Index Investing: Vanguard

|| This article is Part Four in a series on investing with index mutual funds. ||
||   I. SpeculationII. Index FundsIII. John BogleIV. Vanguard   ||
||  V. Moving to VanguardVI. Asset AllocationVII. Maintenance  ||

The Vanguard Group is the investment management company started by John Bogle, inventor of the index mutual fund.  As I mentioned in the previous articles in this series, Bogle's big idea, thoroughly derided by the financial establishment of the day, eventually took off: index mutual funds now account for 28% of the $13 trillion invested in mutual funds, and Vanguard manages over $2 trillion as the largest investment management company in the world.  Bogle rejected speculation, short-termism, and high fees, and believed that the investor's best chance of getting their fair share of market returns was to buy and hold a little bit of everything as inexpensively as possible.  History has shown him to be correct.

(If I sound like a Vanguard shill, let me assure you: I'm not getting a dime for this.  I've invested with Vanguard for years, and this article is entirely based on extensive research and the experiences of myself and others with which I've worked.)

Why Vanguard?

In the financial world, bigger is obviously not necessarily better, so Vanguard's advantages must have to do with more than its size.  Why is Vanguard broadly considered to be the best company to invest with?

1.  Vanguard is a non-profit

That's right: Vanguard is a privately held non-profit organization, the only major investment management company structured this way.  It's the investors who own the mutual funds and there are no external shareholder interests to consider, significantly reducing potential conflicts of interest.  You can invest with Vanguard with confidence that some managing director isn't telling his employees to "rip the eyeballs out" of those "muppets" (yep, they're talking about you).

2.  Vanguard is a one-stop-shop for index mutual funds

The index mutual fund was invented at Vanguard, and Vanguard remains the preferred source of these funds.  Many others, including Fidelity Investments and Charles Schwab, have begrudgingly entered the index fund game (there's not a lot of money to be made for them!), but Vanguard's selection is still by far the best.  If you invest at some other brokerage, you'll probably need to pay transaction fees—usually on the order of $75 per trade—to buy and sell Vanguard's best-of-class funds.  (Note that Vanguard does currently offer a few actively-managed funds, primarily due to persistent investor requests)

3.  Vanguard's fees are the lowest in the industry

All of Vanguard's funds have no sales loads, no commissions, and no transaction fees when traded within a Vanguard account.  As long as you receive your account statements electronically, Vanguard charges no annual fee to maintain an account.  Vanguard is also unusual in that it doesn't charge fees to open, close, or transfer accounts to or from other brokerages; the transfer-out fees (also called an ACAT, Automated Customer Account Transfer, fee) and account closing penalties at most other brokerages range from $75-150 per account.  The annual fees assessed for holding a mutual fund, called the 'expense ratio', are also rock-bottom: while the industry-average mutual fund expense ratio exceeds 1%, Vanguard's funds only charge 0.05-0.30%.  The expense ratio is directly subtracted from the market's returns when calculating your profits, so minimizing costs is the simplest thing you can do to improve your returns.

4.  Vanguard's customer service is excellent

I've helped over two-dozen people set up accounts with Vanguard, and none has had a problem that couldn't be resolved with an email or a phone call.  The personal finance blogosphere loves Vanguard:

5.  Vanguard has no history of financial wrong-doing

Most other investment management firms have been implicated in a variety of financial scandals.  I sleep a little sounder knowing that Vanguard has done a pretty good job keeping their hands clean.

Vanguard has also collected a healthy list of reasons why you should invest with them:

Getting Started With Vanguard

If you're not entirely sure how much you want to invest or exactly what you want to invest in, that's okay—opening an account, funding an account, and choosing your investments are three separate steps.  Don't let this stop you from opening an account with Vanguard today.

This link will take you to the new account application, which only takes a few minutes.

Everyone should have a Roth IRA to start out with, so follow these steps to open one:
  1. Chose 'Retirement', then 'Roth IRA'.
  2. Fill in your personal information (you'll need your social security number)
  3. Fill in your contact information
  4. Select 'You're not ready to select all of your investments'
  5. Enter '$3000' as your contribution (don't worry, you don't need the money yet!)
  6. Select 'Check'
  7. Submit your application
  8. Create an online account with Vanguard
  9. Log into your account
  10. Under 'My Account', click on 'Account Maintenance'
  11. Click on 'Bank Information' and 'Add a new bank'
  12. In a few days, follow the instructions and verify your bank account
Now your Vanguard account is set up and your bank account is linked to it.  As soon as you pull together $1,000 to begin investing with, you can select the appropriate Target Date fund, make an electronic transfer or mail a check, and you'll be off to the races!

($1,000 a bit steep and want to get started right away?  See the article on Investing with $100.)

Hopefully I've convinced you that Vanguard is an excellent choice and inspired you to take the first steps toward investing to secure your financial future.  Consider following the steps in the Financial Order of Operations article to direct your efforts and keep the momentum going.  Future You will be pleased.