I confess that I play favorites. Back in 2005 when I finally started figuring out what the heck I was doing with my four figure investment portfolio, the first mutual fund I ever purchased without the “assistance” of a commissioned salesman masquerading as an advisor was the Vanguard Total Stock Market Index Fund (TSM). It is still my favorite mutual fund and I suspect I will own it until the day I die. In fact, at 25% of my current retirement asset allocation, TSM is my largest investment holding and may always remain so. It also makes up nearly 100% of my HSA allocation and plays a large role in my children's Roth IRAs (Target Retirement 2060) and UGMAs (TSM and Total International Stock Market Index Fund.) I have owned it via three different brokerages and have owned all three “retail” share classes (Investor in my Vanguard Individual 401(k), Admiral in Vanguard Roth IRAs, and the ETF in my Schwab 401(k) and HSA Bank/TD Ameritrade HSA.) We spend a lot of time on this website talking about “alternative” investments, real estate, factors and all kinds of fancy stuff. Today, let's go back to basics and talk about 8 reasons why TSM is such an awesome mutual fund.
# 1 Awesome Long Term Performance
I don't select mutual funds based on past performance. There is a very good reason why all mutual fund prospectuses must tell you that past performance is no indicator of future performance. But the process I use to select mutual funds leads to excellent long-term performance, the only kind I actually care about. So what is the track record of TSM? Let's take a look (all data in this post taken on the date it was written- 1/26/2017.) Let's start with a quick look at Vanguard's list of mutual funds.
We see that it has already made nearly 3% in 2017, but that column is almost irrelevant. Let's move a little more to the right. We see that it made 12.66% in 2016, 14.62% (per year) from 2012 to 2016, and 7.23% from 2006 to 2016 (which included the greatest bear market in our generation.) In fact, the admiral share class started in 2000, near the beginning of the tech stock bust. So even including most of TWO of the worst bear markets the US has ever seen, it still made 5.85%. The investor share class was begun in 1992, 25 years ago. Its annualized return is 9.34%.
If you can't retire on returns of 9.34% per year, you have a savings problem, not an investing problem. But even so, absolute performance isn't everything. It is also important to consider relative performance. I mean, there are other mutual funds out there. So let's see how TSM did against its peers. Morningstar is the world's preeminent authority on comparing mutual funds. Here's what they have to say:
Morningstar considers TSM to be a “large blend” fund, which is reasonable if you plot out its holdings.
Take a look at the columns, particularly the line at the bottom, “rank in category.” Over the last year, its rank is 20. That means it beat 80% of mutual funds in its category. Same for the last 3 years. But as you move out further, to the 10 and 15 year mark, you see its rank is 12, meaning it beat nearly 9 out of 10 mutual funds. Not bad considering its “know nothing” strategy.
# 2 It Isn't Going Anywhere
At this point, a few of you are thinking, “I don't want to invest in TSM if 1 out of 10 funds are beating it over pretty long periods of time. I want to invest in one of the funds that beat TSM.” Aside from the folly of taking a gamble on something you only have a 10% chance of doing (although admittedly there are ways to increase that percentage somewhat such as only choosing low-cost actively managed funds), the real issue is that those “rank in category” numbers don't include all the funds that closed over those long time periods. That is not an insignificant number of mutual funds and it introduces “survivor bias” into the data. Morningstar had this to say about survivor bias specifically when discussing TSM:
After adjusting for survivorship bias, the relative performance of existing funds looks better. For instance, Vanguard Total Stock Market Index‘s VTSMX 9.5% annualized return placed it in the top 19% of all large-blend funds before correcting for survivorship bias. After this correction, its ranking jumped to the top 9th percentile of the category. That's not bad for a fund that offers passive exposure to the market. Likewise, the ETF SPDR S&P 500‘s SPY 9.4% return originally placed it in the top 24% of all large-blend mutual funds, but correcting for survivorship bias would place it in the top 11th percentile.
Low-cost, broad market-cap-weighted index funds, like Vanguard Total Stock Market Index and SPY, have a better chance of surviving than their actively managed counterparts. Over the 20-year period, only 34% of active large-blend share classes survived, while 55% of index fund share classes survived. Consequently, their relative performance is better than many investors realize.
It's weird to think that 45% of index funds disappeared, but I guess that's what happens when you open an “index fund,” charge 0.9% a year for it, and hope there are enough idiots out there who will invest in it.
# 3 It Is Super-Tax Efficient
But wait, there's more. Many investors are investing in taxable accounts, where tax-efficiency matters. TSM, by virtue of its strategy (which can be found in the prospectus):
is inherently extremely tax-efficient. So you should not be surprised that when you adjust the data for taxes, that TSM looks even better than its peers.
As you can see, at the 10 and 15 year mark, TSM is beating 93-94% of its peers, almost 19 out of 20. Now, imagine adjusting that for survivorship bias and running the numbers out to 30-60 years, your likely investing career length. Still want to take a bet on choosing a fund that will beat it? I wouldn't. One of the reasons TSM is so tax-efficient is it can use its unique ETF share class structure to flush appreciated shares (with their associated capital gains) out of the fund. But the main reason is simply it's low, low turnover. Since it just buys all the stocks, those stocks never leave the index so there isn't any rapid-fire buying and selling like you see in an actively managed fund (and to a lesser extent, in an index fund that only covers a small portion of the market.)
# 4 No Tracking Error
Investing isn't all about logic. It is also about behavior and discipline. One of the hardest things for investors to do is to stick with their portfolio through thick and thin. That is especially hard when their portfolio deviates significantly from that of their peers and the overall US market which is reported on a daily basis in numerous sources- print, TV, and online. That deviation is called tracking error. Guess what? TSM essentially doesn't have any tracking error. Tracking error is MEASURED from TSM. That helps the investor to stay the course.
# 5 Super-Diversified
Diversification protects you from what you don't know. If you were omniscient, you would simply pick the stock that is going to go up the most and leverage up as much as you possibly could. But you're not, so you don't. Instead, the smart move is to diversify. Is TSM a diversified fund? Do skiers love powder? Check this out from the most recent semiannual report:
See that “number of stocks” line? 3,650. That's a lot of companies. What's going to happen to your investment if a couple of them go out of business this year? You're not even going to notice (unless the two that go bankrupt are Apple and Google.) Why only own some of the stocks when you can own all the stocks? Lots of people, including Warren Buffett, like the 500 index fund. Sure, I guess 500 stocks is pretty diversified. But it seems downright silly when compared to 3,650 stocks.
# 6 Economies of Scale
The mutual fund industry has been built, in a sense, on witchcraft. – John C. Bogle
TSM is huge. How huge? $498.5 Billion. By comparison, that's larger than the GDP of 40 of the states in this country. Larger than Sweden's GDP. Larger than Chile and Finland combined. If liquidated, it could run the entire US military for a year. When you have half a trillion dollars you can benefit from some sweet economies of scale. You get great prices on your trades. People come to you (and pay you) when they want to borrow shares. You can get expense ratios down into the single digits. Admiral shares and ETF shares are 5 basis points and Investor shares are 16 basis points. What does that mean? That means for every $1000 you have invested in the fund, the fund spends 50 cents on its expenses. It is essentially free. You can own the equivalent of every publicly traded company in the most economically successful country in the world for free and buy and sell it online in 10 seconds, for free. Now, there are some “me too” funds out there. Schwab has a TSM fund (3 basis points for the ETF). So does Fidelity (4.5 basis points) and iShares (3 basis points.) Is it worth it to go to these other funds to save 1-2 basis points? I don't think so, but all of these funds are excellent investments.
# 7 No Manager Risk
One of my favorite aspects of TSM is that it is an index fund. That means low costs and excellent long-term returns, but it also means that I can “set it and forget it.” I don't even know who is in charge of managing it. It's basically all done by a computer, and that computer isn't going to retire, get dumb, or get unlucky. I don't have to watch it, check on it, benchmark it, or anything. I certainly don't have to worry about whether the manager has “lost his touch” or become senile. Why run risk that you don't have to?
# 8 Widely Acknowledged to Be Smart
Every investment authority who is worth listening to acknowledges that a low-cost, broadly diversified index fund like TSM is a great way to invest.
Warren Buffett:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
Allan Roth:
“The S&P 500 fund is a great way for investors to harness the return that capitalism has to give. In fact, I think it's better than 99.9 percent of mutual funds out there. A total stock market fund is just slightly superior.”
Jack Bogle:
“The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors and manager selection, leaving only stock market risk.”
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Jonathan Clements:
“Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry. All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffer the derision of eight-year olds everywhere, actively managed stock funds still have an ardent following among otherwise clear-thinking adults. This continued loyalty amazes me. Reams of statistics prove that most of the fund industry’s stock pickers fail to beat the market.”
Jeremy Siegel:
“There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all.”
William Bernstein:
“An index fund dooms you to mediocrity? Absolutely not: It virtually guarantees you superior performance.”
Taylor Larimore (whose favorite fund is also TSM):
“Index investing is an investment strategy that Walter Mitty would love. It takes very little investment knowledge, no skill, practically no time or effort-and outperforms about 80 percent of all investors. It allows you to spend your time working, playing, or doing anything else while your nest egg compounds on autopilot. It's about as difficult as breathing and about as time consuming as going to a fast-food restaurant once a year.”
I think you can now see why the Vanguard Total Stock Market Index Fund is my favorite mutual fund and my largest individual holding.
What do you think? Do you own TSM? Why or why not? What part has it played in building your wealth? Comment below!
Your first pick was your best pick. Impressive. I agree completely. This is probably the most thorough argument for passive index investing I have seen. I hope EVERYONE reads this.
First time I get to post first! WCI, what do you think about the Vanguard TSM ETF vs Admiral/Investor shares in a taxable account. Is there enough of a difference in terms of tax efficiency? Is there any advantage of buying the ETF vs buying fund shares?
At Vanguard, the ETF and mutual fund are treated the same from a tax perspective. That is not the case at Fidelity or Schwab.
The major difference between the two is that the ETF has the same expense ratio as the Admiral shares. If you plan on investing less than $10,000 and need to invest in the Investor shares because you can’t make the minimum investment for Admiral Shares, then you can invest in the ETF and get the lower expense ratio.
-WSP
I wouldn’t choose one over the other just based on tax-efficiency. I use the ETF in my Schwab 401(k) PCRA because the commissions are lower.
It’s a fine fund if you want a large cap strategy – big companies with a growth orientation due to its cap weighting. If I had to pick one fund I’d go with DFSVX – the DFA US Small Value Fund. $10k has grown to $149k since inception (only $88k for VTSMX), it’s declined by less than VTSMX in both 2002 and 2008, and when VTSMX went 10 years (!!) with no return from 2000-2009, DFSVX netted 9% a year.
DFA Int’l Small Value is a close second, with similar relative results compared to VGTSX.
Thank you for the contrary thoughts. I thought DFA funds were only available through specific financial advisors? Do you end up paying a higher expense ratio or a fee to work with an advisor that gets you access to a DFA fund?
Thank you,
John Martino
Yes, DFA funds are typically only available to invest in through fee-only RIA firms (and some 401ks and 529 Plans). Hiring an advisor costs about 1% a year, so you should only hire one if you think the benefits and time savings outweigh the costs. It’s a personal decision.
Vanguard estimated that advisor value can add up to 3% a year (over time) to an investor’s bottom line, and this is before factoring in 1-2% higher expected returns from superior investments (DFA vs retail index funds), which obviously Vanguard didn’t include in their research.
I found the reference for the 3% value add, and I think it deserves some qualification. Reference: https://www.vanguard.com/pdf/ISGQVAA.pdf
“In creating the Vanguard Advisor’s Alpha concept in 2001, we outlined how advisors
could add value, or alpha, through relationship-oriented services such as providing cogent
wealth management via financial planning, discipline, and guidance, rather than by trying
to outperform the market.”
Half of the predicted 3% value add is from “behavioral coaching,” i.e. hand holding, and the the rest is from buying funds with lower fees, appropriate rebalancing, asset location and drawdown strategy.
If you’re already familiar with these concepts and able to implement them, as many astute WCI readers are, the value added disappears. That being said, the great majority of high-income professionals out there are not familiar with the above strategies, or would not implement them appropriately.
I just wanted to clarify that Vanguard doesn’t expect an advisor to help you beat the market or VTSAX. They expect an advisor to protect you from making poor choices.
Best,
-PoF
1-2% a year DFA advantage is extremely optimistic in my view. So is 3% for an investor willing to read a few investing books and blogs and participate in forums. But only the individual investor can decide if the value the advisor brings exceeds his costs.
Reading a few books and actually weathering a bear market, or a 10-year period of zero returns (VTSMX from 00-09), or SV tracking error, are much different things. Very tough for most to tolerate the realities of investing — including some advisors. The more sophisticated just make different mistakes, currently that’s loading up on all sorts of alternatives: managed futures, long/short funds, non-tradional lending, risk parity. Or bond-heavy allocations with 100% SV on the stock side.
Some of the behavior cost is also hidden in the form of excessively-low stock allocations when the capacity to hold more equities is ever present.
That being said, the 10/15-year behavior gap on the Vanguard Lifestrategy funds is about 1% a year, so even those well-read Vanguard investors who know to diversify and save on costs are losing 100bps a year on average over time.
No, I don’t recommend you hire an advisor just to get DFA funds and neither does DFA. But if you find value in the services of an advisor anyway, then you might as well get one with access to DFA funds. More discussion of that point here:
https://www.whitecoatinvestor.com/dfa-vs-vanguard/
Be sure to read the lengthy comments section for many more opinions than mine on your common question.
There are many reasons to add a small value fund to your portfolio (and I do.) But I think putting ALL of your domestic (or international) stock allocation into a small value fund is not sufficiently diversified given that SV is only something like 3% of the market.
All good points WC. No one should put all their $ in SV or any single asset class (including LC, which TSM basically is). SV is my favorite because (a) it has the highest expected returns, (b) is a great diversifier to TSM — see the 00-09 “Lost Decade,” and (c) because it has an imbedded buy low/sell high mechanism that buys beaten down small stocks and sells them when they are bigger and growthier, a very intuitive approach, and (d) including it in your stock portfolio allows you to include moderate amounts of high-quality fixed income while still achieving market-like returns.
On behavior – the studies show investors tend to lose 1-2% a year to buying and selling at the wrong time. Even experienced investors struggle with it but often don’t realize it (its called blind spot bias). Not everyone, of course.
On DFA funds vs retail indexes, so far, +1% to +2% (in favor of DFA) has been the case. 1999 is the farthest back on some MSCI Int’l style indexes, but here’s the data (’99 to ’17):
DFA Enhanced US LC = 5.7%
S&P 500 = 5.7%
DFA US LV = 8.2%
Russell 1000 Value = 6.7%
DFA US Microcap = 10.7%
Russell 2000 = 8.2%
DFA US SV = 10.9%
Russell 2000 Value = 9.3%
DFA REIT = 10.8%
DJ Wiltshire REIT = 10.8%
DFA Int’l LV = 6.2%
MSCI World ex US Value = 5.1%
DFA Int’l Small = 9.6%
MSCI WxUS Small = 8.3%
DFA Int’l SV = 10.8%
MSCI WxUS Small Value = 9.3%
DFA EM Large = 9.6%
MSCI EM = 9.3%
DFA EM Value = 11.7%
MSCI EM Value = 9.5%
DFA EM Small = 12.6%
MSCI EM Small = 9.1%
Only US LC and REITs are the “1% to 2% exception.” Looking at balanced portfolios (20% US LC, 20% US LV, 10% US SC, 10% US SV, 10% REITs, 10% Int LV, 5% Int SC, 5% Int SV, 3% EM LC, 3% EM Value, 4% EM SC) of DFA funds and indexes since 1999 using above returns:
DFA Funds = +9.2%
Retail Indexes = +8.0%
…and, again, this difference is on top of the additional value Vanguard found.
You know this is like the 10th time we’ve had this discussion on this website, right? I’m not going to rehash the reasons why I think 1-2% is a stretch again.
Data/stats don’t “prove” anything. My only point is, at least historically, 1-2% DFA outperformance hasn’t been a “stretch,” or “extremely optimistic,” it’s exactly what has happened. I reproduce the data (a) to illustrate this fact and (b) because most people aren’t in possession of the data or know how to do the comparisons. That’s all…
Btw, most small value funds are not 100% in the SV style box due to hold ranges and more liberal buy ranges. An asset class portfolio that includes small value and even micro caps isn’t as extreme as you’d think. Let’s look at a standard US Equity split: 33% DFA US Enhanced Large Cap (S&P 500), 33% DFA US Large Value, 17% DFA US Microcap, 17% DFA US Small Value. Compared to the Total Stock Index (which I’ve included in parenthesis), it’s:
12% large growth (TSM = 23%)
19% large blend (TSM = 25%)
23% large value (TSM = 25%)
1% mid growth (TSM = 6%)
5% mid blend (TSM = 6%)
7% mid value (TSM = 6%)
7% small growth (TSM = 3%)
14% small blend (TSM = 3%)
12% small value (TSM = 3%)
Which one of these looks better diversified? The portfolio that doesn’t have 25% in any single style box, or the one with approximately 75% of its holdings in large cap stocks and 25% concentrated in just 3 asset classes (large growth/blend/value)?
All right, I guess we’ll have this discussion again. 1-2% has happened in some asset classes, asset classes which in a reasonable balanced portfolio account for a relatively small percentage. I mean, how much do most people really put in EM small value etc? Usually that is due not just to what I like to call the DFA edge (mostly execution kind of stuff), which makes a small contribution, but simply due to being smaller and more valuey. So yea, when small/value wins (as it has historically), the smaller and more valuey the better. More risk, more return.
When you look at more core asset classes like a TSM like fund, DFA certainly doesn’t add enough value to over come their costs and those of the advisor, much less add 1-2%. Just look at DFA and VG large cap funds, for instance.
Let’s compare the DFA US Large Cap Equity Institutional Class and the Vanguard TSM Admiral shares. DUSQX vs VTSAX. TSM is just slightly smaller, but seems a better comparison than VG Large Cap Index. The DFA advantage over the last 3 years (as long as the fund has been around)? -0.74% per year. Before paying the advisor fee. So if you’re losing money on a big chunk of your portfolio, you’ve really got to make a lot on the smaller chunks to get 1-2% a year, especially after paying the advisor.
Your diversification argument is the classic “should you diversify to the number of companies or to the number of factors?”
Now I’m a DFA fan, don’t get me wrong, but I think it’s important not to oversell the benefits. Let’s say an investor is comfortable putting 20% of his portfolio into small/value type funds. If he gets a 2% advantage there, and then breaks even on the other 80%, that’s only a 0.4% advantage, which is more than eaten up by the advisory fee. One of the services a “DFA Advisor” like yourself sells (usually for 1% of AUM) is access to DFA funds. It’s just like any other business. The better you can make DFA funds look, the more valuable your services in total become.
I looked at diversified portfolios too, to answer your question — see my asset allocation example* in my first comment. That’s as good a stock mix as there is, very well balanced. The difference was 1.2% per year in favor of the version implemented with DFA funds 9.2% vs 8.0%). It’s an asset allocation DFA has reproduced annually in their Matrix Books since 1996 (and has far outperformed a TSM-only allocation).
You might not like the allocation, which is fine. But it’s a good one and it supports by comments of 1% to 2% higher returns. Your skepticism isn’t warranted.
I’m not sure what 4-year returns for a DUSQX proves, it’s a large cap fund tilted to slightly smaller, lower-priced, and higher profitability stocks. The first 2 factors have underperformed over the last 4 years. It’s a minuscule amount of time and we can’t really say anything meaningful about it.
The 1999-2017 period and 11 different funds (9 of which beat TSM), that’s something we can sink our teeth into.
I have no problem if you wanna use Vanguard funds, roll your own, etc. use the asset allocation I referenced above. You’ll do fine if (a big if) you can stay the course.
Dumping it all in US TSM though, as a lot of recency-biased DIYers are gravitating towards today? That’s a mistake. Again, just look at 00-09. How long can’t the FANG stocks run? I wouldn’t want to base 15% of my wealth on “this time is different.”
*
20% US LC
20% US LV
10% US SC
10% US SV
10% REITs
10% Int LV
5% Int SC
5% Int SV
3% EM LC
3% EM Value
4% EM SC
We need to separate out two arguments here that you’re conflating.
# 1 Vanguard vs DFA
# 2 A whole market vs a tilted portfolio
In the past, a tilted portfolio has outperformed a whole market portfolio. I think the data is clear on that. Whether that will hold in the future or not, I don’t know. And the picture becomes even more confusing as you add in all these new factors.
However, if you wish to compare a Vanguard portfolio to a DFA portfolio, one must first make sure the portfolios are equally tilted and then subtract out the cost of the advisor minus the non-DFA access value the advisor is providing for you. When you do that, the picture is not nearly as clear. And that of course assumes that the future resembles the past.
Costs are guaranteed, but the value of DFA’s management in the future is not, so that is another factor that has to be considered when making an a priori decision about how to invest going forward. I know you’re a true believer in DFA, but I remain a skeptic, especially when people start throwing out numbers like “2% value-add for DFA and 3% for the advisor.”
You’re right; there are a few issues here:
#1 – Asset allocation:
will a portfolio diversified across multiple return “factors” (primarily size and value, but you can include profitability as well although it’s only been around for a few years) outperform a portfolio that excludes most of these factors? Not in every period, but over time it’s expected that the “tilted” portfolio will win out, just as we expect a portfolio with more exposure to the “market factor” to outperform a bond-heavy allocation. We don’t need examples, we all know that history confirms this.
#2 – Implementation:
do all index funds have the same return, controlling for their size and style objectives? I listed 11 asset classes above and reported the almost 20-year returns of the DFA funds, net of fees, compared to costless index benchmarks. In 9 cases the DFA funds had higher returns, in 2 cases the returns were the same. The average across all 11 funds, assuming a well-balanced asset allocation, was +1.2% per year in favor of DFA.
And, of course, the implementation discussion is further clouded by the fact that retail index funds aren’t even available in several key asset classes: international small value and emerging markets value, unless you’re going with questionable “smart beta” strategies.
#3 – The value of an advisor:
which includes expert portfolio design, income and estate-tax efficient implementation, financial planning, ongoing counseling and discipline, and all of the time the investor saves not having to study/research/manage their money. As the data above shows, at least historically, all of this has come for free as simply accessing better-managed funds in the various asset classes (not included in Vanguard’s estimates) has more than paid for an advisor’s fee. Or, looked at differently, if all an advisor could do is to keep their client fully invested in their plan and avoid buying/selling at the wrong time…that too would pay the entire fee (Lifestrategy investors trailed their funds by about 1% per year over the last decade per M* investment/investor return calculations, most investors did even worse) and higher returns and time savings would be totally free.
By the way, if we only want to look at the historical returns to a Total Stock Index mix, a tilted portfolio using DFA funds, and the same tilted asset allocation using Vanguard Index Funds as well, you can see about 20 years of data here (further quantifying #1 and #2 above):
http://bit.ly/2sMbnio
The DFA tilted portfolio outperformed the Total Market mix by 2.8% per year and beat the Vanguard tilted portfolio by 1.7% per year. To call
1% to 2% per year higher returns “a stretch” is not in touch with the real-world results.
Here’s another comparison where I create insanely extreme Vanguard allocations which are almost 100% small cap stocks, finding that even here, the Vanguard portfolios are 0.5% to 1% or more per year behind:
http://bit.ly/2uN7riw
The usual error with the Vanguard to DFA tilted comparison is to put the same % of the portfolio into a SV fund. But since the DFA fund is smaller and more valuey, you have to actually put a higher percentage of the portfolio into a SV fund to get the same tilt.
As you get into the sub 1% figures, the “DFA advantage” is no longer making up for the advisory fees.
You said:
“The usual error with the Vanguard to DFA tilted comparison is to put the same % of the portfolio into a SV fund. But since the DFA fund is smaller and more valuey, you have to actually put a higher percentage of the portfolio into a SV fund to get the same tilt.
As you get into the sub 1% figures, the “DFA advantage” is no longer making up for the advisory fees.”
First, if you clicked both the links, you’ll find that my second example had a Vanguard portfolio with DOUBLE the amount in small cap and small value (20% vs. 10%) as the DFA mix, and STILL the underperformance was north of 1%.
What’s more, putting double the portfolio in SV increases tracking error and reduces the likelihood that a DIY investor will stay the course compared to a plan with more assets in LC stocks. As we’ve already concluded, that stay-the-course likelihood is already very low to begin with (see Lifestrategy behavior gaps).
Second, conveniently, you are not accounting for ANY value whatsoever to an advisor beyond DFA’s higher returns (if DFA funds don’t outpace indexes by at least 1%). What about simply the benefits of a more tilted/diversified portfolio vs. a Total Market/Lifestrategy approach most DIYers adopt? How many investors do you actually know who know how to properly diversify across size/value asset classes globally? How about how to account for taxes and locating assets in the proper accounts? How about arriving at the appropriate stock/bond mix vs. an age-in-bonds allocation or just naive 50/50 splits? How about the issue the vast majority of investors have with staying the course, even after “reading a few good books”? Bogle estimated the behavior gap as -2.2% per year from 1997-2011 (“Clash of Cultures”).
That’s several percent of practical value that a good advisor can add to the equation, before accounting for superior portfolio fund implementation (which has added, as the data shows, ANOTHER 1-2% a year).
I know this doesn’t square with the DIY-centric blogosphere or the Diehards forum, but groupthink often clouds rational judgment even when the data firmly indicates otherwise…
1) Glad that you’re not making that error as it is frequent.
2) Yes, I am not accounting for value from the advisor. I made that very clear. If one gets value from the advisor, that should be added in to the calculation. This is the main reason I tell people that “if you’re going to use an advisor anyway, use one that has access to DFA funds.” A good advisor can add A LOT of value for some investors, while adding almost nothing (or even subtracting value) from others. Advisors, like investors, aren’t immune to the behavior gap.
Great news! Your favorite fund has become even more affordable since you wrote this. http://www.physicianonfire.com/vanguardfees/
Investor shares now have an expense ratio of 0.14%. The Admiral shares and ETF are now down to 4 basis points.
28% of my portfolio is in VTSAX, so every basis point counts.
Cheers!
-PoF
I love your blog. I have been a lifecycle fund guy for the last five years that I have been in residency (after reading Ramit Sethi’s book that my brother gave me when I graduated med school). I recently opened a brokerage account for my son and bought vtsmx after reading your “how to pick a mutual fund” post.
My question is, why is only part of your retirement investment in vtsax? Why not all of it? It is diversified, has great returns, and is tax efficient. So why waste time on anything else?
Thank you, John Martino
John,
Couple of ideas to keep in mind:
1) Risk tolerance. Is both a concept and reality. Can you sleep at night as 25% of your savings seem to vanish with no end in sight? If you stick with this long enough, it will happen. Some people like to have some dry powder for down markets. Individual preference.
2) Factor Tilts. As another has pointed out, there are certain risk factors that reward risk better than others (DFA stuff). The fund mentioned here is a package of risk factors. Some investors like to unbundle the package.
KJF
You said: “there are certain risk factors that reward risk better than others” when you meant:
“there are certain risk factors that rewarded risk better than others in the past and may continue to do so in the future.”
There is a significant difference between the two statements and it is critical for beginning investors who this particular post is aimed at to understand the difference.
People write about factor investing as though it is physics when the evidence is dramatically weaker, perhaps even so weak that it is more art than science. It’s important for an investor making big bets on factors (small, value, momentum, quality, volatility etc) to understand the limitations of the data and the risks of relying on it.
You make valid points on my use of language. I was trying to keep it simple. The concept I was focused on communicating was the concept of “unbundling”.
I am surprised at your comments with regards to the scientific method. True, Eric is not quoting T-stats along with his evidence in other posts above. But I think your comments that the science DFA is using is “perhaps even so weak that it is more art than science”, paints an overly negative perspective on some of the best researched financial theory out there.
Novice investors should learn to separate the wheat from the chaff, but picking on DFA with the overall philosophical deficiencies common to all science seems like a stretch.
KJF
More details on my asset allocation here:
https://www.whitecoatinvestor.com/the-new-wci-asset-allocation/
This post talks about some of the reasoning of my previous asset allocation.
https://www.whitecoatinvestor.com/implementation-of-my-asset-allocation-an-update/
As noted here:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
a 100% TSM portfolio isn’t crazy.
I think going 100% TSM is one of the biggest mistakes an investor can make today, right behind holding excessive amounts of $ in long-term bonds (or any bonds, really).
#1 – this move is likely based on recent returns, where US large cap stocks have been one of the best performing asset classes
#2 – you’ll likely be selling assets that have done more poorly, and miss out on their superior results when markets revert
#3 – putting your entire portfolio in one asset class (TSM is a US large cap strategy) can do very poorly from time to time.
On #3, consider the period from 1966-1981 (16 years), the TSM Index returned -0.5% per year LESS than inflation, while US Large Value, US Small Cap, and US Small Value Indexes achieved +3.4%, +4.7% and 7.8% per year real returns. Or consider the 2000-2009 period…-2.8% per year real returns on the TSM Index, versus +1.6%, +6.4% and +10.0% real returns on US Large Value, US Small Cap, and US Small Value Indexes.
Outside of the US, we’ve seen Japan’s Large Cap Index produce no NOMINAL returns since 1990, while Japan Large Value, Small Cap, and Small Value Indexes did +3.9%, +2.2%, and +4.9% per year, respectively. And most non-Japan indexes have achieved double-digit returns…
There are many roads to Dublin. If you pick a reasonable investing plan and fund it adequately, you are highly likely to meet your investing goals. Is it crazy to use TSM as a major block of your portfolio. Nope. Is it crazy to hold bonds? Nope. Is it crazy to put 100% of your portfolio into 3% of the market (i.e. small value)? Yes. Is it crazy to invest 100% of your portfolio in Japan? Yes.
I’m really curious to see how small/value does over the next 5-15 years. It’s already trailing TSM by 7% YTD. The pendulum swings…and even if it eventually swings back, can an investor stay the course? Tough questions.
At any rate, I think you need to meet more investors if you think one of the biggest mistakes an investor can make is invest solely in TSM. I can think of hundreds of bigger mistakes that I’ve seen doctors make. Investing solely in TSM would be a relatively minor one in my book.
John,
Since 1999, US Total Market Index (Russell 3000 Index) did just 6.2% a year and has trailed virtually every single asset class, including 0% a year from 2000-2009. You gotta diversify, US LC stocks aren’t enough…
Returns of other asset classes since 1999 (longest Index data):
Russell 3000 = 6.2%
S&P 500 = 5.7%
DFA US LV = 8.2%
Russell 1000 Value = 6.7%
DFA US Microcap = 10.7%
Russell 2000 = 8.2%
DFA US SV = 10.9%
Russell 2000 Value = 9.3%
DFA REIT = 10.8%
DJ Wiltshire REIT = 10.8%
DFA Int’l LV = 6.2%
MSCI World ex US Value = 5.1%
DFA Int’l Small = 9.6%
MSCI WxUS Small = 8.3%
DFA Int’l SV = 10.8%
MSCI WxUS Small Value = 9.3%
DFA EM Large = 9.6%
MSCI EM = 9.3%
DFA EM Value = 11.7%
MSCI EM Value = 9.5%
DFA EM Small = 12.6%
MSCI EM Small = 9.1%
ERIC do you sell DFA funds?
Nobody “sells” DFA funds, they aren’t available through commission-based brokers. Fee-only RIA firms can get access to use DFA funds in the management of client portfolios. That is what I do for a living, and all my personal money is with DFA, I cannot find any ETFs or Vanguard funds that I’d want to own instead of the comparable DFA fund. So far, it’s been the right choice.
Something I’ve been debating about for years (since starting to read your blog) is if it’s worth it to jump to Vanguard when I already own a pretty good Fidelity index fund. My Roth IRA and taxable accounts are entirely invested in FFNOX (which is Fidelity’s 4 in 1 fund that includes their 500 Index Fund and Extended Market Index Fund) and I’ve just kept adding to it since I’m happy with that asset allocation. In an ideal world I’d be a one fund and done investor since I don’t trust myself not to tinker too much. Alas/happily, my 401k is in a Vanguard target date fund.
Do you love TSM so much you’d recommend changing existing assets over to it? Or just start investing into it going forward?
A few comments about change: Changes in ERs, investment products ( ETFs, robos) will continue to happen over the next 60 years of your investment life. Schwab now has TDF, ETF with expenses lower than Vanguard. Will the future bring all expense ratios, in all products, in all companies to zero?
Behavior matters more than expenses. Chose an AA for each goal, and stick to it. Chose an investment vehicle that constrains your behavior.
Any tax deferred account ( your Roth) can be changed with no tax consequences. Changes in the taxable accounts become more costly. Consider add-ons rather than costly sales of cap gains. I’ve done add-ons over the past 3 decades and have two large taxable accounts and one small. I’d prefer one simple taxable account, but must exploit the best options each decade.
WRT the OP, I’ve compared VCTLX, which I’ve used for 25 years in one of my taxable accounts. It’s after-tax 15- year returns are a half-smidgen higher than VTSAX.
correction:……..I’ve used for 22 years.
You picked a mutual fund a priori that beat TSM over 22 years. Nice work. Now you realize just how lucky/good you were. The question you have to ask yourself every year, of course, is whether that skill or luck is likely to persist going forward.
Doubt expense ratios will go to zero. Suspect Schwab and Fidelity are already taking a loss on their index funds to keep up with Vanguard, which is running at cost as a mutual company.
I think the cheap version of the Fidelity index funds is just fine. Fund of funds like FFNOX and target retirement funds are reasonable choices if you wish to keep things simple but sometimes cost a tiny bit more than building it yourself. Sounds like you’re okay with that trade off so I wouldn’t feel like you have to change your plan to save a few basis points.
Keeping it simple seems to win once again. Our IRA’s are 100% invested in VTSMX (but the admiral shares). It does seem to keep things simple. Then I use my 401k for further asset diversification (international funds, REITS, etc.). Still I don’t like owning more than a few asset classes individually (small cap, etc.) and VTSMX let’s me own a lot of things without much thought. Great post!
Only wish I had made such a wise decision when I started out in the early 90s. Wonder where I would be today if I had not chosen aggressive funds with American Century, Gabelli, and Janus which I mostly liquidated in 2001-2.
I hope you got some awesome carry forward losses.
Ahh…the good old Janus tech funds. Seems like every investor owned one of those back then. It’s interesting to read books published in the late 90s. Many of them recommended a 5-10% “tech” allocation.
Was reminiscing about my hs/college employer plan and thinking it was odd that it was all Janus, I felt like the whole prospectus was just different tech funds.
Great analysis I thought I was reading Jim Collins blog for a second. I own VTSAX in my 401k and Roth and have a spousal IRA with the Schwab total market fund (which has an even lower expense ratio than Vanguard). It has served me well in my first 8 years of investing (right after the Great Recession).
More importantly, I know it will serve me will through my entire investing career which will probably include a number of bear markets. While others will be bailing out of their fancy active managed large cap funds, I’ll keep humming along with VTSAX and get the payoff after.
I absolutely love the Vanguard total stock index. It’s a set it and forget it kind of investment. I am on the pension committee at my multispecialty clinic and petitioned to have it added to the 401k plan which we did, driving down the cost basis that had been hitting us for a similar investing strategy.
I have a question about these returns, do they include the dividends paid out? (I believe the dividend yield on the total market Vanguard fund is low 2% (thinking 2.08% yield). Is that on top of the returns given in chart above or part of it?
For a while, the VTSAX actually had the highest expense ratio (0.05%) among the low-cost TSM index providers. Schwab’s SWTSX is still the cheapest (0.03%), followed by Vanguard’s VTSAX (now 0.04%) and Fidelity FSTMX (0.045%). And I’m pretty sure Fidelity will undercut Vanguard again before too long. So, for all those who are not investing with Vanguard, there other low-cost alternatives.
About your claim: “When you have half a trillion dollars you can benefit from some sweet economies of scale. You get great prices on your trades.”
From my perspective, as someone working in the industry, that’s not right: The economies of scales apply to spreading certain fixed costs (legal, compliance, portfolio management, etc.) over a larger investment portfolio, true. But larger trades are actually a big, big headache. Stocks are not sold like toilet paper at Costco (larger lots = smaller prices per roll). With larger trade sizes you have more of a price impact. Remember: at the level of the large institutional investors the trade cost is not about commissions but about the bid-ask spread and how much your buy/sell order moves the market price.
Excellent point. Size has disadvantages as well. But I’m confident that a fund with 3-4% turnover can minimize the impact of that pretty darn well.
Totally agree! Made the move to VTSAX several years ago from active funds that had done quite well, and no regrets. One thing I would have done differently is to not also buy VTSAX in my taxable account so that I have to pay attention to an inadvertent wash sale from selling in my taxable at a loss and buying VTSAX in my IRA from a dividend payout. So if had it over I would use VFIAX (which is similar enough for me) in my taxable account just so I don’t have to pay attention to that. However, since VTSAX has done so well over the last 4 years, it doesn’t look like I’ll be selling at a loss in my taxable anytime soon. 🙂
Why don’t you exchange to an S&P 500 fund in your IRA? That would avoid the inadvertent wash sale issue (as long as you don’t use S&P 500 as your TLH partner in taxable.
Best,
-PoF
Good (and simple) idea. I have already actually bought additional funds including VFIAX in my taxable account now, so my water is a bit muddier. But I thought I might mention how I would have done things a bit different if I was starting over, for others.
Great post. I have both Vanguard and Schwab accounts and find that I use Schwab predominantly due to the lower ERs. The SCHB ETF (Broad US stock market ETF) has an ER of 0.03, while Vanguard is 0.05.
Vanguard’s went to 0.04 a couple months ago, but Schwab is still cheaper by a basis point. Schwab has positioned some index funds as loss leaders, but Vanguard’s got the lowest fees portfolio-wide.
http://www.physicianonfire.com/vanguardfees/
3 basis points and 4 basis points is the same thing. People need to stop pretending they’re not. Besides, ERs are determined AFTER the year is over. They’re basically saying, our ER last year was 0.03%. That doesn’t actually tell you what it will be this year. So choosing one fund over another for 1 basis point in ER is just bizarre. If you’ve got everything at Fidelity or Schwab, then sure, use their versions of TSM. If you have everything at Vanguard, don’t buy a Fidelity fund there or open a Fidelity account to save a basis point.
Any comments on American Funds? They seem to be the favorite for my accountant and 401k administrator.
They are a favorite for people that sell them, due to front-end loads up to 5.75%, 12-b1 fees, and the resulting large commissions.
As an investor, there’s nothing like the feeling of investing $10,000 and only having $9,425 the next day.
Frequently sold, usually with a load/commission. Not a fan but you could certainly do worse. Most of their funds are so large they’ve been considered closet index funds.
An important point about their advertised past returns – they are average returns. Beware of using these stats for modeling (ahem, ahem…Dave Ramsey with your 12% growth stock return).
It’s important to use annualized returns. Vanguard doesn’t help though. Despite the fact that their returns are annualized, they actually label them “average”.
Really? So the advertised numbers are geometric means? This is contrary to what one of the Vanguard employees told me over the phone. Wouldn’t be the first time they gave me bad intel.
Yes they are. Run them yourself and you’ll be convinced.
Love the back to basics post, keeping it simple is best. Low cost, broad exposure passive, long term hold will get you there.
I agree with the posts that any broad market index will do. At fidelity, you also get access to ITOT for 3 bps, commission-free, and this is primarily what I hold, mixed in with some DFA funds for small value US and ex-US exposure. Personally, I think that over the last 10-15 years, the advantage of DFA funds has decreased vs index funds holding similar factors, but there is still a small advantage. If someone already has VTSAX, they don’t need to sell it to get ITOT, or the schwab fund….just buy on top of it, as a previous post said.
I got the DFA funds from FPL capital management, they charge $250/quarter. You can get any institutional mutual fund , in many cases without a minimum, or with a significantly lower one.
I have used Schwab and Vanguard low cost diversified funds for years. However prior tp that (before Schwab had funds) I purchased some other companies mutual funds (now charge about .6 to 1.1% a year) and the ones I have kept have done very well and have high capital gains (over 200%). If I sell those now I have to pay high taxes on them so is it better to hold those, or sell those and get Schwab or Vanguard funds with the amount remaining after paying capital gains? I live in California which itself charges 10% for capital gains), not to mention the federal capital gain charges. Thank you.
Lots of people hold “legacy funds” for just that reason. The answer of whether to change or not is “it depends.” How big is the tax hit and how big is the advantage going forward for the better fund? The smaller the tax hit and the bigger the advantage, the more likely it is to be worth changing. Certainly don’t reinvest dividends or send any new money into those funds. You might also consider using them for charitable donations.
Hi everyone. We are debt free and want to invest 200 G to this index fund. Should we do it in one shot or weekly at intervals to get s benefit from DCA? Thanks!
In general, best to lump sum but no guarantees. More details here:
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
In most (not all) cases, you will be better off investing the lump sum immediately. However, since the price to earnings ratio is very high currently (potentially suggesting a looming bear market), you might sleep better at night using a dollar cost averaging strategy. See Vanguard’s take here: https://investor.vanguard.com/investing/online-trading/invest-lump-sum?lang=en
Worth noting that after 3 years, when many were concerned about the looming bear market, S&P is up 40%…
You might not have been around in 2009-2010, but everyone was talking about the double dip… that never happened. (Unless you count summer 2011, December 2018, or March 2020.
I was around for 2009, and don’t really count any of those short term drops to be the second dip. But while reading this post for something unrelated and saw this comment, it reminded me of the dry powder post from a couple of days ago. If you were sitting on your dry powder in 2017 due to high PE’s, you would have watched a lot of gains pass you by.
Excellent excellent article. I have been telling family and friends THIS for years. This article sums up the argument for indexing. The only thing that I would change about this article is the title should be be why indexing wins. Although VTSMX is a mutual fund. This is not a typical mutual fund and is more of an index fund(not actively traded). This can be confusing for beginner investors. I would recommend vti the etf for basically the same holdings for .11% cheaper. (.15 vs .04). Compare holdings on morningstar. Thanks for the article
I agree that VTSAX is a great fund for a taxable account. When I did my 2016 taxes, I was pleased to see that there were no short term capital gains (a function of the fund’s low turnover) and 93% of the dividends were qualified (and thus taxed at the lower long-term capital gains tax rate).
Great article! I prefer vanguard s&p 500 mutual fund. I suppose I like the idea of my fund tracking an index and prefer the mutual fund since I can purchase fractional shares; therefore investing full amounts. Of course all of vanguard’s main funds are perfect for the long term. My 401k holds a Russell 1000 fund but I will roll and convert it to my Roth IRA soon after I leave my job. I have not started funding my HSA yet or a 529 for future children. I will have to look into the other vanguard funds although VFINX and VFIAX will remain the majority. I would love to hear your take on VITAX (vanguard info tech). With a future so focused on tech I wonder if this fund will provide a slightly better return than any index fund or vanguard total stock market. As we all know a fraction of a percent over 30 years makes a large difference. Do you still invest any amount in individual stocks? You discussed having a Roth IRA For your kids. Do you pay them from your business? My father has a business and I have thought of setting up a Roth IRA for my sister’s son who is 2 years old. Although I am not sure if the IRS would believe a 2 year old working although we could have him do some small tasks in the office or cleaning. Do they have to pay FICA? I assume it might be best to consult with our accountant. I would also like to set up a 529 (my account but nephew as beneficiary) , UGMA/UTMA (as he pays no tax until kiddie tax kicks in), and HSA (not at sure if this is possible for him).
You know that TSM tracks an index and allows the purchase of fractional shares, right?
Not a big fan of narrow sector funds like VITAX. I prefer broader diversification. Same reason I prefer TSM over 500.
No individual stocks here ever. Why run uncompensated risk?
Yes, I pay my kids for modeling and writing for this site and those earnings go in a Roth IRA. The IRS WILL ask you each year what that 2 year old is actually doing. Also, since your sister’s kid isn’t the business owner’s kid, payroll taxes will have to be paid.
You could do the 529, but probably not the HSA.
Hi there – I’m new to this and just opened a Roth IRA with etrade. I see that they have an option to purchase a vanguard total stock mkt idk inv (VTSMX) for 3000 with a 19.99 transaction fee. Is this something you would recommend doing? Thanks so much!
No. Either buy something similar off their commission-free ETF list or at a minimum buy the Vanguard ETF for total stock market for 1/4 the commission.
Or re-open your Roth IRA at Vanguard, which is actually what I would probably do. Why did you choose eTrade if you want Vanguard mutual funds in it?
Okay sounds good. Vanguard has a 1000 minimum for Roth IRAs so I can wait a bit and then transfer. Thanks!
Great article Jim. If I’m opening up a backdoor Roth, does it make sense to just use Vanguard Total Stock Market index fund or one of the target retirement funds that use the vanguard TSM plus a couple additional funds/bonds ?
I never know what to do with that question. I get some variant of it several times a day. Does your written investment plan say you should use TSM or a TR fund? Mine doesn’t say anything about TR funds, but does use TSM. Not in the Roth IRAs though. It’s in a couple of 401(k)s and the taxable account. I think the Roth IRAs are mostly small value and REITs.
These resources may help you come up with a written plan to follow, especially the last one:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
https://www.whitecoatinvestor.com/in-defense-of-the-easy-way/
https://whitecoatinvestor.teachable.com/p/fire-your-financial-advisor
Jim, your posts are so great. The medical finance world would be lost without you.
Similar to Amy a couple posts up I’m new to this, but really excited to finally open up my Roth IRA with Vanguard.
Have really been wanting to get VTSAX, but on a Resident’s salary I don’t have 10k saved up to invest.
I have ~6k I can easily invest, without dipping into my Emergency fund, and plan to invest an additional few thousand per year during Residency.
It seems like you don’t like VTSMX due to the higher commission, so would you recommend VTI instead? I would eventually switch to VTSAX once I have enough money.
I would prefer the ease of the mutual fund, and also am concerned about having to pay capital gains if I went with VTI.
Thanks!
There’s no commission, just the very slightly higher expense ratio. As soon as you hit $10K in it you can convert from VTSMX to VTSAX. I started in VTSMX long, long ago. Whether that’s worth the hassle of messing around with VTI to save a few basis points of ER on a 4 figure investment I’ll leave up to you. I’d just do the mutual fund.
Awesome, that’s what I was leaning towards.
And yes sorry you’re right, expense ratio – not commission.
Thanks again!
Jim,
you have turned me into a much more educated DIY self financial adviser, and I am kind of excited that I am not so ignorant anymore, but still have a ton to learn (I feel like a first year resident) 🙂 Actually, I’m a total newby at this stuff only 2 months into it and am trying to figure out the difference between VTI and VTSAX. A close friend recommended VTI so I did invest into this a couple weeks ago.
I have a roth that I am trying to figure out where to put that money, should I put it all ($ 5,500) into VTSAX ?? I am wondering if using VTI and VTSAX only, is diversified enough for a first year start to my investing?
If not would you mind offering any other recommendations with vanguard other than the above? As I am looking for somewhere to put my some extra monthly savings dollars in and hopefully do it under a SEP IRA. I am thinking I will probably add VTSAX to my portfolio soon as well, but just trying to pick your brain for some of your other favorites. Thanks.
PS If you ever need another buddy to do a canyoneering trip call me up! I’ve always wanted to do that!
VTI and VTSAX are the same fund. They’re just two different forms of it. I own both in various accounts depending on which is cheaper for that account. If I have to buy it away from Vanguard, I use VTI. If I buy it at Vanguard, I use VTSAX. I prefer traditional funds but I’ll use ETFs if there is a compelling reason like lower transaction costs.
Sure. Yes, it’s diversified enough for your first $5,500. Maybe next year you add a bond fund or an international fund or something. But honestly, it’s all about your savings rate now. You could also keep it simple and just use a target retirement or life strategy fund. That’s what I’d do with my first 100K if I had it all to do over again.
Don’t use a SEP. If you have self-employment income, use an individual 401(k) to preserve the ability to do a Backdoor Roth IRA without getting hit with the pro-rata rule.
One thing I’ve never run out of is people that would like to be invited on a canyoneering trip. I get surprisingly few invitations though. 🙂
For 2018 taxes, I was mostly employed by a hospital, but did have a small amount of income as an independent contractor. I did not open up a 401(k) during 2018. I’m wondering how to make the most of the 2018 year. Would you recommend a SEP IRA in this case, or just a traditional IRA and then convert either the SEP or traditional IRA to a Roth since I am 2.5 years out of residency and will have a 20% income raise next year. And then going forward in 2019 just using the solo 401(k)??
Which I looked into Vanguard they have a 401(k) where you can contribute to a 401(k) component and also a roth component. With 19,000 max in the Roth and upto 55,000 total (25% of my business profits). Also they only charge $20 to manage the 401k per mutual fund, but the fee is waived if you have over $50,000 total investment in Vanguard. And I would probably just stick with the simple retirement plan as you mentioned in the above reply. Does this sound like a reasonable option from Vanguard.?
Since I hired my wife to do the bookkeeping for me we will have the business contribute 25% as well 401(k). Since I am early on in my career I was thinking that maxing out the Roth portion of this would be the best initial step?
Also I wanted to let you know that since I ended up hiring my wife We were eligible for getting a group health insurance plan which made it significantly cheaper, and much much better policies and coverage. You probably already know this but I can’t just throw that out there in case you ran into somebody else who needed some advice on that.
Yes, for 2018 you procrastinated too long to use an individual 401(k). So put what you can into a SEP and just convert it to a Roth IRA. You can obviously also do a Backdoor Roth IRA, then an individual 401(k) for 2019 assuming you still have self-employed income.
If you’re not using the $19K employee contribution in a 401(k) from your hospital, then you can use it in your individual 401(k). I guess you could go Roth there this year if you’re not yet at peak earnings. Not enough info to really know.
I may have to look into a group health insurance plan for my wife and I next year. We’re actually COBRAing our partnership plan this year because now that I’m half-time I’m no longer eligible for it despite paying the entire premium myself.