Is Vanguard Getting Too Big?

I hope everyone had a great weekend. Here at Ridinkulous HQ, it was Eurovision weekend, of course. We had some friends over so we could introduce the Eurovision madness to others. Maybe you’ve heard, but the Muppety man with the huge suit from Portugal won the contest. He was very good, but this year we were a Moldova house. After all, it featured the return of the Epic Sax Guy. They came in third place!

Then when the sun was shining (and Eurovision wasn’t on) I worked outside on a DIY lounge chair. During the warmer months, all I want to do is sit outside and read. Right now all we have is some patio table chairs. But I want to stretch my legs out, so I figured a lounge chair would increase my leisure comfort about 50%. But lounge chairs are expensive! So I found plans online and made that my new project. I had a lot of the wood on hand already, so it should be pretty cheap, and hopefully very comfy.

Now for the actual financial part of our post…

If you read any personal finance blogs, including this one, you know Vanguard pretty well. They are the dominant name when it comes to broadly-diversified low-cost investing.

They provide cheap, easy access to the stock market as a whole. It’s a no-brainer to use them, since we know that the average active investment mutual fund will underperform a passive investment fund, especially after accounting for the fees.

I had been hearing recently about how passive investing has really taken off. That even your average, middle class investor understands that this is the way to go. But it wasn’t until reading an article in the New York Times that I realized just how dominant Vanguard has become. (We shell out $7.50 a month for a Times online subscription, but it’s worth using one of your precious ten free articles a month on this)

Besides painting a charming portrait of Vanguard’s low-key suburban Philadelphia offices, the article shows the extent to which Vanguard has been ruling the market:

“In the last three calendar years, investors sank $823 billion into Vanguard funds, the company says. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period.”

I mean, I knew Vanguard was getting more well-known these days, but my jaw dropped at those numbers. They’re taking in almost ten times more than every other company combined! Those include like Fidelity, T. Rowe Price, and Blackrock…

Our household is a case in point. I wondered, how much do we actually have at Vanguard?

How much of our money is invested with Vanguard

Vanguard Mutual Funds 89%
Individual Stocks 5%
Other Mutual Funds 3%
Lending Club 3%

Yes, that’s almost 90% in Vanguard mutual funds. That basically reflects what’s going on with Vanguard in general. Crazy, isn’t it?

We started investing in Vanguard in 2006 or 2007 after previously putting our excess cash into some unbelievably profitable (by today’s standards) CDs with a 5% return. I can’t remember how I found out about Vanguard, but since I had taken finance classes in college, it had already been drilled into me that most mutual funds were out to profit as much as possible from the consumer, with the front and back loads and high fees.

So we started Roth IRAs at Vanguard. As jobs came and went, 401(k) savings were rolled over into more IRAs at Vanguard. Our emergency fund moved from a savings account to a Vanguard money market mutual fund. My 457 Plan started introducing Vanguard funds to their choices a few years ago. Soon I had exchanged all of former 457 funds for Vanguard Total Bond, Institutional, and Small Cap Indexes. I even moved all of our individual stocks from the skeevily named TradeKing to Vanguard for the sake of easier record-keeping.

At this point, it’s easier for me to list our financial assets that are NOT with Vanguard: A DRIP fund with Coca-Cola, a handful of other stocks, Marge’s current 401(k), and Lending Club. The Coca-Cola DRIP is basically a legacy investment that I’ve been putting money into monthly since 2003, when I was but a junior in college.

“The triumph of index fund investing means Vanguard’s traders funnel as much as $2 billion a day into stocks like Apple, Microsoft and Amazon, as well as thousands of smaller companies that the firm’s fleet of funds track. That is 20 times the amount that Vanguard was investing on a daily basis in 2009. “

So what are we to make of this? Is this a problem that passive investing is becoming the norm?

Soon the only people playing around in the stock market using active investing will be the super-rich who have nothing to lose. They’re the only ones not getting on the passive investing bandwagon because, well, what do they care if they lose some money? So the part of the market that is actively invested will have fewer and fewer players in it.

There will always be some money to be made on buying and shorting under- or over-valued stocks. I don’t think there will ever come a point when the entire market is invested in passively. As long as there are current events happening, economic news coming out, and quarterly reports being issued, people will be buying and shorting stocks based on that information. If there is any money to be made at all, people will be there to take advantage of it.

Also, I heard that supposedly the market is showing a extremely low amount of volatility lately. Like, so little that it’s strange historically. I wonder if the amount of passive investing is part of the cause?

How much of your money is at Vanguard? Or do you actually use another company?

2 Comments

  1. More than 90% of my net worth is in Vanguard. I think passive/active investing is cyclical. People are plowing money into index funds since active has been underperforming. In the next 10 years, I’m sure active funds/hedge funds will go on a tear and then people will chase returns and pile into active just as they are about to revert to the mean. I’ll be happy sitting in passive funds while everyone else chases returns 🙂

    • Norm

      May 16, 2017 at 10:10 pm

      I don’t know if it is cycical! Maybe you’re right, but I think of it more as a sea change. Like everything else, so much is being automated in areas where you used to have to go see “a guy.” I think once going passive, most people would be happy to just let it be. I guess we’ll see!

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