VTSAX and Chill

For the Savvy Solos out there looking to eat up as much content as possible, it won’t be long till you stumble across the “VTSAX and Chill” investment approach. While it isn’t the sexiest strategy out there, its simplicity is second to none. This passive investment approach has become very popular in the FI community due to its low cost and low maintenance structure.

Since starting this blog, many friends and family members have talked to me about investment strategies. Many want to discuss the next hot stock, NFTs, or buying on margin; crypto currencies come up a lot! 😂 Hey, I like to gamble as much as the next guy, I wouldn’t necessarily call that investing.

When it comes to investing, and personal finance in general, I tend to lean towards a KISS (keep it simple stupid) approach. This stuff can get as easy or as complicated as you want it to be. Those taking the “VTSAX and Chill” approach are more apt to spending time on core values, rather than trying to eke out an extra dollar (most of the time unsuccessfully) from the market.

Disclaimer: I am not a CPA, CFP, CFA, or certified financial representative in any fashion. This post is intended for informative and entertainment purposes only. Your investment decisions are your own.

The one fund investment strategy was first popularized by one of my heroes in the FI community, JL Collins. Collins has been in the financial industry since 1975 and made many mistakes along the way. In 2011 his blog was formed (originally a series of letters to his daughter) where he laid out what had worked in the past and, perhaps more importantly, what didn’t.

In 2016 Collins’ first book was published, “The Simple Path to Wealth.” It became an instant classic in the FI community and is highly regarded as one of the best personal finance books to this very day. Through his many decades of trials and tribulations with various investing strategies, he found that keeping it simple not only freed up time, but carried bigger returns as well.

From the very first page in this book, Collins states “Here’s the important truth: Complex investments exist only to profit those who create and sell them. Further, not only are they more costly to the investor, they are less effective.” The essence of this book is to keep investing simple, and you’ll likely have greater returns than those trying to beat the market.

If you, or someone you know, would like an introduction to personal finance “The Simple Path to Wealth” is a fantastic start and one of my personal favorites. Collins never actually used the term “VTSAX and Chill” (was Netflix & Chill even a thing back then?); but his ideas and teachings are what inspired this term to help simmer down the hungry investor.

First and foremost, many investors out there take the VTSAX part of this too literally. VTSAX is a low-cost total market index fund that holds over 3500 different stocks from US based companies offered by Vanguard. The goal of this fund is to follow the ups and downs of the entire US market. Due to its broad diversification, it does so even closer than other funds, such as those that follow the S&P 500.

VTSAX is the fund that Collins references in his book since he is a big fan of investing with Vanguard (as am I). VTSAX in particular has a minimum initial investment of $3,000 and currently an expense ratio of 0.04% for those with a Vanguard account. Depending on the custodian of your investment account, there might be other fees associated with VTSAX. If your account is with Fidelity, for example, it would be essentially the same strategy to utilize FSKAX. VTI or FZROX could also be employed in the same way given the circumstances of the individual investor.

We’ll get more into the weeds of the actual differences of these in a later post, but for now the Savvy Solo is looking for a low-cost total market index fund with no fees associated. It’s generally recommended for new investors to start a brokerage account with one of the big 3 low-cost providers: Fidelity, Schwab, or Vanguard. For this strategy, we are looking for the expense ratio to be roughly 0.09% or less, which is hard to accomplish with some of the other investment firms out there.

Here’s the plan! While in our wealth accumulation phase (essentially while we are still working), keep pumping money into this account and leave it alone. That’s it! Once we get a little closer to the wealth preservation stage (retirement), a Savvy Solo might start buying into a total bond market fund, Collins suggests the VBTLX, until you are at a comfortable asset allocation ratio. If the retirement date sneaks up on you before achieving the intended ratio, it’s totally fine to sell existing shares of VTSAX (or equivalent) and buy into more shares of VTBLX (or equivalent).

Many would suggest a 60/40 split between stocks and bonds during retirement; but Collins states in his book that his allocation is 75% stocks, 20% bonds, and 5% cash. This allows for more growth of the overall nest egg during retirement but still incorporates bonds in the case of a market downturn. Once a year Collins will review the portfolio and reallocate funds to represent the intended 75/20/5 ratio intended.

Let’s review the steps:

1. Put all investment dollars into VTSAX (or equivalent) while in our wealth accumulation phase
2. Buy into VBTLX (or equivalent) when nearing or at wealth preservation stage
3. Review once a year to maintain the intended allocation ratio

That’s the entire plan! Doesn’t get any simpler than that does it?

Simplicity

By it’s very nature, Collins’ book “The Simple Path to Wealth” introduces the idea that investing is not as complex as it is made out to be. There’s no need to research individual stocks, constantly monitor progress of certain companies, or even pay attention to the day-to-day market trends at all. Instead, you can use that time on one of your core values and/or something you love!

There’s an old proverb “it’s time in the market, not timing the market.” This approach to investing takes this saying to heart. The US market has always bounced back from downturns; investing should be done for the long-term growth benefit anyway. If a Savvy Solo decides to set up automatic contributions to their brokerage each month, then they literally don’t have to think about it ever! (Or at least till retirement🤪)

Fees/Taxes

An actively managed account can have an AUM of 1% in many cases, plus high fees on top of that. It might not sound like much (it actually is), but compared to an expense ratio of 0.04% or lower the Savvy Solo can expect greater overall returns. Paying a high AUM to a financial advisor over the years could lead to missing out on hundreds of thousands of dollars! This is not a joke, if you are currently paying an AUM do some quick back of the envelope math on how much of your nest egg isn’t going towards your golden years.

Minimizing tax liability is one of the keys to a Savvy Solo’s overall financial health. An actively managed account is generally buying and selling stocks at a high rate, which creates a taxable event each time. VTSAX, for example, has a turnover rate of 2% which means trades are very infrequent, creating very few taxable events. Also, as long as the investor doesn’t sell shares within a year of buying, they will only be responsible for paying the more favorable long-term capital gains tax upon selling.

Diversification

A total stock market index fund is going to incorporate thousands of different stocks from all different types of industries. Not only are you investing in each kind of sector (technology, healthcare, industrial, etc.); you are also investing in each type of company within that sector. Generally, a stock for a specific company is either considered a “growth” or “value” type, and then the current size of the company will indicate if it is small, mid, or large cap. More on that later, but for now it’s best to know that you’ll be investing in ALL of it with a total stock market index fund.

This broad reach across the market limits overall risk due to poor performance in any given sector. Perhaps technology has a down quarter, but healthcare really boomed. You didn’t miss out on any of it! Plus, in this case, if you look at historic trends you know that technology is coming back eventually. Keep investing, keep your foot on the gas, you don’t want to be on the sideline when the sector booms next!

Returns

In 2023 VTSAX had a return of 26.01%, and it’s looking like the returns for 2024 are going to be even greater! How many of you with actively managed accounts can say the same? I’m guessing not many! 🤪 Of course, the nature of a total stock market index fund is that it’s capturing the returns of the entire US stock market, so the ups and downs are going to be quite drastic.

Those utilizing this method are in it for the long term. No sense in looking at a couple years, what’s this going to look like in 10 or even 30 years down the line? VTSAX is showing a return of 12.84% over the last decade, and an average annual return of 8.68% since its inception in November 2000. If you are factoring in AUM and high administrative fees that come with actively managed accounts, very few have proven to outpace these returns. There are really only a few account managers that have proven to beat the market when looking over a time period of decades.

I heard this recently, and thought I would share:

Don’t try to beat the market, BE the market!

Volatility

Anyone who has ever invested knows that stocks are volatile. They go up and down with great intensity at times. A total stock market index fund tends to mitigate risk due to diversification across different industries, but is subject to fluctuate (sometimes aggressively) with the US market. This can be hard to stomach for many Savvy Solos looking to invest.

As discussed earlier, the US market has always bounced back (and then some) from every market downturn. This strategy incorporates a 100% stock portfolio, so it’s going to fluctuate harder than other investment strategies. The plus side is that you’ll likely end up with more in the end, this gameplan is for long-term investing anyway. So, hang on to your hats and put those blinders on, it’s going to be a bumpy ride!

International Exposure

VTSAX focuses on US stocks with the intention of following the US stock market. This strategy excludes the exposure of international stocks that many portfolios might include. Collins would suggest introducing a total international stock index fund (VTIAX) to the mix if this is important to an investor. He also cautions the reader that it’s fairly unnecessary to do this.

VTIAX has had an average annual return of 5.11% over the last 10 years. Obviously, we’d all be better off with the 12.84% return from VTSAX, so why is everyone talking about international exposure? International stocks can, at times, outpace US stocks for shorter periods of time. Active fund managers try to capture the gains when they happen, essentially trying to time the market. Remember we are all about long term growth here, so trying to time the market isn’t part of the plan.

For those that are still concerned with international exposure, Collins asks the reader to look at the list of companies that are held in VTSAX (or similar). Not all 3500 of them, just start at the top, and start to work your way down. You’ll see companies like Apple, Google, Amazon, Microsoft, etc. How many of these companies are doing business overseas? Oh, almost all of them? Well, look at that, we are inadvertently getting more international exposure than we thought. 🤪

Sector Investing

The more you dig into it, the more you’ll realize that there is an index fund for just about everything. There’s an index fund for small cap growth, mid-cap value, small cap technology growth, green index funds (clean energy companies), and on and on and on. With the VTSAX and Chill approach, you are invested in just about everything, but its more heavily weighted on the top companies.

Much like with international stocks, there are times that a particular sector is going to outpace the others. The person who is 50% in on small cap growth might be killing it one quarter, which makes those taking this approach feel left out. Don’t forget, we are investing in these sectors as well, just not as heavily. This person might be winning right now, but our exposure to the entire market will ensure that we are winning in the long run.

It should come with no surprise that I absolutely love this strategy, especially for the younger Savvy Solos. For those with decades to go before reaching the standard retirement age, this approach will have excellent returns with minimal maintenance. Even those with retirement on the near horizon should consider this strategy. It’s a lot more cost effective than paying an AUM to a financial advisor, and you can consult a fee only fiduciary when looking to get into the weeds with investments.

That being said, this strat is not for everyone. If market shifts are going to persuade you to make changes to your plan, then you’ll be missing out on the long-term benefits a total stock market index fund provides. When utilizing this strategy, it’s fatal to get hooked on market trends or look at the fluctuation of the account often. The point of VTSAX and Chill is to set up automatic deposits, and just let it ride out for the long haul.

Short term investing is very risky, no matter the strategy. Those utilizing this approach would be best to not plan on using the funds for the next 7+ years or so. Big purchases coming in the next couple years would probably be best going in a high yield savings account. Check out the bucket fund strategy on this post. Of course, life does happen, and if you find the need to reach past your emergency savings you can always pull from your investment brokerage account. As long as it’s been longer than a year (and not in a retirement account) you’ll avoid short term capital gains tax, which is extremely beneficial.

While “VTSAX and Chill” has its limitations, it’s an extremely effective strategy for long-term investors. The simplicity alone grabbed my attention, but the fact that it outpaces most actively managed accounts is really what hooked me in. For early to mid-level investors this strategy can bring you to the promise land sooner than anticipated.

It’s worth noting that many pundits like this strategy up till a certain point. Once crossing over a certain dollar amount in investable assets, it might be worth having a fee only fiduciary take a look at your situation to get some new strategies on maintaining this wealth. For the rest of us still in the wealth building phase, it’s time to take a hands-off yet aggressive approach to our future: VTSAX AND CHILL!

Stay classy Solos! ✌️