A Vanguard benefit for those without “elite” status

InspectorsPhoto courtesy of Dave Conner

So Vanguard has “elite” status tiers with extra benefits for those who qualify. The tiers start at $50,000.

But $50,000 is a lot of money to many of you. Me too. And while it’s nothing approaching the roughly $1,000,000 that we’re all going need in order to retire well, the first $50,000 is always the hardest. (This is true for both psychological and mathematical reasons.)

Luckily, for those who despair that they’ll never get to $50,000 anytime soon, fear not: there’s another “elite”-like benefit that Vanguard offers that doesn’t require nearly that much money. Even better, it’s more impressive and relevant than things elite status offers, like “commission-free trades”.

What they charge you

If Vanguard is known for anything, it’s known for being cheap. It’s also investor-owned, which is confusing: the funds you buy through Vanguard own Vanguard, which feels sort of like the M.C. Escher method of organization.

M.C. Escher: Drawing Hands

Vanguard’s organizational structure

Vanguard sells lots of things, but they are most famous for their low-cost index funds. These mutual funds track a particular index, and don’t try to beat it. They just match it. This may seem unsophisticated, and indeed it is, but it also works. Find me a fund that’s consistently beaten an index over the long term (more than 20 years) and I’ll show you nothing, because you can’t do it. (Try!)

When you have an investment account, you can be charged in one of a few ways:

  • A periodic account maintenance fee: normally the domain of the 401(k), active investment funds, etc. Vanguard doesn’t, as far as I’ve ever been to determine, have one of these.
  • When you buy or sell: Otherwise known as “loaded” funds, I have yet to find a loaded fund that I’ve liked. Stay away. (I’ll include 12B-1 fees in this too, of which the less said the better.)
  • An operational fee (expense ratio): A percentage of the fund taken off of your returns to pay for the mutual fund operations. Vanguard’s are usually very low.

So with no account maintenance fees, and without buying loaded funds, the only costs you are guaranteed to have as an investor with Vanguard is the expense ratio.

The Vanguard 500 Index Fund Investor Shares mutual fund has an expense ratio of 0.16%. This means that if you have $10,000 invested in the fund, every year you will be charged $10,000 × 0.16% = $16. That’s seems way more than reasonable.

(Compare this with the amount a credit card charges you. With a $10,000 balance at even a low 6% interest turns out to be around $600 a year.)

Share classes and expense ratios

So what about this quasi-elite status I talked about above?

It has to do with the expense ratio. You see, the expense ratio is not quite a static figure. And this is because Vanguard has different “classes” of shares of its mutual funds, which are purely dependent on how much money you have invested.

And the expense ratio varies depending on the share class you buy.

Take that Vanguard 500 fund again. Their “Investor” class shares have a minimum buy-in of $3,000. (If you don’t have $3,000, they have a few other funds with a $1,000 minimum.) But there is also an “Admiral” class of shares, which have a minimum of $10,000.

And check out the expense ratios:

Fund Class Minimum Ratio
Vanguard 500 Investor $3000 0.16%
Vanguard 500 Admiral $10000 0.05%

So if you can save up to the $10,000 mark, you can get a 69% reduction in fees for the exact same performance!

Other funds work the same way. Here’s the Vanguard Total Stock Market Index Fund which tracks (wait for it), the total stock market:

Fund Class Minimum Ratio
Vanguard Total Stock Market Investor $3000 0.16%
Vanguard Total Stock Market Admiral $10000 0.05%

Same thing here too.

All of Admiral funds are much cheaper than Investor funds, so getting to the $10,000 can save you money. A lower expense ratio means a higher return for you!

And even better, when you reach this threshold, Vanguard automatically converts the shares for you. One day, you’ll log in and see that those funds have a lower expense ratio. Why thanks, Vanguard!

An argument against diversification

But wait a minute Mike, I was told that I need to diversify my account with [insert diversification strategy here]. If I do that I’ll have to divide my funds up too much to get to this point.

Correct. So don’t diversify.

(Cue screams of terror.)

When you have less than $10,000 to invest, I’m not convinced that diversification is your concern. What’s more important is finding low costs and actually investing. Remember: don’t get sophisticated. Keep it simple, because you’ll be more likely to do it.

Let’s talk about diversification when you’ve got five figures invested.

Investing in Admiral shares might not gain you elite status with Vanguard, but it’ll save you money, which is the more important thing. It’s a nice goal to attain, and it is attainable.

By the way, please see my disclosure policy. Please be sensible, and don’t do anything just because I said to do so.

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on February 16, 2017