Investing feels intimating to most people. It conjures up images of complex financial models and jargons that normal people don’t understand. Enter your solution – Vanguard’s VTSAX!
When I started in my investing journey, I was overwhelmed by all the options out there – How do I find winning stocks? Can I research the best companies to invest in? What is a mutual fund and why are there so many of them??
What if I was to tell you there was just ONE FUND that you need to know when it comes to investing? That this one fund will not only help you effectively grow your net worth but will outperform majority of actively managed funds and single stocks out there!?
VTSAX – The ONE FUND to rule them all!
In this blog post, I want to share with you our one stop investment – the Vanguard’s VTSAX Index Fund that has helped us reach financial security and continues to grow our net worth.
1 - Who is Vanguard?
If you’ve read any of my other articles, you know that I’m a big fan of Vanguard and their products. My two primary reasons are due to the company’s incentive structure and their specialization in high quality index funds.
Jack Bogle founded Vanguard in 1975. When he started the company he created it with a quite unique structure – a company that is client owned and operated at-cost.
Unique Company Structure – Most companies have different stakeholders that they serve. If it is a publicly traded company, it needs to serve its shareholders as well as the customers that it sells its products to.
If it is a private company, it needs to serve its owner as well as its customers. It must create value to both groups. If things are going well, this is not a problem. Customers get the widget they want at a good value and the shareholders get the profit they’ve been expecting.
However, when times are tough, we see the tension that this model can create. In the case of investment companies, in order to create more profit for the owner or the shareholders, we often see them passing those expenses to the customers with higher fees.
Vanguard on the other hand has a model where because the investors of funds (the customers) are also the owners of Vanguard, everyone’s interest aligns perfectly.
Pioneers of Index Fund – Vanguard is also the pioneer of low cost index funds. In 1976, Jack Bogle launched the world’s first index fund, the S&P index, and this concept of index fund has really taken a hold of mainstream investing in the last few decades.
These days almost all major investment firms offer some variation of index funds; Fidelity, Schwab, etc. However given the aligned company incentive structure and the consistent low expense ratios, Vanguard is still my number one investment firm.
2 - What is VTSAX Index Fund?
VTSAX is Vanguard’s Total Stock Market Index Fund.
Ok you are probably asking – What does that mean?? It may sound complicated but don’t let fancy name intimidate you.
Represents All Publicly Traded Companies in the US – Just know that it is an index of every publicly traded company in the United States. At the time of this writing, there are approximately 3,700 companies being represented in this fund.
In essence, by purchasing a share of VTSAX you are essentially buying a piece of every publicly traded company in the US.
Market, thus the Index Normally Goes Up – Since the recession of 2009, the market has done fairly well. In the last 10 years, VTSAX has had an average return of almost 15% annually!
That means that if you had invested $1,000 ten years ago, it would have grown to over $4,000 from just the compounding growth alone – 4x your original investment and you did nothing except invested in VTSAX.
The Fund is Self Cleansing – Because all companies are working hard to create value for its shareholders, there is endless upward potential for the stocks to go up. Who could have imagined Amazon or Facebook to have gotten as big as they have?
However, the lowest a company can go is $0. It can’t fall any further. When a company fails, it will go bankrupt and disappear essentially making its stock price $0. But there are always hundreds of new companies coming into take the reign.
Sounds cool huh? How many of your friends can say they own a piece of every publicly traded company in the US and are able to tap into the phenomenal growth of the stock market to grow their wealth??
3 - Is VTSAX Index Fund Better Than Buying Single Stocks?
The simple answer – YES.
Jack Bogle, the founder of Vanguard had a great quote about beating the market.
“I’ve been in the business 61 years and I can’t do it. I’ve never met anybody who can do it. I’ve never met anybody who’s met anybody who can do it.” – Jack Bogle
People naturally think they are smarter than they actually are. I have a big problem in this area – and my wife has to put me in my place daily. God bless her.
We think we can easily spot good companies from the bad ones.
“Oh my God, Tesla is the future! It’s no brainer you should buy Tesla stocks!”
But the reality is no one knows. The rising star today could become bankrupt tomorrow and the lackluster company today could become the industry standard in the future.
Anyone remember Blockbuster? Or how about Circuit City? And people forget that Apple actually went through a pretty rough patch in the 90s.
If you can’t pick winning stocks, the best bet is to bet on the whole market.
Buy VTSAX and hold them forever.
4 - Is VTSAX Index Fund Better Than Actively Managed Mutual Funds?
Another simple answer – YES.
When you read big newspapers or magazines dedicated to financial advice, they oftentimes list the ‘top mutual funds,’ or ‘the top performing mutual funds of the year.’
And if you read further, the article goes onto explain how this amazing fund manager was able to produce ridiculous returns on his or her fund year after year.
However, what it forgets to mention is how expensive these active managers are. And the way they pay for these expensive managers are by charging the investor outrageous fees.
Actively Managed Funds Charge Outrageous Expense Ratios – You can easily compare these expenses by looking at the ‘expense ratio.’
Expense ratio is the annual fee that all funds charge their shareholders for basic administrative and operating expenses. The average expense ratio for actively managed mutual funds ranges anywhere from 0.5% to 1.0%.
Now compare that to VTSAX’s expense ratio. Stunning 0.04%!
Vanguard’s Index Funds Are 4-5x Cheaper – That’s almost 10x less than the cheapest actively managed mutual fund. Even when compared to other passively managed funds, who’s average ratio is about 0.2%, VTSAX is 4-5x cheaper.
When we consider the fees that these actively managed mutual funds charge, even if they outperform the index by a few percentage points, the extra expense ratio wipes out any advantage.
In addition, I’m sure we’ve all seen tons of ads as regards to these actively managed funds. But when was the last time you saw an ad for a low cost index fund.
I like to believe that Vanguard would rather keep the expense to its investors low and not waste its money on ads while other companies are spending hard earned investor money on promoting their funds gain more business to fund their highly paid active managers.
Keep it simple and opt for the best passive index fund – VTSAX.
5 - Conclusion
Now that you understand why VTSAX is the best investment vehicle out there, go and get yourself some VTSAX and start growing your wealth!
If you’d like to learn more about investing, I highly encourage you to read JL Collins, the Simple Path to Wealth. By far the best investment book I’ve read so far.