only strategy SMI offers that you can set up and then forget about for an extended period of time.
CAN'T I BUY AND HOLD A DIVERSIFIED PORTFOLIO OF ACTIVELY MANAGED FUNDS AND GET BETTER RESULTS?
You can certainly buy and hold a diversified portfolio of actively managed funds, but that probably won't help you beat the market, and is likely a recipe for lagging it. The reason is that in any given year, roughly 75% of all actively managed funds underperform the market. Those numbers get even worse over longer time periods. Selecting individual funds that will beat the market over time is incredibly difficult. Rather than attempt that low-probability game, many people prefer to take the market's returns via index funds, rather than suffer a below-market return, which is what most actively managed funds produce. If you want to try to beat the market, you need to look into a more active strategy than simply buying funds and holding them for a long period of time. SMI's Enhanced Just-the-Basics and Upgrading strategies are two approaches that offer promising odds of coming out ahead of the market, but they require more time and attention than does JtB.
WHY NOT USE VANGUARD TOTAL STOCK MARKET INSTEAD OF HAVING TO BUY BOTH THE S&P 500 AND EXTENDED MARKET INDEX FUNDS?
The reason is that the Total Stock Market Fund tracks the performance of the Wilshire 5000, which is typically weighted in such a way that the S&P 500 stocks represent a little more than 70% of the fund, and the remaining Wilshire 4,500 stocks count for slightly less than 30%. If you put, say, $10,000 into the Total Stock portfolio, it would be like investing $7,000 in the S&P 500 and $3,000 in the Wilshire 4500. However, the JtB formula calls for having equal amounts in each, meaning you would be underrepresented in the smaller companies by using Total Stock Market. There are times when the emphasis on large companies has paid off. But there are also times, when small companies have outperformed large ones, and JtB would have the edge. It's your call which allocation you prefer.
CAN I SIMPLIFY JtB BY BUYING A VANGUARD LIFESTRATEGY FUND INSTEAD?
JtB was introduced to SMI readers way back in May 1992. A few years later, Vanguard introduced "LifeStrategy" portfolios that embodied the simplicity of JtB. There are four LifeStrategy portfolios, labeled Growth, Moderate Growth, Conservative Growth, and Income. While the exact composition of each fund varies somewhat, it's reasonable to think of these as being roughly equivalent to JtB portfolios allocated 80%/20% stock/bond, 60/40, 40/60, and 20/80, respectively.
The performance of the LifeStrategy portfolios has been quite similar to their JtB counterparts. The major difference between JtB and LifeStrategy portfolios is that JtB includes a much higher allocation to small-company stocks. This means that when small-cap stocks are performing well, JtB tends to outperform the LifeStrategy funds, and vice versa.
Certainly, the LifeStrategy portfolios are an attractive, easier-to-administer alternative to JtB for those with the stock-to-bond portfolio allocations mentioned above (80/20. 60/40, 40/60, 20/80). There is no LifeStrategy portfolio that is 100% invested in stocks, so investors using that mix should stay in Just-the-Basics. If you want to switch from SMI's indexing recommendations to a LifeStrategy fund, you're welcome to do so. Just recognize that you'd be making a major shift away from small cap stocks.
CAN I USE EXCHANGE TRADED FUNDS (ETF'S) RATHER THAN INDEX MUTUAL FUNDS?
Yes. In fact, in 2012 we began recommending that readers use Vanguard's exchange-traded fund class of each fund included in JtB. These are the same funds, just packaged a bit differently. Vanguard has no minimum initial investment requirements for these ETFs, charges no trading fees for Vanguard customers, and the ETFs charge the lowest expense ratios. (Read more about SMI's change to ETFs in JtB)
Each JtB fund has an ETF share class. The tickers are as follows: VOO (S&P 500), VXF (Extended Market), VXUS (Total International), and BND (Total Bond).
If you'd like to stick with traditional index funds in JtB, it's fine to do so. However, if you have $10,000 or more in any of the Vanguard index funds, we recommend switching to the Admiral share class of those funds since they come with slightly lower fees, which has translated to better return over time.
DOES IT MATTER WHERE I OPEN MY ACCOUNT, SINCE INDEX FUNDS ARE PRETTY SIMILAR?
While it's true that all funds tracking the same index should earn similar returns, there's no guarantee. In fact, Fidelity's free ETFs have actually underperformed Vanguard's. Schwab's ETFs haven't been around long enough to compare to Vanguard's.
Vanguard is also usually the low-cost index fund leader. So, if you're just starting out with JtB and you haven't opened a brokerage account yet, we recommend going with Vanguard.
If your account isn't at Vanguard, you have a decision to make. You can go with the "house brand" equivalent of each index fund in the JtB strategy, which you'll be able to trade for free. Or you can buy the Vanguard ETFs through your broker and pay a small commission on each trade ($7.95 at Fidelity, $8.95 at Schwab).
Part of the decision whether to choose the house brand vs. the Vanguard ETFs may involve where you are in your investing life cycle. If you're regularly adding to your investments, you might lean toward the house brands, because your regular investments will incur repeated commissions. On the other hand, paying the Vanguard commissions is less of a big deal if you'll be setting up your JtB funds once and then leaving them alone for a year until your rebalancing occurs. If you decide to use Fidelity or Schwab's free ETFs, the tickers are provided in the June 2012 newsletter article where we made the announcement that we are changing our recommended JtB implementation strategy to ETFs.
DOES JtB OFFER ENOUGH DIVERSIFICATION FOR AN ENTIRE PORTFOLIO, SINCE IT INVESTS ONLY IN FOUR FUNDS?
It may feel like four funds can't be enough to diversify your entire portfolio, but in reality, you can't get any more diversified than JtB. That's because by owning these index funds, you essentially own the entire market. There isn't anything else to diversify into, unless you're talking about entirely different asset classes, such as real estate. JtB makes you an owner of the entire domestic stock market large and small companies both plus the foreign stock market and domestic bond market. That pretty well covers all the bases!
Just-the-Basics in Depth