My good friend Irving was about to open a Roth IRA with a $10,000 lump sum he had squirreled away in a savings account at his local bank. At thirty, he had just been promoted to manager of the production division of Widget Sure Repair, a manufacturer of easy-to-use tools for do-it-yourself homeowners. The promotion came with a large salary increase and my friend felt confident he could afford to make monthly contributions of $250 to the plan. But I detected a problem—a big problem—with Irving’s retirement formula. You see, his father had gone bankrupt when his men’s clothing store could no longer compete with the online presence of large discount retailers.  Irving became very conservative in his financial affairs, rolling over CDs he purchased at his bank. Oh No, My Friend Wants to Go Active with Fidelity After almost a year of cajoling, I was able to convince Irving to start a retirement program and open a Roth. I explained to him the simple logic behind the superior long-term performance of index funds, but he feared he would become too nervous whenever the market nosedived and would probably sell out rather than stay the course. He felt knowing a portfolio manager was at the helm would help him stay calm in bear markets.  He strongly favored Fidelity because it had a branch office a few blocks down the street from his house. I knew my friend would be throwing away his money unnecessarily and reducing the size of his ultimate nest egg by going active but I was at wit’s end. Then I remembered Irving had been a math major in college and might be swayed if I presented my argument in numbers. A Rescue by the Numbers Here is how I made my case to Irving. I briefly described how I conducted a back-of-the-envelope analysis of what it would mean for him to put the Roth into Fidelity’s active funds rather than their index fund alternatives. I could identify four active domestic non-specialty Fidelity funds categorized as large blend (containing both value and growth stocks), whose expense ratios ranged from .46 to .79. To remove any idea that I was up to any hanky-panky, I chose the actively managed fund with the lowest cost, the Diversified Equity Fund. Next, I selected the less expensive of the two active small cap blend funds at .92, Stock Selector Small Cap. I was frustrated in my search for an active large blend international fund and settled on taking the average expense (.78) of the lone international value fund (International Value, .95), and the cheapest growthier fund (Diversified International, .62). Total Bond costs .45, which struck me as prohibitive for a fixed-income fund. What were the comparative index funds? Zero-fee Total Market and Zero-fee International funds are obvious choices for our two large blend categories. Several readers have pointed out that these investment vehicles, though available to everyone, are self-evident loss-leaders and by their very nature unrepresentative. I therefore also ran the cost numbers for the passive Total Market (.015) and Total International (.06) offerings. Small Cap and US Bond have the same expense ratio (.025). I was now ready to calculate the averaged overall cost of the four equally-weighted categories of funds—large blend, foreign large blend, small cap blend and bond, a 75/25 stock/bond allocation. The resulting figures are .65 for the active portfolio and .01 and .03 for the passive zero-fee and total fund portfolios, respectively. But how significant in a practical sense are these seemingly astounding disparities? A Well-Deserved Latte I showed Irving how much he could save by investing in passive funds, assuming an average annual market return of 10% across about thirty-five years until retirement. The active approach generated about $1,078,000, whereas passive investing produced about $1,290,000 and $1,283,000, depending on the index funds used, or over $200,000 more either way. Irving was startled at the magnitude of the difference and proceeded to invest in index funds. As a thank you, he treated me to a latte at the local coffee haunt. Some Notes to Readers. If Irving had insisted on investing in actively managed funds, he would have been better off with Vanguard. PRIMECAP Core and Windsor, two of the low-cost provider’s most popular active funds, have expense ratios of .46 and .42, respectively, considerably lower than the foregoing Fidelity funds. His choice of index funds at Fidelity, though, would not have been entirely unwise. Although Vanguard has over 100 index funds and Fidelity only about 35, their cost is highly competitive with the cost of Vanguard’s similar index funds. The Boston mutual fund behemoth apparently uses them as loss-leaders, confident that aggressive marketing will lure passive fund investors into their inefficient and expensive active funds.                

WHEN WAS THE LAST time you got scammed? Mine was about a year ago, when I threw more than chump change into a red-hot newfangled exchange-traded fund called the JPMorgan Equity Premium Income ETF (symbol: JEPI). Now, JEPI could be the name of someone’s pet poodle, but it’s actually one of the more misunderstood high-income products in the burgeoning world of actively managed exchange-traded funds (ETFs). Just how red hot is the fund? Around for only four years, the fund has amassed more than $34 billion in assets and become the country’s most popular actively managed ETF. It’s benefiting from a revival of enthusiasm for the option-income fund, a strategy with an underwhelming investment history but a surge of industry propaganda. On the surface, the JPMorgan Equity Premium Income ETF looks sweet. It offers a yield that has at times exceeded 12%, with a downside of less than two-thirds that of the broad stock market. Meanwhile, it still has some room for capital appreciation. The fund’s advisors look for stocks of high-quality, fundamentally sound companies, most of which are members of the S&P 500. The portfolio is diversified across about 130 stocks, and is tilted away from the tumultuous and likely overvalued technology sector. See how I got hooked? I even got victimized by the 0.35% expense ratio, which I saw as a bargain for an actively managed fund. Just what is this contraption called an option-income fund? Its portfolio consists mostly of dividend-paying stocks. The fund’s managers sell instruments that, like options, are designed to slightly limit losses during a market decline. While you get some insurance, I’ve discovered that I pay dearly for it, in the form of a cap on the fund’s gains during up years. That restriction on how high your gains can go isn’t the only snafu here, but it’s the most important reason I should have stayed away. The fund’s advocates like to point to its stunning performance when the market took a drubbing in 2022. The ETF lost only 3.5%, compared to the 18% decline in the S&P 500. What boosters gloss over is the fund’s subsequent lackluster showing. In 2023, it earned 9.9%, including dividends, while the broad market charged ahead by 26%. Things are no better in 2024. Its return is 8.2% through July, compared to the S&P 500’s return of 15.8%. Let’s put it in plain dollars and cents: Since its inception in May 2020, a $10,000 investment in the vaunted ETF grew to about $16,300 as of this June, quite a bit short of the $19,600 returned by Morningstar’s comparable broad market index. Yes, the protection it offers in a falling market could come in handy. But let’s get the truth out folks—stocks are in a bullish mode roughly two-thirds of the time. The fund’s fat dividend is no bargain, either. First, the fund’s dividend yield has dropped from 12% to 6.4% as of July 31. Second, dividend is a misnomer anyway. This ETF’s distribution is actually a combination of dividends from its stock investments, plus income thrown off by the option-like vehicles known as equity-linked notes. The dividend component of this combined distribution is actually quite small. How could it be otherwise when four of the fund’s top 10 holdings are technology behemoths that pay small dividends or none at all? The lion’s share of the payout comes from those equity-linked notes, which—unlike dividends—are very much affected by the jumpiness of the market. People who trade options crave action. They’re driven to them when stocks are the frothiest. That’s why the fund’s distribution topped 12% when market volatility was high. The yield has gradually subsided to 6% as the market has become less lively. The ETF’s monthly payouts to shareholders are a nice feature, but hardly anyone I know likes a variable distribution. Retirees using dividends to pay for essential living expenses prefer their income stream to be steady. The fund’s deficiencies go beyond its lagging returns and uneven payouts. Income from the fund’s dividends and option-like notes are treated as ordinary income. The fund’s dividends are not considered qualified. After taxes, that 6.4% dividend becomes worth something like 4.6% for me. That’s close to the rate I can obtain practically risk-free from a money market fund. Don’t make the same mistake I did. You’ve got two good options for this option-income fund. Own it in a nontaxable account or—better yet—pass it by. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

Two  roads diverged in a wood, and I took the one less traveled by And that has made all the difference --Robert Frost The Road Not Taken, 1915 I have volunteered to teach a module on stock fund investing for students taking a new elective course at a small private high school in Sacramento. Here is a fleshed out outline of what I’m thinking about presenting. I want to educate “my kids” about the factors that ushered in the advent of the index fund and ETF and how to distinguish between the virtues and vices of their investment options. In the process, I’ll shine a light on those TV commercials showing an advisor in a tweed jacket speaking patronizingly about what to do now in a voice dripping with sincerity. Above all, I want these 18-year-olds to feel confident and not be intimidated by advisors, brokers or their apologists. In short, I hope to add a few names to the small cadre of informed young consumers of the stock market. To be sure, nothing has been finalized after an enthusiastic handshake with the head of the high school in the spring, so all this may be the ramblings of an old fool on a belated mission. By the way, if anyone can use this article as a refresher or has a kid about to take the dive, that would be a joy. The Road Is Long, with Many a Winding Turn Learning how to invest in the stock market is a lot like learning how to drive. Done wisely, it will get you to where you want to go—a life of financial well-being and money for college, your first home, raising your children, and then their college. Done recklessly, investing in stocks is fraught with danger. Over the last twenty years, the overall stock market has gained an average of almost 10% a year. Pretty cool, right? But a sputtering economy and extremes of human emotion can cause this gradually rising slope to be temporarily disrupted by violent downside episodes of more than 40% a year. After bear markets, though, the inexorable march upward resumes. How can I be so arrogant and so sure? Because it always has. Stocks have tended to finish higher over 80% of the time across ten years and over 90% across twenty. They have overcome the Crash of 1929, the dot.com technology massacre at the turn of the century and the mortgage lending fiasco of 2008. Rolling the Dice with Individual Stocks Buying individual stocks is risky, too risky for most of us. If management executes poorly and earnings disappoint or if the public loses confidence in its product, you will feel the pain. Boeing’s stock lost 23% in a few days following its two tragic air accidents in 2019. What could that mean for you? Well, the $1,000 your parents set aside for college textbooks is now $770. Single-stock risk is particularly perilous. Even Apple has sustained staggering blows on the way to investor nirvana, plummeting over 50% in 2008. Sure, rooting on your individual picks is challenging and fun, but serious investing needs to be more than that—certainly so when replenishing your tuition savings account or beginning to save for a down payment. Many have said that diversification js the only free lunch on Wall Street. What’s  a Mutual Fund, Anyway?  Let’s say your mom would love to have a second home in Tahoe, but she only has half the money needed for the down payment. She enlists two women friends to invest 25% each into a chalet. Your mom owns 50% and each of her friends owns one-fourth. The three partners will divvy up any gain or loss in the value of their mountain retreat according to their proportionate share. A mutual fund works much the same way. People pool their money to buy stocks, with each person owning the percentage of shares represented by the size of her investment. Cost: The Achilles Heal of Professionally-Managed Funds  The modern era of mutual fund investing that began in the 1920s solved the problem of diversification by providing instant ownership of a large number of stocks. Until the 1980s, virtually all mutual funds were actively-managed by a professional stock picker. His mission was to replace stocks deemed overvalued with those believed to be undervalued to maximize the fund holder’s profits. This oversight freed investors from having to monitor developments in their individual stocks, opening up time for leisure pursuits or, of course, (ugh!) homework. The aura of professional supervision is particularly attractive to individuals---including many students—without the time, ability or desire to manage their own finances. But hold it. These features of the active mutual fund must be weighed against a stark disadvantage. The prodigious costs of maintaining a mammoth research division to turn up ideas for the portfolio managers have proven a stubbornly high hurdle for them to clear  Index Funds: The Portfolio Manager Has No Clothes Until the mid-1970s, the commonplace assumption was that portfolio managers’ trading skill enhances the performance of their funds. It was a slam dunk.  After all, many of them had Ivy League pedigree and most were educated in elite business schools. It was around that time that several market observers began to question the seemingly unassailable conviction that the quality of professional management determines the success of a mutual fund. These renegades constructed an index fund consisting of all the stocks in the S&P 500. No portfolio management or trading was done, so that the fund’s holdings were fixed. As you might imagine, these skeptics were ridiculed as naïve and traitorous by brokers and advisors whose livelihoods were on the line. But the early results with the index (or passive) fund were encouraging and stimulated considerable academic research. Over the last twenty-five years, literally hundreds of studies have confirmed that gains from actively-managed mutual funds generally do not exceed those for similar index funds. In fact, the results for index funds often eclipse those with portfolio managers. In 2024, active funds surpassed the S&P Index fund less than 25% of the time. Just how cheap are index funds, anyway? They usually cost about one-third as much as active funds and fees for many of the largest passive funds are so low as to be incidental. Let’s bring that notion closer to home. Say your parents have socked away $50,000 toward your first two years of college tuition and associated expenses and put half into a savings account. They allocate the remaining $25,000 to Vanguard’s S&P 500 Index fund. What is their total annual cost?  $1,000? Nope. $500? Uh-uh. Try $10 (not a typo), folks, and that includes all operational and administrative expenses in addition to the management fee itself. Passive funds are no longer the poor kid on the block. In response to investor demand, thousands of index funds have been launched, ranging from highly diversified broad market indexes like the S&P 500 to specialized offerings in areas like aerospace and real estate. With a boost from the financial media and grudging acceptance by the formerly disdainful professional establishment, a cadre of informed mutual fund consumers has been born. I want you to be one of them. The ETF Is Not The New Model Jaguar  By the turn of the century, the actively-managed mutual fund was fast becoming a  dinosaur. Its egregious management fees were exposed by the more efficient index fund and savvy consumers were transferring their assets from one to the other. Asset management companies, which had gorged on their expensive actively-managed funds for seventy-five years, were hemorrhaging money and shedding investors. At the same time, developers of the index fund were emboldened by its stunning success. These two unlikely bedfellows were scrambling for a new consumer-friendly product. They found it in the exchange-traded fund (ETF), The ETF structure has several advantages over active management and even the index fund, which is actually a subclass of the mutual fund.  Though much cheaper, index funds carry other baggage of their active counterparts. Passive funds cannot be bought or sold during the market day, but only at the closing price. They are also subject to the annoying restrictions often placed on mutual and index fund investors, though limitations on the number of times you can return to a fund you recently exited would typically not apply to long-term holders of index funds. By contrast, the ETF wrapper goes way beyond the features of actively-managed mutual funds. Since the ETF is just a new way to package passive funds, they are likewise cheap. No buying or selling occurs in either index funds or ETFs, which also share favorable tax treatment not accorded their active brethren. ETFs are also more flexible than mutual funds and passive funds, allowing trading whenever the market is open, just like a stock. Does all this good come with any bad?  Well, the flexibility of the ETF has come under scrutiny for its susceptibility to the kind of frenzied trading that gives rise to the speculative juices. Ironically, rampant short-term trading may well be deterred by the rigidity of mutual funds’ transaction rules. And to be sure, ETF trades take place in an auction-like market with a spread between the bid and ask prices, whereas mutual and index funds are bought and sold at the closing net asset value. The friction of the ETF is a cost that makes them less amenable to accumulating or withdrawing shares repeatedly in a college savings or retirement plan. Despite these reservations, the ETF is one of the most successful financial products ever created. Although not yet a topic of conversation at the local club, the ETF has become the darling of the investment community. By the end of 2024, assets in ETFs represented fully one-third of those in all stock funds. As of mid-2025,  there were about four-thousand  ETFs in the U.S. and ten thousand internationally. Similar but in many ways superior to index funds, they facilitate investment in widely followed market benchmarks like the Dow and S&P, as well as tap into thematic trends like biotechnology and real estate. ETFs exist for expressing values through investing, like religious beliefs and sustainable farming. Learning how to invest through funds reflecting personal interests is a great way for you to get started. Remember, diversification and time are on your side, so save, invest and be patient. Active Management Descends on the ETF  You’d better look now because they’re coming. The established asset gatherers were hit by a double-whammy. First, their lucrative actively-managed mutual fund model was overrun by the proliferation of index funds of all stripes. And then the entire mutual fund design—including the subclass of index funds—was supplanted by the entirely new ETF structure. But don’t sell the enterprising fund providers short. As investors fled their costly and outmoded mutual funds for streamlined ETFs, the big boys needed a new gig. Ever inventive, they fashioned a new version of the ETF with, of course, active management. All those portfolio managers who failed to outrun passive funds were retooled to pilot ETFs artfully priced between the cost of the mutual fund and index ETF. The marketing allure of a relatively cheap ETF combined with button-down surveillance has been breathtaking. In the last two years, new active ETF offerings have far surpassed those for index ETFs. The revamped ETF has also been stealing market share from its predecessor. The Showdown Whether the relocated portfolio managers will be able to tease out better results than they did steering their mutual funds seems a stretch. Unfortunately, since very few active ETFs have been around for more than a few years, little academic study comparing their performance against passive ETFs has been done to deliver a verdict. Until more research is available, we won’t know if the active ETF is indeed the Holy Grail or just another fool’s paradise.

In two previous posts (“The Morningstar Experience” and “Your Morningstar Freebee”), we looked at how readers considering investment in a Vanguard fund can consult the helpful information in Morningstar’s esteemed advisory service. We demonstrated how they might consult this resource to monitor their investments and evaluate their performance. Today, we’ll illustrate how to decide whether the holdings of the fund meet the reader’s objective. Once again, the fund examined is Vanguard’s Small-Cap ETF (symbol VB, or VSMAX for the mutual fund alternative).   We begin by searching our target fund—even without the $249 subscription price—and slide over to Portfolio. You can see that the stocks in VB are overwhelmingly domestic, as they should be. I find the map designating Stock Style confusing, so I recommend you drop down to Weight. Here we get a surprise and a big reason to depend on Morningstar. Fully one-third of VB’s holdings are classified as midcap stocks!   What might be going on? Well, Morningstar may set a higher bar for inclusion in the small cap space than VB’s underlying index. And this difference in criterion could exert a significant effect on performance. Readers may recall that VB’s average annual 10-year return was about 1% higher than that of similar funds. Could VB's  portfolio have benefited from the higher long-term performance of midcap stocks?   Quite possibly. The iShares Russell 2000 ETF (IWM), which is curiously more popular than VB despite its higher expenses (.19 vs. .05), is virtually 100% small cap and did not enjoy a midcap edge. Likewise, iShares S&P Mid-Cap ETF advanced yet another percentage point more than VB. You will probably get the superior performance of VB only as long as midcap stocks continue to outperform.   We also see that VB is suitably balanced across the value vs. growth dimension. But if you want to more efficiently participate in a small cap revival and are not put off by the added cost, you might prefer the iShares offering (IWM).   Now, let’s scroll down to the Factor Profile. I want to point out the low quality of stocks in VB (and IWM). Small companies are more likely than large ones to have no earnings and balance sheets vulnerable to economic conditions. At Style Measures, you learn that the price/earnings ratio of VB is only 14, strikingly lower than the S&P’s 21 and reflecting the extent to which small stocks are currently out of favor.   The dividend, as expected, is nominal.  The Exposure table reveals another valuable piece of information—technology stocks represent only 15% of VB, less than half their weight in the S&P 500. Despite any qualms about investing in small caps, keep in mind you would gain substantial diversification away from the possibly overvalued technology sector.   With over 1,400 stocks that fully replicate its index and only 4% of the portfolio in its top 10 holdings, VB is more than amply diversified. You can see that turnover is only 12%, which speaks to the fund’s efficiency.   What about the actual holdings? Well, remember we’re dealing with small companies, so don’t despair if you only recognize a handful of names, like Williams-Sonoma and Texas Roadhouse. Take solace that VB’s constituent stocks are not closely followed by analysts.   Folks, now you’re armed to consider how well VB (or any other fund) fits into your investment plan. I hope you feel more confident about navigating Morningstar’s fund Portfolio page the next time you’re in a quandary.          

"SO STEVE, WHAT BRINGS you to therapy?" “I’ve been moody, sluggish and short-tempered lately. I think I’m depressed.” “Any guesses what might be going on?” “I do, but it’s so silly. My wife Alberta needs to make her first required minimum distribution in a few months. You know, when you reach that point in your 70s where they make you withdraw from your retirement accounts. I don’t think it’s about the tax liability. We’ve planned for that.” “Then?” “This is going to sound strange. But I manage the money, and I’m afraid I’m going to miss seeing her retirement funds grow.” “Sounds like investing has been kind of a passion for you.” “Uh-huh. The stock market is challenging for me in so many ways. I read about mutual funds and exchange-traded funds all the time, and have used my math ability and common sense to build up a nice nest egg for Alberta. I know I’ll still have some tinkering left to do, but the required withdrawal is a shot across the bow.” “I’m getting the picture. Investing has given you a structure and a different kind of gratification than you get from seeing people in your psychology practice.” “Yes, helping patients work out their lives is enormously satisfying, but I sit all day. I like a hit every now and then.” “Is it fair to say you seek a lot of action to keep you from sinking into the blues?” “Yes, definitely. That’s why the other doctor started me on Prozac a few years ago. He said my personality is keyed for depression and so I compensate with excitement.” “Steve, from what you’ve told me, I’d agree. And maybe becoming a successful stock investor has been a source of pride and self-esteem. It’s a big thing in our society, especially for men.” “Investing has been a big part of my identity. In my 40s and 50s, I became depressed and lost my job as a psych professor. Investing became my contribution to my family’s well-being. Friends still ask for advice all the time. Even so, I’m constantly comparing my successes to theirs.” “Steve, you must have been raised in a very achievement-oriented family, which makes letting go of your money all the more terrifying. What you’re going through now isn’t a garden-variety depression. You’re in mourning.” “Mourning? But no one close to me has died.” “Grief doesn’t only happen with the death of a loved one. You’re losing a very good friend, an activity that has been a source of self-worth for many years.” “I’ve never thought of my investing that way. I do feel a little lost. And truthfully, I’m scared.” “Sure you are. Passage from a stage of life you’ve mastered to one that’s new—and that you’ve probably resisted planning for—is frightening. Steve, you’re in what we might call retirement affective disorder. You’re having trouble moving from the accumulation phase to the distribution phase, and from retirement planning to enactment.” “Can you help me through the transition?” “Steve, your prognosis is good if you’re willing to explore new ways of finding meaning in your life. Your path has been too narrow. Like many people, you’ve concentrated too much on what you do well, and haven’t experienced nearly enough of all life has to offer.” “I’m open to most anything that might break up this fog I’m in.” “As the fulfillment you get from investing winds down, you’ll need to replace it with activities that also have meaning for you. You’ve taught and you love investing. Maybe volunteering to coach teenagers in good money habits or assisting seniors in managing their financial affairs would help. And, of course, there are the rewards of travel—relaxation, learning and just plain fun.” “Whoa, you can stop right there, doc. I hate vacations that involve a lot of travel. First of all, they’re absurdly expensive, not to mention a big hassle. You’ve got all the jostling at the airport and the discomforts of the plane. Alberta coaxed me into a trip to Europe a few years ago. After landing in Madrid, we were told our bags had turned up in Berlin.” “So, you had an experience that only reinforced your worst-case scenario. But I wonder how it would be if the purpose of the travel held more meaning for you.” “I’ve been having this recurring dream about a trip I would take. Some people wake up from a dream feeling anxious. But last night, I woke up all teary.” “Can you remember any part of the dream?” “Oh sure, the whole thing. I fly to New York—in economy, of course—and drive a rental car to the house I was brought up in on Long Island. I walk up to the front door and knock. When a woman opens it, I tell her my name and that I lived in the house 60 years ago. She smiles and invites me in. Then I point to the stairway and ask if I could see my old room. She says sure and gestures toward the stairs. When I get up to my room, I hear the Beach Boys playing one of my favorite songs. It goes, ‘There’s a world where I can go and tell my secrets to, in my room, in my room.’ And that’s when I wake up crying, just like I’m doing now.” “Steve, your dream has to do with your fear of leaving a place that’s safe for one that’s frightening. Your unwinding of a rewarding sideline career is exaggerated by your memory of leaving home. You’re depressed because you feel trapped. But you’re not trapped. You’re just scared about what’s to come.” Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

Do you rebalance your retirement portfolio?  Many studies have shown that you should. The folks at Hartford Funds compared the results of a 70/30 buy-and-hold strategy with annual rebalancing of an $100,000 lump sum investment from 1999 through 2023. The asset manager found that the rebalanced portfolio produced a nest egg over $13,000 greater than simple buy-and-hold. But rebalancing does much more than just improve performance. It encourages you to sell high and then buy low, reestablish your original position, lessen volatility, return to your preferred level of risk tolerance and increase diversification. If rebalancing qualifies as the Holy Grail, then why limit the method to reconfiguring the venerable 60/40 stock/bond allocation? Say you think a certain sector of your stock fund is horribly overvalued. You could reduce the imbalance by selling it (or some of it) and replacing it with a fund having a less lopsided profile. The Case for Rebalancing Now, if you’re a devout Bogelhead, you’ll probably see where I’m going with this post as blasphemous. But at least hear me out. Market observers far better informed than me have expressed concern about the stark overrepresentation of technology stocks in the S&P 500. Writing for the highly-respected Reuters news agency in July, Ankika Bismas noted that the gap in returns between the S&P and its equal-weighted counterpart is at the widest in fifteen years, underscoring the wisdom of diversifying beyond heavyweights like Nvidia. She warns that the one-third weighting in mostly mammoth AI-linked technology companies makes the broad market index vulnerable to a sharp retrenchment. I’d like to propose Vanguard’s Dividend Appreciation Index Fund (VDADX) as a sensible alternative to the technology-glutted Vanguard 500 Index Fund (VFIAX). Nonsense, you cry, its .08 cost is double what you’re paying now. True, but the difference between the 1.7% dividend of the suggested replacement fund versus the 1.3% yield of its predecessor more than compensates for the 0.04% expense gap between them. The Vanguard 500 Index Fund Before we introduce Dividend Appreciation, let’s review some basics pertaining to Vanguard’s S&P proxy. Once a large-blend fund according to Morningstar’s investment Style Box, the Vanguard 500’s holdings now fall disproportionately into the large-growth space due to its current 33% weighting in technology companies. Is that where readers intended or want their “broad market” exposure to be? Seven of the top ten stocks in the Vanguard 500 are mammoth AI-fueled tech stocks and those ten account for 36% of the fund’s net assets. The median market cap is a daunting 274 billion. Because of its tech overweight, the fund is surprisingly aggressive, losing more than 18% in the 2022 rout. As you can tell, today’s version of the S&P 500 is more growthy, less diversified and riskier than many folks realize. The Vanguard Dividend Appreciation Index Fund Now, let’s compare this picture with the corresponding data for Dividend Appreciation, which is more robust than its name would suggest. Although the fund has maintained its large-blend style designation, the technology sector comprises fully one-quarter of the fund’s net assets. Importantly, the suggested substitute fund is a dividend growth vehicle and not a more stodgy high-yielder whose contents would have landed it in the large-value box. Only three of Vanguard Appreciation’s top ten holdings are technology companies and those ten constitute less than a third of net assets. Notably, 30% of the fund is invested in the more defensive health care, consumer products and utilities sectors, about 10% more than in the Vanguard S&P surrogate. Plus, the median market cap of the replacement fund is under 200 billion, only two-thirds of the size of companies in the Vanguard 500. Significantly, Dividend Appreciation lost only 10% during the 2022 debacle. Taken together, we’ve learned that the fund is more balanced in style, better diversified and more stable than its predecessor. The New 40/20/40 Allocation Many people who believe they are comfortably ensconced in a 60/40 retirement plan are actually sailing in an unsteady 40/20/40, with the middle 20% consisting almost entirely of AI-fueled technology behemoths. Readers approaching retirement or just wading in are highly vulnerable to an unfavorable sequence of returns. Is 40/20/40 where you should or want to be? I want to anticipate a reasonable rejoinder to my presentation. The relative performance of the two retirement vehicles has been entirely dismissed. Frankly, I didn’t think that conversation was necessary—we all know that in recent years a higher tech overweight has translated into a higher return. Hence, $10,000 put in the Vanguard 500 ten years ago would now be worth about $35,000, as against the $30,000 that would have resulted from the same investment in Dividend Appreciation. Presumably, most of that discrepancy is due to the funds’ different representation of technology stocks. Some last notes.The dividend growth fund tracks about 85% of the changes in the broad market index. If an investor wants to increase the sensitivity of his retirement portfolio using Dividend Appreciation in place of the Vanguard 500, he could raise the stock fund’s allocation from 60% toward 65%. I have viewed diversification in terms of what the lay of the land “should be” based on the logic of the past—technology exposure “should be,” say, about 20%. But who are we to disagree with the voice of the market, which is calling out that technology companies legitimately reflect one-third of the entire market’s value? It may be that AI and its beneficiaries are the real deal, or perhaps we are foreshadowing a reenactment of the dotcom bubble dressed in the regalia of a new era.