Vanguard Dividend Growth Vs. Vanguard Wellington Fund Vs. S&P 500

(Every now and again, I receive an email that is a great guest post. This one about Roth IRAs for younger folks is one of those…enjoy!)


All you in your 20’s and 30’s out there listen up!

If you’re just starting out in your career and making over $60K you’re probably smart with a good head on your shoulders.  Even if you are earning less, try and work these rules into your budget plans as soon as you can, and yes you are still smart for listening to ole Josh.  Let’s start you off right.


Just Starting Out

Rule Number One: After you get your first paycheck open a Roth IRA account and start contributing to it monthly!  I would suggest a larger reputable established brokerage firm like Vanguard, Fidelity, T Rowe Price, etc.

Rule number two:  Hopefully the company you work for offers a 401K plan with company matching contributions, most do.  Sign up to contribute as much as you can to the company 401K but at the beginning make sure you contribute enough to get the “full” company match.  If you don’t you’re just leaving money on the table.  I would suggest that your contributions go into a Roth 401K if it’s offered.  The company match will have to go into the tax-deferred 401K plan but that’s ok, we’ll deal with that later.

Rule number three:  When, not if, but when you quit your job to go to work at a better job for more money, transfer your Roth 401K funds into your Brokerage Roth account (See rule one).  Then transfer the tax deferred 401K funds to your new jobs 401K plan.  There’s a reason for transferring these tax deferred funds to the next companies tax deferred 401K plan and not to a Standard IRA account and we’ll cover that later on.  Then setup your 401K options with the new company like you did with your last job (see rule two).  Rinse – Wash – Repeat…


What to Do When You’re Making Good Money

“But Josh!  Now both the wife and I are making BANK (over $193,000 income a year for 2019).  We are making too much money to contribute to our Roth IRA and we both are maxing out our 401K plans so we can’t contribute any more there either.  Yet we still want to save more for retirement so that we can retire early!  Is there anything else we can do before we open another Brokerage account and have to start paying taxes on those dividend earnings and capital gains.”


Backdoor Roth

Why yes, yes there is!  Since you and your wife can no longer contribute to your Roth brokerage accounts, you both can use the Roth Backdoor Conversion method to add more funds to your Roth IRA account at your brokerage firm.  How you ask?  This is how.  You open a Standard IRA account with the same Roth brokerage firm using after tax money to fund the account.  Do not invest this money!

For 2019, under the age of 50, the maximum you can contribute to a Standard IRA is $6,000.  This number will probably rise in the future.  As soon the money clears and is available in the account you would do a Roth conversion and transfer the money into your Roth brokerage account.  Because you already paid taxes on the money you will not have to pay any taxes to do the conversion.  Thus the legal Roth Backdoor conversion method…

The IRS has special rules when dealing with tax-deferred Standard IRA accounts that mingle both tax-deferred funds and after tax funds so it’s better just not to deal with that at all.  But there are other reasons for transferring your tax-deferred 401K funds to your next job and not to your tax-deferred Standard IRA and we’ll cover that later.


Fully Funded ALL Retirement Accounts

“Ok Josh!”  That sounds great and right now everything is maxed out and working smoothly.  We still have a few dollars left to save.”  Well you can always contribute more to an HSA account or open a regular brokerage account then invest in Bonds or CDs.


Looking at Retirement

“Sup Josh?  We are getting closer to age 55 and want quit our crappy jobs soon!  Got any suggestions on how to avoid any sort of early retirement penalty”  Now it’s time to explain why you were told to move all of your tax-deferred 401K fund from your old company plan to your new company plan each time you switched jobs.


Post-55 Rules

When you turn 55 you can quit your job (provided you’ve run the numbers and have enough money saved) and start taking distributions from that last companies 401K plan without incurring a 10% penalty from the IRS for early withdrawals.  The withdrawals have to come from that last company plan that you worked for.  You cannot leave money in other company 401K plans that you have worked for in the past and withdrawal without penalty.  That is why you were told to transfer those tax-deferred 401K funds to your new company each time you switched jobs.  The amount just keeps getting bigger over time and is in one location.

The best rule of thumb is to withdrawal from your Tax-Deferred accounts first for as long as you can.  Retiring at 55 I would personally would make sure that I had enough money in my tax-deferred 401K account and cash on hand to make it until 59.5 years of age.  If there’s plenty to cover that and then some, you would still withdrawal from your tax-deferred 401K account first.  If your 401K plan is plentiful but lacking in investment options, you can always transfer “PART” of your 401K funds to your tax-deferred Standard IRA account at your brokerage firm in order to get better investment options.  Once your tax-deferred 401K funds have run out (after you are over 59.5), you can then start distributing for your tax-deferred Standard IRA.  Depending on how much money you have left in your tax-deferred accounts will determine when you want to start doing Roth conversions before you turn 70.5 and RMD’s kick in.

VDIGX Re-opens

The news that the Vanguard Dividend Growth Fund(VDIGX) re-opened to new investors escaped me until subscribers on my Youtube channel mentioned it.

Generally, I’m an index type-of-guy but I do appreciate a well-run, low-cost, actively-managed fund too; American Funds and the active funds at Vanguard come to mind.  I also appreciate a fund that limits the amount of assets it takes in, as per the Vanguard press-release:

“Vanguard closed the fund to most new accounts in July 2016, seeking to protect the interests of existing shareholders by reducing cash flow after a period of rapid growth. Cash flow has subsequently subsided and market conditions have changed since the fund’s closing.”

That VDIGX closed to new investors, and is re-opening, tells me it will close again. And so, I wanted to do some research on this fund to see if this was a fund I’d want to own.

Again from the Vanguard press-release:

“Introduced in May 1992, the actively managed Vanguard Dividend Growth Fund is designed to provide investors with some income while offering exposure to dividend-focused companies across all industries. The fund focuses on high-quality companies that have both the ability and the commitment to potentially grow their dividends over time. Reopening the Fund will have no impact on its investment objectives, strategies, and policies, and Wellington Management Company LLP remains the fund’s investment advisor.”


Index Investing Vs. Active-Management

Turns out, this is an amazing fund. Exactly what one would expect from Vanguard.   

$100,000 invested on Jan. 1, 1993 would have grown to $729,794 by Dec. 31, 2018.  The fund only had 5 down years in those 25 as well. So, not only did you make a lot of money, you didn’t have many down years either.  


Lower Volatility

In fact, other than 2001 when the fund was down over 19%, it was a whole lot less volatile than the S&P 500 index. For instance, in 2000 when the S&P 500 was down around 9%, VDIGX was UP nearly 19%!

In 2008 when the S&P 500 was down 37%, VDIGX was “only” down 25.57%.   But, don’t forget, the Wellington fund was “only” down 22%. And in those crazy years of 2000-2002, where both the VDIGX and S&P 500 got knocked around, Wellington only had 1 down year, -6.9% in 2002.


So, I thought it would be fun to do a comparison of all three funds over the last 25 years.

Let’s start with an investment of $100,000 into each fund on Jan. 1, 1993.  How did we do?


As you can see in the table above, VDIGX under-performed both Wellington AND the S&P 500 by a LOT over that time period. You’d be almost $250,000 richer in the S&P 500 and Wellington Fund!  That is a lot of money, indeed.

But before you dump ALL your money into the S&P 500 based on the above, you may want to consider this:


From 2000 through 2018 an investment of $100,000 into the three funds would have more than tripled with VDIGX, almost QUADRUPLED in Wellington and, yet, only a bit more than doubled in the S&P 500.

Interesting, no?

So far, from 1993-2018 and 2000-2018, the Wellington Fund appears the cream of the crop, by far.

But before you throw all your hard-earned money into Wellington based on those two scenarios, you may want to consider this:


From the beginning of 2008, with the HUGE decline that happened, to the end of 2018, VDIGX did significantly better than the other two funds.   

In fact, take out that crazy 2008 and we find:


The S&P 500 reigns supreme again!


How To Predict The Future

What to make of all this?  Well, first and foremost, you simply can’t predict which investment will perform best in the future.  You MUST admit you have no clue. Should you even look at past performance as your guide? Actually, probably not. Why? Because kind of like how climate change alarmists cherry pick the data to “prove” warming, you have to make a determination of what year to start your past performance research.

Start in 1993 and VDIGX looks like a dog compared to VWELX and VFINX.  Yet, start in 2008 and VDIGX smokes ‘em all. One year later though, and VFINX is back on top.


Be Careful Not To Cherry-Pick

So, why focus on one year as opposed to another?  It’s ALL in the past after all. To choose past performance based on X year over Y year is inherently manipulating the data.

However, one of the best reasons to own Vanguard funds is because we know the simplest, most proven way to predict future performance is the fees you pay to invest.  The lower the fees, the better your performance will be. All of these funds have incredibly low expense ratios AND very high tax efficiencies too. Tough to go wrong in that regard.

Another thing to consider is that VDIGX only has 41 stocks as of today, Sept. 2019.  That is a VERY concentrated portfolio.


How To Outperform

If you want to outperform, concentrated portfolios are what you must invest in.  When that area of your investing focus takes off, you’ll do way better than a broad and diversified portfolio. Of course, when that area of your investments gets hammered, you’ll get crushed much more so.  The more concentrated, the more up, and down, side.  

A portfolio built solely on Amazon stock WAY outperformed.  A portfolio built solely on GE got destroyed. Concentration = risk. No two ways around it. 

Remember, though, there’s nothing wrong with saying, “You know something? I like all THREE funds, let me throw ⅓ into each.”  That’s probably the best path to take. 

Now, be advised, I do own VDIGX.  Just bought into it the other day. That and VTV are my only two holdings.  That’s it. I do not own Wellington or the S&P 500 index. Only time will tell if I’m smart, or a loser.  

Stay tuned to find out!

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