Today's post is written by Dr. Phil Zema, a friend of mine from high school. We spent many long nights around the gaming table, and over the years I have come to appreciate his keen mind and thoughtful analysis. He's been investing with Vanguard since 2014.
Investing can be overwhelming, scary, and confusing. There are legions of ways you can invest, and if you aren’t paying close attention, you’ll never know if the financial advisor or investment platform that promises hefty financial returns is a shark or legitimate. For example, we’ve heard about financial institutions who charge hefty fees to manage your portfolio. Such fees shred whatever you've gained during bull markets. Moreover, scary events such as the financial crisis of 2008 or the current COVID-19 pandemic can lead to long-standing recessions and sudden drastic drops in the stock market. With all the bad things that could happen and given all the uncertainty in the world, isn’t it just better to avoid investing and put one’s money in super-safe savings accounts? In the long run, the answer is likely no, especially if you consider inflation’s impact on your wealth.
There’s a safe, honest, and reliable platform through which one can invest. It’s called Vanguard. Vanguard is focused around mutual funds (more precisely, they are Index mutual funds, but I’ll save this nuance for another post). Mutual funds are sets of certain types of investments. For instance, an S&P 500 mutual fund is basically a stock portfolio of each company in the current S&P 500. Accordingly, if you have money invested in this mutual fund, you own a tiny bit of shares in each of these companies.You will own a piece of Google, Amazon, some pharmaceutical company you’ve never heard of, and 497 other companies. Vanguard has scores of these mutual funds, and each is designed to track various types of investments including both American and international markets, industry types (e.g., energy, healthcare, and technology), bonds, real estate (specifically, REITs), and money markets.
Vanguard has two primary virtues: First, it makes investing incredibly easy. For example, if you just want to start an IRA (and you should want to do this) and plan to retire in 30 years, easy-peasy: go to Vanguard, create an account, and select the retirement fund that you think best suits your needs. Note: Vanguard also creates mutual funds according to when you think you’ll retire. So if you think you’ll retire around 2050, Vanguard has a 2050 retirement plan.
Why does the year matter? Basically, on average you make more money if your money is invested in stocks rather than bonds. However, events like the 2008 recession or the 2020 pandemic happen, which can substantially lower the value of your retirement nest egg. However, if you’re young, you have time to recover. Considering that the stock market increases on average between 6 and 10% (depends on who you ask and if inflation is factored into the equation), in the long-run you’ll likely end up doing quite well yourself. What makes Vanguard awesome is that, as time passes and you slowly move towards retirement, they invest your money in significantly safer bond funds. While bond funds tend to make less money, they are less susceptible to economic downturns. Moreover, by the time you retire, since your investments have paid off, you no longer need the added gains and risks of investing in stock market mutual funds. Thus, a few clicks and your retirement plan is taken care of.
The second advantage of Vanguard is that it is incredibly cheap for investors. Typical financial advisory firms charge anywhere between 1%-2% (maybe even more) of your portfolio’s value. Accordingly, for every $100 your portfolio is worth, your financial advisory firm gets anywhere between $1-$2 per year (and perhaps more--see Jeremy’s last post where he links John Oliver’s take on such firms). The fee for Vanguard’s 2050 lifecycle fund is .16%. Which means you pay $16 for every $10,000 in your portfolio. On the other hand, firms could take anywhere between $100 and $200 of your portfolio.
$100 to $200 may not seem like much, but it adds up over the long haul especially when you consider its toll on the compounding interest you’ll receive from long-term investing. Let’s put this in perspective: Imagine you start investing in an IRA today with $5,000. And let’s suppose you invest $1000 per month for the next 30 years. Let’s also be modest and suppose that, with inflation factored, your mutual fund increases roughly 6% each year (there is a ton of literature about the amount of stock market returns, but I’ll leave this for another time. Many say 8-10%, but I’ll lean more conservatively). The bottom line is that if you go with Vanguard, you’ll keep most of this 6% increase.
However, if you stick with the investment firm , they could take as much as 2% of your portfolio leaving you with around a 4% net gain on your investments. Accordingly, if you go with Vanguard, in 30 years you’ll have $1,003,230.43. Yup, you’ll be a millionaire. If you go with the firm: $701,487.55. This is not to say that all financial advisors are sharks. Some are undoubtedly reasonable, honest, and caring (e.g., those with the fiduciary label). This is just to paint a scenario about what could very well happen to your investment money if either it’s managed by the wrong hands or you’re not paying attention.
You don’t need a degree in business or economics to be a good investor. My gut is that if you just go with Vanguard low cost index funds, in the long-run you’ll likely be just as good as many investors (Warren Buffet is of similar opinion -see page 20, paragraph 6). Ultimately, your money is in good hands with Vanguard, and they are incredibly friendly and helpful to work with. When it comes to investing, Vanguard is da bomb.
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