New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 9,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Vanguard Review: Why I Invest with Vanguard

Over the last few years, I’ve had accounts at just about every brokerage firm you can name–Schwab, Fidelity, Vanguard, ETrade, Scottrade, TradeKing, and a whole list of others.*

And over the last year, I’ve consolidated everything at Vanguard.

To be clear, Vanguard is not the only reasonable choice. Low-cost, diversified portfolios can be built just about anywhere these days. So, while my own portfolio consists of Vanguard index funds, I’d be perfectly happy with this portfolio of commission-free ETFs at Schwab, for example:

  • Schwab U.S. Broad Market ETF
  • Schwab International Equity ETF
  • Schwab Short-Term (or Intermediate-Term) U.S. Treasury ETF

…or this index fund portfolio at Fidelity:

  • Spartan Total Market Index Fund
  • Spartan International Index Fund
  • Spartan Short-Term (or Intermediate) Treasury Index Fund.

So Why Do I Use Vanguard?

I prefer Vanguard because of their unique ownership structure. You see, Vanguard is owned by the mutual funds it runs. (This is in contrast with other brokerage firms and fund companies, which are owned by third-party shareholders.)

Believe it or not, this isn’t just trivia. It has important ramifications.

Low Costs

First and most obviously: It makes their funds very inexpensive. All of Vanguard’s services are provided “at cost” to investors. And why wouldn’t they be? The investors essentially own the company.

Cost Reduction (rather than Profit-Maximization)

Second, it means that Vanguard is always looking for ways to reduce costs even further. Contrast this with other brokerage firms, and you see a big difference.

For example, discount brokerage firm Zecco became known for offering commission-free trades to people with accounts of $25,000 or more. They recently announced, however, that they’re ending that program completely. Tough luck to everybody who opened accounts for exactly that reason.

With Vanguard, you don’t have to worry about bait-and-switch tactics like that. You don’t have to worry about them roping you in with a low-cost promotion, then jacking up prices to increase their profit margin (because, again, there is no profit margin).

Elimination of Conflicts of Interest

Finally, Vanguard’s unique ownership structure means that the information investors receive from them is not polluted by conflicts of interest.

As a contrasting example, with my account at Schwab, I frequently received emails (as well as their quarterly On Investing publication) that encouraged me to seek above-market returns by trading individual stocks or selecting actively managed mutual funds. I daresay it’s not a coincidence that frequently trading stocks and investing in high-cost funds happen to be strategies that are more profitable for Schwab than buying and holding index funds.

My experience was similar with other brokerage firms: They consistently encourage their clients to use investment strategies that are most profitable for the brokerage firm, regardless of how likely those strategies are to be successful for the investor.

At Vanguard, it’s different. I don’t agree with every piece of information they put out, but at least I don’t have to worry that they’re trying to get me to do something just because it’s more profitable for Vanguard.

*I do not recommend having accounts at several places. I did it for business purposes — so that I could write intelligently about several different companies — rather than investment purposes. As an investment decision, it makes little sense.

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing

Comments

  1. Mike another good post. I use a number of their mutual funds and ETFs for both invidual and institutional clients. I have a couple of clients who have accounts there. While their services are improving, they are not always the easiest to deal with. That said this is from my perspective as an advisor. Based on what you described as your needs they are probably totally fine. I also applaud their philosophy. (Disclaimer this is not a recommendation of any Vanguard fund or product and should not be construed as such)

  2. Hi Roger.

    Yeah, I’ve know of at least a few advisors who keep client accounts at Schwab or Fidelity, then invest in Vanguard ETFs via those accounts in order to avoid Vanguard’s advisor platform.

    But as an investor who uses a whopping total of four index funds and who logs into his account just a few times per year, Vanguard gets the job done quite well for me. :)

  3. It’s all music to my ears! I have been a Vanguard fanatic for awhile and it’s been great to see the recent posts that support my thinking! Thank you!

  4. Kathryn C says:

    Hi there, I’m curious why you invest in all index funds (and no ETF’s?) I’m familiar with advantages/disadvantages of both….but just curious on your reasoning… want to make sure I’m not missing out on anything! I’m a long term holder of ETF’s with Vanguard. Thanks in advance!
    Kathryn

  5. Hi Kathryn.

    No particular reason, really. It’s just what I got started with in the first place.

    I see very few differences between owning the regular index funds as opposed to owning the corresponding commission-free ETFs in a Vanguard Brokerage Services account–especially if the amounts invested are sufficient to qualify for admiral shares, such that the expense ratios on the index funds are the same as the ETFs.

    Six of one, half a dozen of the other, so to speak.

  6. Kathryn C says:

    got it, thank you Mike.
    Kathryn

  7. I can quantify what Vanguard and “low cost” mean to me. My IRA is at Vanguard and my wife’s 403b is at TIAA-CREF [the OTHER non-profit mutual fund and annuity provider]. My wife is ultra conservative in investing, and for many years put 20% of her salary into a stable value account, and nothing in stocks. Since we both are eligible for a pension and Social Security and plan to save the retirement investment accounts for inflation and longevity protection I would have our asset allocation at around 50/50 [stocks/fixed], but to accomodate my wife we are invested at 40/60, including 40% in the stable value account [I know, way too much concentration!]. While rebalancing recently it struck me that thanks to our far lower than average expenses [0.20% for my Vanguard account vs. industry average between 1.20 and 1.50%, with TIAA-CREF falling about midway in-between] we are getting about 1% better return every year, which is like having the return of a 60/40 portfolio and the risk of a 40/60 portfolio [I am using the average historical returns shown on the Vanguard model portfolio allocations, unfortunately not available unless you sign on]. I am hoping to get my wife to rollover her account to Vanguard after she retires in 2012 to maximise our savings.

  8. When I opened up an IRA with Schwab, I got a phone call from my “IRA Concierge,” asking if I knew what I intended to do with the account. I told him that I knew exactly what I was going to do: Fund it, convert to a Roth IRA, invest in a REIT, and forget about it. He asked why I was opening a traditional IRA and converting, and I explained that it was because I made too much money to open a regular one, but that I could convert. He then informed me that the conversion option was 2010 only. With him still on the phone, I checked the irs.gov website and found out he was completely wrong. Which he eventually admitted. He then tried to sell me on their plan whereby you’d get a discount on commissions if you were a frequent trader.

    So, yeah, Vanguard is sounding pretty good…

  9. Mike you say

    I don’t agree with every piece of information they put out,

    Would you mind elaborating or at least give an example of what you meant?

  10. “Concierge”?

    Gee, I’ve never heard it called that!
    [I guess I'm not up on current euphemisms.]
    With “helpers” like that “servicing” your account
    you don’t need to make any mistakes on your own.

  11. Jay: Sure. For instance, I disagree with much of what is posted here. Not because I disagree with their predictions, but because I disagree with the very premise of having predictions (“market outlooks” as they’re often called).

  12. I am currently with Fidelity under a managed account. I am think of moving out of the managed account to save some money. I did like the idea of some one with more financial insight watching my retirement fund. If I was to move to Vanguard what are the four funds that you are invested in with them?

  13. Bud: You can find a discussion of the funds in my portfolio here: http://www.obliviousinvestor.com/my-portfolio/

  14. Jim says, ” I am hoping to get my wife to rollover her account to Vanguard after she retires in 2012 to maximise our savings.”

    In my experience, moving money out of TIAA-CREF is ridiculously inefficient. When I started with Vgd about 9 years ago (wish I had known about them earlier), I had a fairly small balance in T-C from my earlier teaching career. I wanted to consolidate these funds with Vgd, but was told I had to establish a Transfer Payout Annuity that would move over the funds over 10 years. After installment 9 is moved over next month, instead of an extremely small balance in T-C I will have a ridiculously small balance in T-C, but I will still have to wait until 2012 to close out the account. Jim, please check with T-C to see if you fall under the same rules.

  15. Larry

    MANY thanks for your post!

    My wife previously rolled over her account, INTO TIAA-CREF [from AIG - in late August 2008!] without creating a TPA. Also, she is still making contributions to the new, active TIAA-CREF account. She only had a choice between several insurance companies, but TIAA-CREF was the clear choice.

    Your plan’s rules may be different than hers, but my understanding of her employer’s plan is that once she retires she can either “annuitize” her account and start receiving payments, or she can rollover all or part of the account into a different vehicle or company like Vanguard. If she performs the “annuitizing” process, then any later rollover-withdrawals are as you describe. [This MAY be an IRS rule.]

    Thanks again!

    Jim

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2013 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy