It’s been a while since Vanguard announced a big round of expense ratio cuts, and just in time for their upcoming 50th anniversary, they announced what they call the largest fee cut in Vanguard history spanning 87 funds and projected to save fundholders $350 million this year (effective 2/1/25). In this regard, I am not worried about Vanguard. They know that low costs are core to their identity.

At Vanguard, we believe our funds’ impressive long-term performance owes much to their low costs. For the 10 years ended December 31, 2024, 84% of our funds outpaced the average results of competing funds. The performance of our actively managed fixed income funds has been especially strong: 91% of our active bond funds and 100% of our money market funds have outpaced their peers’ average results.

In fact, I worry that they focus on low costs too much. Cuts are nice, but these expense ratio cuts mean probably 0.01% for the average investor, or $1 a year per $10,000 invested. I’d much rather Vanguard keep the 0.01% and spend it on maintaining a highly-trained, long-tenured staff. There is a palpable difference when talking with a typical Fidelity employee vs. Vanguard employee. I think Vanguard is heading in the right direction, but their staffing still feels much less experienced.

Here are the largest funds and ETFs with expense ratio drops:

I would point out that the ETF version of some of the mutual funds are still slightly cheaper. For example, BND is at 0.03% while VBTLX went from 0.05% to 0.04%. Again, small margins, but you can hold Vanguard ETFs easily at any brokerage and I like that optionality.

Here are a limited sample of funds that I have held in the past that were affected:

• Vanguard Total International Stock Market (VXUS) lowered to 0.05%.
• Vanguard Treasury Money Market Fund (VUSXX) lowered to 0.07%.
• Vanguard California Municipal Money Market Fund (VCTXX) lowered to 0.12%.
• Vanguard Intermediate-Term Treasury ETF (VGIT) lowered to 0.03%.
• Vanguard FTSE Emerging Markets ETF (VWO) lowered to 0.07%.
• Vanguard FTSE All-World ex-US ETF (VEU) lowered to 0.04%.

Here are the current expense ratios on the four broadest ETFs + their classic S&P 500 ETF:

• Vanguard Total US Stock Market (VTI) at 0.03%.
• Vanguard Total International Stock Market (VXUS) at 0.05%.
• Vanguard Total US Bond Market (BND) at 0.03%.
• Vanguard Total International Bond (BNDX) at 0.07%.
• Vanguard 500 Index (VOO) at 0.03%.

I find it interesting that one of the last places where the “Vanguard Effect” hasn’t shown up is in money market funds. They still have consistently the best and cheapest default cash sweep money market funds, Treasury money market funds, and Municipal money market funds. They also have some of the best muni funds in general. They are expanding their bond ETFs, but for now access to these alone is a strong reason to stay with Vanguard as a brokerage if you are DIY investor.

Vanguard recently released their most recent annual 10-year forecast as of mid-November 2024 (effectively the beginning of 2025). The beginning of the year is the time for forecasts, and that also makes it a good time to remind ourselves how badly they can be wrong and how you shouldn’t really use them for anything.

Let’s look back at how those same forecasts performed from 2011-2021, with confidence ranges within the 25th and 75th percentiles. I have some old images saved from when Vanguard gave us an update in 2021.

For US Stocks between 2011-2021, their forecast in 2011 was roughly between 6% and 12% annually for US stocks, for a median around 9%. That a wide band! The actual return? 13.4%. As of early 2025, we are still outside their confidence bands.

For Global ex-US Stocks between 2011-2021, their forecast in 2011 was roughly between 6% and 11% annually for US stocks, for a median around 8.5%. The actual return? 4.0%. As of early 2025, we are still outside their confidence bands here as well.

I’m not trying to pick on Vanguard here, but they do release these things with a certain degree of seriousness and brand authority. But honestly, I wish they wouldn’t. I mean, sooner or later they’ll be correct, but how could you possibly attribute that to skill and not luck?

I’m going to include a copy of their late 2024 10-year forecasts (close to the start of 2025) here because they usually delete the post after a couple of years. This way, we can look back again in the future. For this chart, the ranges are their median forecast with a fixed 2% range of confidence for stocks and 1% range for bonds.

Notably, the 10-year median return forecast is 3.8% for US stocks, 7.9% for Global ex-US stocks, and 4.8% for US total bond. This table includes their percentile confidence ranges.

This all reminds of me of the old joke: How can you tell economists have a sense of humor? They use decimal points.

I’ve been a Vanguard customer (ahem, owner) for 23 years now. As such, I’ve also been one of those long-time customers that has been disappointed to see their struggles with customer service for their individual retail brokerage clients. One of my big decisions in 2024 was if I would move the majority of my assets to Fidelity or Schwab. Here’s another long-winded post about my thoughts about Vanguard.

Jack Bogle made a powerful decision when he created the Vanguard ownership structure. Each of the mutual funds was its own entity, and the shareholders own the funds. In turn, the member funds own the umbrella Vanguard Group. The member funds each pay their own expenses for research, management, etc. Everything is “at-cost”. There are no outside shareholders that may call for profits to put aside or dividends to be paid out to them. In theory, this means that the goals of each individual retail investor are aligned with the Vanguard executives.

However, in practice, we are entirely passive shareholders in that we have no vote over who is CEO, who is on the Board of Director, how much each of those folks gets paid (we don’t even get to see the actual number), whether the company should prioritize customer service or growth of assets or employee benefits. As with many large non-profits, the executives at Vanguard get very large compensation packages and the target is almost always growth, growth, growth. Bigger is better; more assets means the executives can justify a larger paycheck.

When I started with Vanguard, they were much smaller and there was more “fat” in the system. Their expense ratio for the flagship S&P 500 index fund something like 0.20% annually ($20 a year for every $10,000 invested). ETFs did not exist, and mutual funds usually charged users a transaction fee unless they were on a “mutual fund supermarket” with a pay-to-play structure. In turn, this made mutual funds more expensive because they passed the costs onto the customer. Vanguard refused to pay kickbacks because that would increase the costs to shareholders, so us retail investors had to go “direct” to Vanguard to get access with no transaction fees. The cheapest option was to go direct with Vanguard, and they had a “cheap and cheerful” reputation. They weren’t the best in customer service, but phone calls were answered promptly.

Then came the exchange-traded fund (ETF). ETFs were cheaper to maintain for Vanguard (and everyone else). This drove costs even lower. ETFs could be bought and sold at any brokerage with the same transaction costs as a stock. ETFs also had inherent tax-advantages that made it much easier to avoid creating capital gains distributions. I believe a big break happened when Vanguard stopped holding the mutual fund and ETF expense ratios at the exact same level. Everyone was incentivized further to hold the ETF version.

Today, the expense ratio for the flagship S&P 500 index mutual fund is only 0.04% annually ($4 a year for every $10,000 invested). But the ETF version is only 0.03% annually ($3 a year for every $10,000 invested). There are both certainly much cheaper than 20 years ago, but today each of their ETFs also has at least two other competitors at the same low expense ratio. Vanguard probably feels forced to keep their ETF costs as low as possible, lest they hurt their “low-cost” brand.

However, since each Vanguard fund has to pay for its own expenses including customer service costs, Vanguard is now incentivized to have you hold your ETF at another brokerage. (And once you start holding Vanguard ETFs in another brokerage, technically you should be rooting for lower costs and thus Vanguard to spend less on customer service as well.) Trades are zero now everywhere. But every single customer service call still has to be paid for somehow, and from this perspective, you can begin to understand why their customer service has gone downhill. Their margins are purposefully thin and the only solutions are to either raise their expense ratios a tiny bit (slower growth and perhaps lower executive salaries) or just try to keep spending as little as possible on customer service.

Guess which one they picked? From WSJ article (gift) Vanguard’s Die-Hard Customers Have a Message for New CEO: ‘The Service Is Abysmal’:

Brokerage-account customers were also recently warned that “excessive reliance on phone associates” could lead to additional fees or account termination.

Importantly, Vanguard has limited ways to subsidize the low costs of their ETFs. Meanwhile, Fidelity still makes a ton of money upselling customers to a variety of wealth management services. Schwab earns hundreds of millions extra by quietly paying nearly zero interest on their cash sweep (they recently dropped it to 0.05% APY in December 2024), pocketing an average of 2% to 3% annually on their customer’s idle cash. Robinhood lets me trade random crypto 24/7 and promotes active trading which results in an insane amount of payment for order flow.

Is this the natural end for Vanguard? Will they just make the commodity product and let others distribute it and deal with customers?

This is why the new CEO will undoubtedly have a big focus on low-cost wealth management. This will allow them to charge customers a higher fee for increased financial advice and customer service. They would finally have something to upsell. The only other alternative is for them to raise Vanguard brokerage fees so that the retail customers pay directly for the additional services they require.

In the end, I asked myself, “If something happens to me, would I rather have my wife deal with Vanguard, Fidelity, or Schwab?” She may end up wanting to pay for extra assistance and advice. Vanguard would have the worst customer service, but perhaps they will come up with a reasonable-cost advisory system. Fidelity and Schwab would undoubtedly be happy to provide her additional financial advice as well, likely at a higher price. Fidelity has solid customer service in my opinion, but I don’t really like their wealth management options based on my past experiences helping older relatives. Schwab has a conveniently-located physical branch near us, but I have a bad taste in my mouth after their “Intelligent Portfolios” zero-interest-cash-is-good-for-you fiasco. (See CBNC article Charles Schwab to pay $187 million to settle SEC charges that it misled robo-advisor clients on fees.)

In the end, I have punted my decision and only made some smaller moves. I transferred our Vanguard IRA assets over to Robinhood as a 5-year test run (in exchange for $16,000). I already have my Solo 401k and an active Cash Management Account at Fidelity. Perhaps Vanguard will shore up their customer service to “decent enough” and use AI to create a at-cost/low-cost advisory platform for the masses. Perhaps the Fidelity model of solid customer service plus a whole bunch of both low-cost and higher-cost menu items is the best one. Perhaps I will place the highest value on a local Schwab human rep.

Image credit: Canva AI generated with prompt “HMS Vanguard in rough seas”

The most common reader question about my personal portfolio is definitely the fact that the allocation to international stocks has been a drag on performance relative to owning 100% US stocks. This is kind of a repeat topic, so I won’t dive into the full debate again, but wanted to offer some expanded and updated thoughts to my response to a comment from reader John. All numbers below are taken as of January 2025.

The divergence between the performance of US stocks and the rest of the world started around 2009, which of course coincided with most of my investing lifetime so far. 😒 Here’s a chart from the Bloomberg article Global Diversification Has Disappointed. Don’t Give Up on It (gift article for next 7 days). Worth a read.

As noted in my portfolio updates, my asset allocation floats along with total world market cap breakdown, as tracked according to the Vanguard Total World Stock ETF (VT). I remember a time when it was only 45% US and 55% Rest of the World (World ex-US). As of the end of 2024, it is now at 65% US and 35% World ex-US.

In practical terms, this means that I used to own about the same amount of Vanguard Total US Stock Market ETF (VTI) and Vanguard Total International Stock ETF (VXUS), a 1:1 ratio. But as of the end of 2024, I now own about double the amount of VTI relative to VXUS, a 2:1 ratio. So my performance isn’t exactly that of the chart above due to ongoing investments over time, but it’s still been much lower than if I used owned 100% US stocks.

I can’t change the past. The question is: Should I change my asset allocation now?

Let’s look closer. A significant chunk (not all) of the outperformance has been due to a higher P/E ratio. Below is a Yardeni chart of the P/E ratio of US stocks vs. International stocks. The gap looks like the greatest in 25 years. Can this trend continue? I don’t know, and I don’t think anyone really knows.

Are US stocks simply a better investment, forever? They might be. The US definitely offers a very business-friendly environment overall. That’s why I just let it float. If the US manages to continue this outperformance in the future, then one day my allocation might grow to 75%/25% (3:1 ratio) or even 80%/20% (4:1 ratio). My portfolio adjusts.

This is the same theory as owning all of the companies in a market-weighted S&P 500 index fund: you own all the winners, and you also own the losers, but owning the winners is good enough to pull everything up overall. If the US keeps being a huge winner, I’ll own a lot of the US. If not, I still own the entire haystack. Therefore, I plan to continue holding a chunk of international stocks according to the investable market-cap float with maybe a slight home bias.

I could sit here and lament how big my portfolio would have been if I had bet on 100% US for the last 15 years, but honestly the stock markets have been kind to me as a business owner (although I’d say at the expense of the average worker bee) even with my international stocks and bond holdings. The 10-year trailing average annualized return has been 9.33% for VT vs. 12.50% for VTI. Owning a mix of winners and losers has still worked out just fine, and I was covered in case history turned out differently. I have no complaints.

Photo by Andrew Neel on Unsplash

The IRS officially announced the new 401(k) contribution limits for 2025 (full news release), which also included a new “super catch-up” allowance for people who are ages 60-63 at year-end 2025. Strangely, it goes back down once you are age 64. I hadn’t heard of this before now. As usual, by “401(k)” I mean that it applies to 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan.

The 2025 base 401(k) contribution limit is increased to $23,500, up from $23,000. This WSJ article (paywall) has a handy chart for reference.

The 2025 base IRA contribution limit remains at $7,000 (subject to income limits). Taken together, “maxing out” your IRA and 401(k) now takes more than $30,000 a year even ignoring any catch-ups. That’s a lot, but whatever you can cram in there may get roughly a 30% boost towards your final retirement balance.