Bogleheads

[ptrxi]

I'm trying to help some family members consolidate their investments at Vanguard. They are wary of putting all their "eggs in one basket"-- meaning a single Investment company." I can understand the emotion behind that concern.

Are individual fund assets held in separate accounts from that of the firm itself? Could some unforeseen "hack" divert Vanguard investments? Is there any basis at all NOT to keep all assets at Vanguard (in terms of safety of the assets)?

[mudfud]

Hi,

This is what Mel Lindauer posted previously:
http://www.bogleheads.org/foru....439#148439

"What if Vanguard Went Broke?

This is a very serious and timely issue, so I'll address it to hopefully set everyone at ease.

First, The Vanguard Group Inc. (VGI) is actually a subsidiary of the various mutual funds, each of which is a separate legal entity. The best way to describe Vanguard's unique structure would be to think of General Motors turned upside down, with Chevrolet, Cadillac, Oldsmobile, Pontiac, etc. as the corporate parents, and General Motors as a subsidiary. If you think of Chevrolet, Cadillac, Oldsmobile, Pontiac, and the other GM divisions as mutual funds, and General Motors (the subsidiary, in this situation) as Vanguard Group Inc., you'll get the picture.

Since VGI is actually owned and funded by the various mutual funds, it technically couldn't go bankrupt unless all of the various mutual funds that support it went bankrupt. The only way that could happen would be for the value of all of the stocks and/or bonds held by each and every individual Vanguard mutual fund to go to zero. So, forget about Vanguard going bankrupt -- it just isn't going to happen.

It's also important to point out that even if VGI were to somehow go broke, VGI has no recourse to the assets of the funds. Rather, each fund's custodian holds that fund's assets. Even the fund managers do not have custody of their fund's holdings. They simply decide which stocks/bonds to sell, and the custodian actually delivers (in the case of a sale) or takes delivery (in the case of a purchase) of the actual asset.

Another huge and very important difference between Vanguard's mutual funds and the Enrons and WorldComs of the world is that Vanguard is required to "mark to market" (value each fund share based on the value of all of the fund's holdings) each day the market is open. That keeps the fund's books current. This "marking to market" pricing is subject to both routine and spot audits by both the SEC and the Pennsylvania Department of Banking.

One major reason for the lack of problems with mutual funds comes from the fact that they're regulated by the Investment Company Act of 1940, which spells out the legal responsibilities of the mutual funds to their investors. In addition to the provisions of the Investment Company Act of 1940, the SEC also directly regulates mutual funds. While the SEC can investigate fraud allegations against investors at public companies like Enron and WorldCom, where the accounting is much more complex than at mutual funds, it has no authority to set corporate governance rules for these public companies. These are huge differences.

Keep in mind, too, that, despite all of this, if something were to happen to the Vanguard Group (the entity that provides the fund with the administrative services they need to exist), the funds would continue to operate and would simply replace VGI with another entity to provide these same services.

Some have expressed concerns about putting "all their eggs in one basket" by consolidating their investments at Vanguard. There's simply no need to worry about that. Each fund is a separate investment company (and part owner of the Vanguard Group, rather than the other way around). Thus, having all of your investments in several Vanguard funds is tantamount to having your investments spread among a variety of baskets, each independent of the other. So, put your fears to rest; your investments are safe at Vanguard.

For what it's worth, other than my Savings Bonds, all of my investments are at Vanguard, and I sleep like a baby! "
_________________
"Are you sure you have tested an a priori hypothesis?"

[at]

Yes, there are far too many checks and balances that will keep Vanguard honest and safe.

1. SEC monitoring the industry
2. independent external auditors checking its accounts
3. trustees/custodians doing the bookkeeping for its assets
4. index companies maintaining benchmarks that create a more or less hard limit on the amount of tracking error of its funds.
5. marking to market on a daily basis
6. knowledgeable institutional investors who have a large portion of their assets indexed at Vanguard

[CyberBob]

The only reason I can see not to do it that way is the availability of the investments you want. For example, Vanguard's only small-cap international stock fund is closed. So if you want that asset class, you'll currently have to look elsewhere. But if that's not an issue and you can find all of the investments you want in one place, then it's great way to simplify!

Bob

[djw]

No matter how safe something is, it NEVER hurts to diversify.

I would not keep ALL of my investments at Vanguard. Suppose a terrorist group managed to destroy Vanguard's HQ and all of their backup data sites? Sure, you'd probably get all of your money back eventually but in the short term you might want to be able to make a trade or two in the aftermath of a huge terrorist attack on the US aimed at Vanguard.

Why not split your money between Fidelity, T. Rowe Price, and Vanguard? It couldn't hurt. Each of these (or some other firm) has specialties that might make them an equal or better choice for some of your investment funds.

While I love Vanguard, only about 1/3 of my net worth is in their hands. The rest is in individual bonds, my wife's 403(b), and other fixed income investments held elsewhere, not to mention the value of my home which I own free and clear and is equal in value to my Vanguard total.

I can't imagine EVER putting anywhere close to 100% of my money at Vanguard or anywhere else for that matter, not even in the famously-safe US Treasuries purchased at very low cost through TreasuryDirect.gov and held by them on my behalf. Their data center and backups could be destroyed too.

[mariela_nyny]

How about using different fund families to preserve your ability to tlh?

For example, maybe you use vanguard and buy $100,000 in S&P 500 index. In 10 years, you have earned 10%/year on your investment. So you have about $250,000. And then you invest another $100,000. But if the market loses 50%, your cost basis is still low and you would have to pay capital gains on sales.

But if after 10 years, if you use fidelity (instead of vanguard again) and buy $100,000 in a S&P 500 index account, and the market loses 50%, you can tlh that $100,000 into total stock.

thx,
mariela

[chaz]

ptrxi, I recommend you follow the message contained in the mudfud post. Mel has written why it is safe to invest at Vanguard. I agree.
_________________
Chaz
"It is better to travel well than to arrive." - Buddha
http://www.bogleheads.org/wiki/index.php/Main_Page

[Tall Grass]

[sewall]

[Cparkinson]

[Mel Lindauer]

[mariela_nyny]

Mel,

Thank you. I guess I have a lot to learn and I will talk to my familly's accountant to make sure that I understand better.

Have a good weekend.

thx,
mariela