Investing Your Funds At Vanguard
Vanguard is the 800 pound gorilla of the mutual fund industry. They are the largest firm and manage nearly $6 trillion (yes, with a “t”) of mutual fund and ETF assets, roughly double their closest competitor, Fidelity.
You may be wondering:
1. Why have they been so successful?
It’s simple — their fees are significantly lower than their competitors and many investors recognize these investment fees have a meaningful impact on your long-term savings.
2. How much do lower fees effect your ultimate net worth?
Over the time horizon of your adult life, low fees make a big difference. The cumulative effect of paying an extra 1% in investment expenses over a 40-year period amounts to giving away ~25% of your accumulated wealth. These fees include mutual fund expenses (aka “expense ratio”), advisor fees, trading fees to buy and sell securities, or any other expenses you incur to invest your savings.
3. Why are their fees so much lower?
Vanguard has a unique ownership structure. It is essentially organized as a non-profit in which the mutual fund investors (that’s you and me) own the investment management company and the operating expenses are passed on to the mutual funds at their actual cost. Instead of profits accruing to owners, they are converted into lower expenses.
4. With these lower fees, do you get what you pay for?
Investment expenses are a dead-weight loss to your net returns. When investing your life savings, your goal should be to achieve market returns while incurring the least amount of friction. Low-cost index funds are the most cost-efficient way to do this. John Bogle, the Vanguard founder, explained it best, “When it comes to investing, you get what you don’t pay for.”
5. Is Fidelity a suitable alternative?
Yes. In 2018, Fidelity announced a series of low- and zero-cost index funds, specifically to respond to Vanguard. With a few minor exceptions, their offerings are now competitive with Vanguard’s (and in some cases, Fidelity’s fees are slightly lower). Many consumers use Fidelity Net Benefits as their 401K administrator and are already comfortable with them and this makes Fidelity a good choice.
6. Is my enthusiasm for Vanguard influenced by some consideration I receive from them?
It’s a good question and you should ask similar questions of any service providers — e.g., surgeons, auto mechanics, financial advisors — to whom you entrust important decisions. I do recommend Vanguard to everyone but, no, I don’t receive any benefit for doing so.
You cannot choose where to invest your 401K funds as you are limited to your employer’s plan administrator and their choice of mutual funds. However, when you have an IRA or other savings, I recommend Vanguard. You’ll be in lots of company and ultimately, wealthier for doing so.