Vanguard’s winning strategy is plain simple

Vanguard rules the world of low-cost index investing, so are you willing to join the frenzy?

Gary Clement for The National

Conceived in hell and born in strife is how the founder put it. And it worked. The result: a revolution democratising investments in financial markets. Talk about a legacy. And it is still playing out: US$9 out of every $10 invested in US mutual funds or exchange-traded funds (ETFs) lands in Vanguard’s coffers. Astounding. That was in February.

If you search for the company online, the headlines have it all. They read like an Olympic record-breaking frenzy.

Each one outdoing the last, sharing an ever increasing amount of money vested in the American investment management company, and how far behind it is leaving the competition.

Over and over again it goes: Vanguard sets record fund inflow.

To give you some context, at the start of the year the amount of money going to Vanguard was more than the money being put in the next 16 fund families combined.

Let us take a step back. What is Vanguard about? Why is it knocking the competition for six?

It invented index-tracking, and provides it at a very low cost. The lowest out there, in fact.

That is not all.

The way it is set up is so simple, it is scary. Everyone who invests in Vanguard funds owns a bit of the company. That’s because when you put money into a fund, you own shares in the said fund. In Vanguard’s case, the funds own the investment company. No one, other than shareholders in the funds, owns a stake in the investment company.

Again, you own a share in the investment company when you buy shares in one of Vanguard’s funds.

As a result, no third-party owners need to be paid anything, because they don’t exist. Have I mentioned this already? You, the investor, share the takings, after the costs of running the funds are paid. And so, because everyone is in it together, expenses are controlled and contained.

You’ll see this reflected in staff reviews posted on certain workplace related websites. Some of the less satisfied employees class the company as cheapskates. Makes sense, and it is good news if you’re investing with them.

On the plus side, time and again, the reviews rate the company as having a super work-life balance. In fact, many posting reviews say they are fine with lower pay, precisely because of the work-life balance on offer. Their priorities appear to be well-placed. Now, if those staff- members were to part-own the company, they’d be on a pretty good thing if you think about it.

Are there risks? There is always risk.

Things like legal costs. They’ve been sued for having fees that are too low. Yes, really. The concern isn’t that they’ll lose a case like this, but lose the fees they have to pay out to fight it.

Yes, there’s been bad press around the issue of investing passively. Concerns include who controls what, how to mitigate a slump in value if markets tank, and what the fallout could be from pumping too much money into what has, to date, been a very successful strategy. I suppose it gives rise to the question: is there such a thing as too passive? I’ll ponder that another time.

For now though, take comfort in that Warren Buffett, widely considered the most successful investor in history, doesn’t seem perturbed.

In fact, quite the opposite. He’s telling his heirs to put 90 per cent of what they inherit into something that – currently – only Vanguard really provides.

Here’s what he set out in his will a couple of years ago: “My advice to the trustee could not be more simple. Put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, individuals – who employ high fee managers.”

He means Vanguard.

If it is good enough for him, he again extolled the virtues of the company, what it does and how it works, in his recent Berkshire Hathaway shareholder letter, is it good enough for you?

That is your decision to make. I will say this though: Vanguard rules the world of low-cost index investing.

If this sort of investment fits in with your strategy, forget about “follow the leader” – just join it. It pays to be boring and cheap.

Nima Abu Wardeh describes herself using three words: Person. Parent. Pupil. Each day she works out which one gets priority, sharing her journey on finding-nima.com

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