Betting on America

      2 Comments on Betting on America
Piggy bank - minimal expense ratio

Piggy bank – minimal expense ratio

A friend of mine approached me and asked me an investing question he had about his 401k/457 arrangement. I explained mine and then learned he read my post about our investment priorities, but still wanted to know why putting so much of his money into the VINIX fund did not amount to “putting all of his eggs into one basket.”

I understood his concern. I certainly wouldn’t want to make the mistake of choosing one company and sinking all of my money into it. His questions were straightforward and direct. What if the company folded? What if something occurred even outside of its control that seriously degraded its value? I agreed with him that he could mitigate the risk to his money if he diversified across numerous companies. I then explained that is precisely why I recommend the VINIX fund so confidently.

Why the VINIX Fund is Awesome

Invest in America

Invest in America

The VINIX fund is an S&P 500 Index fund. That doesn’t mean much if you don’t have an understanding of what an Index fund is, like I didn’t about two months ago. Simply put, an “Index Fund” is a passively-managed fund that attempts to closely track the index (S&P 500, DJIA, NASDAQ). This can be done by a computer program and therefore it is not an “actively managed fund.” That is good, because actively-managed funds are far more expensive and almost always underperform the index/market. VINIX will largely match pace with its Index, in this case, the S&P 500. It is great getting to invest in the 500 biggest companies in America (the land of the free) in one, low-cost fund.

Investing Costs Matter

VINIX has an expense ratio of only .04%. This is exceptionally low. For every $10,000 invested, it costs you $4 to invest for that year. I compared this to a few other options we have in our 401k. The fund we previously put our money in, Vantage Milestone 2040 Fund Investor M Shares (VPRKX). This fund has an expense ratio of .79. So, for every $10,000 invested I would pay $79/year. By keeping the fund costs (expense ratio) down, you set yourself up for success by maximizing your returns. You may have heard about the incredible power of compound interest, but that compounding goes both ways. Your expenses will compound as well. I took a look at a fund analyzer and provided a 6% annual return on an initial $10,000 investment. After ten years, VINIX cost $89 to invest that initial $10,000 over ten years, but VPRKX cost $1,181 to invest. I would rather have the $1,092 on my side to compound for me.

Highly recommended investing book

Highly recommended.

Keep in mind, actively managed funds largely underperform the market. So I was paying more to get less. Never an exciting prospect! John Bogle, the founder of Vanguard and the inventor of the Index Fund wrote an easy to read book that covers this in-depth. I recently read it and found it to be accessible and informative.

I only wish I had read the book about a decade or two earlier, though I do count myself fortunate to have read it and added the knowledge to my own. It dispels many of the myths I believed before I started reading about investing. It is currently available on Amazon for $13. (affiliate link) I believe you will benefit greatly from it if you decide to read it.

The Fund Replenishes Itself

While using VINIX we are investing in the 500 biggest companies in America and doing it at a bargain rate. If any one of those companies ceases to be one of the top 500 biggest companies in America, it is dropped out of the Index and then a new company is moved into the vacated space.

 You are Betting on America

America represents the best the world has to offer when it comes to a free economy. In contrast to some international and emerging markets, the oversight in America does actively work to ferret out corruption and allow for hard work, good ideas, execution, and raw talent to win on the economic battlefield. Plus, the biggest companies in America are also international companies (e.g., Apple has many of their products built in China, McDonald’s sells fast food in most industrialized countries) and that also provides for some level of international exposure in the portfolio.

So, in summary, invest in VINIX, read John Bogle’s book, and bet on America!

Happy Fourth of July!

Celebrate responsibly

Celebrate responsibly

Update 1:

If you decide to pay a financial advisor, the amount you pay may vary greatly. If you went with a Robo-Advisor such as Betterment or Wealthfront, you could expect to pay between 15 to 40 basis points (0.15% to 0.40%), but an actual person is often much more expensive. Sometimes, the cost for the person alone is over 1%! Then, this person will choose a dozen or two expensive, actively managed funds with expense ratios of their own to further suck away at your investments. This is a quick way to make your financial advisor rich and keep your investment returns in the “little-to-nothing” category. ICMA-RC offers a “guided pathway” assistance program which starts at 40 basis points (0.40%) and that is on top whatever they decide to put your money into. Seems expensive when such fantastic options are available.

If you are not sure how much you are paying your advisor or what the expense ratios are for your funds, then I highly suggest you find that out. Only then will you be able to make an informed decision as to whether or not you are overpaying for things you could likely easily do yourself. Please consider all of your options before putting your money into something that, by definition, involves risking the loss of principal. Reading the aforementioned book will talk a bit about the psychology of investing. That will help you to “get your fair share” of the market’s return.

2 thoughts on “Betting on America

  1. The Cynic

    ” keep it all in company stock!”
    – Enron executive 2001

    “Our firm manages billions, let us manage all your retirement”
    – Bernie Madoff 2008

    ” Having more than one index fund is unnecessary!”
    – this blog 2016

    Sometimes diversification in investing is about more than the holdings of the fund.

    Reply
    1. Neal Landfield Post author

      The first two examples of Enron and Madoff demonstrate exactly why you do not put all of your stock in one company or hedge fund. It is simply too risky. If having your money in the 500 biggest companies in the most prosperous and stable economy in the world is not enough diversification for the average investor, I am not sure what would satisfy you, Mr. Cynic. You could put your money in gold and guns, but those things are nothing like having ownership in successful companies. Rental properties is another solution for those seeking passive income (it would certainly do better than recent 2% dividend yields), but in the area I live it is a seller’s market. Also, you can’t put your 401k/457 into a rental property. Thanks for the comment!

      Reply

Leave a Reply