Stop Worshiping Vanguard Funds Already!

In the personal finance world, it’s very well known that mutual fund expenses can significantly reduce your real returns over the typical 20 to 30 year period that most people have for retirement savings. Vanguard, the company that pretty much invented low cost mutual fund investing, has achieved an almost cult-like status among the personal finance blogging community due to their ultra-low expenses ratios, which are around 0.04%. And, compared to funds that charge 1% or higher, that is a steep discount that can save you tens of thousands of dollars over your investment time frame.

But let’s try to cut back on drinking the Vanguard Kool-Aid, ok?

Yes, Vanguard is great for saving investors money. Yes, they were the first to introduce low costs index funds to the masses. Yes, John C. Bogle was a wise man.

But does Vanguard still deserve the automatic recommendation that many people give it? I’m not sure it does anymore.

You Could Do Worse Than Vanguard. But You Could Do Better, Too

Look, choosing a Vanguard fund will probably never be a flat out bad choice. It’s well established that index funds do better in the long term than actively managed funds, that they have less turnover, which results in less of a tax bill (if you are investing outside of a tax-preferred plan such as an IRA), and that they have some of the lowest fees of all the mutual funds out there.

However, index funds have become something of a commodity now and when something becomes a commodity, competition reaches a peak and differences between various offerings become almost negligible. Think gasoline or milk or multivitamins. It doesn’t really matter which brand you buy because they are all pretty much the same.

Index funds have become commoditized. Just about every broker offers their own version and because they all seek to mirror a particular benchmark, there isn’t much to differentiate them other than price. For years, that was what set Vanguard apart from other funds, but that advantage is now gone.

I've written before about how many brokerages are now charging a surcharge to invest in Vanguard funds. This can either come as a flat percentage surcharge, as Fidelity has implemented, or a higher transaction fee, like Schwab charges. So it’s time to look for alternatives to Vanguard. I was quite surprised to see they are easy to find.

A Comparison

Let’s compare the granddaddy of Vanguard funds – the Vanguard S&P 500 Index Fund Admiralty shares (VFIAX) with Schwab’s version of the same fund – The Schwab S&P 500 Index Fund (SWPPX). (I’m picking the Vanguard Admiralty shares because, although it requires a $10,000 minimum investment, that is the one that gets you the ultra-low 0.04% expense ratio. The non-Admiralty shares have a higher 0.14% expense ratio.)

The expense ratio is actually lower for the Schwab fund: 0.03% versus 0.04%. Turnover is also lower at 2% versus Vanguard’s 3%. Both funds limit frequent traders, although Vanguard has stricter rules. If you sell shares of the Vanguard fund, you cannot buy more shares within 30 days of the sale. The Schwab fund, according to the prospectus, MAY limit purchases of traders who buy and sell the fund multiple times within 60 days, but the limit will extend for 90 days from the last roundtrip buy / sell. VFAIX has a $10,000 minimum investment. SWPPX has a $1 minimum investment (however, as of Oct 2017, you must be a Schwab customer to purchase shares). And of course, there are also the higher transaction fees some brokerages are now charging for Vanguard funds.

	VFIAX	SWPPX
Min. Purchase	$10,000	$1
Expense Ratio	0.04%	0.03%
Turnover	3%	2%
Total Assets	$400 Billion	$32 Billion

So far, I don’t see anything that gives Vanguard a huge edge. If anything, I would say the Schwab fund is looking slightly more attractive at this point.

How About Performance?

click to enlarge

As you might expect, performance is just about identical and both funds mirror the S&P 500 perfectly.

What About Holdings?

The top 5 holdings of each fund differ only in the fourth and fifth spots. This seems a little strange because both funds are supposed to have holdings in the same proportion that the S&P 500 is comprised of. But for the most part, their holdings are identical as well.

What About Distributions?

Here, at last, there is a significant difference - the frequency at which they distribute dividends and capital gains. The Schwab fund does it yearly while Vanguard does it quarterly. I suppose if you were retired and looking for cash flow, then the Vanguard fund would be the better choice.

Although the distribution amounts are different, when you look at dividend yield, the distribution as a percentage of asset price, the two are very close: 1.84% for Vanguard and 1.76% for Schwab. That's a 0.08% edge to Vanguard. But remember they have a 0.01% higher expense ratio, so the true edge is just 0.07%. On a $10,000 investment, that works out to an extra $212 over 30 years. That's less than peanuts. Peanut shells.

Leave The Cult

So there you have it. Vanguard, without a doubt, changed the mutual fund industry with their low cost fund offerings. Their influence was, and still is, huge and consumers have benefited from it. But other companies have learned that lesson and offer funds that are just as good as, if not better than, Vanguard. It's time for an intervention. Stop the blind devotion to Vanguard and start exploring other comparable funds.

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Call Me Crazy, But I Purposely Went To Work For A Company Without A Retirement Plan

When we moved to Washington last year, I was able to keep working for the same company I was working for in Arizona because they were kind enough to allow me to work from home full time. In Arizona, I was already working from home two days a week, so when I asked to work from home full time in another state, I had a track record my boss could look back on. It also helped that my company had offices across the nation and videoconferencing was a part of their culture.

Working from home may seem like dream to some people, but it’s not always easy. When we first moved and had not yet found a house, I was working from the living room of a tiny two-bedroom apartment. My computer was set up on a non-so-stable Ikea table and I sat in an uncomfortable Ikea plastic chair. Having the desk in the living room meant any after-hours work I had to do (and I work in IT, so there is a fair amount of it) interfered with my wife and daughter’s use of the TV. The kitchen was three steps to the right of my “office” and the washer and dryer just two steps. I’m sure the people I had meetings with heard some strange noises once in a while.

When we moved into our house, things got better. I was able to have my own room for a home office and I bought a real desk and chair. I actually felt like I had a real place to work. (But, as my father likes to say, the problem with working from home is that when you come back from being out, you never know if you are going home or going to work.)

Am I Really Considering Giving Up Working From Home?

Despite being able to work from home full time, I eventually ended up looking for a new job. There were a couple of reasons. First, I was living in Washington, a fairly expensive state, but was still earning an Arizona income. Arizona is fairly inexpensive, so salaries are lower there when compared to Washington. Second, the Seattle area is a high-tech mecca. I am a database administrator and the demand for people with that skill-set is much higher here. When you add the increased demand to the higher cost of living, you end up with salaries that are significantly higher. So while I was hesitant to give up a full time work at home position, I felt I had to at least look for a higher paying position locally. To not do so would be like losing money each paycheck.

I saw an ad on LinkedIn and contacted the recruiter who posted the position. Long story short, I had an interview, then a second interview, and then I got an offer! I got the first job I applied for. Nice!

But there was a catch. The company that wanted to hire me did not offer a 401(k) plan. WTF? When I asked about this, the stated reason was that the company employs a lot of low income employees (in this case, warehouse workers). In IRS parlance, these are Non-Highly Compensated Employees (NHCEs). Those that worked in the main office in management or tech positions earned more (i.e., they are “Highly Compensated Employees,” or HCEs). The IRS has rules for 401(k) plans so that they cannot favor HCE over NHCEs. To avoid running afoul of those rules, the company decided to not offer 401(k) plans at all.

This was a bit of a concern for me. If I took the position, not only would I be giving up being able to save for retirement in a tax-advantaged manner, I would also be giving up the free money I was getting from my employer 401(k) match.

I Need Some Professional Advice

Honestly, given how competitive the tech industry is here, I’m surprised the company was able to attract good talent without a 401(k) plan. Before accepting the position, I called my CPA and asked her opinion. You see, not only would I be giving up a 401(k), my wife and I also had high enough incomes that we were no longer eligible to contribute to an IRA. So I felt like I was losing out on some valuable retirement savings options.

In the end, my CPA said don’t worry about the lack of a 401(k) and take the job. As long as I still saved an amount equal (or more) than I was contributing to my old 401(k), I would be OK. Plus, any money I saved would have no rules on how or when it could be used, unlike 401(k) or IRA funds.

I wanted to take the new job. Although it did have a 35 to 45 minute commute (each way), I would still be able to work from home two days a week. Furthermore, it was obvious the company wanted me. The recruiter submitted me at $30,000 over my old salary and the company offered $35,000 over plus a $10,000 yearly bonus plus four weeks of vacation a year, which was two more than most starting employees get. Wow.. I've never heard of a company offering more than what someone was initially asking. Well, I have heard of it happening, but in more of an urban legend kind of way. It had never happened to me.

The company did not mention that they did not have a 401(k), naturally. Luckily, I found that information out while Googling the company. I was almost maxing out my 401(k) at my old company and that meant I was getting an additional $5,000 per year from their match. So I countered the job offer asking for $40,000 over my old salary but was willing to take a $5,000 bonus instead and explained the reasoning was because I was losing the 401(k) match money. This was actually a double win for me - not only was I asking for more money, I was swapping $5,000 of bonus money I may or may not have been paid for $5,000 of salary I was guaranteed to get paid. They agreed and I accepted the position.

A 401(k) Could Still Happen

But that’s not the end of the story. Now that I am employed, I will be pushing the company to institute a 401(k). There is a special type of 401(k) plan for companies like mine – it’s called a Safe Harbor 401(k). It is specifically designed to avoid favoring HCEs over NHCEs and thus avoid IRS penalties. I’m not sure if management knows about this but given the highly competitive nature of the Seattle area tech job market, I think I can make a good case for the implementing such a plan.

I actually worked at a company in the past that had a Safe Harbor 401(k), although at the time, I didn’t know it was anything special. These types of plans have one feature that is very beneficial to employees: you are immediately 100% vested in all employer contributions!

While it seemed a little crazy to start working for a company that does not offer any type of retirement plan, it’s not as crazy as it sounds - provided you negotiate for something else to make up for the loss. Would you ever work for a company that did not offer a retirement plan?

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Goal Update: End Of March 2018

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of March, 2018
Current value: $41,043
Change from last Month: +$2,957
Percent of Goal:  37.74%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

My SQL courses on Udemy generated $160.94 of income. My courses on SkillShare are starting to gain traction. I received $42.25 from there, up from about $10 in February. We'll see if that's a one-time aberration or if they are actually attracting more students. Again, I'm doing zero promotion for them.

I saw a big rise in my Tesla account this month, which makes up for the horrible drop in February. Realty Income stock made a comeback, which boosted my total. It's still down about 10% from 6 to 9 months ago, so I might see some more upside.

Net Worth Update

Our net worth shows a $21,060 increase this month, coming almost all the way back from last month's $22,919 decline.Stock market volatility continues to drive the large fluctuations not only in my Tesla account, but also our overall net worth.

Our investments dropped about $8,000 in value, but Zillow says our house increased by $20,000, so that offsets the investments drop.

February 2018

March 2018

Next month, our net worth should start going up more rapidly. In March, we bought a new couch and I diverted some of our monthly savings amount towards paying that off. It's paid for now, so those monthly funds will resume going into our brokerage account.

Taxes

We got hit hard by the tax man this year. Even with $17,000 in tax deductible moving expenses, we still ended up owing just over $2,000. With my wife's new job, which almost doubled her previous salary, and my higher salary with my new job (which I just realized I never wrote about here), we got bumped into the 33% tax bracket. Her big relocation bonus she got when we moved to Washington pushed us deeper into that bracket. We did get about $800 back from our Arizona state taxes, so that helps offset the federal tax somewhat.

My CPA says our higher income also means we are now subject to the Additional Medicare Tax and the Net Investment Income Tax.

I don't mind paying taxes, really. I live in this country and take part in the benefits, protections, and services it offers. I don't expect to get those things for free. But I really dislike being surprised each April with a huge tax bill. I don't understand why the government can't get the monthly tax withholding rates more accurate. I realize everyone's situation is different and we all have different deductions, but surely something can be done.

In an effort to blunt the pain each April, for the past two years, I have increased the additional amount I have withheld from each of my and my wife's paychecks. In 2016, we owed $1,900 in federal taxes come April 15. At the time, I increased our additional withholding from $90 to $250 per month. That works out to an extra $160 per month, or $1,280 per year (because the additional withholding didn't take effect until the fourth month of the year).

In 2017, we still ended up owing $1,000 in federal taxes in April. So in 2017, I increased our withholding again to an extra $400 per month. That's another $1,200 per year (again, $150 for eight months, since it didn't go into effect until April.)

This year, we owe $2,100. Now, I will grant you our income was much higher this year due to the relocation bonus, so there's that. But this year, I'm increasing our additional withholding by another $200 per month, for a total of an extra $600 per month withheld for federal taxes. That's an additional $1,600 per year over 2017.

To sum up: we are now sending an extra $7,200 per year to the government over and above what their regular tax withholding tables call for. My wife and I are basically W-2 wage earners. We don't own our own business or have tons of investment income. In other words, those withholding tax tables should be fairly accurate as to what we owe, yet we still have to significantly overpay to avoid a huge April tax bill. Clearly something is askew with those tables.

Check back next year to see how it turns out this time.



If you have any questions or suggestions for topics, please drop me a line in the comments section!

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How To Save Money Equipping Your Kitchen

I think just about everyone knows that eating out is more expensive than making meals yourself. When people try to save money, one of the first things they cut back on is eating out at restaurants. When you go out, you’ll pay $2 to $4 for a soft drink that you can buy for yourself at the store for about a quarter. The actual food has a similar, if not quite so high, markup. It’s easy to justify eating out due to lack of time or lack of cooking knowledge, but over time, those excuses will end up costing you a pretty penny. By spending the time and taking the effort to learn how to cook on your own, you’ll start saving money almost immediately.

Of course, if you are going to cook at home, you need a couple things. Recipes, for one. Luckily, the internet of chock full of those. There are sites for all levels of home cooks – from those just starting out to full blown gourmets. Find a site or two whose recipes sound tasty you and that seem easy to prepare. As you become more adept at cooking, you’ll find yourself naturally looking to expand your skills and start branching out into recipes that match your growing experience.

In addition to recipes, there are a few other things a home cook needs. Pots and pans, for starters. You don’t need a bunch – one frying pan, a couple sauce pans of varying sizes, a big pot or two for making soup or pasta, and perhaps a baking sheet or two (because you have to make cookies). You’ll also want some measuring cups and spoons, a whisk, some wooden or plastic mixing spoons, maybe a pair of tongs. A couple of knives, like a chef’s knife and paring knife would be useful. I would also suggest some food storage containers to store any leftovers.

You’ve got a couple of choices for where to go to pick up these items. You can go to a department store and buy a pre-packaged set of pots and pans. Those tend to be pricey, running in the hundreds of dollars, and the set may contain pieces you don’t need. You could try heading to a lower priced store such as Target. They are OK for smaller items like measuring cups and other accessories. I’d steer clear of any pots and pans they sell though, as they tend to be either cheaply made pieces or brand-name items that cost more simply because they have a well-known name on them.

Shop Where The Professional Chefs Shop

But there is one other place everyone should investigate when they are in the market for new kitchen items: restaurant supply stores. These places are not going to have your big brand names – no Calphalon or Anolon or All-Clad – and that should tell you something. If restaurants and professional chefs can get by without these expensive brands, you likely can too. What you will find at the restaurant supply store are large numbers of items that are workhorses. They will stand up to a lot of abuse, will heat evenly, and, more importantly, will not cost an arm and a leg. And, of course, these places will also sell your measuring cups, food storage containers, knives, and whatever else you may need. Even towels and napkins.

Not only will they have all these items, they will have them at decent prices. The restaurant business is very competitive and margins are not high. Therefore, restaurateurs can’t afford to buy outrageously expensive cookware.

The best thing is almost all restaurants supply stores are open to the public and almost every large city has at least one. Whether you are building your collection from scratch or just want to pick up one item, it’s worth the trip to see what they offer. You do need to be careful. Their selection will be huge and it can be tempting to buy more than you need. Here’s my list of what I think the minimum items every home cook should have.

• Skillet (frying pan) – At least one twelve inch pan. If you’ve got a few extra bucks, pick up another smaller one – around 6 to 8 inches. The bigger size is good for cooking larger items or a large amount of vegetables. A smaller size of nice for cooking things like eggs. I like the smaller size to be non-stick and the larger one to be not non-stick. You can’t really brown stuff well in a non-stick pan. Look for a lid for the larger size pan. The one you buy may not come with one, but it's likely that a lid from one of the other pots you might be buying could fit on it.
• Sauce pots – you’ll want a couple of sizes. A small 1 or 1.5 quart pot is good for heating soups or other canned items. A 2.5 to 3.5 quart size works well for homemade soups and sauces. Get lids for these as well.
• Stock pot – A larger pot, between 6 and 8 quarts, is ideal for making pasta or large batches of homemade soups or broth. (Save your extra vegetable scraps and/or bones in the freezer and when you have enough, make your own stock to freeze for later use.)
• Knives – At a minimum, you’ll want a large, general purpose chef’s knife, a small paring knife, and a bread knife (a long knife with a serrated edge). There are all sorts of other knives you can get and they can be priced into the hundreds of dollars each, but those three will get you through most recipes. Pick one that feels comfortable in your hand. Look for ones that have a full or partial tang - the part of the knife blade that extends into the handle. A full tang extends all the way to the end of the handle, whereas a partial tang only goes part of the way into the handle. A full tang knife will have better balance in your hand and be more sturdy. A knife without any tang is one where the blade is either glued or crimped onto the handle. These types of knives are flimsy and prone to breaking. As you cook more and more, you’ll come to discover what type of knife feels best in your hand.

  

  No tang

  
  

  

  Full tang

  

  Wu-Tang Clan

• Measuring cups and spoons, mixing spoons, tongs, and other accessories – A good set of measuring cups and spoons is a must. In time, you’ll be able to judge amounts just by eyeballing them, but if you are just starting out, you’ll need to follow the measurements in the recipe. (This is especially true when baking. Most recipes can be fairly forgiving if your ingredient amounts are slightly off, but baked goods require more exact measurements due to the importance of the correct ratios of baking soda, baking powder, or yeast to the other ingredients in order for the finished product to turn out correct.)  Big mixing spoons are useful for mixing (go figure) and plastic ones work well for most liquids. For mixing sturdier things like cookie dough or pancake batter, a wooden spoon works well. Tongs aren’t just used for turning steaks. You can use them for plucking things out of boiling liquid or pulling sheet pans out of the oven. They will become like an extension of your hands.

Some other tips:

• Non-stick versus “stick” – Teflon was the original non-stick cooking surface. In recent years, there have been some health concerns about it and, as a result, other non-stick surfaces have started appearing on cookware. Regardless of what makes a surface non-stick, there are a couple things you should be aware of. First, if any recipes calls for you to brown something, you’ll get better results if you stay away from non-stick surfaces. Second, not every piece of cookware you own needs to be non-stick. Your sauce and stock pots don’t need to be non-stick. It may help when cleaning things, but I generally find the extra expense for non-stick pots to not be worth it. Third, non-stick surfaces are delicate. Don’t use metal utensils in a non-stick pan as they will scrape the coating and ruin the non-stick surface. Use wooden or plastic utensils. For a similar reason, don’t put them in the dishwasher. The tines of the dishwasher rack will rub against the coating and ruin it. I find a non-stick surface best for a small skillet. They are great for cooking eggs. Because the non-stick surface is relatively delicate, don’t spend a lot of money on non-stick cookware. Rather, buy fairly inexpensive, but decent, pieces and just plan on replacing them every 3 or 4 years
• Material – The cheapest pots and pans you will find will be made of all aluminum. They are lightweight and cheap, but they are also not worth it, so avoid them! Aluminum is a great conductor of heat, so theoretically, it should make great pots and pans. In reality, they don’t because your stove burner, be it gas or electric, does not heat evenly. Some spots will be hotter than others. Because aluminum conducts heat so well, those hot spots are transferred through the pan and to your food, which will cook unevenly. What you want is a 3-ply pan: one layer of aluminum sandwiched between two layers of stainless steel. The steel will help distribute the heat evenly across the pan surface. Of course, aluminum is non-magnetic, so if you have an induction cooktop, all aluminum pans can't get used.
• Aluminum also reacts to acid, so acidic foods, such as tomato sauces, will pick up a slightly metallic taste if cooked in an aluminum pot or pan.
• Glass versus metal lids – Choose metal lids. They are cheaper and glass lids get clouded with condensation, so you can’t see through them anyway.
• Handles – look for handles that are riveted to the pan, not stuck or crimped on. They will last longer and won’t get loose over time. Hollow handles tend to stay cooler than solid ones, but I prefer the heft of a solid metal handle. This is a personal choice.

  

  Non-riveted handle

  
  

  

  Riveted handle

• Wood versus plastic utensils – this is mostly a personal choice, but keep in mind what I mentioned earlier about stirring thick mixtures. I find wood performs better in those cases. I've had plastic spoons bend or break. Never put wood utensils in the dishwasher. The harsh detergents and high heat will dry out the wood and cause it to crack and splinter in a relatively short time. If you want to keep your wood utensils and cutting boards in good shape, get some food grade mineral oil and rub them down with it every couple of months or when they start to look dry.
• Wood versus plastic cutting boards – A lot of people like plastic cutting boards because they can go in the dishwasher and people seem to be paranoid about germs. However, wood has natural anti-microbial properties and, provided you wipe it down after each use, germs should not be a problem. Wood is also more gentle on your knife edges than plastic. (Please, never use a glass cutting board! Those destroy knives.) 
• If you opt for a wood cutting board, look for one that is “end grain cut,” meaning the cutting surface is comprised of the ends of wood pieces, not the sides. They are made by gluing together a bunch of short wood pieces on end rather than long pieces laying down. This makes for a harder surface, while still playing nice with your knives, and will last longer. Just like with wooden spoons, a little food grade mineral oil applied every so often will keep the board in shape for decades.



End Grain Cut



Not End Grain Cut

• Storage containers – Don’t spend ridiculous amounts of money on Tupperware or Rubber-Maid containers. Deli takeout containers work just as well and are much cheaper. As a bonus, they are cheap enough so that if they get cracked or stained, you won't feel bad about throwing it out.

Do you have any tips for cookware? Where to buy, what to use? If you have any comments or questions, please leave a comment below.

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