Vanguard vs. Yale

A simple portfolio of Vanguard Index Funds performs amazingly well compared to college endowments.
Photo credit: altopower via / CC BY-NC-ND

I recently encountered a fascinating article on the site: A Wealth of Common Sense. It’s a blog maintained by Ben Carlson that focuses wealth management and investments.

This particular article: How the Bogle Model Beats the Yale Model compares the performance of college endowment funds to portfolio comprised of only three Vanguard Index Funds. (You may recall that Jack Bogle founded Vanguard, thus the name. It should also be duly noted that Mr. Bogle is a Princeton grad.)

College endowments are a huge business. The largest endowments (primarily Ivy League schools) run into the tens of billions of dollars. Nationwide, college endowments total more than half a trillion dollars!

With such huge sums of money involved, colleges can afford to hire the best and brightest money managers. Furthermore, significant funds provide access to private placements and other exotic, ‘alternative’ investments.

But guess what? The Vanguard portfolio of three mutual funds (aka the Bogle Model) more than holds its own in this comparison. Indeed, its returns rank in the top quartile (top 25%) of best-performing endowments! And this is not just a one-year aberration – the Bogle Model stands the test of time for three, five and ten year intervals. I encourage you to read the article for yourself (click here or the link above).

Thoughts and Takeaways:

  • This analysis should be a tremendous encouragement to us all. It gives great hope to the common man and woman that they, too, can attain financial independence.
  • The Vanguard portfolio averaged a 6% annual return over the last ten years. If you were to invest $500 per month for 30 years with a 6% annual return, you will have accumulated over a half million dollars! (Disclaimer: no one can predict future returns but historical returns do provide a small sense of confidence. Very small.)
  • It’s rare and very difficult for actively managed mutual funds to consistently beat their corresponding index funds. (But not impossible)
  • It’s perfectly OK (and even desirable) to grow rich the slow, boring way.
  • Don’t be continually chasing the highest returns. Merely average or even mediocre returns can still make you quite wealthy.
  • When it comes to investing, simple is good.
  • It seems crazy to be comparing billion-dollar college endowments to a Vanguard portfolio that you could easily recreate in your IRA. But there you have it.

At this point, you are probably screaming at the top of your lungs, “SO WHAT IS THIS BOGEL MODEL????” Well, it’s:

  • 40% Total U.S. Stock Market Index Fund (VTSMX)
  • 20% Total International Stock Market Index Fund (VGTSX)
  • 40% Total Bond Market Index Fund (VBMFX)

The annual expenses for these funds are a minuscule 0.16%, 0.19%, and 0.16% respectively. With more than $10,000 in any of theses funds, you can upgrade to the ‘Admiral’ version where the annual expenses drop even further to 0.05%, 0.12%, and 0.06%.

Disclaimer: please don’t blindly transfer all your investments into this portfolio without further study and analysis. Investing is not a ‘one size fits all’. You may want to seek advice. If so, find a fee-only consultant with CFP (Certified Financial Planner) credentials. Avoid ‘financial planners’ that work on commission for financial products they sell.

That being said, the Bogle Model might be a good place to start. You could possibly do better. But you could also do a whole lot worse.

© 2017 Paul J Reimold

Photo credit: altopower via / CC BY-NC-ND

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