Author Topic: Vanguard or Betterment? VTSAX, VTSMX, or VTI?  (Read 19966 times)

Merdox

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Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« on: November 29, 2014, 01:20:23 PM »
Hello,

I'm a brand new Mustachian looking for guidance with my first investment. I have about 180k in the bank which, from reading up on MMM, I now realize I should transfer to index funds. I'm having a hard time, however, choosing between Vanguard and Betterment, and between VTSAX, VTSMX, and VTI. I'm thinking I'll dump 100k into one for starters and keep the rest for other investments or purchases (in case I get married or have kids). I'm 30, single, make 125k/year and save the vast majority of it -- please feel free to give general advice as you please. Many thanks!

ALSO, I don't have a 401k or Roth IRA, and I don't have an employer match. From what I see, my income puts me in the "phasing out" range. Does this mean I can't start one? If I can, should I? Thoughts?

-Merd

forestbound

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #1 on: November 29, 2014, 02:21:39 PM »
Hard call, but I really liked the Stock Series of Jim Collins. Give it a read, perhaps it will help you.

http://jlcollinsnh.com/stock-series/


pbkmaine

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #2 on: November 29, 2014, 04:27:34 PM »
In general, mutual funds work best for small regular purchases and ETFs work best for big infrequent ones. That's because ETFs are bought and sold like stocks and can have transaction fees when buying and selling. When comparing an ETF and a mutual fund with the same holdings (an S&P 500 index fund, for instance) make sure you understand the transaction costs for the ETF.

Mike

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #3 on: November 30, 2014, 10:32:54 AM »
There are no transaction fees for Vanguard funds / ETFs if you have an account with them.

As for whether to go mutual fund or ETF, the fees are tiny with each when it comes to Vanguard, so I don't really think it matters.  My taxable account has ETF investments while my IRA has mutual funds.  I think I did it this way because some funds have minimum initial investment requirements while ETFs can just be bought by the share which is easier if you're working with smaller amounts of money at the start.

rmendpara

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #4 on: November 30, 2014, 10:46:39 AM »
Generally you have mutual funds in a retirement account and ETFs in a taxable account. You can easily have either in both, however.

The reason retirement accounts generally use mutual funds is mainly because you can buy partial shares. For example, you deposit $500/mo into a retirement account (ROth, IRA, whatever) and a mutual fund has a per share price of 150. You can actually purchase 3.x shares. Mutual funds also have minimums for the initial purchase. Vanguard (I believe, don't remember the exact amounts) generally has a minimum between 1-3k for investor shares. ETFs have no minimum. You can buy 1 share or 1,000.

With an ETF you have to purchase whole shares only. In this example, you would have to buy 3 shares and have $50 left or 4 shares and put up another $100.

You can actually contribute to an IRA (pre tax) but only 5,500 per year. In an IRA, I would recommend just putting it into a broad market mutual fund until you reach tens of thousands and can actually invest more broadly. In a taxable account, I would suggest ETFs.

Mutual funds price once per day, so when you click "sell", you don't actually know the price until the end of the day (they trade at net asset value which is calculated once per day). ETFs trade like stocks, so you can buy/sell very quickly.

Hope that helps a little.

Btw, awesome stash of cash.

As far as Betterment goes...there are several threads on here that talk about it. Do a quick search and you'll see a few.

It really comes down to a question of how involved you want to be in your portfolio. Betterment will rebalance and allocate for you, whereas Vanguard will not (besides the "Target Retirement Funds" series). The great thing is that you can try it out, and if you don't like it just sell out of everything and move wherever you like.

Good luck
« Last Edit: November 30, 2014, 10:48:50 AM by rmendpara »

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #5 on: November 30, 2014, 11:26:08 AM »
Read through this thread for all the for/against arguments. No point rehashing them here:

http://forum.mrmoneymustache.com/investor-alley/betterment/

Long story short, Betterment can cost you millions in extra fees over your life-time, this is not debatable.  Some think Betterment makes up for the extra fees with their tilt, I don't, and think it's a terrible idea.  If you want a fund that does rebalancing and maintains your asset allocation for you, without the extra fees, go here:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

If you want a fund that does all of the above, but automatically gets less risky when closer to retirement, go here:

https://investor.vanguard.com/mutual-funds/target-retirement/#/

It's really that simple.
« Last Edit: November 30, 2014, 04:59:31 PM by Dodge »

johnny847

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #6 on: November 30, 2014, 04:42:14 PM »
Generally you have mutual funds in a retirement account and ETFs in a taxable account. You can easily have either in both, however.
Why do you recommend this? With ETFs, you will always had some turd cash left over from only being able to buy whole shares.
Also, you can set up automatic investing with mutual funds, as they are only priced once a day and can be bought in fractional shares. You can't do that with ETFs.

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #7 on: November 30, 2014, 08:03:07 PM »
Can't thank you all enough for your responses. DODGE, you've pretty much sold me on Vanguard. As far as the Lifestrategy funds, would you recommend those as opposed to just dumping all my money in VTSAX? From what I've read, VTSAX is the choice index fund and is already spread out across the market, so I don't understand why putting all my money there is considered high risk (even though it's all stocks). Would you recommend Lifestrategy or straight up VTSAX?

Glad I could help!

When you're asking why choose a LifeStrategy fund vs VTSAX, what you're really asking is "Why include bonds and international stocks in my portfolio?"

For example, the 80/20 stock/bond LifeStrategy fund, is 56% domestic stocks (same holdings as VTSAX), 24% international stocks, 16% domestic bonds, and 4% international bonds.  To answer why international stocks, you can read this Vanguard study:

Considerations for investing in non-U.S. equities

To answer why bonds, my typical comments are in the first posts of this thread:

The case against 100% US stocks

I also had a super-fun thought experiment here which touches on it:

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/msg416356/#msg416356

Long story short, a 100% stock allocation is considered high risk, because the stock market is very volatile.  If it happens to drop 50% when you need it, the results can be devastating.  Personally, I have a Three Fund Portfolio with:

56% Total Stock Market Index Admiral Shares VTSAX - https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
24% Total International Stock Index Admiral Shares VTIAX - https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT
20% Total Bond Market Index Admiral Shares VBTLX - https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT

This gives me an Expense Ratio of a little more than 0.07, compared to the 0.17 LifeStrategy fund I'm modeling it off:

https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

And compared to the 0.31 Expense Ratio of Betterment:



http://www.begintoinvest.com/expense-ratio-calculator/

As you can see, keeping fees down is a big factor in the growth of your portfolio.

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #8 on: November 30, 2014, 08:05:15 PM »
I'm a little confused about the need for rebalancing, so I guess what I'm asking is isn't VTSAX spread out and automatically rebalanced enough to just leave the money there for a long time?

Correct, VTSAX automatically rebalances, across all the stocks it holds.  If your portfolio is 100% VTSAX, there is nothing to rebalance.  People talk about rebalancing, because holding 100% stocks across your entire portfolio is generally not recommended.

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #9 on: November 30, 2014, 08:10:14 PM »
I'm currently on the verge of maxing out a Roth with Vanguard, keeping a modest emergency fund, and dumping the rest in VTSAX. If anyone thinks this is a bad plan, please share your thoughts. Endless thanks, you mustachioed badasses.

We can't possibly tell if this is a bad plan for you, because we don't know anything about your need, ability, or willingness to take risk.  We don't know what your Investment Policy Statement calls for (do you have one?).  I really recommend watching the boglehead video series:

http://www.bogleheads.org/wiki/Video:Bogleheads®_investment_philosophy

Yes, the guy is over-the-top, but the information is spot-on, and he really brings you through all you need to know on the subject.  Spend the 30 or so minutes to watch all the videos, and you'll have a better picture of what you need to do.

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #10 on: December 01, 2014, 12:02:27 AM »
Dodge,

I haven't been able to watch the videos (though I'm eager to do so ASAP), but I wanted to quickly thank you again for your extremely enlightening guidance (really on-point) and also to answer your questions. I certainly don't have an IPS as I'm brand new to this stuff, but as far as my goals, I'm thinking I would like to reach FI in about 10 years (age 40) just to have the peace of mind that goes with it, and then probably continue to work with a more relaxed attitude, perhaps extending into some different professional areas. I'm still processing the info from the links you shared, but as it stands right now I think I am convinced re: int'l stocks, so I will be incorporating VTIAX. I also appreciate your concerns about 100% stocks and I think I will eventually incorporate some bonds, but I'm thinking I might be a little aggressive with this first lump investment and keep it 100% stocks for starters, as it seems I can reasonably count on my income for the time being and I don't expect to need my savings for the immediate future. Then I would use my income to incorporate bonds and pad my emergency fund in the near future. I've come across varying views on emergency funds, but my thinking was to keep a decent enough one to see me reasonably through the next crash so that I could leave my stock-heavy investments alone as per the buy and hold principle. Having an emergency fund was my idea for 100% stock portfolio insurance, but I suspect you may have already determined that it's overall better to keep that money in bonds so it grows? I'm guessing psychology and personal preference play a not-insignificant role in the emergency fund discussion. Please feel free to share any other thoughts, as your impressive knowledge is really helping me navigate through this initial stage of ignorance (thanks again). Otherwise, I look forward to watching those videos.

No problem Merdox!  I don't think there's anything wrong with going 100% VTSAX when starting out, especially when you have an emergency fund.  If you're putting $10,000 in VTSAX, and have $5,000 in an emergency fund savings account, really that's just a 67/33 stock/cash allocation :-P  Cash earning 0.9% in an online savings account or 2% in an online CD isn't significantly worse than putting it in bonds.  Personally I follow MrMoneyMustache's advice, and use credit cards as an emergency fund.  He talks about it here:

Springy Debt instead of a Cash Cushion

and a bit here:

Where should I Invest my Short-Term ‘Stash?

If I get caught with a $10,000 bill that needs to be paid immediately, I pay it with my 2% cash back card (yay $200 back!), sell $10,000 from the portfolio, and the money will be in my bank account in 1-2 business days.  More than enough time to pay off the credit card without incurring any interest.  But as you said, psychology and personal preference play a role.  There is no wrong answer here. :)

Good luck, and post here if you have any questions!

Icecreamarsenal

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #11 on: December 02, 2014, 07:06:15 PM »

Can't thank you all enough for your responses. DODGE, you've pretty much sold me on Vanguard. As far as the Lifestrategy funds, would you recommend those as opposed to just dumping all my money in VTSAX? From what I've read, VTSAX is the choice index fund and is already spread out across the market, so I don't understand why putting all my money there is considered high risk (even though it's all stocks). Would you recommend Lifestrategy or straight up VTSAX?

Glad I could help!

When you're asking why choose a LifeStrategy fund vs VTSAX, what you're really asking is "Why include bonds and international stocks in my portfolio?"

For example, the 80/20 stock/bond LifeStrategy fund, is 56% domestic stocks (same holdings as VTSAX), 24% international stocks, 16% domestic bonds, and 4% international bonds.  To answer why international stocks, you can read this Vanguard study:

Considerations for investing in non-U.S. equities

To answer why bonds, my typical comments are in the first posts of this thread:

The case against 100% US stocks

I also had a super-fun thought experiment here which touches on it:

http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/msg416356/#msg416356

Long story short, a 100% stock allocation is considered high risk, because the stock market is very volatile.  If it happens to drop 50% when you need it, the results can be devastating.  Personally, I have a Three Fund Portfolio with:

56% Total Stock Market Index Admiral Shares VTSAX - https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
24% Total International Stock Index Admiral Shares VTIAX - https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT
20% Total Bond Market Index Admiral Shares VBTLX - https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT

This gives me an Expense Ratio of a little more than 0.07, compared to the 0.17 LifeStrategy fund I'm modeling it off:

https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

And compared to the 0.31 Expense Ratio of Betterment:



http://www.begintoinvest.com/expense-ratio-calculator/

As you can see, keeping fees down is a big factor in the growth of your portfolio.

Great post, very visually enlightening.
I think that's what betterment had for me: charts and ease.
I may still keep money in betterment for tax loss harvesting. I'm not sure this would offset the extra expense ratio. The madfientist wasn't really clear on that in his recent post about betterment.

Dodge

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #12 on: December 02, 2014, 07:54:36 PM »
Great post, very visually enlightening.
I think that's what betterment had for me: charts and ease.
I may still keep money in betterment for tax loss harvesting. I'm not sure this would offset the extra expense ratio. The madfientist wasn't really clear on that in his recent post about betterment.

That depends on 4 factors:

1.  How much your Expense Ratio increases
2.  Your tax bracket
3.  How much money you have invested
4.  How much tax loss harvesting is possible that year

ER increases: In order to avoid the wash sale rule, you can't have the same category of investments anywhere else, including your 401k.  For many people, this means moving out of the less expensive 401k funds, and into the more expensive ones.  It's important to measure this, as many 401k funds don't have many inexpensive options.  Then there's the Betterment ER, which is 0.15 to 0.35 depending on amount invested.  If you have $100,000 invested in Betterment, your total ER in that account will be 0.31.  That's 0.16 for the underlying funds, and 0.15 for Betterment's fee.  The total ER on my 3 fund portfolio, is about 0.07.

Tax Bracket: Tax Loss Harvesting acts as a tax deduction, and the maximum amount you can harvest is $3,000 a year.  So if you're in the 25% tax bracket, the maximum dollar amount you can receive back is $750.  If you're in the 15% tax bracket (retired), that's $450.

Money Invested: This is where the ER increases come in.  If you have $100,000 invested, and your ER increased by 0.39 by choosing Betterment (moved my 0.07 three fund portfolio, and incurred an extra 0.15 in my 401k) the total fee is $390.  If you have $500,000 invested, your total fee is $1,950.

Here's a real-world example.  You have yearly expenses of $40,000, and need $1,000,000 invested in order to satisfy the 4% rule, and be Financially Independent.  Once retired, you'll be in the 15% tax bracket, and you move all your money to Betterment for an increased ER of 0.24 (0.31 vs 0.07).  The additional fees on your portfolio will total $2,400 a year.  That's 6% of your yearly expenses!

There's a lot of middle ground in there, where tax loss harvesting has the potential be useful.  I say that, because it's no guarantee they will meet the maximum deduction allowed.

How much TLH is possible: This is a Betterment chart on how much they would have harvested over the last decade or so:



Once you're retired, and no longer contributing to the account, it's almost impossible to TLH unless there's a huge crash in the beginning years of retiring.  There will simply be no losses to harvest.  So even if you do the math, and determine TLH has the potential to be worth it for you, there's no guarantee it will come through.  The extra ER you will incur, however, is guaranteed.

Considering all this, I wouldn't recommend Betterment based on the TLH alone, as your account size will inevitably grow to the point where the extra fees will usurp the maximum TLH can possibly offer you.  If you're thinking you'll stay with Betterment until that happens, then move to Vanguard, I'd do my research on that.  If you move over the investments "in-kind" (without selling), you'll be stuck with managing/rebalancing a portfolio of their 10 or so funds, forever.  If you instead liquidate the holdings, so you can make a simpler to manage portfolio, you'll get a huge capital gains tax bill.

Hopefully that clears it up for you!

Icecreamarsenal

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #13 on: December 02, 2014, 08:09:44 PM »

Great post, very visually enlightening.
I think that's what betterment had for me: charts and ease.
I may still keep money in betterment for tax loss harvesting. I'm not sure this would offset the extra expense ratio. The madfientist wasn't really clear on that in his recent post about betterment.

That depends on 4 factors:

1.  How much your Expense Ratio increases
2.  Your tax bracket
3.  How much money you have invested
4.  How much tax loss harvesting is possible that year

ER increases: In order to avoid the wash sale rule, you can't have the same category of investments anywhere else, including your 401k.  For many people, this means moving out of the less expensive 401k funds, and into the more expensive ones.  It's important to measure this, as many 401k funds don't have many inexpensive options.  Then there's the Betterment ER, which is 0.15 to 0.35 depending on amount invested.  If you have $100,000 invested in Betterment, your total ER in that account will be 0.31.  That's 0.16 for the underlying funds, and 0.15 for Betterment's fee.  The total ER on my 3 fund portfolio, is about 0.07.

Tax Bracket: Tax Loss Harvesting acts as a tax deduction, and the maximum amount you can harvest is $3,000 a year.  So if you're in the 25% tax bracket, the maximum dollar amount you can receive back is $750.  If you're in the 15% tax bracket (retired), that's $450.

Money Invested: This is where the ER increases come in.  If you have $100,000 invested, and your ER increased by 0.39 by choosing Betterment (moved my 0.07 three fund portfolio, and incurred an extra 0.15 in my 401k) the total fee is $390.  If you have $500,000 invested, your total fee is $1,950.

Here's a real-world example.  You have yearly expenses of $40,000, and need $1,000,000 invested in order to satisfy the 4% rule, and be Financially Independent.  Once retired, you'll be in the 15% tax bracket, and you move all your money to Betterment for an increased ER of 0.24 (0.31 vs 0.07).  The additional fees on your portfolio will total $2,400 a year.  That's 6% of your yearly expenses!

There's a lot of middle ground in there, where tax loss harvesting has the potential be useful.  I say that, because it's no guarantee they will meet the maximum deduction allowed.

How much TLH is possible: This is a Betterment chart on how much they would have harvested over the last decade or so:



Once you're retired, and no longer contributing to the account, it's almost impossible to TLH unless there's a huge crash in the beginning years of retiring.  There will simply be no losses to harvest.  So even if you do the math, and determine TLH has the potential to be worth it for you, there's no guarantee it will come through.  The extra ER you will incur, however, is guaranteed.

Considering all this, I wouldn't recommend Betterment based on the TLH alone, as your account size will inevitably grow to the point where the extra fees will usurp the maximum TLH can possibly offer you.  If you're thinking you'll stay with Betterment until that happens, then move to Vanguard, I'd do my research on that.  If you move over the investments "in-kind" (without selling), you'll be stuck with managing/rebalancing a portfolio of their 10 or so funds, forever.  If you instead liquidate the holdings, so you can make a simpler to manage portfolio, you'll get a huge capital gains tax bill.

Hopefully that clears it up for you!

Yes, in a powerful way. Thanks Dodge!

forestbound

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #14 on: December 06, 2014, 09:41:13 AM »
If your work doesn't offer a 401K you open a SEPT IRA or Solo 401K. That would help a bit with taxes.

Chrissy

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Re: Vanguard or Betterment? VTSAX, VTSMX, or VTI?
« Reply #15 on: December 06, 2014, 09:55:39 AM »
Forestbound, the SEP IRA and Solo 401k are only for business owners/self-employed.