Why Vanguard Is Essential to My Investing Strategy

Why Vanguard Is Essential to My Investing Strategy
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I'm a big fan of Vanguard as a place to house a brokerage account, a Roth IRA, or a variety of different accounts. Part of why Vanguard is a great option, in my opinion, is just how easy the accessibility of low-cost ETFs is through Vanguard, but it's also just a great place to start an investing journey.

Understanding The Challenges of Getting Started Investing

One of the elements of investing that I find hardest to overcome is the need for activation energy. In chemistry, this is the term for the initial burst that is needed to start a chemical reaction, but for me, when it comes to handling my money, there is a kind of activation energy needed to do anything different from what I’ve done before.

It would take, for instance, no energy at all to let my paycheck float to my checking account: I had to sign up for direct deposit when I got the job, so an automatic action brings my money to checking, where it earns no returns.

It would take a little energy to use my bank’s system to transfer to savings, but it’s a big jump for me to imagine how to invest in the stock and bond markets: how much research do I have to do? Do I have to meet or call a financial advisor? How do I make sure I’m not missing out on a good investment opportunity somewhere else?

These questions ​should​ prompt research, but for so many of us, they actually prompt apathy - me included! We let our money sit and do very little for us, even if we save it up.

Vanguard is essential for me because it provided me with a low-activation energy way to start investing. No, I probably won’t get the best returns in the market (people who do that are working on their investments a lot!) but I’ll outperform my bank account a lot, and over time, investing in low-cost index funds with Vanguard might even beat out more active forms of investing. That’s the key: put your money in for a long time and don’t mess with it much when you use Vanguard.

The Vanguard Advantage

Opening an account online with Vanguard is fairly simple, and they have made a name for themselves in the financial world because of their easy access to whole-market, low-cost index funds.

My understanding is that index funds, for the most part, rely on investing all over the market, not just in hand-selected stocks and bonds that are predicted to do well. Because our economy tends to grow over time, investing broadly means you’ll tend to have slightly more “winner” stocks than “loser” ones. Over time, this has proven an effective way to get strong gains in the market over the long term.

The difference between these index funds and actively-managed, or handpicked, mutual funds is often in something called the expense ratio. This is the percentage of your invested funds that the manager keeps for themselves as a fee for managing the fund.

Vanguard’s ratios are often very low, ​0.1%-0.6%​ for instance (they vary though). For actively managed funds, ​1%-1.5%​ isn’t uncommon, because there is someone specifically picking the stocks rather than investing throughout the market through an automatic or somewhat-automatic selection process.

So, let’s say that half your money is in actively-managed funds with a 1% expense ratio and the other half is in Vanguard index funds with a 0.25% ratio. If both offer a return of 7% in a year, you’ll actually have a 6.75% return on the index funds and a 6% return on the actively managed funds.

For a long time, the assumption was that the actively managed funds would boost your return, say to 8%, making the larger expense ratio worthwhile. However, decades of research show that most actively managed funds don’t outperform index funds - some do, but picking which ones will is much more difficult than you might think.

So Vanguard offered me a proven investing strategy that let me keep most of my yearly returns and not pay a lot of fees.

Other Vanguard Benefits: Adding Accounts

I began my Vanguard experience with a Roth IRA, which allows me to pay taxes now and use the money during retirement without paying taxes on it then. It’s particularly nice for low-income earners, since they pay a low marginal tax rate now.

Then, when I started a small business and wanted to sponsor a different kind of retirement plan for myself, a SEP IRA, it was easy to input my new information, deposit my money, and begin investing in the various index funds that Vanguard provided.

For both my Roth and SEP IRAs, I could look at the explanations of the funds available and select the ones that allowed for an investment minimum that I could afford, like $1,000, or for the ones with the lowest expense ratios.

Managing all of my retirement savings through a single account saves me time and makes me more likely to keep taking the time to add to my accounts.

Vanguard Shines for the Long-Term, Average Investor

I don’t move my money around much in my account; while I do try to invest a bit each month through a strategy called dollar-cost averaging, I mostly don’t try to put my money where the market is moving or time it to any particular event.

Vanguard shines as a place to park your money for decades to let it accumulate over time. If you look at it the day after a bad recession downturn, you’ll be scared because your money’s value will fall with the market.

However, the market tends to recover, and over time it trends upward. I have no advice at all about whether Vanguard is the best platform for more active investors who are researching and making adjustments to their portfolio frequently.

My experience with Vanguard has been as a way to make the baby-step from “letting money languish in a savings account” to “letting money accumulate for retirement in two retirement accounts.” Vanguard’s platform is much bigger than that, so it might also be a good place to explore as your interest in investing grows, but it’s particularly well-suited for average investors like me who just want to make sure our money has a job to do and that it can do it with fairly low risk over the long-term.