Quick investment advice for the smart and lazy

Fees, fees, and more fees

Someone new to investing asked for some advice of how they should allocate their SIMPLE IRA funds in their Vanguard account. There are so many funds that if you didn’t know what to look for, it’s easy to get lost or worse – make bad decisions. Here’s my philosophy:

  • Be average: I don’t have the insight into companies to outmaneuver hedge funds and professional traders and neither do you. So one should strive to invest into assets that track the market.
  • Be frugal: Since we’re average, any fees cut into our retirement.
  • Be lazy: I don’t have time to rebalance my portfolio so that it becomes more conservative as it matures. One should set their portfolio to 100% of a single fund and let that sit until retirement.

The takeaway: invest 100% into a single Vanguard Target Retirement Fund. Look up your age, and vanguard will tell which target retirement fund is appropriate. For instance, VFIFX (a target retirement of 2050 fund) is one of the options.

To dive deeper into the reasoning:

  • For the Vanguard SIMPLE IRA, each fund charges a yearly fee of $25. So if you invested $100 initially and the market stayed the same over 4 years, you’d actually be losing money.
    • Takeaway: it’s best to choose one fund and put a lot of money into it.
    • Ideally this means you plan on eventually having over $2,500 in the account so that the fee is less than 1%.
  • But wait, there are more fees! Each fund charges a fee proportional to funds invested into it.
    • For instance, if a fund’s fee is 0.5% and you have $100 total invested, you’d be charged 50 cents for that year. 0.5% doesn’t sound like a lot until you have an account with 1mil and you’re being charged 5,000 a year.
    • Takeaway: look for funds with a low management fee (ideally < 0.3%), so that savings in fees will be compounded as the years progress.
  • Though not applicable to Vanguard SIMPLE IRA, I must mention tranasction fees (yet another fee!). If it costs you $7 a trade you better be investing over $700 (ideally 2,500) at a time to minimize what you have to “make up” to even out the fee.
  • I don’t have the expertise nor the inclination to manage my portfolio (eg: evaluate new funds / transfer money to different funds (eg: to more bonds)) every year, all I know is that I can be more risky while I’m young, but when I’m nearing retirement I’d like a more conservative portfolio to guard against a depressed market delaying retirement.
  • Enter: target date funds. They encapsulate that idea by tracking the market and automatically balancing the portfolio. So it will start out risky with more stocks but as the fund ages it will automatically start acquiring more conservative bonds.
  • VFIFX is a target retirement 2050 fund which has a 0.15% management fee. So a $100k portfolio would have an annual fee of (100k * 0.0015 + 25) $175 (or 0.175% of portfolio).
  • If you think you can outsmart the market, there are better funds out there

This post complements notecard investing and dives deeper into the “buy inexpensive, well-diversified mutual funds such as Vanguard Target 20XX funds”. For a rabbit hole of information, see bogleheads Vanguard target retirement funds.

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