Author Topic: Do you put all your eggs into one ETF/MF basket? (Newbie question)  (Read 3317 times)

Freedomin5

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I couldn't find info on the forums on this particular question, so please just point me in the right direction if this has already been addressed. Hoping one of the seasoned investors on this forum can help me understand this better.


So, I understand the concept of buying the market, which I have done via Vanguard ETFs. I have no problems with the concept of buying the total stock market.

However, my question is about investing in the whole market solely through one company. Isn't it kind of risky? It's like I'm giving all my eggs to one surefooted servant named Vanguard and saying, here, go to the big city sell them for me. If this servant is waylaid and killed, or, let's not be so morbid, if he trips while running to the city and falls on all the eggs, I have now lost all my eggs.

However, if I split the eggs between two trustworthy and surefooted servants named Vanguard and iShares, who each charge me the same fee for running eggs to the city, then even if Vanguard falls, I've only lost half my eggs. Now, I'm not saying that Vanguard or iShares will trip and fall -- they both have reputations of being VERY surefooted runners, but it's the concept of putting all my eggs into one basket that I'm having trouble figuring out.

Yet on these forums, I often read of how some people only trust Vanguard to do their running, even though iShares (or other companies) has the same fees for a similar ETF, with similar returns since they're all index ETFs. It doesn't cost me extra to purchase two different funds - I could simply buy Vanguard once during the year, and the equivalent iShares ETF once during the year. I only purchase twice a year, and put in approx. $20-30k each time. Or if you're doing monthly contributions to a mutual fund, instead of contributing $500 to one MF each month, you could simply contribute $250 each to two equivalent MFs each month. (Dollar figures for illustrative purposes only)

Is there some benefit to only having one type of ETF from one company, even though I can purchase both types from my discount brokerage? What am I missing or not seeing?

Radagast

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #1 on: June 30, 2017, 07:19:29 AM »
It's been asked. Many forumites read Jim Collins and think Vanguard is the only fund company. I'm more in your boat and think once you have a lot of money it may be better to split it between two or three fund companies. In my case my employer uses Schwab and Optum Bank, and I use Vanguard and recently Fidelity, so I don't need to think about it because that is a minimum of three already. If you are using a single brokerage I'd think that is more of a weak link than the index fund company, especially because your individual account could get hacked.

Freedomin5

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #2 on: July 02, 2017, 02:37:27 PM »
Good point. I hadn't thought about the point of only using one brokerage. Thanks!

Mighty-Dollar

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #3 on: July 02, 2017, 03:05:55 PM »
Aliens will land on earth the day that Vanguard or iShares or SPDR are found to be running ponzi schemes. These companies are highly regulated. I'm not sure it's even possible that someone could steal tons of money from these companies or that there could be some sort of MF Global type meltdown. Nevertheless I think it makes good sense to diversify among index fund companies.

ChpBstrd

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #4 on: July 03, 2017, 02:50:57 PM »
I agree with the comment about brokerage acct hacking.

If you are trading options, selling covered calls for example, it might lower your commissions to do bigger trades rather than lots of littler ones. But doing so would also raise the risks of options strategies. SPY has the deepest options market, but expenses a couple basis points higher than Vanguard last time I looked. The difference in cost would be quickly made up for by the tighter bid-ask spreads.

misterhorsey

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #5 on: July 03, 2017, 07:12:58 PM »
The management of Vanguard funds is carried out by a company owned by those who invest in Vanguard funds.  So effectively the more funds under investment, the greater the economies of scale.  Occasionally Vanguard send out a pleasantly surprising email advising they are reducing management fees.

My experience with 'for profit' fund managers is that fees can vary more than you'd want - even with an index type fund. Ultimately the fees are determined by the margin they can extract while still remaining competitive.  While Vanguard is uniquely focused on reducing fees.

So that's one other factor to consider why Vanguard is so popular.  I.e. I consider higher fees a greater brake on my investments than the risk of Vanguard collapsing.




misterhorsey

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #6 on: July 03, 2017, 07:15:13 PM »
Actually I'll rephrase that.

I consider the risk of Vanguard collapsing so low that I regard higher or variable fees provided by other 'for profit' index fund managers to have a greater impact on the performance of my investments.

So I stick with Vanguard

Father Dougal

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #7 on: July 04, 2017, 05:01:10 AM »

Is there some benefit to only having one type of ETF from one company, even though I can purchase both types from my discount brokerage? What am I missing or not seeing?

It's down to personal preference and risk tolerance, in my humble opinion.

Personally, I split my stash across different brokers.  What we are really dealing with here is unknowns.  The reason I split assets is because I don't trust any one company not to have a total fubar.  For example, they might have a rogue employee - it has been known.  Or what if they lend out my stock to a hedge fund that goes under and the collateral turns out to be worthless?  What, they said they wouldn't lend it?  Join the line of other creditors.  Regulation?  Bernie Madoff was regulated and was even chairman of the NASDAQ.  Everything is safe and foolproof until it isn't.  I've seen Barings, Enron, Worldcom, Lehmans and all the other banks, etc - any firm can have hidden problems.

The chances of firm like Vanguard or BlackRock, (or Charles Schwab or Interactive Brokers on the broking side) going under and taking your investments with them are very very remote.  But the consequence of having all my assets with one discount broker could be so catastrophic that I prefer to hedge my bets (it's the brokers I'm more concerned about than the ETF providers, unless they are synthetic ETFs, but that is another story).

That's not to say my decision is right or wrong - it's just that I'm very risk averse. 

As you are asking the question, it sounds like you might be too.
« Last Edit: July 04, 2017, 04:35:22 PM by Father Dougal »

chasesfish

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #8 on: July 04, 2017, 12:17:34 PM »
I'm not worried about this at all.

I think there's more risk of my brokerage account at Fidelity being hacked/drained, then I hope I'm with a good enough company that they and/or the SPIC would make me whole. 

On my ETFs, it comes down to cost for me.  I don't have an account at Vanguard, so iShares ETFs are cheaper through Fidelity in increments of $15,000 or less and Vanguard is better above.  I buy Vanguard ETFs through my self-directed brokerage account inside my 401k because its cost neutral.

The good news is Vanguard and Schwab pioneered low fees and we argue over one one-hundredth of a percent now.  Its a far cry from the 1.5% money management fees or large transaction fees of years past.

Freedomin5

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #9 on: July 08, 2017, 07:14:43 PM »
Thanks for all your input! This has been very helpful.

seattlecyclone

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #10 on: July 08, 2017, 09:50:07 PM »
I'm not at all concerned about my assets being safe with Vanguard. I find any risk to be not even close to worth the added complexity of monitoring two sets of brokerage accounts and everything.

Father Dougal

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Re: Do you put all your eggs into one ETF/MF basket? (Newbie question)
« Reply #11 on: July 09, 2017, 09:42:13 AM »
I'm not at all concerned about my assets being safe with Vanguard. I find any risk to be not even close to worth the added complexity of monitoring two sets of brokerage accounts and everything.

Yes, you're probably right. Especially considering you are fortunate enough to live in a country where you can hold directly with Vanguard.

Still, it is interesting that Vanguard does loan stock from your ETF to third parties (like hedge funds wanting to short a share).  This is pretty standard across the industry, and is low risk because Vanguard receives collateral.  However, the financial industry has not exactly covered itself in glory with regard to managing risk.  It is extra hassle managing more than one brokerage, that's for sure.  I used to have all in one place, but eventually decided there was too much risk in one custodian as the portfolio increased.   Anyway, that's my story.