Rudy Fichtenbaum: The bottom line is the index fund portfolio had a higher annual rate of return [than that of STRS OH] and took less risk.

STRS OH v VFINX Part 3

By

Dr. Rudy Fichtenbaum 

May 1, 2022 

VFINX is the Vanguard S & P 500 Index Fund for Investors and VBMFX is the Vanguard Total Bond Market Index Fund for Investors. The following data come from https://finance.yahoo.com/quote/VFINX/history?p=VFINX , https://finance.yahoo.com/quote/VBMFX/history?p=VBMFX and STRS Returns from various Annual Comprehensive Financial Reports (ACFR) some of which can be found on STRS’s website https://www.strsoh.org/publications/annual-reports.html where in the interest of transparency they have the most recent 5-years of reports that are locked so you cannot copy and paste numbers from the report into a spreadsheet. They can also be found at ORSC https://www.orsc.org/reports/search?6&pageSize=10&start=1&sort=NewToOld&pensionSyste m=6&reportCategory=1&reportType=5 where the reports are also locked or on the Auditor’s website where they are unlocked allowing you to cut and paste numbers and put them in a spreadsheet. https://ohioauditor.gov/auditsearch/Search.aspx Type State Teachers Retirement System into the search box. You will have to do a little hunting, but the reports are there. 

I took the quarterly data for VFINX and VBMFX and took the last two quarters and put them together with the first two quarters of the following year to create data that is consistent with STRS’s fiscal year which runs from July 1 though June 30. I am willing to share my spreadsheet if you want to check my numbers or see how I made my graphs. 

In this post I show the difference in investing using rates of return for STRS OH v investing in a diversified portfolio of index funds. For my portfolio, I use 65% VFINX and 35% VBMFX. Again, I will present two graphs. 

The first shows the impact of investing $10,000 and earning the STRS OH total fund return for 33 years compared with investing $10,000 and earning the return from our diversified index fund portfolio. At the end of 33 years investing $10,000 and earning the STRS OH total fund return we would have $126,193. Compare that with investing the same $10,000 in a diversified portfolio of index funds which would have yielded $163,010. 

The second graph presents the average annual rates of return over 33 years for STRS OH and the diversified index fund portfolio. Here we see STRS OH had an average annual return of 8.83% compared to 9.60% for our diversified portfolio of stocks and bonds. The index fund portfolio outperforms STRS OH by an average of 77 basis points per year. 

Of course, return on investment is not the only thing to consider. We must also consider how much risk was taken to earn the respective returns. If one can find a portfolio that has a higher rate of return while taking the same or lower level of risk, clearly that portfolio is superior. A good measure of risk is the standard deviation of the returns for a portfolio. The standard deviation for the STRS OH portfolio was 9.95% compared to 9.71% for the diversified index fund portfolio. So, the bottom line is the index fund portfolio had a higher annual rate of return and took less risk.

Dr. Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University and an elected member of the STRS Board since September 1, 2021.