In a recent podcast (here or here), Morgan Housel, author of The Psychology of Money and one of the better financial writers out there, listed a few permanent skills. One enduring skill he identified as …

The ability to distinguish temporarily out of favor from wrong. One other way to think about this is the difference between patience and stubbornness.

Housel’s remarks struck home, as my Portfolios have trailed broad index funds like 500 Index (VFIAX) this year. Have they been “temporarily out of favor” or just “wrong”?

This is the question I tried to answer last week when digging into the PRIMECAP Management-run funds, which have been huge contributors to the long-term success of my Portfolios but have recently hurt them.

Now, I want to address that question to my Portfolios.

As I said last week, this isn’t an idle thought experiment for me. My money is invested in the funds I recommend—I eat my own cooking!

So, let’s start at the beginning and review my investment beliefs and approach. I’ll then show you how the Portfolios are positioned before discussing performance.

As you’ll see, all of the ways my Portfolios are different from the market, which I’ll define as 500 Index—the Portfolios having overweights to healthcare stocks, smaller stocks, foreign stocks, dividend growth stocks, etc.—worked against me (and you) this year. And, as I’ll show you, this year, the divergences within the market were extreme, meaning the cost of being on the wrong side of a trend was steep.

In my view, the Portfolios are far from wrong, just temporarily out of favor. Of course, this doesn’t mean I’m not considering trades or constantly looking for opportunities to improve returns or reduce risk—I am. But I believe patience is required.

Ultimately, you’ll have to judge whether I’m being patient or stubborn.

Note: All of the performance stats in this article are through November 30, 2023. Also, I will compare my Portfolios against 500 Index since it’s the go-to benchmark for most investors. The story doesn’t change much if I use, say, Total Stock Market Index.

People, Process and Philosophy

If you followed my old newsletter, The Independent Adviser for Vanguard Investors, you are probably familiar with my approach to investing, but it’s worth restating.

My Portfolios follow a simple recipe: Partnership with the best managers and funds that Vanguard offers and patience with the vagaries of the markets.

Looking more closely at those ingredients: While Vanguard is known for its index funds, the firm should get more credit for offering individual investors (like us) access to institutional-quality managers at low, low costs. That doesn’t mean every active Vanguard fund is a winner—far from it.

Furthermore, partnering with the best that Vanguard offers often means investing alongside an active manager, but I am selective. If I’m looking to invest in a particular strategy or sector of the market and I don’t have confidence in an active manager, I’m more than happy to buy an index fund or ETF.

The second ingredient—patience—stems from my belief that time in the market, not market timing, is the best way to compound and grow wealth. I aim to build a diversified portfolio that I have the confidence and conviction to hold through the ups and downs of the market.

This is the same philosophy and approach Dan practiced when he started writing about and investing in Vanguard funds in 1991. He and I collaborated and refined this for over a decade beginning in 2011. And while I’m calling the shots today, the fundamental beliefs are the same. (Given that I don’t trade often, the portfolios still look similar!)

Portfolio Positioning

Now, let’s look at how my Portfolios are positioned.

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