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Why Invest With Vanguard?
Marnie Aznar, November 2003
In the wake of the scandals rocking the mutual fund industry, the
importance of investing with a mutual fund company that has the
best interests of their individual shareholders at heart has become
exceedingly clear. The Vanguard Group has and continues to be known
for its fiduciary responsibility, ethics, and integrity.
Vanguard has long had a variety of measures in place to discourage
harmful trading activity and protect long-term shareholders. These
measures include (among others) strict trading restrictions, early
redemption fees, fair value pricing, and candid communications with
their shareholders. Additionally, as the average expense ratio on
mutual funds has increased nearly 24% to 1.36% over the past seven
years, Vanguard's average expense ratio has dropped 16% to 0.26%
during the same time period. (Source: Lipper Inc.)
Vanguard is well known for its index funds. Index funds or "passively"
managed funds do not try to beat the market. Instead, these funds
seek to mirror the performance of a target market index. Index funds
buy and hold all (or a representative sample) of the securities
in the index. Index funds are typically the lowest cost, lowest
risk, and most consistent performers in the mutual fund universe.
They are widely diversified, stay fully invested, keep costs to
a bare minimum, avoid style drift, and generate the lowest tax consequences
to their owners.
There is no evidence that active management increases returns over
a passive buy and hold strategy. The data overwhelmingly shows that
over time attempts to select individual stocks or time the market
under perform the appropriate benchmark. Clearly, some funds will
always beat the benchmark, but this eventuality is dictated by pure
chance. These funds are seldom the same funds from one period to
the next, and unfortunately it is impossible to know which ones
they are in advance.
We therefore recommend the following three Vanguard index funds
as a sound core to any individual investor's portfolio:
1. Vanguard Total Stock Market Index (Ticker: VTSMX)
This is an excellent choice for low-cost exposure to the broad
stock market. It is difficult to beat the wide diversification,
incredibly low expenses and high tax efficiency that this fund
offers. Thanks in large part to the fund's low cost structure
the fund's long-term returns are excellent.
2. Vanguard Total International Stock Index (Ticker: VGTSX)
This fund is composed of Vanguard's three regional index funds:
Vanguard European Stock, Vanguard Pacific Stock, and Vanguard
Emerging Markets Stock. This fund has outperformed most actively
managed rivals since 2000 and its five-year return bests about
two thirds of the foreign large-blend category. Low costs and
wide diversification make this fund of funds an excellent choice.
3. Vanguard Short-Term Bond Index (Ticker: VBISX)
Like many of Vanguard's index funds, this fund's low costs and
wide diversification have paved the way to very good relative
returns. The fund's five-year annualized gain of 6.2% bests the
majority of its short-term bond category rivals. Given the likelihood
of increasing interest rates over the next few years, bond investors
would be well served by choosing short and intermediate term fixed
income investments as opposed to long-term investments which will
be more heavily negatively impacted by rising rates.
Full Disclosure: AFA and some of AFA's clients are invested
in these funds.