Vanguard is a giant in the sleepy space of passive investing.

It’s been leading the charge for passive management over active management for decades.

Active investors struggle to beat the market. As we mentioned last week, less than 50% of active managers beat their index. Active managers charge management fees that eat into returns, making the hurdle even steeper.

That’s why one of the best things you can do if you aren’t picking your own stocks is investing in low cost passive funds.

John Bogle founded Vanguard in the mid-1970s and quickly became the face of the passive management movement. He created one of the first index funds available for the everyday investor.

Its first passive fund matched the S&P 500, and since then it has added funds that track the Russell indexes, small-cap companies, and mega-caps too.

It’s also been increasingly present in the world of bonds. Vanguard has an impressive $1 trillion bond indexing business in the U.S.

While we typically discuss stocks, and we think a good chunk of your money belongs in stocks, bonds have a place in your portfolio, too.

Similar to the equity side of the market, passive bond funds give investors the ability to just get exposure to the bond market. As we’ll talk about today, we think these tools are incredibly important for any investor.

Investor Essentials Daily:
The Monday Macro Report
Powered by Valens Research

Investing is less about picking the right company than you think.

There’s a great deal of research out there that highlights how much of a person’s investment outcome comes from just being in the right assets. Basically, whether someone is investing in bonds, equities, cash, and so on.

Over 60% of a stock’s performance over a long period of time is explained by the market it’s in.

What matters is that you get exposure to the market.

There’s a reason each month in our Timetable Investor we talk about our macro outlook. The report helps track changes in how healthy the market is.

In the Timetable Investor, we’re not trying to pick stocks or tell you how much money to invest in certain companies. Instead, we say “based on current market conditions, you should put 50% of your money you don’t need for 5-10 years in equities, and 50% in bonds.”

Under our framework, all your money that you don’t need for 10 years should be entirely in equities. And any money you need for less than five years should never be in equities.

Because of the volatility and returns of different asset classes, you shouldn’t put money in equities that you don’t have ten years to make back.

If you need money in two to five years, bonds are a great place to put it. And a great place to store that money should be in the equity or bond markets based on your timetable is in index funds.

We think of them as the “bank account for equities” or the “bank account for credit.”

So when you find opportunities for active investments (like from our Microcap Confidential, Hidden Alpha, High Alpha, or even when we launch our credit product sometime down the line) you shouldn’t be buying those ideas out of cash.

You should be using money you already have in the equity or bond markets. Vanguard offers a few great passive bond funds like BND, its total bond market ETF, or VCIT, one of its U.S. corporate bond indexes.

These funds only charge about 0.03% in fees, whereas some active funds cost more than 1% annually. Using these passive, low-fee vehicles as a source of funds to make sure you’re in the right market as opposed to just focusing on beating the market.

If you treat these like more of a bank account for your credit investments, you’ll already be exposed to the right parts of the market when a specific opportunity comes up.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research