Do Bogleheads worry about institutional risk?
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Do Bogleheads worry about institutional risk?
I love the idea of the 3-fund portfolio and I am almost there. However, I'm curious if anyone considers it to be riskier to put all funds at one institution such as Vanguard and therefore spreads investments in other places such as Fidelity, Schwab, etc.
Re: Do Bogleheads worry about institutional risk?
I keep the majority at Vanguard but I also keep a decent amount at Fidelity for exactly the reasons you suggest.
Best wishes.
Best wishes.
Andy
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Re: Do Bogleheads worry about institutional risk?
Interesting question, never thought about it too hard.
Are you talking about some catastrophic scenario or simply technical issues that are resolved within hours/days?
In a catastrophic scenario (global/US internet is shut down, world war 3, global financial meltdown), logic asks me, in what situation does Vanguard go down and Fidelity doesn't? Seems like we'd all be screwed.
Presumably all electronic records held by Vanguard are on some cloud system exactly like Fidelity, Schwab, etc?? It seems like you'd always have an accessible record somewhere of what you owned up until something really bad happened (internet goes down forever?))
Are you talking about some catastrophic scenario or simply technical issues that are resolved within hours/days?
In a catastrophic scenario (global/US internet is shut down, world war 3, global financial meltdown), logic asks me, in what situation does Vanguard go down and Fidelity doesn't? Seems like we'd all be screwed.
Presumably all electronic records held by Vanguard are on some cloud system exactly like Fidelity, Schwab, etc?? It seems like you'd always have an accessible record somewhere of what you owned up until something really bad happened (internet goes down forever?))
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Re: Do Bogleheads worry about institutional risk?
Do a search. This has been discussed many times on this board. There is no consensus.
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Re: Do Bogleheads worry about institutional risk?
I worry most about a wide-scale fraud. There is no explicit guarantee that your funds will be restored. (Be sure to the read the fine-print that goes along with any claimed customer guarantees.)nobsinvestor wrote:Interesting question, never thought about it too hard.
Are you talking about some catastrophic scenario or simply technical issues that are resolved within hours/days?
Last edited by Call_Me_Op on Thu Aug 28, 2014 9:34 am, edited 1 time in total.
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Re: Do Bogleheads worry about institutional risk?
I can come up with a few scenarios but I was thinking something illegal going on at Vanguard. I don't believe anything is but I'm not sure anyone thought there was something wrong at Enron either.nobsinvestor wrote:Interesting question, never thought about it too hard.
Are you talking about some catastrophic scenario or simply technical issues that are resolved within hours/days?
In a catastrophic scenario (global/US internet is shut down, world war 3, global financial meltdown), logic asks me, in what situation does Vanguard go down and Fidelity doesn't? Seems like we'd all be screwed.
Presumably all electronic records held by Vanguard are on some cloud system exactly like Fidelity, Schwab, etc?? It seems like you'd always have an accessible record somewhere of what you owned up until something really bad happened (internet goes down forever?))
I agree that if something goes wrong with the market, it doesn't really matter what your investments are.
Re: Do Bogleheads worry about institutional risk?
Like all risk, institutional risk can be hedged at a cost. The costs include more management time, more records to follow, more logins/passwords to follow, and possible difficulty in reacting to market conditions due to having the wrong amount of money in the wrong fund manager in the wrong kind of an account at a critical moment.
In addition, the fund family you diersify to might have problems.
For me, I'd rather stick with a company I feel good about and trust, than take on the costs of diversification for unclear benefit.
In addition, the fund family you diersify to might have problems.
For me, I'd rather stick with a company I feel good about and trust, than take on the costs of diversification for unclear benefit.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
Re: Do Bogleheads worry about institutional risk?
Today's headlines with JP Morgan et al. being hacked should give even Bogleheads pause.
Re: Do Bogleheads worry about institutional risk?
There is a large thread about Vanguard being sued. It probably won't change anything, but it has the potential to. Multiple people have posted minor concerns.
I like VG, so I have an IRA with them. My employer provides a 401k through another firm. I guess I don't have to worry.
I like VG, so I have an IRA with them. My employer provides a 401k through another firm. I guess I don't have to worry.
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Re: Do Bogleheads worry about institutional risk?
I don't see Vanguard as any riskier than Fidelity, Schwab, etc. They can all be hacked, all be sued, etc.
The only "safe" thing to do would be to stuff your liquid net worth in cash into a bolted down safe in your house.
Of course, that has its own set of risks and downsides
The only "safe" thing to do would be to stuff your liquid net worth in cash into a bolted down safe in your house.
Of course, that has its own set of risks and downsides
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Re: Do Bogleheads worry about institutional risk?
I believe in institutional diversification along with all the other "regular" kinds.
In theory, theory and practice are identical. In practice, they often differ.
Re: Do Bogleheads worry about institutional risk?
Vanguard has 3 trillion in assets under management, it is likely if something unfortunately happened the government would be rather interested. I don't think it's unreasonable to hold assets at two companies but as far as risk goes there are far larger ones that should be addressed first.
If you practice poor computer security it is no more difficult for an attacker to break into your Fidelity and Vanguard accounts than it is for them to just break into Vanguard. A break-in is far more likely to be caused by poor security decisions (poor password, malware, no antivirus, insecure computer, etc) by the end user than the organization.
If you practice poor computer security it is no more difficult for an attacker to break into your Fidelity and Vanguard accounts than it is for them to just break into Vanguard. A break-in is far more likely to be caused by poor security decisions (poor password, malware, no antivirus, insecure computer, etc) by the end user than the organization.
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Re: Do Bogleheads worry about institutional risk?
Almost certainly Vanguard, nor any other large financial institution, keeps their vital customer account records in "the cloud", for computer performance and control reasons. They want them in their own premises where they have total physical and operational over them. They (and other large financial institutions) will also have a real time data storage back-up in a second, remote location and also have physical tape back-ups in a third location.nobsinvestor wrote:
Presumably all electronic records held by Vanguard are on some cloud system exactly like Fidelity, Schwab, etc?? It seems like you'd always have an accessible record somewhere of what you owned up until something really bad happened (internet goes down forever?))
That certainly doesn't mitigate all risks, but does laregly cover those having to do with a physical catastrophe. This got greater emphasis post 9/11 when several of the NYC financial institutions were found sorely lacking in that regard.
Re: Do Bogleheads worry about institutional risk?
I suppose we shouldn't mention how obsolete and archaic all the records held by the Social Security Adminstration are. They might even keep your annual contribution amount on paper tape.
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Re: Do Bogleheads worry about institutional risk?
There is no consensus so one has to do what makes you sleep well at night.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Do Bogleheads worry about institutional risk?
If the financial crisis taught us anything, when one goes, they all will go!nobsinvestor wrote: In a catastrophic scenario (global/US internet is shut down, world war 3, global financial meltdown), logic asks me, in what situation does Vanguard go down and Fidelity doesn't? Seems like we'd all be screwed.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Do Bogleheads worry about institutional risk?
That is probably more-or-less correct. However, if you assume (humor me for a moment) that the probability of something like this happening to one company is independent of the probability of it happening to another company, and if we let x equal the probability of something bad happening to one company (in a given year), then the probability of something bad happening to 2 companies in a given year is x^2, and to 3 companies is x^3, etc. Thus, diversifying (under the independence assumption) has a huge effect. If the probability of something bad happening to one company is 1/1000 (one in a thousand), the probability of something bad happening to 2 companies is 1/1000000 (one in a million).nobsinvestor wrote:I don't see Vanguard as any riskier than Fidelity, Schwab, etc. They can all be hacked, all be sued, etc.
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Re: Do Bogleheads worry about institutional risk?
I never understood the paranoia of institutional risk threads. The Investment act of 1940 and Vanguard carrying insurance called a Fidelity Bond indicates we will be fine.
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Re: Do Bogleheads worry about institutional risk?
I worry about it a little. It didn't stop me from consolidating everything down to Vanguard. Nobody knows how to judge these low-probability-high-consequences events. I believe the independent custodian requirement of the Investment Company Act of 1940 is pretty good. From reading The Rise of Mutual Funds: An Insider's View, by Matthew P. Fink, I've learned that there has always been concern about the possibility of a "run" on a mutual fund.
I've asked about "any historical examples of mutual fund companies failing, and what happened," and for a long time I thought there weren't any, and then I suddenly realized...
...that money market funds such as Reserve Primary are mutual funds, so the Reserve Primary failure is an historical example of "what happens when a mutual fund collapses?" The answer is that Reserve Primary's shareholders experienced major inconvenience, it took them about a year to get half their money back, and about two years to get something like 98% or maybe more of their money back. And this basically was an example of a "run" on a fund.
I don't see a "what-if-Wellstrade-goes-bankrupt" issue, or "what-if-Vanguard-goes-bankrupt," because a mutual fund is not a promise of something to be performed in the future (like a plane ticket or a health club membership), it is an actual package of assets.
The danger seems to be a "run" on a fund, and this would be a "fundwise" issue, not an "institutewise" issue. The danger arises because mutual funds are pledged to redeem at net asset value, and in an illiquid situation the net asset value may not be easy to determine... so the fund could effectively be making a redemption promise it couldn't fulfill.
A money market fund like Reserve Primary is probably different in kind from stock and bond mutual funds, but I still that's what we're looking at in a the case of a mutual fund collapse: a huge nuisance, a lot of anxiety for one or two years--but probably not catastrophic losses for fund holders.
In the specific case of Vanguard, each mutual fund is an independent business so maybe you only have institutional risk in each fund. That is, if something like Reserve Primary were to happen to Vanguard Prime Money Market Fund, I don't think it would affect the Vanguard Total Stock Market Index Fund.
You could have an argument for fund diversification. For example, this could actually be an argument for holding both Total Bond Market Index and Total International Bond Market Index, or Total Bond Market Index and Intermediate-Term Bond Market Index--the idea that a "run on the fund" collapse might affect some funds in a particular asset class and not others, because of details of just what the managers were doing.
I am worried about "IT diversification," the possibility that a single mutual fund company experiences some monumental data processing glitch that takes a long time to sort out. I don't know how sensible it is but I continue to receive mailed printed statements, because I think they are a fairly good, fairly up-to-date evidence of what I have in my account.
I am not too scared by Laurence Kotlikoff's alarmist pronouncements, Close Your Brokerage Account, but as nearly as I can tell his issue is the SIPC, period, end of story, and doesn't raise concerns about individual mutual funds in themselves, only about mutual funds held in a brokerage account.
I've asked about "any historical examples of mutual fund companies failing, and what happened," and for a long time I thought there weren't any, and then I suddenly realized...
...that money market funds such as Reserve Primary are mutual funds, so the Reserve Primary failure is an historical example of "what happens when a mutual fund collapses?" The answer is that Reserve Primary's shareholders experienced major inconvenience, it took them about a year to get half their money back, and about two years to get something like 98% or maybe more of their money back. And this basically was an example of a "run" on a fund.
I don't see a "what-if-Wellstrade-goes-bankrupt" issue, or "what-if-Vanguard-goes-bankrupt," because a mutual fund is not a promise of something to be performed in the future (like a plane ticket or a health club membership), it is an actual package of assets.
The danger seems to be a "run" on a fund, and this would be a "fundwise" issue, not an "institutewise" issue. The danger arises because mutual funds are pledged to redeem at net asset value, and in an illiquid situation the net asset value may not be easy to determine... so the fund could effectively be making a redemption promise it couldn't fulfill.
A money market fund like Reserve Primary is probably different in kind from stock and bond mutual funds, but I still that's what we're looking at in a the case of a mutual fund collapse: a huge nuisance, a lot of anxiety for one or two years--but probably not catastrophic losses for fund holders.
In the specific case of Vanguard, each mutual fund is an independent business so maybe you only have institutional risk in each fund. That is, if something like Reserve Primary were to happen to Vanguard Prime Money Market Fund, I don't think it would affect the Vanguard Total Stock Market Index Fund.
You could have an argument for fund diversification. For example, this could actually be an argument for holding both Total Bond Market Index and Total International Bond Market Index, or Total Bond Market Index and Intermediate-Term Bond Market Index--the idea that a "run on the fund" collapse might affect some funds in a particular asset class and not others, because of details of just what the managers were doing.
I am worried about "IT diversification," the possibility that a single mutual fund company experiences some monumental data processing glitch that takes a long time to sort out. I don't know how sensible it is but I continue to receive mailed printed statements, because I think they are a fairly good, fairly up-to-date evidence of what I have in my account.
I am not too scared by Laurence Kotlikoff's alarmist pronouncements, Close Your Brokerage Account, but as nearly as I can tell his issue is the SIPC, period, end of story, and doesn't raise concerns about individual mutual funds in themselves, only about mutual funds held in a brokerage account.
Last edited by nisiprius on Thu Aug 28, 2014 5:01 pm, edited 1 time in total.
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Re: Do Bogleheads worry about institutional risk?
Apparently Vanguard's custodian for its funds' investment holdings are at JP Morgan Chase.
Ironically, I'd bet anything the odds of something catastrophic happening to JP Morgan are way higher than Vanguard, since JP Morgan practices volatile trading and is largely a black box just like every other major investment bank. Luckily (and hopefully) the US government would intervene at a bad stage.
Ironically, I'd bet anything the odds of something catastrophic happening to JP Morgan are way higher than Vanguard, since JP Morgan practices volatile trading and is largely a black box just like every other major investment bank. Luckily (and hopefully) the US government would intervene at a bad stage.
Re: Do Bogleheads worry about institutional risk?
Concur.
My only concern is a catastrophic database failure of an extended duration at Vanguard, for this reason I save a soft copy all our statements on external drives and a hard copy in our investment binder, just in case this black swan.
Thanks for reading.
My only concern is a catastrophic database failure of an extended duration at Vanguard, for this reason I save a soft copy all our statements on external drives and a hard copy in our investment binder, just in case this black swan.
Thanks for reading.
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Re: Do Bogleheads worry about institutional risk?
I'm not sure it is for every fund. I think you look that up in the Statement of Additional Information and I think someone actually found that it's not the same for every single fund.nobsinvestor wrote:Apparently Vanguard's custodian for its funds' investment holdings are at JP Morgan Chase.
Ironically, I'd bet anything the odds of something catastrophic happening to JP Morgan are way higher than Vanguard, since JP Morgan practices volatile trading and is largely a black box just like every other major investment bank. Luckily (and hopefully) the US government would intervene at a bad stage.
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Re: Do Bogleheads worry about institutional risk?
Yes, that's right (except to the extent Nisi said it's wrong while I was typing, but the rest of this post is not about that custodian in particular).nobsinvestor wrote:Apparently Vanguard's custodian for its funds' investment holdings are at JP Morgan Chase.
That isn't a problem. Outright theft would be, but risky dealings in its own assets are not.nobsinvestor wrote:Ironically, I'd bet anything the odds of something catastrophic happening to JP Morgan are way higher than Vanguard, since JP Morgan practices volatile trading and is largely a black box just like every other major investment bank. Luckily (and hopefully) the US government would intervene at a bad stage.
A custodian does not own the assets it has in custody. It's just charging a fee for holding on to them. They are not pledged as collateral, not rehypothecated, not monkeyed with, unless, as I said, the institution or some of its units are practicing outright theft of assets, as happened with Jon Corzine's side business (from which, eventually, all value was recovered excluding opportunity costs).
The custodian's creditors cannot go after the assets in custody. They aren't the custodian's property in the first place. That's the way it's set up legally.
Lest any of us get onto the same old merry-go-round again, I am not here to defend all the moral choices of JP Morgan Chase.
PJW
Last edited by Phineas J. Whoopee on Thu Aug 28, 2014 5:16 pm, edited 1 time in total.
Re: Do Bogleheads worry about institutional risk?
Here is this from Oblivious Investor.
Here is some good information from Mike Piper and from Vanguard on the same subject (including custodian banks).
http://www.obliviousinvestor.com/is-it- ... companies/
Thanks for reading.
Here is some good information from Mike Piper and from Vanguard on the same subject (including custodian banks).
http://www.obliviousinvestor.com/is-it- ... companies/
Thanks for reading.
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Re: Do Bogleheads worry about institutional risk?
Or, as in the case of the GLD ETF, the custodian can appoint sub-custodians which it disclaims responsibility for monitoring. At least, that the way it was when I read the GLD prospectus a few years ago.Phineas J. Whoopee wrote: A custodian does not own the assets it has in custody. It's just charging a fee for holding on to them. They are not pledged as collateral, not rehypothecated, not monkeyed with, unless, as I said, the institution or some of its units are practicing outright theft of assets, as happened with Jon Corzine's side business (from which, eventually, all value was recovered excluding opportunity costs).
The custodian's creditors cannot go after the assets in custody. They aren't the custodian's property in the first place. That's the way it's set up legally.
Lest any of us get onto the same old merry-go-round again, I am not here to defend all the moral choices of JP Morgan Chase.
PJW
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Re: Do Bogleheads worry about institutional risk?
Our concern is more along these lines, including some hacking or DDOS (Distributed Denials of Service) that bring the company's website crashing for a longer time than we might expect.cfs wrote:Concur.
My only concern is a catastrophic database failure of an extended duration at Vanguard, for this reason I save a soft copy all our statements on external drives and a hard copy in our investment binder, just in case this black swan.
Thanks for reading.
For most of our investments, that wouldn't really matter, because we aren't juggling things daily or even weekly.
Nevertheless, we've got 403b/IRA monies at TIAA-CREF, Vanguard, Fidelity, and a bit at Schwab for convenience.
A slightly bigger concern is for regular daily living, if BoA or the Credit Union, etc., were inaccessible, for cash.
Anything longer term, or the complete disarray (sorry, General Disarray!) of the investment websites or such, and I think we'll have other things to worry about instead of how our money in 10 years will fare.
... things like food, meds, etc.
It's a sense of the Y2K problem, one that I predicted - very incorrectly (and happy I was wrong!) - we might not be able to access some of the regular needs of daily life for a short time, 'til it got sorted out.
RM
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Re: Do Bogleheads worry about institutional risk?
I worry about EVERYTHING.
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Re: Do Bogleheads worry about institutional risk?
I remember Y2K. My ex-father-in-law was taking survival courses and stock piling necessities. He asked me why I wasn't doing the same? I thought it was a non-issue and my backup plan was acquiring his stock pile. I thought the stock pile reference was funny at the time but he probably didn't like it.ResearchMed wrote: It's a sense of the Y2K problem, one that I predicted - very incorrectly (and happy I was wrong!) - we might not be able to access some of the regular needs of daily life for a short time, 'til it got sorted out.
RM
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Re: Do Bogleheads worry about institutional risk?
Whatever, technovelist. I'm not here to defend their custodians either, whatever countries' legal systems they may operate within. A novelist such as yourself will recognize, from the words and the grammar, I'm making a point about the custodial legal setup in the US, because it's Vanguard and JP Morgan that were the question, and how it isn't dependent on other businesses engaged in by the custodian.technovelist wrote:Or, as in the case of the GLD ETF, the custodian can appoint sub-custodians which it disclaims responsibility for monitoring. At least, that the way it was when I read the GLD prospectus a few years ago.Phineas J. Whoopee wrote: ...
Lest any of us get onto the same old merry-go-round again, I am not here to defend all the moral choices of JP Morgan Chase.
PJW
Last time we covered this point, which is crucial for understanding, I was attacked over JP Morgan innuendo. Now it's some nebulous set of "sub-custodians," a term I'm not familiar with, but maybe you just mean some businesses running gold vaults scattered across the face of the earth the ETF-sense custodian chose to use for storage. That would be something completely different.
It's illegal to sneak up behind someone and steal h/er/is money. People do it anyway.
Did you have a substantive point to make?
PJW
Re: Do Bogleheads worry about institutional risk?
In Missouri, all St. Louis County government websites were taken down for an entire week by the hacker group Anonymous.
These types of incidents seem to be happening more frequently and on a larger scale.
I'm worried that Vanguard, being the world's largest mutual fund company, could become a target.
These types of incidents seem to be happening more frequently and on a larger scale.
I'm worried that Vanguard, being the world's largest mutual fund company, could become a target.
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Re: Do Bogleheads worry about institutional risk?
National and international cyber-crime is very much a legitimate concern, but with respect to government websites:Bustoff wrote:In Missouri, all St. Louis County government websites were taken down for an entire week by the hacker group Anonymous.
These types of incidents seem to be happening more frequently and on a larger scale.
I'm worried that Vanguard, being the world's largest mutual fund company, could become a target.
http://xkcd.com/932/
PJW
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Re: Do Bogleheads worry about institutional risk?
If a person is sufficiently worried about Vanguard's (or any other large financial entity's) institutional risk, then they ought to spread their assets over how ever many institutions make them feel safe. It doesn't matter whether that worry is rational or not. Opinions have and always will vary.
It's your money and your ability to get a good night's sleep.
p.s. I was in IT for one of those large financial institutions for 30+ years and worked through more than my share of "disasters", large and small. I have 90% of my assets at Vanguard. Before I retired and moved them to Vanguard, I had 90% at another of the large financial institutions (the one I worked for). Worry about the safety of my assets being lost has never kept me up at night.
It's your money and your ability to get a good night's sleep.
p.s. I was in IT for one of those large financial institutions for 30+ years and worked through more than my share of "disasters", large and small. I have 90% of my assets at Vanguard. Before I retired and moved them to Vanguard, I had 90% at another of the large financial institutions (the one I worked for). Worry about the safety of my assets being lost has never kept me up at night.
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Re: Do Bogleheads worry about institutional risk?
Here's something I wrote a number of years ago that addresses these concerns:
http://www.bogleheads.org/wiki/Vanguard_safety
Hopefully Bogleheads have a few bucks for gas and food outside of their Vanguard accounts.
http://www.bogleheads.org/wiki/Vanguard_safety
Hopefully Bogleheads have a few bucks for gas and food outside of their Vanguard accounts.
Best Regards - Mel |
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Re: Do Bogleheads worry about institutional risk?
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