Today we share with you the first in a series of essays on ways investors can build their wealth — not by relying on any individual stock to make them a millionaire … but simply by choosing the right mutual fund investments.
Dan Wiener brings more than 30 years of experience in the fund industry to his Independent Adviser for Vanguard Investors service. Dan and his co-editor, Jeff DeMaso, are dedicated to bringing subscribers the secrets Vanguard doesn’t share with the public.
But at the end of the day, Dan and Jeff specialize in performing the analysis and explaining the market conditions that get their readers a better return on their money.
Our goal at the InvestorPlace Digest is to help make you a smarter, richer investor. Dan’s knowledge and experience in the mutual fund marketplace provides insights you won’t find anywhere else.
How to Get Ahead by Doing Nothing at All
By Dan Wiener, Editor
Independent Adviser for Vanguard Investors
Hello. My name is Dan Wiener, and I’d like a minute of your time to show you how to build wealth, the most effective way I know how.
It also requires very little action. Zero, in fact.
Now, don’t get me wrong:
I’m not some “passive income” guru, who’ll end up trying to get you to turn your spare room or vacation home into an AirBnB. Nor will I tell you to start a “side hustle.”
This is about investing.
But it’s NOT about investing in a short-sighted way. Like most people do.
They think that, because the “story” of a stock is just so compelling, it’ll make you gobs of money without risk.
Let’s get one thing straight:
Anything you do (or don’t do) with your money is a risk.
First, there’s the risk of facing the future without developing and growing your “nest egg.” And then, there’s the risk of the market itself.
Smart investing is about mitigating risk. To do so, you need to think big-picture.
I’ll show you how to “set up your cards” right from the beginning — do nothing — and turn $3,000 a year into more than $200,000 … and more … and more.
It’s the method I use myself. I even did it for my kids.
Thanks to me matching my teenagers’ summer earnings, putting it in Roth IRAs, and investing it on their behalf, my son and daughter — now in their 30s — have already built up a tidy sum that will continue to grow for many years to come.
Here’s the kind of payoff you could get:
That’s more than a 50% return. For, again, zero effort.
But it gets better: If you can keep contributing for another 15 years, you’d more than double your money. You’d have $209,282.
Heck, maybe you didn’t contribute for nearly that long. Maybe you just contributed for the first 10 years — then stopped … and let it ride.
At year 15, you’d still have $50,567.
At year 30, you’d have $105,125.
And that’s what you are able to do …
If you simply earn a 5% return each year … but you can do so much more!
You can do even better (and your portfolio can grow even faster) if you play your cards right, as I’ll show you.
The longer it rides, the more wealth gets built for you … your kids … your grandkids … or even just a nice young person you want to make very rich.
The trick, of course, is making that steady 5%!
People might think an index fund is the “safe bet” here.
Or, at least, they DID …
… until their index fund lost money in 2018. Or 2015.
Let’s not even talk about 2008. Or 2002 … or 1987 …
Well, you get the point. I (and my kids) built a nice nest egg, simply by NOT taking that shortcut.
Here’s “the secret” — what I look for in an investment:
I look at its track record, and most importantly, who was responsible for it. I’m looking for good management. Actually, I’m looking for the best management in the world.
Very often, we simply compare performance to something like the S&P 500 — and that’s all the homework we do on it.
But even the S&P itself has a “brain” behind it:
Someone at Standard & Poor’s decided that it should be made up of 500 “leading companies,” chosen by committee. And that it should be “market-cap weighted” … so that the biggest stocks have the most impact.
And as for S&P 500 index funds …
The biggest — Vanguard’s 500 Index — owes to my late friend, Jack Bogle.
When Bogle came on the scene, stock-picking was the name of the game … whether you invested in stocks, or in mutual funds. You were either doing it yourself, or some guy in a Manhattan skyscraper did it for you.
In Bogle’s research, he had looked at the actively-managed funds of the day, and determined that they didn’t outperform. So, he’d tell you, you may as well buy an index fund.
To sell that idea, investors like you and I are told that index funds let us sleep easy at night because of their “broad diversification.”
No way! For every Amazon, there’s an Enron. And for every Starbucks, there’s a Sears. If you own an index fund, you own all the stocks in the index it tracks until — well, until the bad ones simply go bankrupt, or the index providers dump them.
There is no advantage to owning an index fund for access to hundreds or thousands of stocks. In fact, you are exposing your portfolio to hundreds or thousands of variables you can’t control. You’re actually introducing MORE risk.
No … the real benefit of index funds is “the magic of compounding,” as Jack Bogle once put it.
Index funds can be run for much less money than most active funds. Low cost is a “small difference” that gives you an enormous advantage, as you invest, reinvest, and compound your portfolio returns.
But here’s the dirty little secret indexers won’t tell you:
At Vanguard, at least, the active funds are almost as cheap as their index funds.
For a quality money manager, I’d put Dividend Growth’s Don Kilbride up against anyone you got. And when you compare to popular, broad index funds, you find that you can get this world-class management … for just a few pennies more.
So, when it comes to Vanguard, a low-cost fund run by a great manager always, always wins.
But hey, don’t take my word for it.
Vanguard even admitted it!
Yes, the “indexing king” published a little-known white paper in 2013 that said:
In fact, Vanguard found that just by starting with the cheapest active funds, you’ve already got 40% odds of beating an index fund!
Vanguard gave me, my Independent Adviser readers, and you the tools to outperform. We just have to use them.
As it turns out …
Even with a “Conservative Growth” portfolio of 8 top Vanguard funds — 8 funds that you just buy, sit tight, and let the returns compound over time — you can come out $30,000 ahead of the S&P 500, or more … and it’s a smoother ride!
Now, these models are fun for me to run, because I’m all about fund research.
But I also invest in them.
And I share them with as many other investors as I can reach. Because you’ll never get this from Vanguard.
Unfortunately, I think it’s gotten to the point where they are taking advantage of the “cult” that’s grown up around indexing.
After all — running these index funds is “free money” for Vanguard.
Be sure to check out my special report on the topic.
Because what you don’t know about Vanguard could make you a lot more money for retirement.
Dan Wiener, Editor
The Independent Adviser for Vanguard Investors