Vanguard, Will You Be My Valentine?
Shhhh, don’t tell my Mr. that I have a crush. It’s okay really since my crush is on Vanguard. You know, the investment management company. Odd, I know, but then what do you expect from a girl named Ree Klein (get it…recline…)? But that’s a story for another day.
Since Valentine’s Day is upon us, I thought I’d tell you five reasons why I’m so in love with Vanguard. But first, let me remind you that I am not an investment adviser so what I tell you comes from the heart, not a credential. You should always do your own research and make your investment decisions based on what’s best for you.
That said…here we go!
#1: John C. Bogle Had a Big Idea: Put the Investor First
I’m a sucker for a good story and Vanguard has one. John C. Bogle is a brilliant man who had a big idea and stuck with it despite some naysayers. He created an investment management company 40 years ago based on a crazy concept…the company would be owned by the funds, which really means it would be owned by its investors. Similar to how a credit union is owned by its depositors.
The goal: to build wealth for the owners of the company…that means us, the investors.
That was a wildly different approach from the mainstream investment firms back then and they’re still loners in the field operating on the same principles today. Nice!
Along the way those smarties at Vanguard invented the index fund. Their thinking was “Why try to beat the market when you can create a basket of stocks that mirror the market and keep costs WAY DOWN in the process?” What a stellar idea!
With this model, you don’t have to pay a bunch of supposed brainiacs to pick and manage the fund’s stocks because stock selection is basically on autopilot. Ah, the wisdom. So wise that other companies realized they’d be left in the dust if they didn’t pounce on the idea and create some index funds of their own.
#3: Their Employees Don’t Earn Commissions
Whenever I buy something where there’s a commission involved, I always wonder whether the salesperson is nudging me a certain direction because their commission depends on it. Sure, it may be a good product but is it the BEST product for me? I’ll never really know the true motivation for the pitch, but I’d bet that the commission has some influence.
Saturn was loved by many because they stripped the commission from the car-buying equation. Well that’s what Vanguard did. Whenever I talk to their investment professionals I know that I’m getting unbiased information. I do my own research but I never worry that I’m being “sold.”
#4: Their Fees are Wicked Low
As I pointed out in this recent post, you can’t beat Vanguard’s fees.
But let me wax on about that for a minute. Doesn’t it sound like a teeny tiny fee to pay 1.05% annually? If you’re investing $1,000 that’s just $10.05…doesn’t seem like much, but it’s WAY MORE than you’d get in a passbook savings…you’re losing ground.
And, what if you have a $500,000 nest egg you’re trying to grow so that some day you can quit slaving at your job. If you’re giving up 1.05% each year, that’s $5,250. Now that’s starting to sound like you’re being robbed!
Well, that’s what you’d pay if you had your money invested with Schwab in their Large-Cap Growth Fund (SWLSX), which is an actively managed fund. Now I’m no expert here but that fund seems very similar in strategy to Vanguard’s Total Stock Market Index Fund Investor Shares (VTSMX) except that by choosing this fund you pay only $850 in fees. That’s because their expense ratio is only .17%. Wow, what a difference that is! *
By just choosing a Vanguard index fund over some other firm’s managed fund, you now magically pay only $850 instead of being plundered for $5,250! You get to KEEP $4,400 EVERY YEAR!!!
Over 10 years if you kept that $4,400 and earned 6% return, you would grow your assets by $61,475.23. But if you want, you can give it to some investment company instead…that’s your choice!
Good grief, when you think of it who wouldn’t love Vanguard!
#5: They’ve Made it Easy to Get Started
When I was first starting out on my journey to prosperity, I was paralyzed with fear over not knowing what to do with my first shekels that I’d saved for investing. Thankfully my mentor helped me a lot in this department.
Most financial advisers will help you develop an investment strategy based on your risk tolerance, stage of life and financial goals. That’s great, but it usually ends up with you having to get comfortable with a lot of strange terms and many people just hand over the reigns hoping that financial adviser will make good choices on their behalf.
Well, there’s one very easy way to get started without having to learn everything at once and without having to worry that Mr. Financial Adviser will act in your best interest (see #3 above). What if instead you start out by putting your money in Vanguard’s STAR fund? By doing this you get the best of all worlds for a low price of .34%.
The STAR fund is…get this…a mutual fund of mutual funds! That’s right, it doesn’t invest in stocks or bonds directly, rather it is made up of other Vanguard funds that include stocks and bonds (US and international) at various risk levels. It diversifies your money automatically.
I held this fund for many years and I own it again now. This fund has been around since 1985 and since that time the average annual returns have been 9.77%. Not too shabby!
Remember, I’m not trying to sway you to follow my path because there are no guarantees when it comes to investing. That’s why I usually avoid this subject but it is important to your wealth creation. I’m just telling you my story so you have more information on which to base your own decisions.
I’ve been with Vanguard for around 20 years and have been so happy with them. I know a lot of other bloggers in the personal finance niche feel the same way. I’d love to hear about you…have you been overwhelmed with what to do or who to trust? How did you overcome that and what suggestions do you have for other readers? Please share your insights or dilemmas in the comments below.
* I realize I’m comparing apples and oranges here by comparing an index fund to an actively managed fund, but these are the problems we face when trying to decide what to do with our money and how fees play a part of wealth creation is key. For me choosing a fund with a strong and long track record that has low fees is the key.
** I am in no way compensated by sharing my love of Vanguard.
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