Vanguard 10-Year Expected Asset Class Returns (2018)

I was surprised to read the NY Times article Vanguard Warns of Worsening Odds for the Economy and Markets. Everything is written very carefully using odds so that there is no “prediction” that could be called “wrong” later on, but at the same time if there is a future recession, they will appear to have been “right”. I didn’t know that Vanguard did these sort of economic predictions or that they were deemed so noteworthy.

As the chart below reminds us, all bull markets must eventually come to an end:

risefall_720b

The question is, what is the point? What is actionable about this? You could view this article as encouraging market timing (sell stocks now!), or it could be a prudent reminder to rebalance and assess your risk exposure (sell a little stock now? maybe?). The latter is always a good idea, so let’s be generous and call it that. I wonder what Jack Bogle thinks. I mean, the title of his upcoming book about the history of Vanguard is Stay the Course.

For posterity, I wanted to record their expected 10-year (annualized) returns for the following asset classes (as of mid-2018):

  • US Stocks 3.9%
  • International Stocks 6.5%
  • US Total Bond (Corporate + Government) 3.3%
  • International Bonds 2.9%
  • Commodities 5.9%
  • US Treasury Bonds 3%
  • Cash 2.9%

These are nominal numbers. In another economic outlook article, Vanguard projects inflation to run slightly under 2% annualized.

Are You Indirectly Losing Money via Your Brokerage Cash Sweep Account?

A recent WSJ article by Jason Zweig calls attention to one of the hidden ways that brokerage firms make money from you. As interest rates rise, they go out and earn the highest market rates while giving you a lot less on your idle cash. The difference adds up to big profits.

Brokerage accounts used to make you buy a money market fund with a high expense ratio. These days, they use a “bank sweep” account. They advertise the FDIC insurance, but hide the fact that they often own the bank and are skimming millions in interest:

In a bank sweep, your brokerage automatically rakes together and deposits your spare cash in one or more banks. Banks hand the brokerage a hefty fee, and the brokerage hands you some crumbs. For any given investor, a few dollars from dividends or interest income don’t amount to much. Rolled together with idle cash from thousands of other investors, they can add up to millions.

Morgan Stanley. Ameriprise. E-Trade. If you dig through Schwab’s disclosure, you’ll see them state that “In setting interest rates, the affiliated banks may seek to pay as low a rate as possible”. Nice.

Default options often prey on your inattention and laziness. Here are some ways to avoid the low interest rates of the bank sweep accounts.

  • Explore all your sweep options. Some places give you multiple alternatives for your cash sweep. For example, Fidelity has Fidelity Government Money Market Fund (SPAXX), Fidelity Treasury Fund (FZFXX), and FCASH. The two funds have SEC yields over 1.5% right now, while FCASH earns only 0.25% on balances under $100,000.
  • Keep your cash accounts empty automatically. You can set up automatic dividend reinvestment, or perhaps an automatic deposit of dividends into a high yield savings account. That should keep most of your interest and dividends from piling up as cash.
  • Manually reinvest often or transfer to alternative funds. Keep an eye on your cash balance, and invest it as soon as possible into stocks, bonds, or a higher-yielding money market fund alternative. Some accounts offer a text alert if you balance exceeds a certain amount like $1,000.
  • Move your assets to another firm. Vanguard still has a decent sweep option (VMMXX, see below). Fidelity still has two decent money market sweep options as well (SPAXX and FZFXX).

Vanguard isn’t incentivized to play these interest-skimming games. Vanguard’s only sweep account nowadays is the Vanguard Federal Money Market fund due to new regulations (read more here). Vanguard used to have better options as the default account, but at least the Vanguard Federal Money Market fund still earns a decent SEC yield of 1.87% (as of 8/8/18). If you want, you can still move money manually into the Vanguard Prime Money Market fund, Vanguard Municipal Money Market funds, and the Vanguard Treasury Money Market fund which may do better on an after-tax basis.

On the flip side, if you are individual stock investor, this is why higher interest rates are good for brokerage firms like Schwab. If you believe in the future of low-cost index funds, Fidelity and Vanguard are not publicly-traded, but you can become a shareholder in Schwab. Heck, Schwab has even set up their “free” robo-advisor to profit from higher interest rates due to a sizable cash allocation. (I do not hold Schwab stock at the time of this writing, but it is on my watchlist.)

Bottom line. Check the interest rate on your brokerage sweep account – It might be a lot lower than you think. Consider taking action.

How Did Total Bond and Treasury Bond Funds Perform During the Largest Stock Market Drawdowns?

If you own bond mutual funds or ETFs, the most popular benchmark is the Bloomberg Barclays Aggregate Bond Index (AGG), which basically tracks all U.S. taxable investment-grade bonds, including US Treasury government bonds, investment-grade corporates, mortgage-backed bonds, and other asset-backed securities. The largest bond fund in the world is the Vanguard Total Bond Market Index Fund (VBMFX/VBTLX/BND), which tracks a slight variation of this index – the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index.

In an Advisor Perspectives article, Eric Hickman compares the “Total US Bond” index (AGG) to a Treasury Bond-only index and finds that the overall returns are very similar for both, but Treasury bonds perform better during a market drop. Thus, he concludes that Treasury Bonds Are the Only Bonds You Need.

I wanted to save this chart that lists the returns of both AGG and Treasury bonds during the 10 largest S&P 500 drawdowns since 1976. He points out that 8 out of 10 times (and during all top 6 drawdowns), Treasury bonds outperformed the AGG index.

My personal takeaway was that both Total US and Treasury-Only did pretty well. Right now, AGG has ~42% in US Treasuries and 22% in US government mortgage-backed bonds. If you were a professional advisor or a really detailed DIY investor, then yes, there is an argument for Treasuries only. (Because they are all equally creditworthy, you could even build your own ladder of Treasury bonds with zero expense ratio.) But if you hold a “Total US Bond” fund inside your 401k or target retirement fund, I would still be satisfied that it has historically served its purpose as the safer “ballast” of your portfolio. Overall, I would definitely focus more on keeping your expense ratios low, as the numbers above don’t account for the deduction of fund expenses.

Fidelity Investments: Zero Expense Ratio Index Funds, Zero Account Fees

Fidelity Investments announced a bunch of “zero”-themed price and fee cuts across nearly all of their products:

  • Zero expense ratio mutual funds (two new Fidelity ZERO Index Funds)
  • Zero account minimums, zero account fees, zero domestic money movement fees
  • Zero investment minimums on Fidelity retail and advisor mutual funds and 529 plans
  • Lower expense ratios on many existing Fidelity index mutual funds

Fidelity ZERO Total Market Index Fund and (FZROX) and Fidelity ZERO International Index Fund (FZILX). These have zero expense ratio. Not nearly zero like 0.03%, but 0.00%. This was made possible partially because Fidelity is “self-indexing” and not paying any licensing fees to a 3rd party provider like the S&P 500.

  • Fidelity ZERO Total Market Index Fund and (FZROX) tracks the total US stock market, and is supposed to be comparable to the Vanguard Total Stock Market Index Fund (VTSMX) and the Schwab Total Stock Market Index Fund (SWTSX).
  • Fidelity ZERO International Index Fund (FZILX) tracks the total international stock market including foreign developed and emerging stocks. It’s supposed to compare with the Vanguard FTSE All- World, Ex-U.S. Index Fund (VFWIX) and Schwab International Index Fund (SWISX). I like that FZILX includes emerging markets. VFWIX does too, but SWISX does not include emerging markets.

More info on Fidelity index funds.

Zero minimums, zero account fees, domestic money movement fees. There is now no minimum amount required to open an account, buy a mutual fund, or maintain any account at Fidelity. Some of the account fees are nice to see gone as I have been dinged by them from other brokerages. For example: account transfer out fee, IRA closure fee, domestic bank wire fee.

Zero investment minimums. If you want to put $5 in a mutual fund, now you can. They want to get rid of all barriers to entry.

Notably, their trade commissions are holding steady at $4.95 a trade. They still have $0 commissions on select iShares and Fidelity ETFs.

Access to lowest-price share class. Although it didn’t fit neatly into their “zero” theme, another big move was that now all investors will get the lowest priced share class available. In the past, if you only put in $5,000 you might pay one price, and if you had $1,000,000 then you’d get a lower price. Vanguard still does this with their Investor and Admiral share classes. Now, everyone will get the lowest price regardless. Fidelity says the average asset-weighted annual expense across Fidelity’s stock and bond index funds will decrease by 35%, with expense ratios as low as 0.015%.

Bottom line. Fidelity just announced a big round of price cuts that basically shout “We’re cheap too!!” They added two new index funds with zero expense ratios, and they got rid of nearly all their account fees and minimum investments. This comes after Vanguard’s “all ETFs trade free with us” announcement and Schwab’s streak of “we have cheap ETFs” TV commercials.

Are You Worried About Investing at an All-Time Market High?

Maybe folks are worried about the yield curve, maybe it’s the political drama, or maybe they just feel it in their bones – I’ve been getting more questions about if I think now is still a good time to invest.

Well, here are some articles that may help you feel better:

What if You Only Invested at Market Peaks? by Ben Carlson. What if you were so unlucky as to invest only at the following market peaks (and suffering the subsequent drops)? As long as you kept on saving your money (putting it in cash when not at a market peak), and not selling at all, you would have actually done fine.

Meet Bob.
Bob is the world’s worst market timer.
What follows is Bob’s tale of terrible timing of his stock purchases.

Should You Invest (Or Wait) When The Stock Market Is At An All-Time-High? at Engaging-Data.com. Here is another interesting interactive tool that lets you pick any subsequent time period and see how the distribution of future returns compared if you invested at an all-time high (ATH) during that period. The market tends to spend a lot of time near all-time highs.

The key takeaway is that in the past several generations of investing, the market has done well and most of the time, the market is within 5% of its ATH. If you waited for a large dip to invest, you could be waiting for a long time and you would have missed out on a large amount of the gains.

Finally, here’s an older post to consider: The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown.

Zero to $1 Million in 14 Years: Maxing Out 401k and IRAs from 2004-2017

Like many others, I had a vague goal of $1 million net worth in my 20s. It’s easy to find a theoretical path a million. For example, $750 per month earning 8% returns for 30 years with get you there. Doing the actual earning, saving and investing is the hard part. It gets even harder during a bear market when your money feels like it is burning up in flames.

On the list of “Things I Would Tell My Younger Self”, I would include “Be patient and keep saving. You’ll get there.” Or by changing up the phrase “Always Be Closing” popularized in Glengarry Glen Ross – “Always Be Contributing” (ABC). One of the major benefits of writing this blog was keeping my focus on this path.

This is how a real couple could have gone from zero to $1 million from 2004 to 2017. My spouse and I both had our first full year of full-time jobs in 2004. From 2004 to 2017, we contributed the maximum allowable limit to both of our 401k and IRAs each year. The contribution limits rose gradually over the years. (Company match is not included here.) We invested our money in low-cost index Vanguard funds – mostly stocks with a little bonds – which can be closely approximated by the Vanguard Target Retirement 2045 fund (ticker VTIVX). This fund had its share of ups and downs with the market. It crashed a lot in 2008 and 2009. It went back up a lot afterward. We just kept contributing and buying each year.

Using Morningstar tools, I found the final amount today if the limit was invested on January 1st of each year. For example, if both of us invested $16,000 in Vanguard Target Retirement 2045 at the beginning of 2004 ($13k + $3k), that investment would now be worth $104,144 as of June 30, 2018. And so on for each subsequent year. As you can see, if you add all the years up, you would reach over $500,000 for an individual and over $1,000,000 for a couple:

These numbers won’t be the same across other time periods, but they do represent a real-world experience. I’ve done a variation of this before in What If You Invested $10,000 Every Year For the Last 10 Years? 2008-2017 Edition.

According to Vanguard, 13% of their plan participants maxed out their 401k plans in 2017. 58% of participants had their entire account balance invested in a single target-date fund or similar managed allocation.

Bottom line. A real couple that started saving as 26-year-olds in 2004 and maxing out both their 401k and IRA plans each year could have reached $1 million by age 40 in 2018. All with a simple Vanguard Target Retirement index fund. This requires a lot of steady saving, but the important part is that it required no special investment skill. You didn’t need to recognize bubbles. You didn’t need to time bottoms. You didn’t need a fancy asset allocation, estimate future cashflows, understand price/book ratios, or even rebalance. Always be contributing.

My Money Blog Portfolio Asset Allocation, July 2018

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Here’s my quarterly portfolio update for Q2 2018. These are my real-world holdings and includes 401k/403b/IRAs and taxable brokerage accounts but excludes our house, cash reserves, and a few side investments. The goal of this portfolio is to create enough income to cover our regular household expenses. As of 2018, we are “semi-retired” and spending some of the dividends and interest from this portfolio.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my accounts, tracks my balances, calculates my performance, and gives me a rough asset allocation. I still use my custom Rebalancing Spreadsheet (free, instructions) because it tells me where and how much I need to direct new money to rebalance back towards my target asset allocation.

Here is my portfolio performance for the year and rough asset allocation (real estate is under alternatives), according to Personal Capital:

Here is my more specific asset allocation, according to my custom spreadsheet:

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I personally believe that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than US Large/Total and International Large/Total, although I could be wrong. I don’t hold commodities, gold, or bitcoin as they don’t provide any income and I don’t believe they’ll outpace inflation significantly.

I think it’s important to imagine an asset class doing poorly for a long time, with bad news constantly surround it, and only hold the ones where you still think you can maintain faith.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Real-world asset allocation details. No major changes from the last quarterly update. For both simplicity and cost reasons, I am no longer buying DES/DGS and will be phasing them out whenever there are tax-loss harvesting opportunities. New money is going into the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO).

My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I am still pondering going back to US Treasuries due to changes in relative interest rates and our marginal income tax rate. Issues with high-quality muni bonds are unlikely, but still a bit more likely than US Treasuries.

The stock/bond split is currently at 70% stocks/30% bonds. Once a quarter, I reinvest any accumulated dividends and interest that were not spent. I don’t use automatic dividend reinvestment. Looks like we need to buy more bonds and emerging markets stocks.

Performance and commentary. According to Personal Capital, my portfolio has basically broken even so far in 2018 (+1.5% YTD). I see that during the same period the S&P 500 has gained 6.5% (excludes dividends) and the US Aggregate bond index lost 1.7%. My portfolio is relatively heavy in international stocks which have done worse than US stocks so far this year.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +2.8% YTD (as of 7/25/18).

As usual, I’ll share about more about the income aspect in a separate post.

Vanguard How America Saves 2018: How Does Your 401k Compare?

Vanguard recently released How America Saves 2018 report [PDF], which looks at the nearly 5 million 401k, 403b, and other defined-contribution retirement plans that they service. If you are curious about how your 401k stats compare with others, there is a great deal of information in this report. Here are a few quick stats based on 2017 data:

  • Average aggregate contribution rate amongst participants was 10.3% (employer and employee total).
  • Average maximum “employer match” contribution was 7% of income. Nearly 2/3rds of participants received the maximum employer match.
  • Average employee contribution was 6.8% of income.
  • Maxing out. 13% of participants saved the maximum annual amount of $18,000 ($24,000 age 50+) for 2017.
  • Average account balance was $103,866; the median balance was $26,331. A small number of plans with very high balances skews this often-quoted average upward.
  • Target-date funds. 58% of participants had their entire account balance invested in a single target-date fund or similar managed allocation. In other words, 58% let someone else pick their portfolio.
  • Automatic enrollment. Plans with automatic enrollment have a 92% participation rate.
  • Withdrawals and rollovers. About 1/3rd of participants could have cashed out their balance (with taxes and penalties) because they switched jobs. 84% of those folks kept their money in retirement plans. In terms of assets, 98% of all plan assets available for distribution were preserved and only 2% were taken in cash.
  • Loans. 15% of participants had a loan outstanding at year-end 2017.

These numbers don’t tell the entire story, as the average includes workers across different age groups, income levels, job tenures, and so on.

Longleaf Partners Funds: Reasons To Buy Higher-Cost, Concentrated, Actively-Managed Mutual Funds

I can’t recall the exact source or quote, but I read something along the lines of this in a forum recently:

We don’t really want to hear other people’s opinions. We want to hear our own opinions out of other people’s mouths.

In other words, confirmation bias:


(source: Chainsawsuit.com)

The majority of my portfolio is in low-cost, diversified, passive-managed mutual funds. In order to hear a different take, I read the shareholder letters of Longleaf Partners Funds (Southeastern Asset Management), which are respectable examples of higher-cost, concentrated, actively-managed mutual funds. The managers “eat their own cooking”, meaning they put a substantial portion of their personal net worth into the funds. They have a limited number of holdings, try to avoid asset bloat, and try to outline their positions in shareholder letters.

In their most recent 2nd Quarter 2018 letter [pdf], they share a presentation that explains their position:

Why We Believe Active Long-Term Value Investing in Common Stocks Will Actually Work
Active investing is out of favor; long-term investing (or really, long-term anything) is out of favor; value investing as we practice it is out of favor; and, investing in common stocks is out of favor compared to private equity. Doing all four of these things really makes us the skunk at the party.

Many have given up on active, long-term, engaged value investing in public equities just at the point when we believe it offers the best risk/reward proposition. Indexing’s multi-year momentum has pushed more assets into fewer stocks because they have gone up and left behind an expanding universe of highly competitive, well-governed and managed businesses with unique advantages that are materially underpriced in their publicly traded securities.

They make several interesting points, including the high amount of “closet indexers” out there. (Haven’t there always been a lot of closet indexers though?) I tried to see things from their perspective, but in the end I think their 1% expense ratio is just too high to overcome. It will definitely take a bear market for their performance gap to narrow.

In the meantime, their real problem is that poor relative performance. For every $10,000 invested in their flagship Partners fund 10 years ago, you would have about $18,000 today. If you had put it in a low-cost S&P 500 index fund, you would have about $27,000 today. That’s the difference between 6% and 10% annualized returns over the last 10 years. The extra drag from their ~1% expense ratio accounts for about a quarter of the performance gap.

Longleaf Partners Fund very well might turn things back around. I have no position in any of their funds, but I’ll keep reading their free shareholder letters and watch them try their best to play a very difficult game.

Retirement: Start Saving Regularly, Even If You Start Small

T. Rowe Price has a brochure The Benefit of Saving Regularly For Retirement [pdf] which has the common advice that you target saving at least 15% of your gross income each year to prepare for retirement. Of course, the earlier you start, the better. The added wrinkle here is that they offer an alternative route if you find 15% a stretch when you are young.

In their simulation, if you start saving at age 25 at a 6% rate and increase it 1% each year until you reach 15% (and then stay at 15%), you’ll actually come out ahead of someone who starts saving at age 30 at a 15% rate. You’ll even do okay if you start at age 30 at a 6% savings rate and increase it 2% a year until your reach 15% (and then stay at 15%). The two big takeaways are (1} start, even if small and (2) bump up your savings even if just a little by banking some of your raises each year.

The assumptions made seemed largely reasonable:

Examples beginning at age 25 assume a beginning salary of $40,000 escalated 5% a year to age 45 then 3% a year to age 65. Examples beginning at age 30 assume a beginning salary of $50,000 escalated 5% a year to age 45 then 3% a year to age 65. Example beginning at age 40 assumes a beginning salary of $80,000 escalated 5% a year to age 45 then 3% a year to age 65. Annual rate of return is 7%. All savings are assumed tax-deferred. Multiple of ending salary saved divides final ending portfolio balance by ending salary at age 65.

Bottom line. Start saving regularly, no matter the amount. Even if you feel like you can’t save 10% or 20% or whatever you read somewhere, just should start as soon as possible with a smaller number. After a year, try to increase your savings rate by 1% or 2%. Repeat each year. This can help minimize how much you “feel” the savings, while still ending up with a healthy nest egg. Build the habit.

Vanguard Will Offer Commission-Free Trades on All ETFs (Including iShares, Fidelity, Schwab, Etc)

Vanguard made a splash last week when it announced that it will offer commission-free trades on all ETFs in it brokerage accounts. Vanguard ETFs had been free to trade already. Starting in August, they will add nearly 1,800 ETFs from competitors including Blackrock (iShares), Schwab, State Street (SPDR), Powershares, WisdomTree, etc. Also see WSJ article (paywall?).

Pros. It is now cheaper to keep all my assets in only Vanguard accounts. In the past, if I wanted to buy a WisdomTree ETF, I might have held it in external account for cheaper trades. I could buy a Schwab ETF if that flavor is a lot cheaper. I could do some tax-loss harvesting in the same account. Simplicity and convenience are good. (Although, some would argue that it isn’t a bad idea to spread your money across different brokerage custodians.)

This is a bold move meant to disrupt the more limited commission-free ETF lists from other providers including TD Ameritrade, Schwab, and Fidelity. None of their lists include Vanguard ETFs, yet now Vanguard will include all of them. How will this change the competitive landscape? Will others move to match this “deal”?

Cons. Basically… who’s paying for this? Vanguard is known historically for being the “at cost” choice. They paid their employees, did their work, and then charged you what it cost to run the fund. There was no extra profit component for public or private shareholders. You had confidence that when they lowered their expense ratios, that would be a long-term move. Vanguard has never given out big sign-up bonuses or paid for the naming rights of “Vanguard Arena”.

However, in my opinion this move brings them closer to their competitors where they lose money on marketing and promotions and then have to cover that cost by charging a little extra on other things. Vanguard has already increased their ad budget significantly in recent years. I estimate the cost of a stock trade at about $2 per trade. That’s close to what the leanest, high-volume competitors charge when they can’t offset the trade costs with other revenue sources. So basically Vanguard is “paying” $2 a trade and hopefully offsetting that cost somewhere else. This must add up (especially for active traders), otherwise Schwab or TD Ameritrade would have already offer it. Instead, they charge for access to their no-transaction-free platforms.

As a supposed “owner-investor” in Vanguard, I was never asked my opinion on this. Vanguard is basically saying that growth of assets is good for everyone, don’t worry that the money to pay for these trades has to come from your Vanguard ETF and mutual fund holdings. As long as expense ratios only go downward, I suspect nobody will push back too hard.

Vanguard is also heavily pushing their Personal Advisory Services (PAS) at 0.30% of assets. How does the money flow between PAS and their ETFs? If PAS makes more money, does it help lower the expense ratios on my Total Stock Market ETF shares? It’s not very transparent.

In the end, you have to trust that Vanguard is still working for the good of their investors, and not just growing and accumulating a lot of well-paid executives and management. (Owner-investors also don’t know anyone’s salary at Vanguard.) As someone who has seen this sort of more-more-more philosophy in “non-profit” healthcare institutions, I am a little worried. I hope I’m wrong, and this move won’t cost Vanguard investors very much while making ETFs cheaper overall.

Reminder: Don’t Put Too Much Employer Stock Into Your 401(k)

Every time a large corporation stumbles, you will see something along these lines: Having Too Much Employer Stock in Your 401(k) Is Dangerous. That doesn’t prevent it from being solid advice. The best advice bears repeating.

Why? If your retirement savings are heavily concentrated in your employer stock, you human capital and your investment capital are directly linked. If your company falters, then you can lose both your job and your retirement security. Past examples include Enron, MCI Worldcom, and Tyco. Remember that any individual stock can go to zero.

In a large, multinational corporation, even a mid-level executive simply won’t affect the bottom line that much. You could be doing a great job, but what if the top brass commits fraud, takes on too much debt, or otherwise mismanages the company.

This time around, it is General Electric (GE). Per Morningstar data, $100,000 invested in GE stock on January 1st, 2017 would be about $47,000 today. Over the same period, $100,000 invested in a S&P 500 index fund would be about $124,000. That’s a gap of over $75,000 on a starting balance of $100,000. GE may recover eventually, but even that won’t help a retiree who needs the money now.

The Fortune article provides a list of other large company 401(k) plans that have heavy allocations to their own stock. Some of these are highly-respected companies, but then again so was GE.

  • Sherwin Williams (62%)
  • Colgate Palmolive (56%)
  • Exxon Mobil (54%)
  • Lowe’s Home Improvement (50%)
  • PACCAR (50%)
  • Dillard’s Department Stores (48%)
  • Chevron (44%)
  • McDonalds (39%)
  • Costco (38%)
  • Cerner (37%)

In my opinion, things are different if you are a majority owner of a small, private business. Yes, you also have a lot of eggs in one basket, but you directly control that basket! In addition, your upside could be much, much greater.

Consider that Vanguard charges money for financial advice through their Vanguard Managed Account Program (VMAP). When they analyzed the before-and-after results from actual participants, they found that their biggest impact was simply helping people reduce their exposure to company stock. They found that 12% of participants initially had a concentrated position of 20% or more in employer stock.

If you’re reading this, you can implement this advice for free! Do not invest more than 10% of your 401(k) plan in company stock. Consider reallocating funds into a low-cost, diversified index fund or other similar alternative. (Companies themselves are not allowed to exceed 10% in company stock for pension plans.)