A reader writes, asking

“With Spacex’s recent IPO and other upcoming IPOs and the changes that the index fund providers are making, would it be more advantageous right now (until at least things calm down a bit) to mix my own choice of domestic/international funds versus going with a ‘pre-mixed’ blend fund like VT, target date, or something like AOA?”

It’s always the case that if you have a prediction that you think is better than the market’s collective prediction — and you turn out to be right — then doing something other than a boring market-weighted index fund would have given you better results. The challenge of course is somehow managing, on your own, to know better than the market’s collective knowledge.

My prior article, “Why Stock Prices Are Still Volatile in an Efficient Market,” is applicable here. Here’s the relevant part, edited for brevity:

The idea of an efficient stock market isn’t that the stock market can predict the future. Nobody knows what is ultimately going to happen with any given stock.

That is, the market price for a stock doesn’t mean that this is where the price will stay; it’s simply the consensus best estimate, given the information that is currently available.

By way of analogy, imagine that I’m hosting a raffle, in which the winner gets $100. I’m going to sell exactly 100 tickets to the raffle. How much is each ticket worth?

Each ticket is worth $1, because each ticket has a 1% chance of winning $100.

Of course, the reality is that, of the 100 tickets, 99 of them will turn out to be completely worthless, and one lucky ticket will turn out to be worth $100. But we don’t know in advance which ticket will be the lucky one, so until the raffle actually happens, each ticket is worth $1.

The point of the efficient market concept isn’t that an efficient market would successfully predict which raffle ticket will be the winning ticket. Rather, the point is that an efficient market would successfully price each ticket at $1 prior to the raffle.

With regard to SpaceX’s market price, it’s a similar concept. Everybody knows that the current price is not the ultimate “right” price. But the challenge is that there’s a pretty good chance the company will turn out to never be profitable and thus the shares will ultimately be worthless or nearly so. And then there’s also a small chance that it will someday be wildly profitable, possibly even the most profitable company in the world. So the current market price is the market’s attempt to probability-weight those two potential outcomes (as well as potential outcomes in between).

And of course nobody really knows the percentage probabilities of any of those outcomes, nor does anybody have a good way of calculating how profitable the company would be in the best scenarios. So there’s a lot of guesswork going on here. But:

1. “A lot of guesswork going on here” is something that is true for a lot of stocks, a lot of the time, and
2. It is, at least, the collective guesswork of the market, which is probably better than my own guesswork anyway.

A reader writes in, asking:

“I saw that Vanguard was recently fined by the SEC for not disclosing conflicts of interest in their PAS [Personal Advisor Services] program. PAS has been a favorite with Bogleheads and I believe you have written about it favorably as well. Does this change your opinion of the program? Or does it change your opinion of Vanguard in general?”

For anybody interested, here’s the official SEC document, and here’s the SEC’s summary.

Here’s a relevant quote explaining the situation:

This matter arises from Respondent’s failure to adequately disclose conflicts of interest in connection with its recommendation to prospective clients and existing clients (collectively referred to as “clients”) to enroll in Respondent’s managed account program known as Personal Advisor Services (“PAS”), a fee-based advisory service that provides clients with ongoing portfolio management of their accounts.

From August 2020 through December 2023 (the “Relevant Period”), Respondent’s performance review system considered, among other things, certain metrics that incentivized its financial advisors that serviced PAS (“PAS Advisors”) to enroll and retain clients in PAS. During the Relevant Period, Respondent failed to adequately disclose the conflict of interest that this incentive compensation system presented because certain disclosures contained contradictory statements about PAS Advisors’ receipt of incentive compensation.

[…]

Additionally, Respondent made misleading statements in marketing materials regarding PAS Advisors’ conflicts of interest, including that PAS Advisors received no outside compensation or financial incentives.

So, in short:

1. Vanguard PAS employees received compensation based on their ability to enroll prospective clients in the PAS program and retain existing clients in the PAS program.
2. And that creates a conflict of interest, which Vanguard did not disclose.
3. And Vanguard’s marketing materials were misleading because they said that PAS advisors did not receive financial incentives, which is inaccurate.

Disclosures and marketing aside, it’s not exactly surprising that the compensation of an advisor working for an RIA would be based at least in part on their ability to retain clients (or convert prospective clients into clients). If you’re on the phone with somebody from Vanguard Personal Advisor Services, discussing potentially signing up for Vanguard Personal Advisor Services, they’re probably going to try to get you to sign up for it. And if you’re already a client, the people at Vanguard PAS with whom you interact will probably try to keep you as a client. Neither of those conflicts of interest strikes me as especially problematic. And if either of those dynamics comes as a surprise to you, your level of skepticism for the financial services industry needs to be cranked upward by factor of 10 at least, otherwise you’re in for a world of financial hurt over your lifetime.

I don’t mean to make light of the importance of full, honest disclosures. In my own client practice, I spend a lot of time trying very carefully to make sure I’m following all the applicable rules. Vanguard failed to disclose something that they should have disclosed, and they got fined for it. I’m not sad to see the fine. But it doesn’t meaningfully change my opinion of Vanguard PAS (or Vanguard in general).

The disclosures regarding, and marketing of, Vanguard PAS are separate from the value proposition of the PAS platform itself. The Personal Advisor Services platform is the same as ever: 0.3% per year to rebalance your portfolio and provide what I’d describe as “light, portfolio-focused financial planning.” For lots of people looking for somebody else to manage the portfolio for them, that’s going to be a good fit. It’s also not for everybody.

A reader writes in, asking:

“I’ve been a boglehead passive investor for several years now. I’ve fed myself a steady diet of writing by Benz, Bernstein, Roth, and Piper. My question though is whether boglehead-ism (if that’s a word) is really only a middle-wealth sort of thing. Does the same advice really apply to people at the more distant ends of the economic spectrum?”

At the lower end of the economic spectrum, there are some priorities that should be taken care of before investing at all. Namely, paying off high-interest debt and building up a bit of an emergency fund should both be done before we start putting any money into mutual funds, ETFs, etc. And it may be the case that there are education opportunities available that offer a better return (by increasing one’s income) than we’d expect to see from stocks and bonds.

But as soon as it makes sense to start investing, the core concepts of passive investing (diversify, keep costs low, buy-and-hold) are applicable. Something like an iShares Core Allocation ETF is a great choice for a new investor. It’s diversified. It’s low cost. It requires no ongoing maintenance, and as an all-in-one fund, it encourages healthy investing behavior (i.e., buying and then leaving it alone).

Admittedly, expense ratios aren’t super critical if we’re talking about a modest amount of money. For example, for a $1,000 portfolio, the difference between a 0.1% expense ratio and a 0.2% expense ratio is a difference in expenses of just $1 per year. But there’s still no downside to picking funds with low expense ratios.

The concept of diversification is, if anything, even more critical at modest levels of wealth. For instance, somebody who is late to the game with saving and investing really can’t afford to be risking large amounts on individual stocks.

And the same goes for taking a buy-and-hold approach rather than trying to move between stocks/bonds/cash at exactly the right times. If you don’t have any money that you can afford to blow up, it makes sense to just pick an asset allocation that’s suited to your risk tolerance, and then stick with it.

At the very wealthy end of the economic spectrum, passive investing may not be the only reasonable option, but it is always a good option. And it would still be my preferred option, for most people.

The larger the portfolio, the more critical it becomes to minimize costs. So as mutual funds go, it still makes sense to pursue super diversified, low-cost ones.

And predicting stock market crashes or interest rate changes doesn’t become any easier just because you have a large portfolio, so the buy-and-hold part of passive investing is still just as relevant as it is for anybody with a smaller portfolio.

One thing that does change is that the larger the portfolio, the more access you will have to various vehicles that invest in private equity or private debt. And at a higher level of wealth, there’s a greater ability to put assets at risk in such vehicles, without risking financial catastrophe.

But just because you can invest in something doesn’t necessarily mean it’s a good idea. The expenses for such private market investments tend to be quite a bit higher than for simple ETFs or index funds. And such private market investments tend to be dramatically less diversified. That means that they have the ability to provide truly mind-blowing performance. They also have the ability to provide quite lousy performance, which is then made even worse by their high costs.

Regardless of performance, relative to boring ETFs, private market investments tend to be more complicated, less transparent, less liquid, and harder to incorporate into tax planning, cash flow planning, or estate planning. In many cases, if the portfolio is already quite large, that means we don’t need returns greater than what we could expect from boring ETFs. And if you don’t need the hoped-for high returns, why bother with the hassle?

To my mind, the passive/Boglehead style of investing is just as prudent, regardless of whether we’re talking about the low range of the wealth spectrum, the high range, or anywhere in between.

Imagine that, for a few months now, you’ve had a set of new health symptoms that seem to be related. So you go to see a doctor about it. The doctor tells you that he thinks it’s probably [some particular condition], but he notes that this isn’t the sort of thing that can be diagnosed with 100% confidence. This isn’t like a broken wrist, where we can just look at an x-ray and say, “Yep, that’s broken.”

Given the doctor’s uncertainty, you decide that you want a second opinion. So you go see another doctor. And she tells you pretty much the same thing as the first doctor. And that’s valuable! Even though she didn’t add any new information, and even though she was also not 100% confident, the fact that two different specialists agreed should give you more confidence.

Now imagine that there was an easy way for you to get not only a second, third, or fourth opinion, but thousands of opinions. Imagine that you could have thousands of specialists review your symptoms, your test results, and your medical history — and then all of those physicians’ feedback would be collected and tabulated. And you learn that most doctors do indeed agree with what the first two doctors said.

That doesn’t necessarily mean they’re all correct. (After all, they themselves noted that there’s some inherent uncertainty here.) Maybe the correct diagnosis is one of the less-common possibilities that some of the other doctors mentioned. Or maybe it’s a diagnosis that only one or two physicians mentioned.

But you have to pick a treatment plan. And given that you aren’t an expert in this field yourself (or frankly, even if you are an expert), selecting a plan that’s based on the feedback of the majority of the experts is very likely to be your best bet.

And that, by the way, is how the stock market works.

The price of a stock at any given time reflects the consensus opinion of a huge number of professional experts on the topic. This is not to say that every investor agrees that the current price is the correct price. But the current price is the weighted-average consensus, when we weight everybody’s opinion by the number of shares of the stock that they trade. (Point being, the professional investors who move the most money, such as mutual fund managers, hedge fund managers, pension fund managers, endowment managers, etc. are the people who are primarily responsible for setting the prices based on their trading.)

When you buy individual stocks, or when you jump in and out of the market based on stocks collectively looking overvalued or undervalued, you’re deciding that you know more than the collective consensus of a huge number of experts. It’s like a sick patient receiving feedback from thousands of physician specialists and then promptly ignoring that feedback, because he’s convinced he knows better than all those doctors do. Sure, it might happen to work out. But it’s not a great bet. And it’s definitely not the sort of thing that you’d want to implement as a general policy.

I recently encountered a social media discussion in which a financial professional made the claim that [I’m paraphrasing here], the people you know with a multi-million net worth didn’t get there just by buying mutual funds. (He was making the case the entrepreneurship is necessary.)

It made me laugh because I see households with a multi-million net worth all the time, and it’s overwhelmingly people who just followed a plan that could be roughly described as, “have job, buy mutual funds, repeat.” Given enough time, regular saving and investing turns into a lot of money.

As a thought experiment, I was curious what would have been the result if a person simply maxed out their 401(k) and/or IRA every year for the last 30 years and invested it in a boring 80% stock, 20% bond portfolio. So I did the math and, as it turns out:

• If you made the maximum 401(k) contribution every year from 1994-2023 (i.e., the last 30 years) and used an 80% stock, 20% bond allocation, your 401(k) balance would be $1,805,499 as of the beginning of 2024 (assuming no catch-up contributions or “after-tax” contributions).
• If you did the same thing with an IRA, the IRA would be worth $467,081 as of the beginning of 2024.

In other words, maxing out the retirement accounts would have gotten you to “multi-million” ($2,272,580) without needing to do anything else.

Granted, maxing out retirement accounts every year might not be an easy thing to do, depending on income level. But you can see how this sort of thing is achievable via many careers that people would consider “normal jobs” — no need to hit it big by selling a company you started.

And you can see how some households would end up with quite a bit more than that, if any of the following are true:

• They have multiple partners in the household contributing to retirement accounts,
• They’re also building some equity in a home,
• They’re able to save a bit more than the retirement account contribution limits each year,
• They work and save for more than 30 years, or
• They are already retired but their portfolio’s growth has exceeded their spending in retirement.

You don’t need to found a startup. You don’t need to earn 100% annual returns with risky investments. You do need a good income, so that you can actually save and invest regularly. You do need to put a good chunk of those invested dollars to work in the stock market (ideally via a diversified, low-cost fund). And you do need to refrain from blowing up your portfolio (e.g., by selling everything in early 2009 right after the market has fallen by 50%). And you need to give it time.

*With a 60/40 allocation instead, the respective balances would be $1,465,711 and $379,137. Also just for reference, I’m using the S&P 500 as the stand-in for stock returns and 10-year Treasury bonds as the stand-in for bond returns.

In December 2011, we switched our portfolio from a DIY allocation to the Vanguard LifeStrategy Growth Fund. And that fund was the entirety of our portfolio for about 12 years. Because people would often ask, I gave periodic updates, explaining that we still liked the fund. For example:

• Are We Still Using the LifeStrategy Growth Fund?
• 10 Years with a One-Fund Portfolio

We recently made a change, which I’ll discuss in a moment, but it had nothing to do with a change in how much we liked that fund. I still think the LifeStrategy Funds (and similar products) are fantastic (tax-inefficiency aside). They’re easy to understand, reasonably low-cost, and very low-maintenance.

It was something in our life that changed, rather than our evaluation of the LifeStrategy fund. Specifically, we bought a house last fall. And with interest rates being what they are, it made sense to use a portion of the bond holdings to minimize the mortgage balance. (As Allan Roth often notes, it does not generally make sense to hold bonds that pay a certain interest rate while simultaneously having a mortgage balance with a significantly higher interest rate.)

But, with an “all in one” fund like a LifeStrategy fund, there’s no way to directly spend just the bond part of the fund. Instead, you have to sell the whole thing and then re-buy the stock part of the holdings. And that’s essentially what we did.

So for the stock part of our portfolio, we’re now just using Vanguard Total World Stock ETF. And for the bonds (because we do still have some bonds), we just bought individual long-term TIPS in one of our traditional IRAs — essentially a 5-year ladder of TIPS maturing from 2049-2053 (which would be our ages 65-69).

So again, we’re keeping things super simple. There’s still no need to rebalance. (The TIPS aren’t there to rebalance with the stocks. They’re there to just collect ~2% above inflation for 2-3 decades and then eventually be spent.) We’ll continue to buy more shares of Vanguard Total World Stock ETF. And we’ll slowly add to our TIPS ladder as well, buying both nearer-term and longer-term rungs.

Given how not-that-exciting this portfolio switcheroo is, it feels a bit silly to write about it. But given how public I’ve been about our use of the LifeStrategy fund, I felt that I should give an update and explain the recent change.

I suppose it’s still a single-fund portfolio. But now it’s a different single fund. Plus some TIPS.