The Vanguard Founder’s Rules to Investing, and How to Consider Your HSA

In the six months leading up to our acquisition by Morningstar, HelloWallet signed a couple of distribution agreements in the 401(K) record keeper space, first with Vanguard and later AonHewitt. Knowing I was a long time Vanguard investor — and suspicious I was a “Boglehead,” as fans of the Vanguard founder John Bogle are called — the Vanguard transaction lead gave me a couple of personalized signed books by Bogle to commemorate the partnership. “The Clash of Cultures: Investment vs. Speculation” was one of them, a book worth reading for anyone investing in the market, as nearly everyone should be.

For those who aren’t in the know, gone are the days of blissful ignorance in saving for the future. Whether one is investing through a company-sponsored 401(K), individual IRA, college education 529 plan, Health Savings Account, or directly into mutual funds outside of tax advantaged accounts (or all of the above), key investment concepts are nearly as important as the age old wisdom of “spend less than you earn.”

Focused on the everyman of Main Street, Bogle is keenly aware that “not investing” is not an option — inflation erodes purchasing power, therefore undermining retirement financial security — and avoiding the stock market is “the only way to guarantee that at the end of the line you’ll have nothing.” In the decades that followed Vanguard’s founding, Bogle’s focus on “rock bottom costs” and tax efficiency became conventional wisdom for much of the do-it-yourself investor crowd.

Below are excerpts from Bogle’s ten rules to investing:

1. Remember Reversion to the Mean. The market is a pendulum, sometimes providing generous returns, other times removing them; all an investor can count on is long-term trends.

2. Time is Your Friend, Impulse Your Enemy. Bogle’s position on market timing is legendary, as he views hopping in and out of the stock market as a fool’s errand. As he writes, “one correct decision is tough enough. Two correct decisions in a row are nigh impossible.” Instead ignore volatility swings and trust in the long term.

3. Buy Right and Hold Tight. Buy a mix of stock and bonds for a balanced portfolio and change the mix as you age. One rule of thumb, provided by others, is “110 minus [insert your age]” for stock market weighting inside your portfolio, the remainder in bonds and cash.

4. Forget the Needle, Buy the Haystack. Recognize it is hard, if not impossible, to find that needle — a stock or sector about to turn “hot” — instead “simply buy the haystack” that is the entire market.

5. Minimize the Dealer’s Take. Every gambler cannot beat the casino (the house would go out of business), and after subtracting commissions, spreads, management fees, trading fees, taxes and other costs, nor can investors collectively earn a “gross” market return. Instead focus on a “net” return by minimizing the fees paid, both direct and indirect.

6. Stay the Course. “The secret to investing is there is no secret.” In the end investing is simple, but “not easy, for it requires discipline, patience…and common sense.” Own the market, minimize the fees, and hold for the long term.

Bogle’s wisdom, based on the fundamental premise that dividend yields and earnings growth will increase the value of stocks over time, is applicable across all forms of investment accounts. One emerging area can be found in consumer health care.

Many of us are now waking up to a new environment of High Deductible Health Plans (HDHPs) that are “pre-wired” to work in concert with a health savings account (“HSA”). Recall HSA’s offer 401(K)-like investment features, pairing the debit card functionality of Flexible Spending Accounts (FSA’s) with the retirement investment options often found in employer sponsored 401(K) plans, only without “use or lose” provisions of traditional health spending accounts. HSA holders get the best of both worlds, no taxes (not just deferred taxes) for spending on qualified medical expenses now and in the future, plus the possibility of generating long term investment returns. (see another post on 401(k)’s and HSA’s here.)

For those unfamiliar, HSA’s triple tax advantage:

1. Income tax deduction,

2. Payroll tax deduction, and

3. Tax-free withdrawals when used for qualified medical expenses, including withdrawals on any investment gains

Finally, holders can withdraw funds for any purpose after age 65, paying only income tax. In essence HSA’s present a “free” option: significant tax preferences for health expenses, while retaining the ability to divert the balance for a down payment on a beach condo, should a combination of sand and future grandchildren be of greater interest.

Which brings us back to Bogle, whose core principle is to minimize “transaction” costs while maximizing market returns. Few realize Vanguard was founded essentially as a non-profit entity, enabling Bogle to deliver on his message and making Vanguard’s 40-year history all the more remarkable. By comparison, HSA’s only recently celebrated their ten-year anniversary, and yet contain some of the most attractive elements of any investment account. I’m certain Bogle would want you to make the most of them.

Thanks for reading. Comments and suggestions for other topics welcome.

Below are a few posts on my experience with money and the financial industry in general:

• “Money Advice for Millennials: How to Save for the (Not So) Distant Future”
• “How Bank Fees Are Nudging Us to the Right Answer”
• “Should I Invest in a Target Date Fund in my Health Savings Account?”
• “HSA’s, Retirement Savings and ERISA”
• “How Much Do You Know About Your Health Savings Account?”
• “The Next Marvelous Tax Trick”
• “Your 401(k) and the New Rules of Retirement Savings”

Below are reviews of two popular titles in the financial space:

• Ric Edelman’s “The Truth About Money: Everything You Need to Know About Money” here.
• Lars Kroijer’s “Money Mavericks: Confessions of a Hedge Fund Manager” here.

Within the behavior genre, my review of Mischel’s book, The Marshmallow Test, here.

HSA Coach. Health is WealthTM

Our personal health document storage and health savings account (HSA) educational app is now available. App Store here. Google Play here.