By Dr. James M. Dahle, WCI Founder
If you've been around this blog for very long at all, you've probably noticed that I spend a lot of time discussing Vanguard, to the exclusion of other mutual fund and brokerage companies. If you don't know why Vanguard is so special (and my usual default choice when people ask where to invest), this post is for you. In 2020, 9 years after originally writing this post, the time has finally come to update it. It needed precious little update.
Vanguard was founded in 1975 by the late John C. (Jack) Bogle, being named after Admiral Horatio Nelson's Flagship at the Battle of the Nile in 1798. It was founded after a dispute arose between Bogle and the members of the board of Wellington Management Company. He was on the board of the Wellington Management Company, but after irreconcilable differences arose between him and other members, he was forced to resign.
He then went to the boards of directors of the funds administered by the management company, and by convincing them of the merits of a mutual mutual fund company, they gradually chose to move under the Vanguard umbrella. Since then, Vanguard has internalized the management functions, lowered costs, and become the largest mutual fund company in the world.
Why Invest with Vanguard?
#1 Mutual Ownership
As the only mutually-owned mutual fund company in the world, Vanguard has eliminated many of the conflicts of interest inherent in the structure of other mutual fund companies.
At some companies, such as Fidelity, the fund management company is owned by private owners (the Ned Johnson family). The fund management company then administers the mutual funds, which are owned by the shareholders (you and me.) Obviously, the owners of the fund management company want to make some money. Guess where that profit comes from? Yup, you and me.
At other companies, such as Charles Schwab or T. Rowe Price, the fund management company is owned by public investors, and its shares are traded on the stock market. Those investors also want to earn dividends and want their share values to go up. Guess where the money to do that comes from? You're right again — from the owners of the mutual fund shares, you and me. So there is a significant conflict inherent in the structures of most mutual fund companies.
At Vanguard, the management company is owned by the mutual funds, which in turn, are owned by you and me. There are no profits or dividends that need to go to the mutual fund company's owners. What does that mean? It means we get to keep them and it increases our returns over time.
#2 Low-Cost Leader
The means by which Vanguard sends these profits on to you is by lower expenses. In 1990, the average Vanguard expense ratio was 0.35%. The average of the rest of the industry was 1.09%, an advantage of 0.74% a year. Between 1990 and 2011, things got even worse (? better.) In 2011, when I first wrote this post, Vanguard's average expense ratio was 0.25% and the industry had increased to 1.38%, a difference of 1.13% a year.
Vanguard outpaces its peers year after year.
You don't need to know much about compound interest to know that 1.13% a year compounded over 2 or 3 decades is a huge amount of money. Fortunately, in 2020 Vanguard's average expense ratio is 0.10%, just 40% of what it was when I wrote this post. The rest of the industry has realized that we, the investors, have caught on, and the average industry expense ratio is now down to just 0.58%.
#3 Vanguard Funds Outperform Peers
As you would expect, these lower expenses allow Vanguard funds to outperform their peers, especially in the fixed income categories. Time after time, over any reasonable time frame, Vanguard funds outperform the majority of their peers. Over the last ten years, Vanguard funds outperformed 85% of their peers.
#4 Index Funds
Although there was an indexed account for institutional investors at Wells Fargo in 1971, the first real index fund, the First Index Investment Trust was founded by Jack Bogle in 1976. Known today as the Vanguard S&P 500 Index Fund, it is still the largest index fund in the world, with over $543 Billion in assets, more than the GDP of Argentina, and 5 times the size of the fund in 2011 when I originally wrote the post. (If you care, there are no real actively managed mutual funds in the top 20 anymore.)
Since then Vanguard has established dozens of other index funds. A good index fund not only uses ultra-low costs to its advantage, but it also eliminates manager risk. It is well-known that most mutual fund managers don't add value once the cost of the management is added in. Index funds essentially trade the possibility of outperformance for the guaranteed elimination of market underperformance. 85% of our retirement portfolio and 100% of our children's portfolios are invested in index funds.
How to Open a Roth IRA at Vanguard
Other Reasonable Brokerage Choices
These days, you can get low-cost index funds at any brokerage firm (eTrade, etc) by buying Vanguard, iShares or Schwab ETFs. If you still prefer traditional mutual funds, you can also get good, low-cost, broadly diversified index mutual funds at Fidelity or Charles Schwab. But Vanguard is still usually my default recommendation because it offers more index funds and it doesn't treat them like a loss leader to sell other funds or services.
Problems with Vanguard
Is Vanguard perfect? Not even close. They have certainly had some growing pains managing their rapid growth over the years.
Their focus on low costs has predictably led to complaints about their web interface, although having used TD Ameritrade, Vanguard, Schwab, and Fidelity I find it fine for my purposes.
There are also some other quirks you may notice at Vanguard, such as the fact that their individual 401(k) doesn't accept IRA rollovers, a frequent need for white coat investors trying to do Backdoor Roth IRAs.
So when choosing a mutual fund company to open an account with, Vanguard should be your default option. Instead of taking the profits for himself, St. Jack (Bogle) opted to change the mutual fund industry forever and allow the investors to keep the change. Over your investing career, this will probably be hundreds of thousands of dollars you get to keep in your pocket. Now if I could just get them to sponsor this blog…
What do you think? Where do you invest? What mutual funds or ETFs do you use? Comment below!
Great article but you have made one error. Fidelity is owned by the Ned Johnson family:
At some companies, such as Fidelity, the fund management company is owned by private owners (the Neff family).
We have a young lady in our family going to medical school this fall. I am definitely telling her about this website.
Thanks!
Of course you’re right, what was I thinking? I must have been thinking about John Neff for some reason. I’ll make the change.
Good write-up.
Since you wrote this, most of Vanguard’s funds are 0.19%, and some are an amazing 0.12%!
With admiral funds available with only a $10K investment, a good portion of my Vanguard fund ERs are less than 0.10%. Some of the international stuff is a bit more, but considering my 401K fees (not including ERs) are 0.5% of AUM, I’m pretty happy with the costs of my Vanguard investments.
What do you think of the Schwab index funds and ETFs? They seem to be carbon copies of the Vanguard funds, with expense ratios as low, or even lower if you are a Schwab customer.
We’re really dancing on the head of a pin here when we’re comparing Vanguard ETFs and Schwab ETFs. Personally, I think Vanguard is simply better at doing it. I believe this enough to pay commissions in my Schwab 401K to buy Vanguard ETFs instead of the Schwab ETFs. Once you get to ERs this low, a basis point or two just doesn’t matter and it comes down to execution.
All that said, there is very little difference and both companies do a good enough job of execution that I wouldn’t worry much about it if all I had in my 401K were Schwab funds. I do not, however, believe that Schwab would have low cost index funds and ETFs if Vanguard had never come along.
So when it comes to opening a Roth IRA would you recommend going with Vanguard over Capitolone360 (ing) or bank of america?
Yes.
I currently hold Roth IRAs with Fidelity and USAA and thought I should consolidate. Would I Benefit from closing both out to open one with Vanguard?
At a minimum, I’d roll the USAA one into the Fidelity one. If the rest of your money is at Vanguard, sure, go there. But Fidelity is fine. In a lot of ways, Fidelity has improved and Vanguard has regressed since this article was originally penned back in 2011. You can always buy Vanguard ETFs at Fidelity.
WCI, i am currently new to investing. I am maxed out on my 401k, 457b, HSA, and backdoor ROTH. I just recently opened up an account with vanguard and plan on keeping it simple, maybe 70% stock index and 30% bond index. My question is, if i invest in a bond index and i want this money to be readily available for withdraw if i need it. What type of bond is best? thanks, from the amateur.
You can invest in any bond index fund you like and the money can be “withdrawn” at the close of business on any day the markets are open. It may take 2 or 3 days before it can then be transferred to your bank account and pulled out of the ATM.
Now, let me answer the question you should have asked, which is completely different from what you did ask. You should have asked “how should I design my portfolio?” The answer to that probably lies in putting your bonds into your 401K or other tax-protected accounts and holding very tax efficient stock index funds in your taxable account. But it’s possible you might want to use a tax-free (i.e. municipal) bond fund in your taxable account. You can get more help designing your portfolio from the Bogleheads:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212
You probably also should have asked “Which bond fund is least likely to have a negative return so that if I want to withdraw money suddenly it’s most likely to all be there?” The answer to that is that expected return and safety of principal are inversely correlated. The less risk you take, the more likely you are not to lose money in the short term. The safest bond funds are money market funds, then short term treasury funds, then short term muni funds, then short term corporate funds, then intermediate term treasury funds etc. At the far end of the safety spectrum lie junk bonds, emerging market bonds, and peer to peer lending.
I hope that’s helpful.
If you have need money for a specific future purchase (say five years out), look into zero coupon bonds.
WCI, I am also new to investing. I have old 401a ($173k) and new 401k ($39k). I don’t manage these accounts. I am mid 40’s. I just recently learned about backdoor Roth yesterday. I plan to open 2 backdoor Roth accounts (his & her) with Vanguard. Should I design 1 portfolio for 2 accounts or different portfolio for each accounts? How should I design my porfolio? Thanks.
First, read and read. Learn more about investing. You don’t have to do anything quickly. You really don’t HAVE to do your backdoor Roths before April 15th so you have time to learn.
In general, you should have one overall asset allocation, considering all your accounts as one big portfolio- the 401a, the 401K, and the backdoor Roths. You say you don’t manage your larger accounts. You should either go to your adviser and have him help you so all of your accounts are considered together, or fire your adviser and manage them all yourself. There is no point to hiring a manager to do some of your accounts and not the others. It doesn’t make sense. If you’re capable of managing one account, you’re capable of managing them all. “How should I design my portfolio” is such a huge question it cannot be answered in a single comment. This series of posts might help:
https://www.whitecoatinvestor.com/designing-your-portfolio-part-1-goal-setting/
This might also:
https://www.whitecoatinvestor.com/the-default-portfolio/
I don’t have an adviser. I can’t do anything with my old 401a, such as can’t rollover until after age 55 and CHI administrator do the account management. My 403k is with Fidelity through employer 2 years ago. I participate in Fidelity Portfolio Advisory Service (FPAS) with a charge of ~ 0.64%. Since I participate in FPAS, does it mean Fidelity is my adviser? It seems my Fidelity aa is 40/30/30. I needs to check my 401a aa. Thank you for the links above.
You don’t have to be able to rollover your 401(a) in order to select the investments within it. Read the website/literature on it and you’ll see what I mean. I’m not a big fan of services like the Fidelity one. You’re paying enough to get a real financial advisor but all you’re getting for it is advice about your 403B. To make matters worse, there’s a decent chance they’re putting you in their expensive advisor funds instead of their low cost index funds. You shouldn’t have an AA for your 403B and one for your 401A and one for your Roth. You should have one overall one for all your retirement accounts. Try listing it out in the format the Bogleheads recommend for portfolio questions and you’ll have a much better understanding of what you have now. Then you can see how to change it to what you want.
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212
It seems my 401a is in a trust. No stocks/bonds. I need to read more about trust too.
A trust is a type of account, like a piece of luggage. Investments are like clothing. Any investment can go into any type of account. A lot of times the investments in 401As are called trusts, but are really more like a private index fund. Read the document and I’m sure you’ll figure it out.
Great information. I have been reading several of your suggested books (Boglehead, Coffeehouse, etc), and we are officially firing our advisor and moving to a simple, low cost, asset allocation plan. We are finding a few hurdles, though. Our investments were all with fidelity, where we have IRAs, UTMAs and taxable accounts. In order to take advantage of the backdoor Roths, my husband opened up 401Ks there from his business so we could roll our IRAs back into these, eliminate the pro rata, and fund them for Roths next year. The Vanguard funds are available at Fidelity, but at such a fee as to be prohibitive, and so we are considering leaving the retirement accounts at Fidelity and using their versions of the index funds, and taking our taxable accounts to Vanguard to best utilize their index funds. It’s a bit unwieldy, but I can’t figure out how else to be able to do the backdoor Roth. Any better ideas? Thanks!
Fidelity offers a pretty good brokerage where you can buy the ETF versions of Vanguard funds. The index funds that Fidelity offers are also pretty good. There’s nothing wrong with just keeping everything at Fidelity if you like. You can also move everything to Vanguard if you like. Both are good options.
Thanks!
Just starting a 401K and I’m maxing it out this year. I’m young and going with a very basic asset allocation that is a little weird and equity-heavy due to the limited availability of Vanguard funds through my employer’s 401K.
Right now I’m 55% Vanguard S&P 500 Index, 25% Vanguard Total International Stock Index, and 20% Vanguard Inflation-Protected Bonds. I’d prefer both more quantity and better diversification in bonds, but the only other option my plan offers is PIMCO’s Total Return with an expense ratio 6 times higher. In your opinion, is it worth the ER for better diversification?
First, I think that portfolio is fine. I also think it would be fine if you split the bonds between the TIPs and the PIMCO fund. As far as 401(k) options go, yours are pretty good. I’ve seen lots worse, and it’s not unusual at all to not have any Vanguard funds and only have a single index fund- an S&P 500 fund. 6 times a Vanguard ER isn’t necessarily super high, given how low Vanguard fund ERs are.
I love Vanguard also. Just opened my Roth IRA through them. Went with the Total Stock Market Index fund.
I’m wanting to get 20% of my annual gross income invested, so I’m looking at different avenues to make this happen. I like vanguard because of the low fees and great index fund options. I was thinking about buying some more Index Funds outside of my Roth account. Would you recommend funds such as the S&P to continue investing or do you think this is a little overkill considering these companies are already covered under my Total Stock Market fund within my Roth? I guess I was wondering what your advice would be. I like the large index funds because they are lower risk and “nothing beats the index”, but is duplicating these stocks in multiple locations a sufficient investment strategy? I wold be losing diversification. I do plan on buying the Total International Stock Index fund also.
Thanks again for your opinion. Love the website.
You need an overall investing/asset allocation plan that takes into account all of your various accounts and uses one asset allocation across them.
As a general rule, I prefer a Total Stock Market fund to an S&P 500 fund for your US stock/large cap allocation.
Buying the same stocks in different funds or brokerages is not adding significant diversification.
I am a 3rd year EM resident, so I only have about 2 years left to contribute to a Roth IRA. My wife and I are trying to get a good grasp on our finances, and have our life and disability insurances set up and want to take the next step. I have a 403b through work and she has a 401k through work, but we wanted to continue building our financial stability and was wondering if the Roth IRA for two years before we dont qualify anymore would be worth it? That being said, if we dont have $1000 to open the Vanguard account, is there another one that you recommend that has a lower opening requirement so we can at least open it and then contribute monthly to it? Thanks!
I’ve got great news for you-you can continue to contribute to a Roth IRA as an attending. You just have to do it through the backdoor.
Why not just make your monthly payments into your bank account until it hits $1000, the move it all to Vanguard at once? If you’re not going to contribute at least $1000 this year, I think you probably ought to reevaluate your budget. There are places you can open an IRA with less than $1000 (like a local credit union), but then when it hits $1000 you’re to want to do a rollover. Not much lost just leaving it in your checking account.
Thanks for the quick reply! Totally could save $1000 and then open a vanguard Roth, it’s more of the “I want to do something now” mindset that had me thinking open one now and then add to it throughout the year. I like your idea though, appreciate it. Starting the savings already and will hopefully open it soon!
Just finished reading your book. Also read “FP for Dummies” which was a good starter.
I talked to a few of my financial advisor friends about the concepts you discussed in WCI and they were completely in agreement about the basic principles.
Two of them, who share similar philosophies of investing have started accounts with WealthFront.
Wondering if you have any thoughts about WealthFront as a means to achieve the WCI goals?
FYI I am a younger orthopaedic surgeon, 3 years into my career, 34 years old, some basic financial literacy (mostly thanks to you) and investing for the long term
More info on Wealthfront and other roboadvisors here: https://www.whitecoatinvestor.com/what-you-need-to-know-about-roboadvisors/
WCI
I have read your book twice now along with Bogleheads, PF for Dummies and a few others that you recommended in your book. I have now got two of my previous co-residents reading it. I want to say thanks for taking the time to write it.
I have two questions and I am sorry if you have addressed them in prior posts and Id be happy to save you time and read them if you can point me in that direction.
I am in my first year of practice and joined by fathers practice. He was solo until I joined. He has asked me to review the 401K and change it as he has realized that the fees are too high. He is in with Mass Mutual and fees are around 2.5%. There are only 5 full time employees and only 4 contribute consistently. I told our adviser that we were changing and he quickly met with me and explained that the fees were high early but now with more assets he could could convert us over to American Funds for 1% fees. I read prior posts about 5.25% loading and the misrepresentation of their results compared to others including Vanguard. I have read that not all of American Funds products have loading. I was interested in moving to Vanguard but a post on your site by Kon Litovsky makes me worried and I’m not sure if I’m understanding the benefits of Vanguard over American Funds. Also, I am interested in options of Profit sharing and Defined Benefit pension plan in addition to the 401K. Is that possible with Vanguard?
Litovsky- “Vanguard provides only the record-keeper, their TPA services are not adequate for custom-designed plans that are typically utilized by doctors and dentists (and other high earning professionals). And they don’t provide any fiduciary oversight for your plan, so in fact they are simply a record-keeper.”
Is Vanguard the play? Do I need to hire a separate TPA? What funds should I start with? Trying not to make my first decision for the practice a bad one.
Secondly, I had made a financial plan after reading your book including the back door IRA, 529 and HSA. He enthusiastically disagreed with the backdoor IRA and he said it would not be of any benefit and it would be an IRS nightmare since it is going from pre-tax to post-tax. I gotta admit I understood your reasoning in the book etc but I am in a world of confusion after all of this.
Any help would be appreciated.
He’s converting you over because you complained and he doesn’t want to lose you. I’d still fire him because 2.5% is highway robbery.
If you like Konstantin’s writings, why not give him a call? He’s certainly capable of setting you up a small practice retirement plan at a fair price and he’s a huge advocate for flat fees-so no AUM fees. You can get a quote directly from Vanguard too and see how you like the service, attention, and price and then choose between them.
Anyone saying a backdoor Roth is a bad idea for a doc or an “IRS Nightmare” deserves to be fired. Think about how much you’re paying this guy to be incompetent and you’ll probably get really angry. I know I would.
What do you think of the vanguard target dated funds vs choosing your own asset allocation for a Roth IRA?
If you like to keep it simple, go with the Vanguard TR Funds. If you like to tinker, roll your own.
One reason some people roll their own is to “tilt” the portfolio to things like small value funds.
I roll my own: https://www.whitecoatinvestor.com/7-reasons-i-dont-use-target-retirement-funds/
If you’re just starting to contribute to an IRA (like myself) you’re limited to $5,500 (assuming no spouse contribution) and thus not eligible for the low expense ratios that admiral shares offer. Would it make sense to do a Vanguard TR fund, taking advantage of the 0.16% expense ratio (and less volatility) and after several years take the funds out of the TR fund and purchase admiral shares of the desired asset allocation. I was planning on structuring my portfolio off Allan S. Roths second grader portfolio but without admiral shares the costs would be as follow’s: Vanguard total US stocks (0.15%), Vanguard total international (0.18%) and Vanguard total bond 0.15%)
Also, while on the subject of tilt. I can’t help but compare the 3 index second grader portfolio to others on market watch, including Paul Merriman who encourages adding small cap and REIT’s, yet the second grader portfolio outperforms on the 1yr, 3yr,5yr and 10yr returns. Any thoughts would be appreciated. Thanks!
You know, investor shares are darn cheap compared to the average mutual funds. So I would just use those. Asset allocation first, then worry about expenses. But there’s nothing wrong with a TR fund if you prefer a simpler approach. If I had it all to do over again, I’d probably just do a TR fund until my portfolio hit $100K.
Large growth has outperformed small value lately, which explains the recent performance data. Don’t choose a portfolio based on past returns.
Can you please detail the back door Roth? Thank you kindly
Sure. Here it is in as much detail as you can possibly want:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
I am a 4th year getting ready to start residency in the next 6 months and am trying to learn as much now as possible to set up retirement investing/savings. I already have a Roth IRA with Edward Jones that I was able to set up with my military signing bonus under the HPSP. It is currently grandfathered in their system as a $40 flat annual fee with three class a mutual funds investments that have a personal return about 7.6% (although largely skewed by a current 20% return). Since they recently went from a flat annual fee and commission system to a 1% annual portfolio maintenance cost system without fees and commissions I am unable to do anything with my account unless I want to switch to this 1% system. It will be 5 years since opening in 2019 so I anticipate being able to withdraw most of the money for a first time home buyer down payment either in residency or after, but am unsure as to the best option whether to leave it as is or transfer it to a different broker like Vanguard IRA. Any input would be helpful, thank you.
There is so much wrong in this situation that I’m not quite sure where to start.
First, Edward Jones isn’t a place to get financial advice. They are commissioned salesmen masquerading as financial advisors.
Second, it sounds like you’re both paying an annual fee AND paying commissions. That’s ridiculous. Class A means a front-load. That’s a commission. Why pay a commission when you don’t have to? No Vanguard funds charge a commission. All of yours do. The commission is theoretically to pay your advisor for his advice and work (which is why your phrase “I was able to set up” doesn’t make much sense). I’m surprised you’re so resistant to a 1% AUM fee system given your tiny portfolio, but even with a fee-only model, I probably wouldn’t stay at Edward Jones for advice. I just have yet to run into someone with what I would consider a reasonable portfolio that is investing at Edward Jones. I’m sure there’s someone out there somewhere…but I doubt its you. If you think it is, post the names of your fund with their expense ratios.
Finally, a physician using Roth IRA money for a down payment is almost surely a mistake.
Yes, it’s time to get away to a real advisor (if needed) and at a minimum to get into better mutual funds.
I love your website and have read your book 2 times. But i have to ask this, and i am sorry for this.
Do you have a conflict of interest with Vanguard ? Is there a page on your website which details your potential financial conflicts of interest or your affiliate partnership / advertisement programs ?
I will still love all the wealth of info that you provide, just want to get a better idea of why your love of Vanguard ?
The only conflict I have with Vanguard is I have the majority of my investments there. They’ve literally never paid me a dime in advertising or other revenue.
thanks boss !
WCI,
From a financial safety perspective, do you think it is safe to put all or most of your portfolio allocations with one company like Vanguard? What if (although low possibility) Vanguard suffers a major loss a whole?
Also, would you prefer VTSAX or VFIAX?
Thanks
Yes, I think it is safe. If you’re worried, put half your money at Fidelity or Schwab. Remember that your money isn’t “at Vanguard” like it would be “at a bank,” but rather invested in thousands of companies across the globe.
I prefer total stock market to 500 index due to greater diversification as discussed here: https://www.whitecoatinvestor.com/my-favorite-mutual-fund/
This is a question to compare Fidelity vs Vanguard:
Fidelity is offering now a “Zero fee index funds” for Total Stock and Total International funds. Also when buying individual stock in a brokerage account, Vanguard would charge $ 7 for the first 25 trades and then $20. Fidelity would charge $4.95 unlimited.
The lion’s share of my savings are in a Vanguard Brokerage after tax accounts . I rebalance between Vanguard Total Stock Market and Vanguard Total International Funds.
I want now to buy some individual stock in addition to have mutual funds. Its tempting to open a brokerage account with Fidelity and start pouring savings from now, on their zero funds and take advantage of the lower fees for trading. On the other hand I read here and on other books ( Investor Manifesto from Dr W Bernstein) about Vanguard advantage of it’s type of ownership .
I wonder if Vanguard would follow and offer a” Zero fee” choice. Also I wonder if we are really comparing apples to apples between the 2 companies’ funds and if they will perform the same in the long term. Finally if I chose to open Fidelity, I wonder if its worth the paperwork as I would have to follow 2 different companies for tax reports.
I don’t expect to see a “zero” gimmicky fund at Vanguard. That said, it wouldn’t surprise me to see the ER of TSM drop to zero thanks to securities lending by the fund and Vanguard passing that on to its owners. Here’s my article on Fidelity’s Zero ER funds:
https://www.whitecoatinvestor.com/expense-ratios/
Now, about that desire to go buy individual stocks, read this first:
https://www.whitecoatinvestor.com/uncompensated-risk/
When I retired from medical practice about 10 years ago, I consolidated all our different accounts with Vanguard. Seemed like a good decision for a while but then they got rid of their cash management account. That made me mad and I wish I would have consolidated with Fidelity but I am too lazy to switch everything again, at least for now.
Jim,
I have used Vanguard for years also. When they changed the CMA to just invest in a Money Market account for sweeps and trading instead, I was pretty happy with that. What part of the change has bothered you?
Thanks for feedback
Thanks so much for all of your advice! I will be starting a 4 year EM residency this summer and I am trying to learn as much as I can about personal finance and long term wealth management, needless to say I have lots to learn. I will be reading your book and have started following your blog posts as well as the “Start Here” section.
A few questions:
My husbands account is with Fidelity. While I have been in school he has been contributing 3% to get his employer match at 3% (just recently increased to 4%) and then also gets another 6% employer benefit invested for him, for a total of 12% increasing to 14% with new contribution benefits. This will fully vest in 2-3 years. His is currently invested in a target date account with a .55% ER. My residency will give me a similar retirement account with matching (it will only vest 75% in residency and I will likely lose part of the employer match as I will be short 1-2 years given the length of my residency.
Is this money something we have to keep with Fidelity or should we consider rolling it over to Vanguard?
Are there better funds to invest in at Fidelity to at least bring our expense ratio down?
Do you think the financial advisors at Fidelity are good for starting out or are there better options that you suggest?
Last, we will both be contributing to at least our employer match, we are also trying to at least contribute to fully find our Roth IRA. Unfortunately, I was not as financially savvy starting medical school and have a little higher than average overall student loan burden (about $288k with unpaid interest including both undergraduate and med school loans, all federal). We are planning on aggressively paying down these loans. However, I always wonder if it would be better to try to fully finance our tax advantage retirement ($19.5k/person/year) before paying down student loans in residency vs paying them down aggressively (I’m hoping for about 50% in residency and then paid off 1-2 years into my attending practice)?
If you could direct me to anything else you have written about these topics I would greatly appreciate it! Thanks again for sharing your wealth of knowledge and experiences! I wish these were things I would have learned in college and medical school!
You can’t roll it over until you leave the employer most likely, so a non-issue. But there are lots of great investing options at Fidelity including Vanguard ETFs so I wouldn’t feel like you have to move the money. Most likely you’ll move it into your new 401(k) as an attending.
I don’t know much about Fidelity “financial advisors” but I think you get decent asset allocation advice and low cost investment management from the Vanguard advisory service. Don’t expect doctor specific financial planning advice at either place.
No right answer to the pay off debt vs invest question but hope these posts help:
https://www.whitecoatinvestor.com/pay-off-debt-or-invest/
https://www.whitecoatinvestor.com/investing-versus-debt-pay-off/
For reasons beyond my control, all of my retirement accounts are at Fidelity. Many of the articles I have read that have shaped my desired portfolio allocation reference Vanguard funds, so I end up then trying to find Fidelity equivalents. While that’s fairly easy in most cases, for some of my portfolio allocations (small cap value and REIT index funds in particular) it seems that there are some moderate differences between the Vanguard funds and the Fidelity equivalents. So my thought was to buy Vanguard ETFs so that I wouldn’t pay the load fees that Fidelity charges to buy Vanguard Mutual funds. My question is that in a retirement account at Fidelity, is there any downside to buying Vanguard ETFs as opposed to:
a) owning the equivalent mutual fund at Vanguard
b) owning a similar Fidelity mutual fund
I understand that there may be differences in performance of similar Vanguard and Fidelity mutual funds, but I’m wondering if there are any other differences such as fees or tax implications or otherwise. It seems that most Vanguard ETFs aren’t charged any extra fees to purchase at Fidelity. But it feels like making a Fidelity account full of Vanguard ETFs has to have some downside compared to those who have their Vanguard mutual funds at Vanguard or use Fidelity funds at Fidelity. Am I missing something?
No. That’s a great solution. I do think the Vanguard funds are slightly better most of the time in a taxable account, but the difference is so minor if I were at Fidelity (and I am for 3 accounts) I wouldn’t worry about it. I own a Fidelity index fund and some Vanguard ETFs in my Fidelity accounts.
I hold some Vanguard mutual funds and ETFs in my Fidelity account. I think it helps to look at the extreme cases to see when this may or may not make sense.
Case 1: You want to invest a large sum of money in one purchase and hold it along time. For example, suppose you want to buy $250,000 of a Vanguard Admiral fund which will cost you $75 at Fidelity. That fee is 75/250,000 = .03%. If you hold those funds, then you can view that fee as being spread-out over the holding period (e.g. 1,2, 5 years). Not too bad.
Case 2: You purchase the same fund in Case 1, but you decide to dollar-cost average in ten purchases. So the first purchase is for $25,000 and you pay a $75 fee – the same for the remaining purchases. In this case your fee is 10*$75/$250,000 = 0.3%. If fund is a conservative bond fund with a yield of 1.3% , then that 0.3% fee reduces your yield to 1.0%. As an extreme case, if you decide to sell all your shares for tax purposes and then re-buy them via dollar-cost averaging the same year, then you’ve doubled the fees.
Relative to ETFs, I have grown less enamored with them in my account simply because you have to deal with the bid/ask spread as well as the premium/discount percentage. For me, it psychologically complicates the investment process and generates unneeded angst when placing an order. For example, does it make sense to purchase a Vanguard ETF if it is trading at a premium if I can buy the same Admiral shares at NAV? I also learned the hard way, on a non-Vanguard ETF, that you can ‘become the market’ if you try to unload a large number of shares of an ETF that has low trading volume. In that scenario, it may takes days to sell all shares without suffering a lack-of-liquidity loss.
Thank you both for the replies. I currently don’t have a taxable account at this early stage of my career as I’m focusing on maximizing my tax-protected accounts. When I do open a taxable account I may do it at Vanguard to have those options fee-free in the long run as some of my assets shift from tax-protected to taxable. But for now I’ll either use fidelity funds or vanguard ETFs. I do agree with Ron that there is some slightly irrational but real psychological angst of dealing with bid/ask orders. My goal is to make my portfolio as simple and stress free as possible, so it’s possible that long term I might get away from ETFs. Or more comfortable in dealing with the intricacies of bid/ask spreads. Anyway thanks for the replies!
It’s more than psychological. A bid-ask spread will eat up more than a few basis points in expense ratios for most investors.
My setup
Vanguard for taxable account and roth ira (via backdoor)
Lively (which is TD ameritrade) for HSA (Fidelity is also a great option)
Fidelity for non prototype individual 401k and I use Arizona 529 via Fidelity
All things being equal go with vanguard every time for mutual funds, although most platforms can access Vanguard ETF commission free these days
I am used to Vanguard interface, and actually prefer it to Fidelity and TD ameritrade
Customer service at Fidelity is top notch, especially if you have a non prototype 401k in order to execute Megabackdoor roth, as there small business retirement technical support is excellent.
In the end your savings rate and ability to stay the course matters more than anything, as you can find low cost index mutual funds and etfs at any brokerage now.
Hello
Regarding your post with Vanguard
I have a small business, only 3 participants on Safe Harbor 401k plan. Recently the cost of record keeping fees from Ascensus went up yearly , plus I received another bill from employee contribution calculation of $500 , which I have not been charged previous years. So this bring the administrative fees around $4500 annually. I have the feeling that for 3 employees and the overall funds that are in the plan, this amount is high, I don’t believe it can be offset by other fund’s performance. Any opinion on this or if you recommend to switch to other company? Thank you
Why not shop it around?
https://www.whitecoatinvestor.com/retirementaccounts/