Lessons in Investing: 5 Soundbites from the CEO of Vanguard

Mr. PIE is fairly certain most of the readers listen to the odd podcast or two. Perhaps while out on a walk or maybe you squeeze it in over the lunch-time slot to drown out the noise from the neighboring cubicles or open-plan offices. Mr. PIE uses his time commuting to listen to whatever he remembered to download the night before. Alternatively, Mr. PIE forgets all about downloading it so just streams it directly using the work iPhone and doesn’t give a sh** about the data usage.

This week Mr. PIE listened to the Masters in Business podcast hosted by Barry Ritholtz. He was interviewing none other than Bill McNabb, the CEO of Vanguard. You know, that company who appears to be the darling of the individual investor and helps you to build your wealth, dreams and generally anything else you may need to forge a darn happy life in early retirement or otherwise.

Since Mr. and Mrs. PIE have a large chunk of their change entrusted with the dudes who inhabit the campus at Valley Forge, PA, Mr. PIE felt this was a good opportunity to perform some diligence on the man at the helm of the good ship Vanguard. Mr. PIE was very curious to hear what was on the mind of the man who oversees nearly $4 trillion dollars in assets. Yes, that is with a “T”! Would it be a description of the 40,000 sq ft McMansion in the Teton valley? Or teething problems docking the super-yacht in the harbor at Monaco? Perhaps wondering when Mr. Ritholtz would shut up and he could get back on the private jet and fly to the Hamptons for an extended week-end?  First world problems for sure.  It can be tough being a CEO these days.

No, the healthy skepticism cynicism of Mr. PIE was swept away rather quickly in what turned out to be a terrific 1-hour plus long interview with a very down-to-earth, pragmatic and humble man.

Rather than use your valuable time reading the whole transcript of the interview or eat into an hour of your precious work time (muffled sniggering….) by listening to it, Mr. PIE has summarized the discussion into a handy-dandy five soundbites taken directly from the CEO’s mouth. Mr. PIE has also tried to provide some context on application of these words of wisdom to your investing world and lifestyle overall. Let’s jump right in.

Costs are an important component of investing

When was the last time you looked at the fees associated with your investment portfolio? Why, thank you for asking Mr. PIE! If you have not taken a close look at fees, please read the following paragraph and then go investigate your portfolio immediately.

$10,000 tax-deferred dollars invested into your 401K on an annual basis, assuming 0.1% in fees (this is actually not too hard to do with an investment house like Vanguard) and 8% nominal returns, can grow to $1,200,000  in 30 years. If the corresponding fees are 1% (not uncommon with many brokerage houses), the portfolio grows to $1,000,000 – a shortfall of $200,000. Are you interested in fees now? You should be. That difference could deliver an extra 3-6 years of living expenses. Of course Mr. PIE gets the fact that you may not have much choice in your 401K but the same principles apply with a taxable account or a Roth IRA, where you are in full control of your choices. Fees matter BIG time to your FIRE plans.

Simple works better in most cases

Think of a long hike on a sunny day with family or a lazy afternoon at the local river swim-hole or a relaxing afternoon with some friends and a few cold brews to accompany some yummy grilled BBQ food from the grill.

Conversely, think of a Saturday afternoon trip to the packed shopping mall, visiting American Girl, Coach, Crate and Barrel and swinging by Starbucks on the way home for a triple venti soy almond milk latte and extra froth on top just for the hell of it.

One scenario is very simple with respect to use of time and money and the other not so much. And simple applies to investing also.

With investing, keep things very simple and stick to building your portfolio from low cost equity funds (US and a slice of international cheese depending on your palate), corporate bonds, perhaps throwing in some Treasury Inflation Protected Securities (TIPS) and a bit of real estate (either real bricks for rental income or a REIT or two) and of course some cash. For the average investor, there is no need to make it more complicated with the next hot biotech stock or exotic investments like commodities, gold or private equity. Of course every investor is different. If you are a gold-bug and a small allocation to this particular asset class allows you to sleep well, go for it. With Mr. PIE’s background in chemistry, he loved a quote from Early Retirement Now on a blog post rant he had on gold –  “Gold molecules don’t reproduce last time I checked”. Gold is indeed chemically fairly inert. You don’t want your investment portfolio to follow suit, even in retirement.

To help you with simple, take a look at these 8 Simple Portfolios compiled by Mike Piper who blogs over at the Oblivious Investor. Pick one, any one. They are all fairly simple, even if you want to tweak the allocation percentages in any of them.

Average is not average

Taken directly from the 2016 Dalbar Quantitative Analysis of Investor Behavior report: In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%. Wow! The average investor is indeed not average! The figure below from the report gives you a nice visual of this “less than average” performance relative to the S&P 500 over time.


Source: “Quantitative Analysis of Investor Behavior, 2016,” DALBAR, Inc. www.dalbar.com

The reasons why leads to the next pearl of wisdom from Mr. McNabb….

Human behavior is always looking for the home run

Analysis of the under-performance highlighted in the figure above reveals that investor behavior is the number one cause of the problem. The notion of out-sized returns is super seductive and investors invariably chase yesterday’s winners. A study, again taken from the Dalbar 2016 report, showed that a fund that was in the top two quintiles had less than a 20% probability of maintaining its percentile ranking the following three years. You can get to “your enough” without chasing yesterday’s winners.

It gets to the question “How much is enough?”

Anyone pursuing financial independence, early retirement (FIRE) is very aware of the “one more year syndrome”. It will take one more year to hit the magic number and then happiness will suddenly materialize. Another year of salary/bonus will pad the portfolio to get into a safe zone with respect to safe withdrawal rate. That one more year may come, in part, from pressure to maintain a certain lifestyle. Yet if you are a believer in “Simple works better in most cases” (see above), you perhaps realize that your enough may already be staring you in the face. Your enough may actually be nothing more than your intimate relationship with self to understand and appreciate the simple things in life that make you happy and make you thrive. Your savings can help for sure. They can buy you time.  And with enough time, truly great things await.

So there you have it. Five pearls of wisdom taken from the man at the helm of one of the most highly respected brokerage houses on the planet. In summary , being very cognizant of costs associated with your investments, simplifying your overall investment approach, the acknowledgement that human behavior is not average at all and understanding what makes you happy can go a long way to delivering an awful lot more than actually money can buy. Mr. PIE came away from listening to the podcast that adherence to these philosophies over time has made Vanguard great. Understanding them and trying to apply them in your daily life can make you great too.

Do any of these soundbites resonate with you? If you listened to the podcast already, did anything else Mr. McNabb said hit the spot with you? Let us know in the comments.


  1. Two items resinated with me:
    Average is not average, I wrote a post on this topic last week from the same study (no I didn’t hear the podcast, but it sounds interesting). Ultimately you are the main decider on whether you exceed in investing, not that you picked the ultimate investment option that yields .2 better yield.

    Keeping it simple. I’m working on this one. I have a decent number of legacy investment accounts. It takes a lot of specialized management to keep up on whats where, what my overall allocation is, whose holdings I have, etc. As I think about it the extra overhead is both a waste and would be difficult for my wife to handle if something were to ever happen to me. As such one of my goals over the next year or so is as tax ramifications allow start to consolidate a few accounts and holdings. We’re not talking about much, more like collapsing from 4 different S&P 500 index funds (some etf and some mutual from same vendor) to 1 or 2.

    1. I think your approach to simplifying makes a lot of sense. Although if you do have funds that are similar enough, you may be able to do some tax loss harvesting.

      And to tie that back to the average concept, sticking with your plan without too much tweaking should serve you very well.

      Thanks for swinging by and the comment!

  2. I never really understood the costs related to investing until years after I started. I was glad that I did start investing very young (I got my job at 22) – but by the time I figured out how high the fees were, I’m sure I lost a significant amount of money. Now I focus on simple and all my money is in Vanguard. We have pensions, so our overall investments aren’t as big as many others- but I love looking at my statements now and seeing how little is taken out for fees!

    1. Hi Vicki,

      Neither did we really. But since our fund expenses from both our company 401k’s were very low, we lucked out. Better to be lucky than good sometimes!!

      Our taxable brokerage account is with Vanguard and there it is not too hard to keep costs low as you know.

      Pensions – we like! I will have one from my company upon retiring at age 51. At the end of the day it is the composite that matters – pension + taxable + tax advantaged + rentals – ALL good.

  3. Just downloaded the podcast – I have been looking for new episodes to fill the work day

    I have been tweaking my 401k portfolio over the las few months – there was a ton of JUNK in there. The fees are combined with low returns pissed me off. I am debating emailing our HR department about it (doubt they will actually do something)

    Thankfully we have a 5 different vanguard options, one that mirrors the SP 500 and that is where a bulk of my money is going

    1. Hello AE,

      If nothing else, moving to low cost funds will save you a ton down the line. It sounds like the SP 500 tracking option will do the trick for you. Excellent plan. If enough of your co-workers can join you in a mini-revolt, you never know…. no harm in raising the subject…..more power to you!

  4. I’m a big podcast junkie, so will need to download this episode and give it a listen. Seems like these are good pieces of wisdom for any investor to remember. Especially agree with keeping things simple. The “average isn’t average” point you make is interesting. Being average – as in matching the market – is actually above average. Just doing nothing, it seems, can make you a great investor over the long term.

    1. FP,

      “Being average – as in matching the market – is actually above average.” You nailed it completely!!

      Fully agree. With investing, once your plan is rolling, don’t just sit there. Do nothing!

      You will be amazed what your portfolio will do with this strategy!

  5. “How much is enough?” hits the spot for me. I calculated I have “enough” with a decent buffer for just in case so why the hell would I want to keep working? I now don’t understand (I do really) why any of my more wealthy friends want to keep working. Oh that’s right, they have no idea how much is enough as they continue to spend excessively and work toward traditional retirement. I reckon they’re all mugs and they reckon I’m nuts for giving up work when I could have kept going for another 15 years just like them. Great post PIE’s.

    1. Martin,

      Thanks so much for your kind words. Your comments really hit home with us as we talk often about how our friends and work colleagues are going to react when we share the news. We notice so much these days about over consumption by colleagues, friends. To be honest, we fell into this trap also but soon realized that it was a path to more troubles.

      Another 15 years sounds nothing more than mental and physical torture. It’s amazing how simple life can be when you understand your enough.

  6. Our new FIRE mantra: “I just want to be average”! Great post, the “one more year” syndrome is something I’m dealing with now. Technically, I’ll achieve “FI” mid-2017, but am leaning toward “RE” one year later given my concerns re: health care cost inflation. I’ll still be out by 55, and I’m self aware enough to realize the extra year (and reduced anxiety) is a good tradeoff in my situation. I love Vanguard, and appreciate this summary of the podcast. Now, I love VG even more!

    “I just want to be average!”

    1. Hi Fritz,

      Yeah, we are going through the same mental math as you. At times, analysis paralysis. We agree that healthcare costs are a concern and as you know, it can’t be sustainable in this current form.

      I also have a very lucrative bonus/stock option structure (pays out in Feb/March each year) so another year of that is the old silver handcuffs syndrome….

      I will absolutely take that SP 500 average. Sounds like we will both be at the front of the line requesting it!!

  7. Great summary 😀

    The “average is not average” bit was the most shocking to me – man what a difference! And compounded over time? Huge impact on savings/retirement date.

    We love podcasts too ^.^ Gimlet media has some fantastic ones, and Planet Money & Radio Lab from NPR are also favorites.

    1. Hi Felicity,

      I just ran the numbers on Portfolio Visualizer for $10,000 invested initially in a 70:30 equity : bonds mix (equity split equally between VTSAX and VTIAX) and bonds in iShares AGG. Then adding $30,000 anually.

      Even looking at the last five years (when all these funds have been available to investors), the SP 500 benchmark beats out the above portfolio by about $36,000 in terms of final balance. Compound that over another decade or two and you can get to some astronomical numbers and much later date for your escape parachute to deploy……

      Also enjoy Planet Money. Good choice!

  8. “Simple works better in most cases.” This is an important point that most people seem to miss. Just because something is important, does not mean it needs to be complicated. Especially when it comes to retirement saving and investing, this is something that a lot of people need to take to heart a lot more.

    Thanks for the summary!

    1. Absolutely Matt! The trick is not to be seduced by that next potential winner when all around you are the masses scrambling for that “extra edge” that very rarely materializes. Let them scramble. Let them hunt down their edge. They will be hunting for a long time…..

  9. “Human behavior is always looking for the home run.” Absolutely. This is precisely why we get big ‘ole elastic rebound effects in equity prices, housing bubbles, Brexit panics, and a bunch of other moments that defy reason.

    A great summary here, Mrs. PIE – thank you.

    One question: Is 40,000 sq. ft. the going rate for a McMansion these days? Hardly seems adequate, frankly. I’d expect the average McMansion footprint to climb by at least 15% next year. You know, just so nobody feels cramped.

    Great read (as always)!

    1. Greetings FL.

      It was Mr PIE who composed this utter nonsense. So perhaps some harsh feedback to me is in order. Mrs. PIE offers much better content. Tune in next week for a tastier slice of cake. :>)

      Regarding the McMansion size – I think you could be right. After all, to house a couple of new Teslas and the eighty pairs of skis to handle the diverse Teton range snow conditions (subtle reference to powder again from the bad hombre….) one does need a chunk more garage / storage space. Throw in a heli-pad and who needs the boring Tesla to escort you to the finest ski runs that lots of money can buy!!

      1. Apologies, Mr. PIE!!

        This post is just so good I assumed Mrs. PIE must’ve written it!! 🙂

        Then again, since you are one bad hombre peddling in powders of various potencies, perhaps you purloined the post from the prolific Mrs. PIE. (What powder did you slip me, hombre?!?!)

          1. I have been known to be thrown off the ski trail a few times before …..easily done!! Also nearly lost a small PIE in the ditch of one trail when he was about five. Quite the panic but luckily we located him without use of sniffer dogs….

        1. The days when Mr. PIE wore a lab coat are long gone. However Mrs. PIE is still very skilled in the art of practical organic chemistry. I am more the consultant these days on any powder matters, skiing related or otherwise…..

  10. Nice reads and thanks for sharing the pearls from the master of index investing. Actually, back in the old days, index investing was considered a scam and “un-American” so we have to thank gold old Bogle for sticking to his guns. And thanks for the shout-out and sharing a “gem” from the ERN blog as well.

    1. Yeah, it has been interesting to hear the stories of how Mr Bogle was treated like a scam artist. Him and Burt Malkiel. Often the case with those who take the less traveled path and are innovative.

      That gold comment really hit the spot with me and couldn’t resist throwing it back in for others to enjoy!

  11. I’ve begun listening to this podcast in recent months and really enjoy it. The interview with Mr McNabb was very enlightening. I agree that he and the culture of the company are very humble which makes it easy to feel comfortable investing money with them. They really put the customer first, provide a great diversity of investments and are laser focused on cost reduction. Great overview, Mr Pie!

    1. The Ritholtz podcasts are great, aren’t they? Always something to take away from each one. They could do with sorting out the audio though. Barry speaks so loudly at times and his guests are often rather soft spoken. I find myself either being deafened or straining my ears to hear the conversation.

      To the list of things you like about Vanguard, I would also add fairly easy to use web-site and good customer service. They helped us transfer in some funds from another finance house with little pain.

  12. Thanks for the soundbites–I find it quite hard to listen to podcasts right now with two little people at home with me! The “average isn’t average” point is very enlightening–thanks for the graph! And I agree that it’s easy not to realize when enough is enough. We are still figuring out what enough will look like for our retirement, but I imagine it’ll be less than what many people would expect.

    1. Hi Kalie,

      I completely understand. Just this weekend , I had to listen to the podcast again while the small PIEs were excitedly carving pumpkins. Quite the level of enthusiasm….

      The “average is not average” sounbite was just astounding for me to listen to and when I did the further research, it blew my mind. Such a difference and over time, enormous amounts of savings ( or not) can result!

      It is such a myth that we need a large percentage of salary to retire. Most retirees need a whole lot less than they think and it sounds like you are well on the way to figuring all that out.

  13. The thing with the average returns of the S&P 500 is that the average return beats out 70-80% of the investors in the market. I was beyond shocked when I heard that, which is how I structure my 401k account. 90% S&P and 10% bond fund.

    It’s not doing well right now because everybody thinks the world is going to end but that just means I can contribute more to it! I’m beyond ecstatic to be able to get into the S&P at a discount!

    1. I think your strategy over time will do just fine for you. Trick is not to mess with your asset allocation and just let it ride. Buying any equities at a discount is always good.

      The world will hopefully survive this darn election!

  14. Masters in Business is one of my favorite podcasts. I could of sworn he already interviewed Bill McNabb last year, so maybe this the second time. Costs are everything to those guys at Vanguard. I remember McNabb saying he flies coach (unless he gets upgraded) 🙂

    1. Hey FF! You are right. He did interview him 18 months ago. I missed that one but Barry said the content was markedly different to the latest one so will be checking it out when I have some less busy time…..

      Flying coach by a CEO is incredible. Leading by example. I understand a bit more now on why he says they work hard at the culture at Vanguard. From the very top for sure!

  15. Thanks, Mr. PIE. We discussed this recently with my in-laws, who were choosing a financial planner. The planner told them that the 1% AUM fee was the ONLY fee–they didn’t mention expense ratios, index funds, or the difference in ERs between most actively managed funds and the index funds.
    It’s so important to be informed and not just trust people who might not (and probably don’t) have your best interest at heart, and this is easier when you keep things simple.

    1. Thanks for the comment and being our 1,000th comment! Fitting it is such a great one. It is absolutley scandalous that lack of transparency is causing people thousands of dollars. And happy that you are at least able to provide some important context for your family on this subject. Check out Robin Powell and his company Regis Media for the great work they do on bringing transparency to the investment world. They are on a mission to rid the world of investment fees. Worth following him on Twitter. Always has great content to share.

  16. Thanks for the Cliff Notes version of the podcast. Our community has a whole owes the wonderful folks at Vanguard so much for revolutionizing the way we approach investing and for making it so much more accessible (learn everything about everything and beat the scary market? No thank you. Nice, easy passive investing at low cost? Yes, please).

    1. Thanks for swinging by. You are right that we should not take low cost indexing for granted. Hopefully the momentum of this approach will extend to other investment houses and make it better across the board. Fidelity starting to do this and others need to follow. I wonder when Bogle might be honored for his vision with an economics prize of some sort.

  17. Vanguard is a fantastic financial institution, making more millionaires than Buffett’s Berkshire Hathaway. Out of your 5 soundbites, the one that resonated with me the most was not looking for a home run. That’s how most people lose sizable chunks of money (though it’s worked out well for a few people too).

    We’re taking a slow and steady approach for what we feel is best for us in Australia. If we were in the USA I’m sure we’d take that approach. I’m sure one day we’ll own a big chunk of an S & P 500 fund too 🙂


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