(Updated September 2024. If you’re wondering about the future of Vanguard, take note that they have been actively tinkering with their robo-advisor service, Vanguard Digital Advisor Services (VDAS). In June 2024, VDAS added the ability to include a spouse/partner in your plan, such that the portfolio is managed on a household level. In August 2024, VDAS started using fractional shares to invest every last dollar. In September 2024, they lowered the minimum requirement to $100 (formerly $3,000). I decided to wade through the 119-page Client Relationship Summary and VDAS/VPAS Brochure & Supplement again for the third time and completely re-write this review.)

Here are my notes on the robo-advisor service Vanguard Digital Advisor, current as of September 2024:

What is Vanguard Digital Advisor Here’s what they say:

In our robo discretionary offers we provide online financial planning tools designed to help you create a goal-based financial plan, and the service will create an investment strategy aligned with your personal inputs. We’ll monitor your enrolled accounts frequently using an algorithm. We’ll have full investment discretion in order to transact as necessary to align your account(s) with your goal(s).

My interpretation is that they will manage a portfolio of Vanguard ETFs for you based on your inputs into their website. There is also online software to help you create a financial plan towards multiple goals (i.e. they tell you how much you need to save each month). With VDAS, you don’t get access to a human advisor.

Types of Vanguard accounts available to be managed. VDAS can manage Vanguard 401(k) and the following retail accounts held at Vanguard Brokerage, (although you may need to sell your existing investments). They will consider all of the accounts together for purposes of tax-efficient asset location.

• Individual or joint tenants with rights of survivorship (JTWROS) taxable accounts.
• Traditional IRAs.
• Roth IRAs.
• Rollover IRAs.
• Inherited IRAs owned by natural, adult investors.
• Single-participant SEP-IRAs.

Their wording suggests that Vanguard will let you link other ineligible Vanguard account and external non-Vanguard account balances and include them into your long-term goal projections, but they won’t analyze their asset allocation and adjust your Vanguard asset allocation in response.

Existing outside portfolio? You will likely need to sell your existing investments if you want them to manage that money. VDAS wants a clean slate. They say they will analyze your existing holdings, including how much capital gains you have built up, and either recommend that you don’t sell them (but not enroll in VDAS), or sell them and enroll in VDAS where they will re-invest your funds for you.

Factors used to personalize your portfolio. The #1 competition for this product is probably Vanguard’s own series of Target Retirement Funds. Those are based on a goal retirement year, in 5 years increments, and now only cost 0.08% all-in for younger investors. So if you’re 25 years old, you basically have maybe 4-6 possible glide paths available.

In contrast, VDAS says they have “over 300 personalized glide paths” available. Here are the factors that they consider, based on their documentation:

• Taxable income/salary
• Anticipated spending needs
• Current savings/savings rate
• Risk attitude (Very Conservative, Conservative, Moderate, Aggressive and Very Aggressive)
• Current age
• Marital/partner status
• Expected retirement age
• Significant single-stock exposure

To be honest, I’m not sure how many users will end up with a vastly different glide path than one of the Target Retirement funds, especially considering they will most likely be constructed with the same four underlying ETFs that underpin them (more on that later). But if you have a unique situation, this personalization could be attractive.

Now available in 100% index, index/active mix, and ESG flavors. In addition to the original all-index portfolio, you can now also chose a (slightly more expensive) option that includes some actively-managed Vanguard funds or an all-index portfolio that has an environmental, social, and governance (“ESG”) filter.

But for most people picking the traditional 100% index option, your portfolio will consist of the “Four Totals”:

• Vanguard Total Stock Market ETF (VTI)
• Vanguard Total International Stock Market ETF (VXUS)
• Vanguard Total Bond Market ETF (BND)
• Vanguard Total International Bond ETF (BNDX)

As noted, these ETFs are simply different share classes of the exact same funds that underpin the Vanguard Target Retirement Funds.

Pricing and fees. How much does VDAS cost? VDAS has an all-in cost of 0.20% of assets managed annually for their all-index option, but that includes the cost of underlying ETFs. (I’m focusing on the all-index option here, there is a 0.25% all-in cost on their active/index mix option.) Your portfolio of ETFs will probably have their own expense ratio of ~0.05%, so the cost of VDAS itself will effectively be ~0.15%. That works out to $15 a year for every $10,000 invested.

In comparison, Vanguard Target Retirement Funds as of September 2024 have average expense ratios of only 0.08% all-in. The Vanguard Target Retirement Funds got a lot cheaper when finally switched to holidng Institutional shares of their underlying component funds instead of the most-expensive Investor shares. I thought that the gap between the costs would only narrow over time, but they kept the cost of VDAS the same for a gap of 0.12%.

As DIY person, I would remind folks that you can always buy the exact same four ETF building blocks at any low-cost broker (including Vanguard itself). That would make your all-in cost just the ~0.05%. However, DIY investors won’t have automatic rebalancing or automatic tax-loss harvesting.

If you have over $50,000 in assets, you can “upgrade” to Vanguard Personal Advisor Services (VPAS) where you can talk to humans for a higher all-in cost of 0.35% for the all-index option. However, I’m really not sure what actually VPAS has to offer beyond a human voice because they don’t appear to guarantee well-informed advice from a Certified Financial Planner or anything. Essentially, you seem to get some additional hand-holding from a rep who is familiar with the software.

If you have over $500,000 in assets, you can upgrade again to Personal Advisor Select, which does include a dedicated CFP. This costs a flat advisory fee of 0.30% annually (on top of the expense ratio from investments). This might actually be worth the upgrade for those that start with VDAS but over time their financial situation becomes more complicated.

Automated rebalancing: VDAS will check daily and rebalance within 5% bands. Rebalancing will be done in a tax-sensitive manner. Here’s the official text:

On each day that the markets are open for trading, we will typically look to assess Portfolios for whether a rebalancing opportunity exists consistent with our investment strategy and the following criteria (“Rebalance”). Under normal circumstances, if any asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%, the Portfolio will be rebalanced to its target allocations (asset and sub?asset) or, in the future, within allowable guardrails pending embedded tax cost.

I believe that automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t. It’s hard to assess the benefit in terms of excess performance, because you are really adjusting risk and any “rebalancing bonus” tends to come and go depending on the historical period.

Automated tax loss harvesting (TLH). VDAS includes tax-loss harvesting on taxable brokerage accounts. This is the practice of selling equity ETFs at a loss to “harvest” them and replacing them with similar securities to maintain market exposure. If done correctly, this can improve your after-tax return. They will now consider the tax effects across an entire household (when filing joint tax returns). Here is their language:

The Services offer a tax loss harvesting service (“TLH Service”) election for taxable individual and joint brokerage accounts. TLH involves selling a security at a loss and purchasing another security to maintain your asset allocation. Depending on your personal circumstances, a TLH strategy can add value in the form of reduced taxes when harvested losses are used to lower your tax bill and potentially grow your savings if you are able to reinvest those tax savings. For Enhanced Households the TLH Service applies to all eligible Enrolled Accounts in the Portfolio.

From their other documents, Vanguard performs their TLH using only other Vanguard ETFs as the “surrogate” ETF pair to claim the loss but also avoid wash sale rules.

The actual benefit of tax-loss harvesting can vary widely based on individual factors. Most importantly, how much of your portfolio is actually in taxable accounts, and how much of that is stocks? Not to mention, TLH can actually lower your return in certain situations by deferring the tax bill to a future period when your tax rate is higher. This is complicated topic with no single answer. TLH could be a net positive, though, that helps offset the VDAS fee and maybe even then some.

Multiple goal support. VDAS now supports multiple goals in its software. For example, you might have a house downpayment as a short-term goal and retirement as a long-term goal.

Fractional shares of ETFs now included. This is a new feature that they basically had to add if since they wanted to lower the minimum balance to $100. Otherwise, there would be no point as VTI is over $250 for a single share.

My take. Vanguard is obviously focusing a good deal of their energy on Digital Advisor, and I think this is probably a smart move for them. The Vanguard ETFs themselves continue to be well-run and cheap, but I believe their “at-cost” structure has incentivized Vanguard to minimize customer service costs at their in-house brokerage and instead quietly push folks to hold Vanguard ETFs at outside brokers (it’s cheaper for them this way). However, Digital Advisor allows them to charge another layer of fees for management services, hopefully justifying and paying for better service for those customers. If they can keep improving this product technology while also lowering the price as it scales, I believe it can grow in popularity.

US stock returns have been doing quite well, and my brokerage statement numbers keep going up. Should I be worried? Here are some ways that people try to measure whether stock valuations are cheap or expensive, along with some current numbers as of September 2024.

Quick background. Value is often said to be “what you pay” versus “what you get”. For the stock market, you divide price by earnings and get the “P/E ratio”. If a business costs $100 a share and that share earns $100 in profit every year, you get a P/E ratio of 1, which is usually considered very cheap. If another business at the same price earns only $1 per share every year, you get a P/E ratio of 100, which is usually considered very expensive. The inverse of P/E ratio is earnings yield, for example a P/E ratio of 100 is the same as an earnings yield of 1% (1/100).

Cyclically-Adjusted Earnings Yield vs. TIPS yield. CAPE stands for cyclically-adjusted price-to-earnings ratio, which basically means you use the average earnings over the last 10 years to smooth things out. Some call it PE10, or Shiller PE after Professor Robert Shiller who popularized it. This WSJ article Markets Are Way Out of Line With Reality, According to These Measures (archive) offers some nice charts about CAPE and other valuation methods. As you can see, the CAPE is pretty high right now.

I’m currently reading The Missing Billionaires: A Guide to Better Financial Decisions and they also use the CAPE and it’s inverse to offer a prediction of the future real return of the stock market:

The most popular metric for estimating the expected return of a broad stock market is known as Shiller’s cyclically adjusted price-to-earnings ratio (CAPE).a When the CAPE ratio is high, investors are paying a high price for a normalized stream of earnings, and the prospective return of the stock market is low. This finding makes logical and intuitive sense and is borne out in historical data over a long horizon.

[…] We can say something still more specific and powerful: 1/CAPE is a pretty good, though imperfect, predictor of the inflation-adjusted (i.e., real) return of the stock market over a long horizon. The measure 1/CAPE is known as the cyclically adjusted earnings yield (we’ll often shorten to “earnings yield”) because it’s calculated as earnings divided by price. If you invest in the stock market when the earnings yield is 6%, your best expectation is that you’ll earn a long-term return (after inflation) of 6%.

Here is their evidence, taken from the book:

For example, if the CAPE is 35 as of this writing, that means the cyclically-adjusted earnings yield is roughly 2.9%. That means they predict the long-term real return of the S&P 500 to ~3% as of this writing.

As a form of comparison, they suggest looking at the current real yield of TIPS: 1.7% real yield for the 10-year TIPS and 2% real yield for the 30-year TIPS. The gap between the predicted equity return and that of a “risk-free” bond is known as the (one version of) the equity risk premium (ERP). A 1% ERP is historically pretty low, but at least it is positive!

Fed Model: Current Earnings Yield vs. 10-Year Treasury Yield. Another valuation model from the WSJ article is the Fed Model, which usually takes the current P/E ratio (price divided by expected forward earnings or earnings over the last 12 months) and compares it against the traditional, nominal 10-year Treasury yield:

The Fed Model, named by strategist Ed Yardeni in the late 1990s, attempts to compare stocks with bonds by comparing the earnings yield, or earnings per share divided by price, with bond yields. It is widely used to work out whether stocks are expensive or cheap compared with the safer alternative, Treasurys. At the moment, the Fed Model suggests they are very expensive indeed. They were even more expensive a month ago, before 10-year yields fell sharply, when the S&P 500 was the most expensive relative to bonds since 2002.

You can read some criticisms of the Fed model as a predictive measure on its Wikipedia page.

Using either valuation model, you can see that the prices of US stocks relative to their earnings is high according to historical standards. Turning this observation to action is much harder. When should you jump out? When should you jump back in? How high is too high? According to the timing models suggested in The Missing Billionaires book, right now they would be only about 20% equities. I simply don’t have the confidence in the historical back-tested data to make such drastic moves in my own portfolio. My only “skill” is the lazy tendency to do nothing and letting time work things out.

Morningstar recently released its 2024 Target-Date Strategy Landscape Report (free download with e-mail address). This is mostly targeted at industry professionals as opposed to individual investors, but I still like to read through it each year. Here are a few selected charts and quick takeaways from the report.

Our annual report on target-date strategies delves into the landscape by analyzing target-date flows, asset composition, fees, strategy performance, and more.

Average Asset Allocation Glide Paths. I always like to look at the average asset allocation glide path across all of the different TDFs. Morningstar now separates the them into “To Retirement” and “Through Retirement” types, depending on if they stop changing right at the retirement date or not. On average, most TDFs have an asset allocation close to 90% equity and 10% bonds in the early years, with the equity percentage dropping (and bond percentage rising) as time goes on. At the year of retirement, the average asset allocation is roughly 40% to 50% equity.

Here are all of the TDFs rated Gold by Morningstar. Vanguard, which is the largest by asset size, was rated Silver. Morningstar didn’t really explain very clearly why Vanguard only got Silver alongside some pretty mediocre funds like the original Fidelity Freedom series (not Freedom Index).

But really, the most important factor is whether you are invested and “in the game” or not. The differences between different TDFs are relatively small these days. Most of us can’t change the TDF series that is offered in our 401k plan. We can’t control the returns of those TDFs, either.

Here is a comparison of the returns from 2055 Target Date Funds (younger investors that have 30 years until retirement). I don’t see a huge dispersion in the returns. Higher is always preferred of course, but the same TDF that had returns ranked 89th one year was then ranked 9th the next year.

Here is a comparison of the returns from 2025 Target Date Funds (older investors very close to retirement). The same TDF that had returns ranked 83rd one year was ranked 11th the next year.

I remain a fan of TDFs in general. Most are good nowadays. As DIY investors, the most important decision is to participate in the stock market returns and try to maximize our contributions. The rest is much less important. Over the long run, TDFs have created a lot of wealth for consistent savers.

Vanguard recently released the 2024 edition of their annual How America Saves report, a detailed, 113-page report targeted at industry professionals which looks across millions of their 401k, 403b, and similar defined-contribution retirement plans. Personal finance geeks rejoice! Here are a few select bits that caught my eye.

Median employee contribution rate was 6.2%. Median means that half of people were saving more, while half were saving less. This out of all participants. Average is weighted more by absolute dollar savings. The overall historical trend is rising slowly.

Median total contribution rate was 11%, which includes employer match. Nearly everyone gets some sort of employer match The overall historical trend is also rising slowly.

How much does Vanguard think we should be saving? Vanguard believes that if your income is under $50,000, you should be saving at least 9% total. If your income is $50k to $100k, you should be saving at least 12% total. If your income is over $100k, you should be saving at least 15% total.

About half of workers are “saving effectively” according this definition.

What about the “Super Savers”? Overall, 14% of participants saved the maximum allowed tax-advantaged amount in 2023. Maxing it out was very rare at less than 100k income levels. 53% of those with incomes of $150,000+ maxed out their contributions. Here is the full breakdown by income:

More are going beyond the traditional “maxing out the 401k. Interestingly, 9% of participants used the after-tax contribution option if it was available. 23% of those with incomes of $150,000+ maxed out used this option. I am assuming that many of these people are going for the “Mega Backdoor Roth”.

Asset allocation. This chart shows the trends in asset allocation as the participants age. The increased use of Target-Date Funds (TDFs) and other professional management options has changed it so that young people are less and less likely to hold cash. Asset allocations are becoming more uniform and aligned with TDFs in general.

If you’d like a little bit of comfort as a long-term owner of stocks, check out this chart from Ben Carlson at A Wealth of Common Sense. He looks at every rolling 22-year period (based on a reader request) between 1926 to 2023, and finds that the minimum return during any 22-year period is still 1.4% above inflation. The average is a pretty impressive 7.2% above inflation.

Another interesting takeaway from this chart is that the enemy of after-inflation returns is not necessarily an intensely traumatic event like the Great Depression or World War II or the Great Financial/Housing Crisis, but also an extended period of high inflation. The worst real return period was around the 1970s:

Surprisingly, the worst 22 year period for real returns was not in the aftermath of the Great Depression but rather in the 1970s. The two-plus decade real return ending in the summer of 1982 was just 1.4% per year. That time frame featured an annual inflation rate of nearly 6% which is a high hurdle rate to beat.

Here is the a similar chart, but not adjusted for inflation.

Vanguard recently announced that they are selling their individual 401(k), multiple-participant SEP, and SIMPLE IRA plan business to Ascensus (press release). They’ve already updated their small business retirement plan page. One-person SEP IRAs will stay at Vanguard.

Ascensus will provide custodial and trustee services, recordkeeping, client servicing, transaction processing, tax reporting, and other services, and plan participants will retain access to a diverse lineup of Vanguard mutual funds via the Ascensus platform.

This will affect a lot of small business owners who previously chose to open a Traditional Pre-Tax and/or Roth Solo 401k plan directly with Vanguard. The new stated fee schedule includes a $20 annual fee per Vanguard fund per account holder in the Individual(k) plan and a $20 annual fee per participant for custodial services. I believe the previous fee schedule was just the $20 annual fee per Vanguard fund per account holder, but it was waived if at least one participant had at least $50,000 in qualifying Vanguard assets.

I also find this move interesting in the context of the Vanguard company as a whole. This same week, Fidelity continued moving gradually towards being an “all-in-one” financial marketplace, recently adding a high-yield sweep option to their full-featured Cash Management Account. (I will note though, Fidelity does directly not offer a Roth Solo 401k option!) Fidelity is competing directly with the fintechs like Robinhood and SoFi that also want to be everything finance.

Meanwhile, Vanguard already shut down their own Cash Management option, VanguardAdvantage, in 2019. They made their Admiral Shares mutual funds more expensive than their ETF equivalents (they were initially the same expense ratio), which removed a major incentive to use a Vanguard brokerage account (as most other brokers won’t let you trade Vanguard Admiral mutual funds). There isn’t much reason to hold Vanguard ETFs inside a Vanguard brokerage account now that everyone has commission-free trades, and Vanguard seems perfectly fine with that. Now, they are no longer going to service their past Solo 401(k) clients, whether they wanted to stay with Vanguard or not.

Vanguard definitely seems to be narrowing their focus towards offering investment products like ETFs and mutual funds and simple investment advice. They appear happy to move away from anything that requires high-touch customer interaction like phone calls and paperwork. (I would note that my more recent customer service interactions with Vanguard have been more positive with lower hold times.) This is not necessarily a bad thing, especially if it leaves more resources for their other customers, but definitely a different direction than others.