Vanguard 50-year anniversary CEO letter
corporate.vanguard.com
corporate.vanguard.com
Once I joined the military and had a steady paycheck I started putting some money away each month. Fast forward twenty-something years and I’m so so so grateful to have had that influence which gives me optionally in my life.
No doubt investing with vanguard had a huge influence on their lives and I can’t imagine how many millions have been impacted.
Dollar cost averaging ftw!
which, i reckon, might've been what made returns high as that cohort didn't invest as much while prices were down, and thus made more returns as prices grew in the future.
The recent growth in people (esp. young people) investing (from it being easier than ever, to availability of information about investing) would make prices grow higher faster. This, i predict, means future returns are actually going to be lower for this generation.
That said, I mostly invest in indexes even though I have concerns. I've just done much better over the years with index investing than investing in single stocks. Diversification is maximized in index investing.
the S&P 500 index is hand picked (by some committee iirc) at S&P.
But there's only 1 type of index fund - the total market, cap-weighted index fund - that's worth investing in as a passive investor. Not any specific index that excludes some stocks while including others.
Its been general knowledge for a long time. Even more so now, yes, but even before the internet. Famously Warren Buffett has proclaimed that the average person should be investing in index funds for many decades, for example. Bogle published his methodologies like 40 years ago. Value investing was also well understood (and is what made Warren Buffett a billionaire).
Neither of which of these strategies have seemed to overtake the public en masse, even as investing has become easier. There seems to be some disconnect in the human brain that most people can't seem to get their act together with investing[0].
Anecdotally I have been a big Boglehead for quite some time, and long talked people's ear off about it, which inevitably means I'm talking about investing in index funds (the 'holy bogle trinity'[1]). Yet, while I continue to build wealth this way, nobody I know has followed this sound advice, even as I have openly shown that its reasonably sound and likely better than most other forms of investing.
Instead, people buy stock in specific companies, or still trade crypto, or see themselves as day traders etc. with all kinds of predictable (and mixed) results.
There seems to be some allure in the human mind that drives it. I'm not entirely sure what it is, but passive index fund investing while sound, and certainly well known, isn't as 'hot' as it should be.
All this is to say, I don't think its overvalued at all. I think its still undervalued relative to performance
[0]: even when given all the knowledge and tools, though financial literacy isn't great in the US, its not the only reason behind this.
[1]: The three fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
and i'm glad for it, since i am still accumulating, and i'd prefer it if the prices aren't too high. If other people fail to heed good advice when they here it, they also deserve to get whatever they get in the future.
1. Living through the depression made him singularly focused on money, to the point where that's basically all he talked about
2. Throughout life, he tried everything to hustle money - normal job, individual stock tracking, index funds sure, but then also hustling collectibles at garage sales (especially rare coins, because, you know, they are also money), a wide ranging used car sales operation (he'd drive 10 hours cross multiple states to get a good deal on a car to flip), etc etc.
3. He also was pretty good with math (money is numbers), and wasn't dumb, so in the very long run he kept rough track, and realized that of all the things, index funds probably did the best, and also took like zero time. But at least he had his kinda fun doing it.
So when before I went to college (even at age 12), he'd call us up and tell us to go to a good but cheap state school, and study something like engineering that makes a good income.
So then after I graduated (from a good and cheap state school, with two engineering degrees, and also a CS degree), and got a real job, his phone calls changed to telling me to invest in the S&P 500 with as much as I could, and ignore crashes. (He would also call and try to predict crashes, some he missed (dot com), some of which he got right (2007-8), and some of which were basically fiction (2013, 2015).
So I lived like a monk for 5+ years and still live pretty frugally. I think the highest I've ever spent on my income is 50% of after tax, and it used to be more like 20-25% before house+kid.
On the plus side, working for a long time at a >50% savings rate means you're much more immune to short term work shenanigans like layoffs.
On the down side, you gotta resist buying new stuff all the time, which can be hard when there's lots of cool stuff.
I just don't get it. My father and father-in-law both did it.
As such once people can lock in a reasonable retirement they often get really conservative.
To completely cash out - as in, not be invested at all - isn't wise.
US inequality increased significantly after the top tax rates, long term capital gains, etc declined significantly. There’s no question those are related, it was explicitly the intended effect.
Wealth inequality can increase from trends which are net positive but that doesn’t change the fact it’s a net negative. Thus, changes to the tax code specifically designed to increase wealth inequality working shouldn’t be surprising even if other factors are also in play.
The current situation of low land value tax rates and high earned income tax rates leads to two old people living in excessively large lots while two young working people give up goals of having kids because they don’t want to raise them in a 1,000 square foot rental they don’t consider stable enough.
And that’s the case as long as the income tax is at or less than 100%. Income taxes could well be collected from employers directly and never reach you (like some European countries do for roughly 50% taxes due). Ultimately what counts is how much your employment costs. Psychologically, it then may not feel like you are paying anything, because you don’t. You working supports public infrastructure for public benefit (which includes you again). Prefer to pay no taxes but having to build your own roads? Good luck with that.
No, its true as long as taxes on income plus the necessary-but-non-deductible expenses associated with maintaining the job that would not be required otherwise are less than the pay for doing the job.
But income taxes aren't the only taxes on income (payroll taxes exist), and costs of work (added wardrobe costs imposed by dress codes and expectations, commute costs, added childcare costs) are real.
Thus as the value of wages and investment returns is a direct result of government actions just as the value of land is a direct result of government enforcement of property rights, it’s got equal legitimacy for taxing both.
I wouldn’t want to think that somebody is taking something that belongs to me away from me. That is not a pleasant feeling.
However, I was dumping government into that same cost of work category as commuting costs. It just makes more sense to work in a country where you make 100x as much even if you’re paying 50% in taxes than a failed state with zero income taxes. As such it also makes sense for governments to impose income taxes to be able to pay for things like education that improve short or long term productivity.
Why can’t land value tax be used? It already is in the USA (and probably around the world), but the labs value tax rates can be increased to properly allocate tax liability to this who consume more.
Tax homes based on the number of rooms and people suffer without closets even though total revenue remains the same. Income taxes have this wonderful property where factory workers can’t game the system thus avoiding distortions. Land taxes high enough to offset income taxes results in all sorts of unpleasant side effects.
The US approach of funding local schools is horribly inefficient. People like it because it reinforces the class system, but just as with closets people end up with lower standards of living because they’re optimizing around arbitrary rules.
How is this relevant to land value tax?
> Income taxes have this wonderful property where factory workers can’t game the system thus avoiding distortions. Land taxes high enough to offset income taxes results in all sorts of unpleasant side effects.
Why would earned income taxes not have unpleasant side effects if land value taxes have unpleasant side effects? All taxes affect the market, and they are supposed to.
Isn’t it unpleasant that people in large lots who inherited from their ancestors’ pay very little tax for all the security an orderly society provides and all the courts/police/military that keeps their land safe?
Isn’t it unpleasant that too low land value tax rates keep empty store fronts, empty lots in the middle of urban areas, increasing the lengths people have to travel and removing the ability to walk anywhere?
> The US approach of funding local schools is horribly inefficient. People like it because it reinforces the class system,
Only because it’s a flat tax rates. If it was a power law formula, then people using less land (aka those in apartments and in general, far poorer) would pay far less than those on 0.06 acre lot townhomes who would pay less than those on 0.15 acre lot mansions. Not to mention all the rich landowners (via REITs and other real estate holding companies) paying far more for commercial real estate, incentivizing them to make productive use of their land, such as dense housing and not keeping spaces empty.
It’s an example of distortion.
> Why would earned income taxes not have unpleasant side effects if land value taxes have unpleasant side effects?
Distortion requires some way to optimize for the tax by charging behavior unnaturally. Maximizing income results in the same behavior with and without an income tax. Instead distortion comes modifications like not taxing health insurance and lower rates on long term capital gains etc.
A land value tax incentivizes less efficient allocation of resources on the other hand because land becomes artificially more expensive. For example it heavily disincentivizes farming etc. Obviously you’d end up with same kind of tax breaks but now you’re further distorting the market.
It already does, and no one is going to farm a few acres in the middle of a metro or suburb. They will hoard the land and keep it empty or underutilize it with low density housing/business to serve as a piggy bank they can 1031 exchange.
And again, the big distortion is old and wealthy people disproportionately benefiting from an orderly and secure society, while paying the least, while young people who work pay the most. See Additional Medicare Tax for another example.
> Maximizing income results in the same behavior with and without an income tax. Instead distortion comes modifications like not taxing health insurance and lower rates on long term capital gains etc.
I disagree from a society wide perspective, levying a higher tax burden on rent seekers is beneficial. Rent seeking needs to be disincentivized, and using earned income tax to keep rent seeking taxes low (such as land value and estate and cap gains taxes) is overall a negative for the future of society.
Even more distortion.
When you look land value tax and start thinking ahh but this impact needs to be mitigated that’s a sign there’s an inherent problem with the approach. There’s an endless list of things people would tweak if it was high enough replace income taxes the flawed system that resulted would still just be less efficient overall.
Just by comparison people don’t single out professions and say lawyers should have higher rates than doctors. You’re not tempted to try and manipulate the economy through central planning as we would be with land value taxes.
I never implied preferring not to pay taxes. Marginal land value and consumption tax rates would set incentivizes properly.
Earned income tax is the rich and the old and their younger beneficiaries benefiting (rent seeking) off of others’ labor.
If I had a nickel for every time a recruitment process was jeopardized by my asking for the company to cover travel expenses to the interview, I would have two nickels. Which isn't a lot, but it's weird that it happened twice.
Define "liquidating". Do you mean moving all investments in the 401k to cash and equivalents? That seems sensible if you don't want any more market-risk exposure going forward. Withdrawing everything at once seems ill-advised because you'll get hit with high taxes unless your 401k balance is really small.
> Even right now a lot of people retire and then liquidate their 401k
If you did dollar-cost averaging through the Depression, and didn't have any immediate need to withdraw, you'd have come out of it doing pretty well.
1. Start with $10,000,000 2. Invest right before an economic downturn.
I also feel this way, and all of the terminology and marketing around the stock market definitely reinforces this belief. I have my retirement put into one of those diversified retirement mutual fund things which I completely ignore, but other than that, I don't mess around with stock market stuff at all. The up & down junk, trying to decide when to buy or sell, all that stuff makes me feel terrible. Same feeling as going to a casino. Not my kind of fun. I don't want anything to do with it.
Basically - total market index funds have very low cost, and the entire market has very rarely gone down 50%, and eventually recovered.
Since your company is matching you 50% (or 100%) on your contributions, if the market goes down you're losing "house money/free money" you wouldn't have otherwise.
Then after years and years they just get used to it.
It's like saying that because your sibling or friend ended up in a shitty relationship that you need to be celibate for your entire life . . . no, you don't. Just because Company A blew up doesn't mean Company B will.
And to be clear, I'm not a fan of stock picking as a core investment strategy, but I'm talking about dollar-cost averaging in equities (low-cost index funds) as opposed to stashing cash under the bed. Long-term, betting on the economy is free money.
But again, you're asking people to have a lot of trust in this executive team. Unless we have the legal and regulatory framework that can enforce that trust it all becomes very sketchy. And right now it seems like the legal and regulatory frameworks are under attack. It's becoming more a game of "who you know" and favor currying. That kind of erosion of trust is really dangerous for the markets.
There are more options than this. My savings account gives something above 4.5%, and if that rate does go down, there's CDs and stuff like that. And I assure you, I'm not poor, lol :)
Have you checked recently? Short term Treasury yields are hovering around 4% now, so I'd be surprised if HYSAs are yielding more than that today.
Incorrect. Public markets investing (which is what you're talking about here) is about betting that the market is undervaluing some business. This is fundamentally different from "betting on an exec team". The price matters a lot.
I mean, there's also some risk premia and some liquidity risk that you're being paid for, I guess.
But "betting on the competence of an exec team" is just wrong.
Gambling is the total opposite of that. Investing in an equity is saying "I have reason to believe this business or basket of businesses will continue to return profits to their shareholders." And you can do research into their financials, their industry, and so forth to make an informed decision. Gambling is just that . . . random chance in a game that's ultimately rigged against you. Investing is almost the opposite of gambling.
All of our existence involves gambling in the sense of balancing probabilistic risks. You need something more nuanced to distinguish gambling (the moral vice) from risk management (the inescapable survival tool).
Same way you convince them betting on the ponies is not gambling. If you pick a sure thing you're guaranteed to make money. All you need is a system.
How about:
> But in a casino the longer you play, the higher your chances of walking away a loser since the house has the edge.
> The stock market is the opposite of a casino. The longer you play, the higher your odds of success in terms of experiencing positive returns on your capital.
* https://awealthofcommonsense.com/2023/05/the-stock-market-is...
* https://www.cfainstitute.org/insights/articles/investing-vs-...
Day trading is gambling. Buying triple levered ETFs is gambling.
Investing in a diversified index is NOT gambling, because it isn't a zero-sum game, where you have winners and losers. You are investing in the growth of the economy as a whole.
I’ve genuinely never understood why this is so unintuitive to many otherwise intelligent people I’ve known. Over a long enough time horizon (and with prudent management of risk as one ages/approaches retirement) serious increase in wealth is all but guaranteed short of the US absolutely collapsing. And if that happens, then we’d all have bigger fish to fry.
There are no guarantees (other than maybe death and taxes). There's only the likelihood that as long as the market is rational you will make money in the long run. As soon as you start setting odds on success, it becomes gambling.
It has worked to this point, but past returns are not guarantee of future returns. On other hand well both political parties really enjoy line going up, so even if it leads to inevitable destruction lot will be done to keep it going up.
Take all your life savings into a savings account? Well, you could lose it all if the FDIC and your bank collapse.
Take it all into cash under your basement? You are gambling that you won't have a house fire, that you won't be robbed, etc.
Keeping US dollars at all is gambling that the US dollar retains value - there are plenty of examples of currencies completely collapsing.
i was very much infatuated by the idea of total reliability on a global scale and couldn't wait to talk about the CAP theorem with anyone who would listen. Read much of the research. I still love to flip through Designing Data-Intensive Applications by Martin Kleppmann occasionally.
As I was learning about said company's server racks there was a component that I asked an engineer on my team about – "Isn't that a single point of failure?"
He looked at me, exhausted and stressed out, and just said "Take it far enough, the Earth is a single point of failure."
I got the point.
I mostly agree with your assessment, but lots of governments have collapsed, and that doesn't mean that everyone loses EVERYTHING. Some people are able to retain some assets, if they have them in the right form.
I do think some of the hedges people take don't make sense, though... if your hedge is to keep a bunch of cash around, you aren't hedging against your risk because your risks are correlated - the event that will cause all your stocks to go to zero will also cause the dollar to go to zero.
If you are truly hedging against the collapse of the US, you would try to get assets that would survive that... lots of possibilities, and some of them make more sense than others, but all of them have their own risks, and some of those risks are way more correlated than people realize.
As such, if you setup auto-invest into SPY and never look at it, you're not gambling. You don't know if you're winning, you're not thinking about it like a bet.
If you go with your definition of gambling then, well, taking your salary in USD is gambling because the USD, just like SPY, could go to zero and you lose it all.
So, if you run a Casino, I wouldn't call it gambling because your expected value is greater than 1.
Everything is a 'gamble' in the sense that there is a chance of ruin. It is a gamble to drive your car to work, because you could die in a car accident. People don't normally call it gambling, though, because it doesn't fit what we mean when we say gambling - taking a sub 1 expected value risk for the chance of a big return.
Is running a plumbing business gambling? Is opening and running a restaurant gambling? (Sure there's risk in running a business but risk is not the same as gambling.)
Because owning stock is basically owning a slice of a business. Owning a unit of a S&P 500 ETF or mutual fund is owning a slice of five hundred businesses.
Yes, it is a gamble to start a business, but it isn't gambling.
Yes you have more agency in deciding how to run the business, but you have little to no agency about the economic environment you're in. You're highly concentrated in one financial asset, which means any little hiccup can have huge repercussions for your life, especially since you probably only have one business in one particular economic niche.
Whereas if you own a portion of dozens/hundreds of businesses, you have less control of how they are run, but no one business doing badly will impact you as much, nor even one particular economic segment (energy, transportation, tech, agriculture). By owning a broad index of companies you are more diversified.
Further, with modern financial products you can diversify not just between market segments (S&P 500, Russell 3000), but across countries (which deals with the now do Japan retort).
Seems like someone who bought any time since last August and wanted to sell now would be a loser, right? Is now a good time to buy? What if the tarriff horrorshow continues and Apr 2 looks like a cakewalk? Should I put off buying until some time later?
I hate all of this and want to spend my time any way else. So, I do.
The parent is talking about longer term investing, about buying and holding diversified indexes for 10+ years.
Statistically, if you bought and held the S&P 500 for ~30 years, any day since its inception was a good day to buy.
So yes, last august was a good time to buy. Now is a good time to buy.
What the parent is talking about is the way of investing where you do not spend any real time on it.
The bare minimum time is to just setup an autoinvest in vanguard to buy some dollar amount of a broad index fund (like VFIAX) each month, and then never look at it again until you're ready to retire, or have to make a down payment or such.
When you take out money, you don't try to time that either, you just accept the rate is what it is at the time you sell, and only sell the amount you need.
And then, finally, if you want to not think about it much, hardly spend any time, but be slightly more diversified, you could do a 3-fund portfolio, setup autoinvest, and then adjust the autoinvest once a year to push it towards the desired balance. That's a few hours of initial setup time (reading Boggleheads wiki, setting up accounts and auto-invest), and then maybe 1 hour each year from then on (checking rough percent, adjusting auto-invest numbers to push more money towards anything that's lower than desired).
See: https://www.bogleheads.org/wiki/Getting_started and https://www.bogleheads.org/wiki/Three-fund_portfolio
Most growth comes large highly capitalised companies with money to invest in expanding knowledge and capital.
The startup making it big is still relatively rare thing in the grand scheme things.
And the majority of small businesses struggle or stay the same size for ages because they're operating in competitive markets.
However, unlike going to a casino, elected leaders are under enormous pressure to ensure positive expected value - which is precisely why "diversified retirement mutual fund things" are such a good idea for the public investor - they're basically saying "sign me up for EV, please and thank you".
Also unlike going to a casino, some stocks pay dividends and you would in principle receive a share of the proceeds (after paying creditors) if the company liquidates all its assets.
It's been shown to be a mostly rewarding strategy over the last century of so, averaged out at least, and so of course it's not really a foolish bet for most folks, but it's not the only way to secure one's financial health and isn't the ideal one for everybody.
Scrappy hustlers, skilled trade workers, and (SMB-scale) entrepreneurs in particular can often see a better return by investing in themselves and in ventures in their own community, where things are not so passive. Likewise, people with modest dreams and a preference for stability often might prefer securing a paid off house, car, etc before throwing too much money into the casino -- even on good bets. And others with strong and healthy family bonds benefit most by prioritizing enrichment and opportunity for family members who can be trusted to return the favor in less flush/capable times. etc
Many young people have only really been exposed to the idea of market investment as a retirement strategy, and its a good one for many, but there are a lot of roads to staying financially healthy through late life.
You don't understand the power of diversification in portfolios. Yes, there are plenty of individual ventures that will return more than an index fund. But individual ventures are fundamentally volatile. They are volatile because human beings are not machines. People burn brightly and then burn out. People push hard and then fall sick. Cultures and institutions and trust are painstakingly built, and then wiped away in an instant by ideologues.
As an individual investor, you have your labor and your savings. You cannot productively diversify your labor, but you can diversify your savings.
yet, if you look at all people and companies that have grown extremely rich extremely quickly, there is one very common factor: they didn't take money out of the company, but reinvested every single penny. thats the way you can outgrow your competition which doesn't do the same thing. failing businesses are often those that paid too much to their owners.
Starting a business is one of the most risky things you can do. Much more risky then having a diversified portfolio. However the rewards can be amazing given the relatively small chance it hits jackpot.
First of all, to reinvest, you need to have some profits in the first place. Even getting to the point of having any revenue at all, you're losing 90% of entrepreneurs just to get there. Second, among those 10% of entrepreneurs who get to the point where they have any revenue (let alone profits), it's sheer hubris to think that you are unique or special in reinvesting; most entrepreneurs are not seeking to take their goose's golden eggs while they are the size of peas.
There are very, very, very few entrepreneurs who pass survivor's bias to talk about their golden eggs.
When he died in his 90s, his car was the one he bought to visit my parents when I was born.
To be honest, the positive of your story is less Vanguard, more this. You probably benefited more from old-fashioned compounding than Vanguard itself.
Too many people, sadly, don't put some money away each month.
They spend, and then they spend some more on credit, spending beyond their means.
Yes, of course, there will always be people who genuinely live paycheck to paycheck due to whatever reason.
But for people with a stable, reasonably well-paid job, its almost criminal not to put some money away each month.
On the one hand total market index exposure is fantastic.
On the other it’s accumulating more and more with a few firms giving them exceptional power.
Does this unravel at some point? It’s hard to think the index itself could go bad but perhaps everything behind the scenes could fall apart?
I think that the next step will be for individual investors to instruct that their shares be voted according to certain guides. And then the step after that will be for large index investors to be able to directly vote their shares.
3. Impact on Corporate Governance
With substantial holdings across numerous companies, major index fund providers possess significant voting power in shareholder decisions. Wigglesworth discusses the implications of this influence, questioning whether these firms can effectively oversee corporate management without the traditional incentives that drive active investors.
4. Systemic Risks and Market Stability
The author also examines the potential systemic risks posed by the dominance of index funds. He explores scenarios where market shocks could be exacerbated by the passive nature of index investing, potentially leading to increased volatility and reduced market resilience.
In theory, capitalism could fail completely. In theory, governments could stop inflating their currencies. I sure wouldn't bet that way though.
I have some thoughts on this. Not because owning a home is a bad idea, but because you should really factor what you're buying and why. None of this is to say your premise is incorrect, but merely there should be more nuance when thinking about this.
Buying a place you want to live in is fundamentally different than buying an investment vehicle.
I currently rent an apartment, but also own multiple investment properties. Why? Because it makes more sense for my situation, where I myself may need to move more often and therefore some aspects of being in a home that isn't turning profit into my pocket are undesirable, where as buying a house where I am going to live has a very different set of checkboxes, namely between economic issues in the macro and personal health stuff where myself or my wife have to travel a bunch, we're regionally limited and have determined we may or may not want to live in our current metro long term.
That said, I absolutely did buy one of the properties with the future intent of living there myself, I simply am delaying that to make money on the property rather than letting it sit empty. I'm easily a few years away from permanently moving into it myself, but in the advent I decide to live elsewhere long term than where I am right now, I at least have the income stream.
and absolutely, the regulations (and there by, the law) favors home owners every time. Renters get screwed in this I even tell this to young renters who rent from me. You simply can't get a break on the ever growing rise of rent vs a fixed rate mortgage, but you gotta understand what you're buying and why, and don't conflate the difference between a home and an investment vehicle, as many people do.
A house is a depreciating thing you can live in, and is expensive! Once you correctly account for ALL the expenses (not just mortgage, insurance, and property tax!) you discover that renting may be advantageous.
But they do often go up in value over time (ignoring maintenance keeping them together) and sometimes beat inflation (especially when leveraged).
That way, when you retire, your nest egg can go further because you only have to pay the property taxes, and when you die, you can pass the value along to your heirs and build generational wealth.
Houses are not index funds; ideally they should only appreciate at the rate of inflation. But they are absolutely long-term builders of generational wealth through the equity in the home. Heirs can sell them and then invest the proceeds, or live in them themselves without a mortgage.
Housing where it is "affordable" (read: median salary can afford a house) is a great way to get a leg up on the pile - though remember that the average age of a person RECEIVING and inheritance is 60.
But in places were buying a house is $2m but renting the same one is $3k a month, it's hard to ever make the numbers work.
Where I live, what renting currently gets you is an enormous discount compared to the cost of a mortgage and the opportunity cost of parking your cash into a downpayment. Renting and investing downpayment level money is literally a better deal than buying a house.
Why do I care if I'm "paying someone else's mortgage"? The interest payments to the bank aren't building me equity either! It's all money, going one way or another, equity is just more money, and sometimes buying a house means more money goes out than in compared to renting, even if it's more intuitively satisfying.
This helped us tremendously. Rental income while not game changing when you own only 1-2 properties, does help build up your assets. It also allows you to offset some expenses as business expenses, which is nice.
There is overhead of course, and we pay a property management company to do things on our behalf and they get a small percent of the rent every month, but overall it taught us a ton and we did it without incurring significant additional expenses thankfully.
Now we are up to our 6th rental property and things are going smooth so far.
This is building true wealth via real estate in my opinion. Assuming we keep going, we'll likely own 12+ properties eventually, which we will sell down the road many years from now likely for significant upside, all the while having steady income coming in from them until we sell.
And since you're usually in one or two properties to start, if your first one is the tenant from hell in a downmarket, you're going to feel it.
The best thing you can do is structuring everything through a corporation. This also allows some additional avenues when considering financing too. It also gives you the liability shield in case things go sideways.
There's overhead here though, for sure, and plenty of ways to go about it the wrong way, many footguns exist. Its not stress free.
If you want truly passive investments, index funds are the way to go. Which is why I think buying a home for living should fundamentally have different criteria
Nothing else will let you take a government-protected 30 year fixed rate loan at rates barely above what the US government itself pays, that you can pay off anytime and cannot be called, leveraged to 80% or more.
And then the loans are often non-recourse, and the asset protected in bankruptcy.
https://johntreed.com/collections/real-estate-investment/pro... has even more ways that the government is fighting hard to force you to accept leveraged appreciation.
A lot of people find their first house too small and buy a larger house later. IMHO, most people have an idea of how many children they'd like to have and some idea of when. I think the idea of the advice is not to buy a small house that fits your needs as a single person and wait until you have a family to buy a larger house that fits your needs as a family, but to just buy the big house?
a) If you buy your first one big, maybe it will be big enough and you won't need to switch. That saves transaction costs, and keeps you price anchored to your first purchase. If your house is in a state with something like Prop 13 that effectively anchors property tax to purchase price, buying the final house earlier can save you a significant amount of property tax over the years.
b) I think house prices rise faster on larger homes than smaller homes (especially condos and things). If that's the case, buying a right size house first then a new right size house later if your needs grow means you'll have a larger gap to cross over time.
c) probably something about house prices always going up, it's implied in a lot of arguments (and it works except when it doesn't ...)
On the actual whole, they haven't. In the last few years, salary increases did for the time period of 2020-2023 (as far as I am aware that is what we have data for around this assertion) but generally they have not.
IMO, a better measure is how well have salary increases kept up with gains in productivity, and when you look at that its truly abysmal.
For example, I might be a member of a guild that keeps my salary nice and high while having the negative effect of keeping the productivity of the guild constant, which would be bad for society, but good for me.
Also, we are mostly software developers here, and dev salaries certainly have kept up with inflation.
I was saying this in reference to how much we get paid. As a reflection of value / worth. Compared to the value generated, our salaries are relatively small, and its hard to argue otherwise when you look at productivity gains.
If you want to capture more of those gains, being invested in index funds is a good step in that direction.
>Also, we are mostly software developers here, and dev salaries certainly have kept up with inflation.
Even if this is true - and I don't know that it is so broadly true that it can be accepted as the median circumstance of HN users - that situation won't last forever, and more importantly salary is not controlled by you its controlled by another entity.
The entire premise of the conversation is convert your salary - something you may depend on but isn't something you have sole control over - into things that you do have more control over (index funds) or effectively sole control over (real estate investments most commonly).
This allows you to decouple your wealth from any single entity, which is the central goal.
also the US tax code heavily favors owners. Income tax can be > 30% but capital gains tax is < 20%
You should really look at real estate one of two ways when buying.
Either you're buying a home and you live there. Its unwise to treat that in the same vein as index funds. While its definitely an asset, the mindset of living vs investing in something isn't the same, and I recommend not conflating the two.
On the other hand, if you buy real estate as an investment you should remove any thoughts about it being a living space for you and/or your family. At that point, it should be seen as something you'll rent out to others (primarily the best way I currently have found to turn a profit on investing in real estate) or doing more speculative house flipping ventures, home builds etc.
I don't really think this blanket advice is the best advice. I do think its important to own your home - simply because of how society is structured, it heavily favors home owners, plus rent is simply lining someone else's pocket, where as eventually owning a home free and clear removes a major liability from you life. To simply buy the 'biggest you can reasonably afford' could land one in a bad place
I personally think it should be one or the other - you either are buying real estate as an investment vehicle (to flip, rent, speculatively build etc) or buying it to live in, but in which point you don't treat it as a primary store of wealth - but unfortunately home ownership in the US is structured that if you buy and live in a home, you inevitably end up with it being treated as both a store of wealth and a home in which you live, and you're constantly tugging between the two things which have very different considerations.
I think a land value tax and liberal zoning laws would go a long way to fixing some of this, but is another discussion entirely
I think this would be fine if the government was willing to eat some cost of mortgage adjustments. The biggest problem with price decreases in what I believe to be in the way you mean - that existing home owners see their values drop - is one the mortgage is underwater you have an upside down situation for both the owner and the bank.
One way to offset this is if the government eats the difference in some way. I don't exactly know how this would be structured, but if this were to be the case, I imagine it would go a long way to getting more people on board with housing reform.
It shouldn't have ever been treated like a store of wealth to begin with. You're either the homeowner or the landlord, this middle path of being both your own homeowner and effectively treating it as a store of wealth - there by in a sense making you your own landlord if you will - is the problem.
Strongly disagree with this. Buy the house you need, and only if you intend to stay there at least 5 years.
On the one hand I acknowledge the US tax code and housing policy encourages home ownership, but on the other, you're completely discounting the utility costs, maintenance / reno drag, and transaction costs that come with owning more home than you need.
While I was moving every year or so for new opportunities, I happily rented. When I moved to a local tech hub where I felt I could put down roots? I happily bought, but I only bought what I needed.
I saw a lot of classmates buy a home prematurely, and effectively be 'stuck' looking for work in the same small job market their whole career, where moving really helped mine.
I see the situation as this: The middle and upper-middle class have become invested in a perpetuating a system that ultimately will strangle them or their descendants.
Wealth begets wealth, power begets power. It might be a law of nature that things like to polarize. Likely we'll see a return of society consisting of two groups: rich and powerful, poor and powerless.
Most older engineers I meet seem to associate with the mindset and politics of billionaires and multi-millionaires, and see themselves almost in the same club sometimes. I guess making a lot of money does that to people. Add to that the truth expressed by Steinbeck about the USA "The poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires."
I think we have a problem where housing and stocks must continue to make return on investment. Housing prices must keep raising, hurting the next generation. Young people increasingly don't have the luxury of job stability to buy a home. Companies must keep increasing profit, leading to offshoring, outsourcing, stricter working conditions. And now middle class government jobs must be cut and privatized so that capitalists can make profit on providing a service. All the while the top percent owns and increasing share of the wealth pie.
I felt I needed to reply because while what you are saying is the way things are, I wish it didn't have to be that way.
why not? its an basket of stocks. correct me if i'm wrong but in the long run, index beat out stock picking.
i did some stock picking just for fun. two of my picks that i put real money into end up badly that i lose money.
Passive investment breaks that approach, because you're basically buying shares in every company in an index, regardless of its performance or future prospects.
And if passive investment is 1% (as it was back in the 90s) of the market then that's not a big deal, because most of the investment should still be based around performance and productivity. Nowadays its more like 50% - but what happens when that gets even higher? Does the stock market still work effectively if 90% of the money is just blindly invested without any regard of individual company performance or merit? 99%? 100%?
I don't know. But we may well reach a point where the inefficiency of passive investment creates serious problems.
companies lucky enough to be listed in the S&P or whatever would get a huge influx of cash, but their actual quarterly performance wouldn't change whether people buy/sell their stock because people aren't picking and evaluating individual companies. so... what would determine their price?
But then it's no longer your theoretical market that is 100% passively invested.
and it's not even that the index fund is driving price discovery of the aggregate market because people using these funds just keep dumping money in on a schedule because they've internalized the message "time in market beats timing the market".
That would never happen, because the more a market tilts towards index investing, the larger the incentive and opportunity that active management has to exploit misspriced assets. The trick is that the very act of exploiting that opportunity updates the price and eliminates it long term, and the harder it becomes for active investors to find misspriced assets.
TLDR: Active managment effectively performs a service to the market, and gets rewarded for it, but the reward is small and fleeting
Because when you say a stock is undervalued, isn't what you're really saying is that you think it's value with increase at a higher rate than the rest of the index in future, because it will attract above-average rates of investment from other active investors? Or to put it another way, "in the future more people will want to buy this stock than other stocks, so its value will go up".
But if everyone else is the market is investing passively, where does disproportionate future demand come from?
Why does a share of a company have any value? Well, if you buy 10% of the stock of widget co, you presumably get 10% of it's earnings, be that through dividends, share buy backs, etc. It's stock price will reflect that. It also reflects the future potential growth.
For some companies, (utilities, etc) there isn't much future growth so the price is mostly a function of it's ability to pay out dividends. For a tech startup, they're not paying out dividends any time soon and the price reflects it's potential to someday be BigCo with massive earnings and massive dividends.
There will always be active investors trying to beat the market, and they aid in price discovery.
It's always interesting to read the frustrations of star fund managers and how difficult it becomes to sustain success just as they get popular.
I've never argued that there are not market inefficiencies that can be exploited by active managers, but the twist is the very act of exploiting those opportunities quickly eliminates them. Thus why it's so hard for an active manager to beat index funds long term. If you're worried about a few high market cap companies dominating stock indexes, you could always tilt towards small cap value. That sector has under performed for decades, but every dog has it's day.
If it becomes untenable to trust firms to manage index funds, it would be possible , if onerous, to replicate at least a S&P 500 in a retail brokerage. There's a lot of nice things the fund does to earn their 0.03% expense ratio that you'd miss out on, especially convenience; but you'd also be able to vote your shares as you wish for all that that's worth.
The indexes themselves I don't think can stray too far from their mission, or funds will throw a fit, S&P 500 index consideration is nearly a mechanical judgement. At the tail end of companies on the 'all market' type indexes, there's perhaps room for shenanigans that could be material for those doing the manipulation, but given the realities of a market value weighted index, it won't make much difference to those following the index if an inappropriate company is added to the index and followers have to spend 0.001% of their fund on it.
Which firms are you referring to? Firms like Vanguard or firms like Apple?
I don't really see how Vanguard gets "power" here. They have no choices. They can't deviate from the index, so the money they control doesn't give them "power" to affect anything.
Or if you mean firms at the top of the index like Apple, they owe their power to their competitiveness and profit-making ability. I don't really see how inclusion in indexes inflates their power, except in an arguably slightly higher stock price. But it's not allowing them to engage in "powerful" behaviors they wouldn't otherwise. Apple isn't buying up companies it wouldn't if it weren't in index funds, for example.
https://www.vanguardinvestor.co.uk/investments/vanguard-life...
So while they can't easily pick and choose which S&P 500 stocks they include in a fund like that, they can decide if the S&P 500 is 1% or 10% or 50% of what that fund invests in. And given the total amount of investments they have, if they decide to move towards or away from certain countries/indexes/etc that could have a significant impact.
They do have voting rights in companies that are part of the index. In my judgement, that's the more reasonable interpretation of the GP's point.
On the other hand, the more of the market held in index funds, the less is available to active investors to perform their valuation service, as described elsewhere in this discussion.[0]
Is there any information on how Vanguard exercises this? Looking online it's hard to find any actual reporting on it.
It seems like Vanguard could either not participate in governance at all, participate in a kind of "neutral" fiduciary way designed to ensure accountability but without pissing off any segment of Vanguard investors, or could be more "activist" which is where it could abuse that power.
Is there some kind of US law that forces it to operate in a fiduciary way? Or isn't that just what's best for business anyways? I'm still wondering if there's any realistic opportunity for abuse of power here.
https://corporate.vanguard.com/content/corporatesite/us/en/c...
The problems in the world that would result in the entire top line public companies falling apart that make up the TSM or even S&P 500 fall apart protractedly - not like a few companies getting knocked out and replaced by others but the _entire concept_ failing - would be of such magnitude that people's retirement savings would probably not be the 20th thing on their list to worry about. Look at how COVID even at its worst could barely knock things down more than 25% or so for a few months.
I think Fidelity's Net Benefits (which I believe is distinct from the personal site) is pretty bad though.
For an example of a thing I hate about the new web interface is trying to buy a stock. You end up in some different part of the website where after you place your order it shows you a differently formatted order status page than the normal order status page. There's an Exit button at the top. Pressing the Exit button will pop up asking if you want to leave because you'll lose all your unplaced orders, of which you have none because how you got to the Order Status page was by fully placing an order. It's confusing for no reason.
In contrast, I can do all that in one pop-up/side panel in Fidelity or Charles Schwab. I have been a long time user of Vanguard (almost two decades) and I wish they revert to their old web UI, which is informative and simple enough to get all the jobs I need to do in an efficient manner.
Vanguard's architecture is enormous, but they are getting closer and closer to fully modernizing the site and retiring legacy completely. Its something that has been happening and will continue to happen over the next few years.
I refuse to do business with a company with that shoddy of security practices. There's no reason what the representative was doing couldn't have been done online through a secure portal that respects my privacy, but alas, it could not.
I went with Fidelity. Its been great. Though all these brokerages have their pros and cons, I groked the setup at Fidelity pretty fast.
They really did feel like this bastion of customer focused passive investing in the brokerage industry for a _long_ time. They eventually helped seriously popularize index funds to the point where every major firm offers a low cost index fund, because they have to to compete. They continued to lower their fees whenever they could to the point where VTSAX is .04% (with their ETFs being even lower).
He even turned down an offer to create the first ETF (I forget the guy that brought the idea to him), but he explained the idea to Bogle and Bogle politely declined because he thought that having the ability for intraday trading went against the Vanguard model of set and forget passive investing. That guy eventually went to the firm that runs SPY, if I recall from the book. They eventually began offering ETFs, obviously, but Bogle was always more of a mutual fund guy from the way that book puts it.
Bogle really seemed to be for the people. The man was wealthy, but not nearly as wealthy as he could be because they continued lowering fees. Their mutualized fund structure is also a massive part of that.
After he left Vanguard, you saw more traditional brokerage offerings - more active funds and more pushes for offer advisors to you over the phone. If I recall, Bogle expressed some displeasure in that.
You can tell I'm a Bogle fanboy, but I'll gladly wear that badge.
[0] https://www.goodreads.com/book/show/42938221-stay-the-course
I noticed he didn't really have much in the way of suggestions for the individual beyond suggesting DFA funds. Given those aren't easily available without signing up for their advisor services, I am deeply skeptical that the savings would be enough to pay for their fees.
When you invest in an American stock market index fund, you get a highly diversified financial instrument at a fee that is so low that it is nearly free. You're buying into the proceeds of the strongest cultural force that is stronger in America than anywhere else in the world: greed. The force underlying your investment is that every CEO of every public company in America is working to make you richer, because if they succeed at making you richer, they've made themselves much richer in the process. You are investing in the greed of thousands of public company CEOs. When their greed pays off, you get paid off.
No American president, least of all Donald Trump, is going to stop the raw power of American greed, and that's not going to change without some kind of religious revolution of morals in a country that has become increasingly less religious over time.
It really feels like a bunch of people think the stock market is completely fake, gambling, and anyone who invests is directly contributing to strengthening capitalism, which is bad
The fact that like 60-70% of Americans have direct exposure to markets through IRAs and 401k's and benefits incredibly from it is an anathema.
They are no longer the cheapest UK ETF or fund provider in any category, and their Vanguard Investor platform isn't the cheapest either.
Since they have so many shares of so many companies, they are secretly the shadow owners/operators OF all those companies.
The stock market response to "liberation day" implies that stocks don't all move together as you would expect if indexing was driving everything. Certain FANG stocks did very poorly, some mid cap or European stocks did great. The market is still trying to respond to the perceived actual value of companies, not just the expectation that more indexes will pile in and buy.
If people over invest in anything, including equities, the return on those investments will decline and bubbles will form. That can happen with the purchase of selective equities or with indexes. What Vanguard has done has probably not changed the market as much as lowering the cost to participate in it.