Is too much Vanguard a bad thing?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
bigfan
Posts: 8
Joined: Mon Jan 04, 2010 10:28 pm

Is too much Vanguard a bad thing?

Post by bigfan » Mon Jan 04, 2010 10:39 pm

I read a lot of great info on here and it seems a lot of you Bogleheads have a ton of your money with Vanguard. I have to ask, if someone has their 401k, Roth IRA and taxable accounts with Vanguard, does that impose extra risks on your portfolio if something were to go wrong with the company? I know that is obviously not likely, but from a risk management perspective, if you have all your eggs in the Vanguard basket, is that a bad thing? Should some investments be divided up between fund companies?

kevincohen
Posts: 47
Joined: Fri Nov 13, 2009 6:22 am

Post by kevincohen » Mon Jan 04, 2010 10:42 pm

This thread here might answer your question:
http://www.bogleheads.org/forum/viewtopic.php?t=48098 ("Vanguard Brokerage Lost My $60K Roth Account!")

User avatar
White Coat Investor
Posts: 14699
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Post by White Coat Investor » Mon Jan 04, 2010 10:45 pm

You know, there was a post on here about someone who had $900K in 6 stocks. I see the amount of undiversified risk there as thousands of times as high as having all your money at Vanguard. If you're worried about risks like that, I have a hard time understanding how you can handle more significant risks like market risk or interest rate risk that you must live with to be a successful investor.

If it bothers you, put half your money at Fidelity, Charles Schwab or at T Rowe Price. They have a few low cost index funds. For me, I'd rather run that risk than deal with the extra complexity of having money at multiple brokerage houses if I can avoid it. See also this page on the wiki:

http://www.bogleheads.org/wiki/Vanguard_safety
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

adave
Posts: 256
Joined: Thu Sep 13, 2007 7:17 pm
Location: Houston

Post by adave » Mon Jan 04, 2010 10:46 pm

i believe the structure of the company makes it a very safe place to keep your money.

this has been discussed many times on this forum.

retcaveman
Posts: 911
Joined: Wed Oct 21, 2009 8:12 pm

Post by retcaveman » Mon Jan 04, 2010 11:04 pm

Mel Lindauer wrote:

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!

Best regards,

Mel
"The wants of mortals are containers that can never be filled." (Socrates)

User avatar
nisiprius
Advisory Board
Posts: 41087
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is too much Vanguard a bad thing?

Post by nisiprius » Tue Jan 05, 2010 7:06 am

bigfan wrote:I read a lot of great info on here and it seems a lot of you Bogleheads have a ton of your money with Vanguard. I have to ask, if someone has their 401k, Roth IRA and taxable accounts with Vanguard, does that impose extra risks on your portfolio if something were to go wrong with the company? I know that is obviously not likely, but from a risk management perspective, if you have all your eggs in the Vanguard basket, is that a bad thing? Should some investments be divided up between fund companies?
We love stories, and it is entertaining to think through chains of improbable events that could result in disaster. Well, anything could happen. I tried to work through this stuff for myself, and I concluded that losing assets at a brokerage, any brokerage, due to something "going wrong" with the brokerage itself, is a very-low-probability imponderable.

That wasn't always true. Back in the 1960s brokerages were handling more business than their chaotic semicomputerized "back offices" could handle, and were going bankrupt, and were not highly secure organizations, and at least one New York Times story reported... not that there was Mafia involvement in some brokerages, but that there was a rumor to that effect. Literal physical stock certificates were literally missing at one brokerage and literally discovered in a union pension fund in another state. Hence the SIPC. Concoct your dark fantasies about the SIPC, but to my mind, there was a problem, they created the SIPC, problem solved. If your statement says you have 100 shares of GE, you have 100 shares of GE. Worry about your GE shares, not about your brokerage's custodianship of your GE shares.

The possibility of a serious data processing glitch at a brokerage, any brokerage, is very real, as seen by Lbill's story. In his case, the likely outcome--I'm watching with intense interest--is that when the dust settles everything will be fine, but it might take a week or two and in the meantime he has $60,000 worth of stuff that he can't get at. In his case, it sounds like no more than anger and frustration, but it wouldn't be so good if he needed that money for a house closing or something.

It's a tradeoff. Splitting assets between two brokerages means that if one of them is having a data processing glitch you have access to the other one. It also means you are constantly able to compare fees, customer service, etc. between the two. Every brokerage does some things a little better than others so you get the best of both worlds (I keep my Vanguard funds at Vanguard and my individual TIPS at Fidelity for that very reason). If you have enough to have a six-figure account at each brokerage, there's little or no out-of-pocket cost with splitting between the two.

But. There are many disadvantages, too. It complicates your financial life. It makes it harder for other family members to have the picture of what's going on. It makes it harder for you to have the picture, because the pie chart they print on the statement only shows you your allocation at one brokerage, you need to fiddle with a spreadsheet to get a unified picture (or hand over all your online passwords to a personal-finance website).

Any time you need to transfer assets between the two brokerages you're in for a week or more delay, maybe some paperwork, and, in my experience, about a one-in-three chance something will happen along the way that will involve your needing to call customer service.

If you're in retirement and are going to be drawing down savings and you're not waaaayy over the number, typically around $100,000, at which they give you a fancy name and waive fees and give you a couple of free trades, then you will need to think about what happens as your balance declines (or if they raise the qualifying amount). You don't want to be stampeded into doing silly things just to hang on to your Buccaneer status or your Prestige Plus account.
Last edited by nisiprius on Tue Jan 05, 2010 10:37 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
bigfan
Posts: 8
Joined: Mon Jan 04, 2010 10:28 pm

Post by bigfan » Tue Jan 05, 2010 9:31 am

Thanks so much everybody for the great info. I'm sold, I'll keep it all at Vanguard!

chaz
Posts: 13604
Joined: Tue Feb 27, 2007 2:44 pm

Post by chaz » Tue Jan 05, 2010 11:13 am

I keep it all at Vanguard, except what is needed at my bank.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

eurowizard
Posts: 1005
Joined: Sat May 10, 2008 10:26 am

Post by eurowizard » Tue Jan 05, 2010 11:21 am

Personally I like to go by the rule of 3s.

2 is 1, and 1 is none. I like a backup so I have 3 of everything. In my case, I keep 50% of my portfolio in Vanguard, 10% at Schwab, and 40% in a state-sponsored retirement system.

Eventually I would like this to be:

25% Alliant - in High Yield Savings Roth IRA
25% State Plan - in low ER International Funds (0.02% for Developed International)
50% Vanguard

Levett
Posts: 4177
Joined: Fri Feb 23, 2007 2:10 pm
Location: upper Midwest

Post by Levett » Tue Jan 05, 2010 11:23 am

My investments are at TIAA-CREF, Vanguard, a bank, and my university credit union.

In my view, there's merit to the adage, "Don't put all your eggs in one basket."

I'm certainly at peace with the decision, but as I age I just can't claim that I "sleep like a baby." :lol: Bob U.
There are some things that count that can't be counted, and some things that can be counted that don't count.

Post Reply