Last year I was debating about whether to put my 2006 Roth IRA contribution into one of three Vanguard funds: Total International Stock Market Index (VGTSX), S&P 500 Growth Index (VIGRX), or the FTSE Social Index (VFTSX). I ruled out the international fund because 2005 had been such a good year and I didn’t think it could hold up. That led me to the latter two and I chose FTSE because it was pretty close to the S&P 500 index, but also had a social conscience. As it turns out FTSE outperformed the growth index, getting an 13% gain vs. 9% for the growth index while the S&P 500 was just under 16%. But the international index blew them all away, with a 26% return in 2006. Meanwhile the small cap value index that I had contributed to the previous two years did pretty well again with a 19% return.
I feel like the stock market is due for an off year soon, so maybe I should put this year’s contribution into a money market fund drawing about 5%, at least until the market goes down some. The problem is I also feel like the dollar will go down in value and China may stop propping up its value. So if the dollar goes down 5% and I get 5% interest I would be breaking even. That is still better than having money in the stock market if the market goes down, but it makes putting the contribution into international equities more attractive despite yearly returns of 40%, 21%, 16%, and 26% in the last 4 years. It seems like performance of international funds can’t keep up that pace.
I also read an article that said large-cap growth funds have been underperforming for several years and are due to outperform this year. Maybe 2007 will be the year the big growth stocks finally outperform?