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There is one point you haven't considered: Even though a pure indexing strategy is appropriate, it is not appropriate to use Vanguard for this. At the billion-

There is one point you haven't considered: Even though a pure indexing strategy is appropriate, it is not appropriate to use Vanguard for this. At the billion-dollar level, assuming that the index funds had an expense ratio of .05% (among the lowest out there) you would be paying annually: 1,000,000,000*.0005 = $500,000 For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.

sokoloff 8y ago
VTSAX is 4 basis points of expense ratio. There are others with 3 bps and Fidelity has one with 0. Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr. I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.
- whatok 8y ago
  Yeah, I don't think it's that great of an idea. Any sort of operational or execution-related risk you introduce by replicating indices with single names could cost you a lot more than $500k and really isn't worth it.
- tanderson92 8y ago
  There is additional value that can be added by forgoing an index fund, though. Tax management can be enhanced by rolling your own Total Stock Market index fund, since individual names can be harvested for capital losses, increasing the after-tax returns of your portfolio relative to a vanilla index fund. I'm not sure quite how to quantify that, but I'm sure someone has been able to do so.
  - sokoloff 8y ago
    Absolutely. There are a lot of reasons to run your own family office investment office. "Because Vanguard charges too much" isn't one of them, IMO.
  - Scoundreller 8y ago
    I thought you were only able to write-off $3k in capital losses per year against income? If so, not worth dealing with for a billionaire, but definitely an opportunity for a middle-class robo-advisor.
    - sokoloff 8y ago
      You can write off capital losses up to the amount of capital gains plus an additional $3K. So, if you have $5MM in capital gains, especially short-term, it makes sense to sell off up to $5MM in capital losses.
desdiv 8y ago
VIIIX's[0] Institutional Plus Shares (with a $100 million requirement) has an expanse ratio of 0.02%, so that's $200k. It would be hard to find someone at this salary level who can match the tracking performance of Vanguard. If they achieve a tracking error that's 1% higher than that of Vanguard's, that would mean an annual loss of approximately $800k compared to Vanguard (1,000,000,000 * 8% * 1%). [0] https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/productoverview?fundId=0854 https://institutional.vanguard.com/VGApp/iip/site/institutio...
- dev_dull 8y ago
  This really is a no brained. With such a small fee with such a large investment you’d be extremely hard pressed to beat that performance (if all you wanted was to match an index).
  - njarboe 8y ago
    Plus you can directly control the access to the account yourself. One fewer middleman to possibly scam you.
xenophonf 8y ago
a one-man office or other service provider that can buy the individual stocks In the given scenario, you aren't just hiring a guy to buy stocks for the Vanguard expense ratio. You're also buying all their financial and information security processes. You're buying risk mitigations like regular audits and SOX compliance and SP800-53 controls. To safeguard a billion dollars, that overhead is totally worth it.
bigpicture 8y ago
The S&P 500 publishes changes to the index in advance of the changes taking place, so all of the affected stocks have prices that reflect the change at the time of the change. Most tracking indexes, especially the ones Vanguard uses, do not do that and thus do not allow the markets to front-run them. If you adopt the strategy of "do what Vanguard does" and you do it immediately after Vanguard says they did something, you are already too late to get the prices that Vanguard got and can kiss at least .05% goodbye just based on that. I would expect to under-perform by at least .25%, if not more.
foolsgold 8y ago
That's really funny. One man recreating Vanguard's business single highhandedly and doing triple duty with tax planning and philanthropic services and doing it for less money than Vanguard can do just the index funds. Thank goodness the knowledge to handle each and every one of those services, at an expert level, is interchangeable.
tivert 8y ago
> For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well. But then you have to trust that guy not to fuck it up, while Vanguard has a stellar reputation and a whole office of people making sure things go as expected.
ThrustVectoring 8y ago
Tracking error against the index, auditing, security, and financial controls are more important than a couple basis points. Honestly a much stronger argument is tax efficiency. If you're buying the individual stocks, then even when the index is flat you'll have some capital gains and losses. You can use both these to improve your tax efficiency - the losses can be harvested to offset realized gains elsewhere, while any appreciated shares can be donated to charity and repurchased with new money, effectively increasing your tax basis. Still, you're likely better off just hiring people to do the tax planning, estate planning, and philanthropic services. It's essentially setting up a single family office with no control over your investments.
yourapostasy 8y ago
Agreed with what everyone else has responded to counter the claim that a one-man family office can reproduce Vanguard's VTSAX. Such a family office also has to contend with other giants trying to claim the G.O.A.T. title for asset management companies [1] with incredible scale efficiencies. The stakes are "for all the marbles of the game" high [2], and they're using all the benefits of capital scale they can scrounge. The likelihood of a single person delivering index tracking performance better than these giants is pretty slim. Better to drop the tranche designated for broad market passive indexing into one of these giants' funds as an institutional holder, then have the one-man office project-manage leading education of younger generations, help the family leader clarify the ongoing family mission the office supports, the accountants' filing tax compliance at the individual and trust/foundation levels (likely in many different jurisdictions), grooming a successor, updating processes and procedures to improve auditability/accountability/anti-fraud detection, assisting with legal compliance, helping out with financing approved moonshots, etc. [1] https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobbles-under-abby-johnsons-withering-pricing-assault-but-fidelitys-new-cost-cutting-front-aimed-at-advisors-is-proving-more-lethal-for-blackrock https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobb... [2] https://www.bloomberg.com/markets/fixed-income https://www.bloomberg.com/markets/fixed-income
Scoundreller 8y ago
Don’t forget: keeping track of the dividends and cost bases of a hundred or thousand stocks will heavily impact your accounting/bookkeeping bill each year. And once you talk about foreign stocks, you have different amounts of withholdings to account for, dividends that are not dividends (return of capital).

sokoloff 8y ago

VTSAX is 4 basis points of expense ratio. There are others with 3 bps and Fidelity has one with 0. Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr. I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.

whatok 8y ago
Yeah, I don't think it's that great of an idea. Any sort of operational or execution-related risk you introduce by replicating indices with single names could cost you a lot more than $500k and really isn't worth it.
tanderson92 8y ago
There is additional value that can be added by forgoing an index fund, though. Tax management can be enhanced by rolling your own Total Stock Market index fund, since individual names can be harvested for capital losses, increasing the after-tax returns of your portfolio relative to a vanilla index fund. I'm not sure quite how to quantify that, but I'm sure someone has been able to do so.
- sokoloff 8y ago
  Absolutely. There are a lot of reasons to run your own family office investment office. "Because Vanguard charges too much" isn't one of them, IMO.
- Scoundreller 8y ago
  I thought you were only able to write-off $3k in capital losses per year against income? If so, not worth dealing with for a billionaire, but definitely an opportunity for a middle-class robo-advisor.
  - sokoloff 8y ago
    You can write off capital losses up to the amount of capital gains plus an additional $3K. So, if you have $5MM in capital gains, especially short-term, it makes sense to sell off up to $5MM in capital losses.

desdiv 8y ago

VIIIX's[0] Institutional Plus Shares (with a $100 million requirement) has an expanse ratio of 0.02%, so that's $200k. It would be hard to find someone at this salary level who can match the tracking performance of Vanguard. If they achieve a tracking error that's 1% higher than that of Vanguard's, that would mean an annual loss of approximately $800k compared to Vanguard (1,000,000,000 * 8% * 1%). [0] https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/productoverview?fundId=0854 https://institutional.vanguard.com/VGApp/iip/site/institutio...

dev_dull 8y ago
This really is a no brained. With such a small fee with such a large investment you’d be extremely hard pressed to beat that performance (if all you wanted was to match an index).
- njarboe 8y ago
  Plus you can directly control the access to the account yourself. One fewer middleman to possibly scam you.

xenophonf 8y ago

a one-man office or other service provider that can buy the individual stocks In the given scenario, you aren't just hiring a guy to buy stocks for the Vanguard expense ratio. You're also buying all their financial and information security processes. You're buying risk mitigations like regular audits and SOX compliance and SP800-53 controls. To safeguard a billion dollars, that overhead is totally worth it.

bigpicture 8y ago

The S&P 500 publishes changes to the index in advance of the changes taking place, so all of the affected stocks have prices that reflect the change at the time of the change. Most tracking indexes, especially the ones Vanguard uses, do not do that and thus do not allow the markets to front-run them. If you adopt the strategy of "do what Vanguard does" and you do it immediately after Vanguard says they did something, you are already too late to get the prices that Vanguard got and can kiss at least .05% goodbye just based on that. I would expect to under-perform by at least .25%, if not more.

foolsgold 8y ago

That's really funny. One man recreating Vanguard's business single highhandedly and doing triple duty with tax planning and philanthropic services and doing it for less money than Vanguard can do just the index funds. Thank goodness the knowledge to handle each and every one of those services, at an expert level, is interchangeable.

tivert 8y ago

> For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well. But then you have to trust that guy not to fuck it up, while Vanguard has a stellar reputation and a whole office of people making sure things go as expected.

ThrustVectoring 8y ago

Tracking error against the index, auditing, security, and financial controls are more important than a couple basis points. Honestly a much stronger argument is tax efficiency. If you're buying the individual stocks, then even when the index is flat you'll have some capital gains and losses. You can use both these to improve your tax efficiency - the losses can be harvested to offset realized gains elsewhere, while any appreciated shares can be donated to charity and repurchased with new money, effectively increasing your tax basis. Still, you're likely better off just hiring people to do the tax planning, estate planning, and philanthropic services. It's essentially setting up a single family office with no control over your investments.

yourapostasy 8y ago

Agreed with what everyone else has responded to counter the claim that a one-man family office can reproduce Vanguard's VTSAX. Such a family office also has to contend with other giants trying to claim the G.O.A.T. title for asset management companies [1] with incredible scale efficiencies. The stakes are "for all the marbles of the game" high [2], and they're using all the benefits of capital scale they can scrounge. The likelihood of a single person delivering index tracking performance better than these giants is pretty slim. Better to drop the tranche designated for broad market passive indexing into one of these giants' funds as an institutional holder, then have the one-man office project-manage leading education of younger generations, help the family leader clarify the ongoing family mission the office supports, the accountants' filing tax compliance at the individual and trust/foundation levels (likely in many different jurisdictions), grooming a successor, updating processes and procedures to improve auditability/accountability/anti-fraud detection, assisting with legal compliance, helping out with financing approved moonshots, etc. [1] https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobbles-under-abby-johnsons-withering-pricing-assault-but-fidelitys-new-cost-cutting-front-aimed-at-advisors-is-proving-more-lethal-for-blackrock https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobb... [2] https://www.bloomberg.com/markets/fixed-income https://www.bloomberg.com/markets/fixed-income

Scoundreller 8y ago

Don’t forget: keeping track of the dividends and cost bases of a hundred or thousand stocks will heavily impact your accounting/bookkeeping bill each year. And once you talk about foreign stocks, you have different amounts of withholdings to account for, dividends that are not dividends (return of capital).