VTSAX and Chill: A Simple Strategy for Investing SuccessNovember 1, 2023 November 2, 2023 /
If you are looking for a simple, low-cost, and diversified investing strategy that can help you achieve financial independence, you may have heard of VTSAX and Chill. But what exactly is VTSAX and Chill, and why is it a good strategy for many investors?
In this article, we will explain what VTSAX is, how VTSAX and Chill works, what are the benefits and drawbacks of this approach, and how to implement it for your portfolio. By the end of this article, you will have a better understanding of VTSAX and Chill and whether it suits your investing goals and preferences.
|What is VTSAX and Chill?||Why is it a good strategy?||What are the risks and limitations?|
|VTSAX and Chill is an investing approach that involves putting all or most of your money in a low-cost index fund that tracks the entire U.S. stock market, such as Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), and holding it for the long term.||VTSAX and Chill is a simple, effective, and low-maintenance way to achieve diversification, capture market returns, avoid unnecessary fees and taxes, and benefit from compounding. It is also aligned with the principles of financial independence and passive investing.||VTSAX and Chill exposes you to the volatility and risk of the U.S. stock market, which can experience significant downturns and periods of underperformance. It also ignores other asset classes, such as international stocks, bonds, real estate, and alternatives, that may offer additional diversification benefits, risk-adjusted returns, or income streams.|
What is VTSAX?
VTSAX is a mutual fund that provides diversified exposure to small-cap, mid-cap, and large-cap U.S. stocks across various sectors and industries. It aims to track the performance of the CRSP US Total Market Index, which represents nearly 100% of the investable U.S. equity market.
According to Yahoo finance, As of Oct. 31, 2023, VTSAX had 4,163 holdings and $1.2 trillion in net assets. The fund’s top 10 holdings accounted for 25.1% of its total assets and included well-known companies such as Apple, Microsoft, Amazon, Tesla, and Google.
VTSAX has a very low expense ratio of 0.04%, which means it charges only $4 per year for every $10,000 invested. It also has a low turnover ratio of 3.5%, which means it trades infrequently and generates less taxable capital gains distributions than more active funds.
VTSAX has a minimum initial investment requirement of $3,000, but there is no minimum for subsequent investments. Alternatively, investors can buy the ETF version of the fund, Vanguard Total Stock Market ETF (VTI), which has the same holdings and expense ratio as VTSAX but can be traded throughout the day like a stock.
What is VTSAX and Chill?
VTSAX and Chill is an informal term that describes an investing strategy that involves putting all or most of your money in VTSAX (or a similar total stock market index fund) and holding it for the long term without worrying about market fluctuations, timing, or rebalancing.
The idea behind VTSAX and Chill is that by investing in a broad-based index fund that covers the entire U.S. stock market, you can achieve diversification, capture market returns, avoid unnecessary fees and taxes, and benefit from compounding.
VTSAX and Chill is also based on the assumption that the U.S. stock market will continue to grow over time as it has historically done, despite occasional crashes and recessions. Therefore, by staying invested for the long term, you can ride out the volatility and reap the rewards of long-term growth.
VTSAX and Chill is also aligned with the principles of financial independence (FI), which is the state of having enough income or assets to cover your living expenses without having to work. Many people who pursue FI use index funds as their main investment vehicle because they are simple, effective, and low-maintenance.
VTSAX and Chill is also influenced by the philosophy of passive index fund investing, which is based on the efficient market hypothesis (EMH). The EMH states that stock prices reflect all available information and are therefore impossible to beat consistently by active managers or individual investors. Therefore, passive investors prefer to buy and hold index funds that match the market performance rather than try to outsmart or time the market.
Why is VTSAX and Chill a Good Strategy?
There are several reasons why VTSAX and Chill can be a good strategy for many investors:
- Diversification: By investing in VTSAX, you can gain exposure to thousands of U.S. stocks across various sectors and industries. This reduces your risk of losing money due to poor performance or failure of any single company or sector.
- Market returns: By investing in VTSAX, you can capture the returns of the entire U.S. stock market, which has historically been one of the best-performing asset classes over the long term. According to Vanguard’s data, VTSAX has returned an average of 10.22% annually since its inception in 2000 (as of Oct. 31, 2023). This compares favorably with other asset classes such as international stocks (6.72%), bonds (4.61%), or cash (1.63%) over the same period.
- Low fees: By investing in VTSAX, you can avoid paying high fees that can eat into your returns over time. VTSAX has a very low expense ratio of 0.04%, which is much lower than the average expense ratio of 0.82% for U.S. equity funds. This means you keep more of your money working for you rather than paying for fund management or administration.
- Low taxes: By investing in VTSAX, you can also minimize your tax liability, especially if you hold the fund in a tax-advantaged account such as an IRA or a 401(k). VTSAX has a low turnover ratio of 3.5%, which means it trades infrequently and generates less taxable capital gains distributions than more active funds. Additionally, VTSAX qualifies for the lower long-term capital gains tax rate if you hold it for more than a year, which is currently 0%, 15%, or 20% depending on your income level.
- Compounding: By investing in VTSAX and holding it for the long term, you can benefit from the power of compounding, which is the process of earning returns on your returns. Compounding can significantly increase your wealth over time, especially if you reinvest your dividends and capital gains. For example, if you invested $10,000 in VTSAX in 2000 and reinvested all distributions, you would have $77,000 by the end of 2023, a 670% increase. If you did not reinvest your distributions, you would have only $55,000, a 450% increase.
- Simplicity: By investing in VTSAX and chilling, you can simplify your investing process and avoid the stress and hassle of researching, picking, and monitoring individual stocks or funds. You also don’t have to worry about market fluctuations, timing, or rebalancing. You just need to set up an automatic investment plan and let your money grow over time.
What are the Risks and Limitations of VTSAX and Chill?
While VTSAX and Chill can be a good strategy for many investors, it is not without its risks and limitations. Some of the potential drawbacks of this approach are:
- Volatility: By investing in VTSAX, you are exposing yourself to the volatility and risk of the U.S. stock market, which can experience significant downturns and periods of underperformance. For example, during the global financial crisis of 2008-2009, VTSAX lost 37% of its value. During the COVID-19 pandemic of 2020, VTSAX dropped 31% in less than two months. These losses can be emotionally challenging and financially damaging for some investors, especially if they need to withdraw money during a market downturn.
- Lack of diversification: By investing in VTSAX only, you are ignoring other asset classes that may offer additional diversification benefits, risk-adjusted returns, or income streams. For example, international stocks can provide exposure to different markets, economies, and currencies that may perform better than the U.S. market at certain times. Bonds can provide stability, safety, and income that can cushion your portfolio during market downturns or supplement your spending needs in retirement. Real estate can provide inflation protection, rental income, and tax advantages that can enhance your portfolio returns. Alternatives such as commodities, gold, or cryptocurrencies can provide hedge against market crashes, currency devaluation, or geopolitical risks that can affect your portfolio value.
- Opportunity cost: By investing in VTSAX only, you are also foregoing the possibility of earning higher returns by investing in other funds or strategies that may outperform the U.S. stock market at certain times. For example, some actively managed funds or individual stocks may have superior performance due to their skillful selection or timing of securities. Some factor-based funds or strategies may have higher returns due to their exposure to certain risk premiums or anomalies in the market. Some niche funds or strategies may have higher returns due to their focus on specific sectors or themes that may have higher growth potential or competitive advantage.
How to Implement VTSAX and Chill?
If you decide to adopt the VTSAX and Chill strategy for your portfolio, here are some steps you can take to implement it:
- Open an account with Vanguard: Vanguard is the company that offers VTSAX as well as many other low-cost index funds and ETFs. You can open an account with Vanguard online and choose between different types of accounts such as taxable brokerage accounts, IRAs (traditional or Roth), 401(k)s (if available through your employer), or college savings plans (such as 529 plans).
- Buy VTSAX: Once you have an account with Vanguard, you can buy VTSAX either as a lump sum or as a regular contribution. You will need a minimum initial investment of $3,000, but there is no minimum for subsequent investments. Alternatively, you can buy the ETF version of the fund, Vanguard Total Stock Market ETF (VTI), which has the same holdings and expense ratio as VTSAX but can be traded throughout the day like a stock.
- Hold VTSAX: Once you have bought VTSAX, you can hold it for the long term without worrying about market fluctuations, timing, or rebalancing. You can also reinvest your dividends and capital gains to benefit from compounding. You can monitor your portfolio performance and balance online or through Vanguard’s mobile app.
- Enjoy VTSAX and Chill: By investing in VTSAX and chilling, you can enjoy the simplicity, effectiveness, and low-maintenance of your investing strategy. You can also pursue your financial independence and passive income goals with confidence and peace of mind.
VTSAX and Chill is a simple, effective, and low-maintenance investing strategy that involves putting all or most of your money in a low-cost index fund that tracks the entire U.S. stock market and holding it for the long term. It can help you achieve diversification, capture market returns, avoid unnecessary fees and taxes, and benefit from compounding. It is also aligned with the principles of financial independence and passive investing.
However, VTSAX and Chill also has its risks and limitations, such as volatility, lack of diversification, and opportunity cost. Therefore, it may not be suitable for everyone or for every situation. You should consider your risk tolerance, time horizon, goals, and preferences before adopting this strategy.
If you decide to implement VTSAX and Chill for your portfolio, you can follow the steps outlined in this article to open an account with Vanguard, buy VTSAX (or VTI), hold it for the long term, and enjoy the benefits of your investing approach.