Investing Tips to Improve Your Investing Results
Thoughts and Observations To Help You Grow and Protect Your Investments
I once wrote a series of investing tips meant to help new investors avoid some common mistakes that tripped up even the best-intended people; investing tips meant to provide perspective on managing your money while reducing different types of risk. That series has been combined here and will refresh some of the information to better serve you on your journey to financial independence.
Investing Tip #1: Focus on Cost, But Don't Be Penny-Wise and Pound Foolish
In my article on the time value of money, you learned that small differences in the rate at which you compound your money can dramatically influence the ultimate amount of wealth you acquire. Consider that an extra 3% return annually can result in 3x as much money over 50 years! The power of compound interest is truly astounding.
The safest way to try and grab an extra few percentage points of return, as in the case of any good business, is cost control. If you are enrolled in a dividend reinvestment program or DRIP that charges $2 for each investment and you are putting away $50 per month, your costs are immediately eating 4% of your principal. This can make sense in certain circumstances. For example, my family gifted my younger sister shares of Coca-Cola stock over the years through a special type of account known as a UTMA and it served its purpose beautifully. It is also true that, given her life expectancy, that initial 4% cost, which was inconsequential in terms of actual dollars in the grand scheme of things, will end up being cheaper than the mutual fund expense ratio on a low-cost index fund over the coming decades because it was a one-time, upfront expense, never to be repeated.
The problem is that many investors don't know which expenses are reasonable and which expenses should be avoided. Adding to this problem is that there is a huge divide between the wealthy and the lower and middle classes that cause something that is a waste of money at one level to be a fantastic bargain at another. For example, it will often make sense for someone earning $50,000 a year without a large portfolio to forgo an investment advisor altogether, unless there are some behavioral advantages that lead to better outcomes or the convenience is simply worth it, as it is to many people, instead opting for a handful of well-selected, low-cost index funds. This is true despite the severe methodology flaws that have been quietly introduced into things like S&P 500 index funds in recent decades. (There is this illusion, often held by inexperienced investors, that the S&P 500 is passively managed. It is not. It is actively managed by a committee, only the committee has arranged the rules in a way that seeks to minimize turnover.) This same approach is often idiotic for someone who is rich. As people like John Bogle, founder of Vanguard, have pointed out, wealthy investors with a lot of taxable assets who wanted to take an indexing approach would be better off buying the individual stocks, reconstructing the index themselves in a custody account. A wealthy investor can often end up with more cash in his or her pocket, all things considered, paying between 0.25% and 0.75% for a directly owned passive portfolio than he or she would hold an index fund that appears to have a much lower expense ratio of, say, 0.05%. The rich are not dumb. They know this. It's the non-rich constantly talking about it that are displaying their ignorance of things like the way tax strategies can be employed.
Beyond this, there are a lot of compelling reasons that the rich disproportionately prefer to work with a registered investment advisor that have nothing to do with attempting to beat the market. For example, a retired executive could have a concentrated stake in the stock of the former employer along with an enormous deferred tax liability. An intelligent portfolio manager could do things like extract income by selling covered calls against the position, buying puts to protect against wipe-out risk, and attempting to maintain as much of the highly appreciated shares as possible to take advantage of the stepped-up basis loophole so you could pass the stock on to your children, having the unrealized capital gains taxes immediately forgiven. The investment fees you'd pay for such a service could be an absolute steal, even between 1% and 2% under such a scenario. The fact that it would appear as if your portfolio underperformed the market would be inconsequential. Your family ended up wealthier than it otherwise would have on an after-tax risk-adjusted basis, which is all that matters. This is something the lower and middle classes are never going to have to worry about when dealing with their portfolios.
Knowing which fees are worth themselves many times over, and which fees are rip-offs, is one of those things that requires experience to know. For example, at the moment, the effective fee on a $500,000 trust fund managed by Vanguard is 1.57% all-inclusive by the time you've added the various layers of costs, expense ratios, etc. It lacks tax efficiency like the kind you could get in an individually managed account but, otherwise, for what you are getting, it's a fantastic bargain. It's a fool's errand to try and reduce that fee further. On the other hand, paying a 1.57% expense ratio for an actively managed mutual fund that is largely holding the same stocks as the Dow Jones Industrial Average is not intelligent.
Investing Tip #2: Pay Attention to Taxes and Inflation
To paraphrase famed investor Warren Buffett, when it comes to measuring your investment results over time, the primary thing that matters is how many more hamburgers you can buy at the end of the day. In other words, focus on purchasing power. It is amazing how few professional portfolio managers focus on pre-tax returns rather than after-tax returns or who ignore the rate of inflation. Many trade frequently and although they may earn 9% to 12% for their investors over long periods of time, if those investors are in a high marginal tax bracket, the investors will end up with less wealth than they would have otherwise had if they had hired a more conservative manager who made 10% but who structured the investments with an eye towards April 15th. Why? In addition to the enormous cost savings that result from long-term investing (as opposed to short-term trading), there are several tax advantages. Here are some of them:
- Short-term capital gains are taxed at personal income tax rates. In New York City, for example, Federal, State, and Local taxes on these types of short-term gains can meet or exceed 50%! At the Federal level, the worst damage is presently 39.6%. In contrast, long-term capital gains, or those generated from investments held for one year or longer, are typically taxed between 0% and 23.6% at the Federal level.
- Unrealized gains are a sort of “float” on which you can continue to experience the benefit of compounding your money. If you sell your investment to the move the money into a new stock, bond, mutual fund, or other investment, you are not only going to have to pay commissions, but you are going to have to give the tax man his cut of your profits. That means the amount you have available to reinvest is going to be substantially lower than the amount shown on your balance sheet just before you liquidated the position. That’s why the best investment minds, such as Benjamin Graham, said you should only consider switching out of one investment and into another if you think the new position is far more attractive than your current one. In other words, it’s not enough for it to be a “little” more attractive - it needs to be absolutely evident to you. To learn more about this topic, read Using Deferred Taxes to Increase Your Investment Returns.
- Where and how you hold your investments can exert a significant influence on your ultimate compounding rate. If you own shares of many different companies, some of these stocks are likely to pay large cash dividends, while others retain most profits to fund future expansion. (To learn why this happens, read Determining Dividend Payout: When Should a Company Pay Dividends?). Certain types of bonds, such as tax-free municipal bonds, can be exempt from taxes even when held in taxable accounts under the right conditions, while other types of interest income, such as those generated by corporate bonds held in an ordinary brokerage account, can be taxed at almost 50% by the time you add up Federal, state, and local taxation. As a result, you need to pay careful attention to where, precisely, on your balance sheet specific assets are placed if you want to get the most from your money. For example, you would never hold tax-free municipal bonds through a Roth IRA. You would prioritize putting the dividend paying stocks in a tax shelter such as a Roth IRA and non-dividend stocks in an ordinary brokerage account.
- Always, always, always contribute to your 401k at least up to the amount of your employer match. If your employer matches $1 for $1 on the first 3%, for example, you are instantly earning a 100% return on your money without taking any risk! Even if you grab the matching money and park your 401(k) balance in something like a stable value fund, it's free cash.
- Don't overlook the benefit of seemingly boring assets such as Series I savings bonds, which have some significant inflation advantages.
Investing Tip # 3: Know When to Sell a Stock
You already know that frictional expenses can make buying and selling stock in rapid-trading fashion seriously lower your returns (for more information, read Frictional Expenses: The Hidden Investment Tax). Still, there are times when you may want to part with one of your stock positions. How do you know when it’s time to say goodbye to a favorite stock? These helpful tips can make the call easier.
- Earnings were not properly stated. (For more information, see Adjusting Pension Assumptions to Manipulate Earnings, Worldcom's Magic Trick, and .)
- Debt is growing too rapidly. (For more information, see The Debt to Equity Ratio.)
- New competition is likely to seriously harm the firm’s profitability or competitive position in the marketplace. (For more information, see Profiting from Franchise Value: Turning Brand Name Into Investment Income).
- Management’s ethics are questionable. Benjamin Graham said that “you cannot make a quantitative adjustment for unscrupulous management, only avoid it.” In other words, it doesn't matter how cheap a stock is, if the executives are crooks, you are likely to get burned.
- The industry as a whole is doomed due to a commoditization of the product line. (For more information, see The Perils of the Commodity Business.)
- The market price of the stock has risen far faster than the underlying diluted earnings per share. Over time, this situation is not sustainable. (For more information, see The 3 Types of Investment Risk.)
- You need the money in the near future – a few years or less. Although stocks are a marvelous long-term investment, short-term volatility can cause you to sell out an inopportune moment, locking in losses. Instead, park your cash in a safe investment such as a bank account or a money market fund.
- You don’t understand the business, what it does, or how it makes money. (For more information, see Invest in What You Know.)
One important note: History has shown that it is generally not a good idea to sell because of your expectations for macroeconomic conditions, such as the national unemployment rate or the government’s budget deficit, or because you expect the stock market to decline in the short-term. Analyzing businesses and calculating their intrinsic value is relatively simple. You have no chance of accurately predicting with any consistency the buy and sell decisions of millions of other investors with different financial situations and analytical abilities. To learn more about this topic, read What Is Market Timing? and Market Timing, Valuation, and Systematic Purchases.
Investing Tip #4 - You Don't Need to Have an Opinion on Every Stock or Investment
One of the things that successful investors tend to have in common is that they do not have an opinion on every stock in the Universe. The major brokerage firms, asset management groups, and commercial banks seem to feel like it is necessary to attach a rating to everything security that is traded. Some popular financial talk show hosts take pride in espousing their view on virtually every business that’s traded.
While this can be useful when looking at corporate bonds and discovering whether they trade more toward the AAA rating or junk bond side of the spectrum, in a lot of cases, this obsession with metrics is somewhat nonsensical. Investing is not an exact science. Paraphrasing two of the industries’ priests, you don't need to know a man's exact weight to know that he is fat, nor do you need to know a basketball player's exact height to know he is very tall. If you focus on only acting in those few instances where you have a clear winner and watch for opportunities that come along every once in a while, sometimes years apart, you are likely to do better than the Wall Street analysts that stay up nights trying to decide if Union Pacific is worth $50 or $52. Instead, you wait till the stock is trading at $28 then pounce. When you find a truly excellent business, you are often best served through near total passivity and holding until death. This approach has minted a lot of secret millionaires, including janitors earning near minimum wage and sitting atop $8,000,000 fortunes.
Why do investors find it so hard to admit that they don't have a clear-cut opinion about a specific business at the current market price? Often, pride and, to some degree mental discomfort over the unknown, is the culprit. For more information on how to overcome these forces, read Rationality: The Investor’s Secret Weapon.
Investing Tip #5: Know Every Company (Or at Least, a Whole Lot of Them!)
Even if you don't have an opinion on the specific attractiveness of most stocks at any given moment, you should know as many businesses as you can across as many sectors and industries as you can. This means being familiar with things like return on equity and return on assets. It means understanding why two businesses that appear similar on the surface can have very different underlying economic engines; what separates a good business from a great business.
When asked what advice he would give a young investor trying to enter the business today, Warren Buffett said that he would systematically get to know as many businesses as he could because that bank of knowledge would serve as a tremendous asset and competitive advantage. For example, when something happened that you thought would increase the profits of copper companies, if you knew the industry ahead of time, including the relative position of the different firms, you'd be able to act much more quickly and with a much more complete understanding of the full picture, than if you had to become familiar with not only the industry but all of the players within it over a compressed period of time. (Realize that there are no shortcuts for this step if your aim is mastery. When the host of the television show responded to Buffett, "But there are 24,000 publicly traded companies!" Warren responded, "Start with the A’s").
I think the best place to start for most investors is to go through the 1,800 companies in the Value Line Investment Survey.
Investing Tip #6: Focus on Return on Inventories, Not Just Return on Equity
If you haven't read my guides to analyzing a balance sheet and analyzing an income statement yet, this may not make sense unless you already have a background in accounting. Nevertheless, it is important so make note of it and come back in the future when you are more skilled. You'll thank me decades from now if you're wise enough to take advantage of what I'm about to teach you.
Many investors only focus on the DuPont model Return on Equity a firm generates. While this is a very important figure, and one of my favorite financial ratios - in fact, if you only had to focus on a single metric that would give you a better-than-average chance of getting rich from your stock investments, it'd be putting together a diversified collection of companies with sustainably high returns on equity - there is a better test of a company's true economic characteristics, especially when used in conjunction with owner earnings. Here it is: Divide net income by the sum of the average inventory and average property, plant, and equipment balance as shown on the balance sheet.
Investing Tip #7: Look for Shareholder-Friendly Management
Benjamin Franklin said that if you were to persuade a man, appeal to his interest rather than his reason. I believe that investors are likely to get much better results from managers who have their own capital tied up in the business alongside the outside minority investors. While it cannot guarantee success, it does go a long way to aligning incentives and putting both parties on the same side of the table.
I've long been a fan of ownership guidelines at companies such as U.S. Bancorp that require executives to keep a certain multiple of their base salary invested in the common stock (the best part? Stock options don't count!) Likewise, management's affirmation that 80% of capital will be returned to the owners each year in the form of cash dividends and share repurchases and their constant ability to maintain one of the best efficiency ratios in the industry (a key measure for banks - calculated by looking at non-interest expense as a percentage of total revenue) shows that they really do understand they work for the stockholders. Compare that to the Sovereign Bank debacle that was on the front page of the Wall Street Journal years ago after that company's Board of Directors and management attempted to utilize a loophole in the New York Stock Exchange rules to permit it to merge with another company without giving the shareholders the opportunity to vote on the consolidation.
Pay attention to things like that. Actions speak louder than words. For more information, read 7 Signs of a Shareholder Friendly Management
Investing Tip #8: Stick to Stocks Within Your "Circle of Competence"
In investing, as in life, success is just as much about avoiding mistakes as it is about making intelligent decisions. If you are a scientist who works at Pfizer, you are going to have a very strong competitive advantage in determining the relative attractiveness of pharmaceutical stocks compared to someone who works in the oil sector. Likewise, a person in the oil sector is going to probably have a much bigger advantage over you in understanding the oil majors than you are.
Peter Lynch was a big proponent of the “invest in what you know” philosophy. In fact, many of his most successful investments were a result of following his wife and teenage kids around the shopping mall or driving through town eating Dunkin’ Doughnuts. There is a legendary story in old-school value investing circles about a man who became such an expert in American water companies that he literally knew the profit in a tub full of bathwater or the average toilet flush, building a fortune by trading a specific stock.
One caveat: You must be honest with yourself. Just because you worked the counter at Chicken Mary's as a teenager doesn't mean you are automatically going to have an advantage when analyzing a poultry company like Tyson Chicken. A good test is to ask yourself if you know enough about a given industry to take over a business in that field and be successful. If the answer is "yes", you may have found your niche. If not, keep studying.
Investing Tip #9: Diversify, Especially If You Don't Know What You Are Doing!
In the words of famed economist John Maynard Keynes, diversification is insurance against ignorance. He believed that risk could actually be reduced by holding fewer investments and getting to know them extraordinarily well. Of course, the man was one of the most brilliant financial minds of the past century so this philosophy isn’t sound policy for most investors, especially if they can’t analyze financial statements or don’t know the difference between the Dow Jones Industrial Average and a Dodo.
These days, widespread diversification can be had at a fraction of the cost of what was possible even a few decades ago. With index funds, mutual funds, and dividend reinvestment programs, the frictional expenses of owning shares in hundreds of different companies have largely been eliminated or, at the very least, substantially reduced. This can help protect you against permanent loss by spreading your assets out over enough companies that if one or even a few of them go belly-up, you won’t be harmed. In fact, due to a phenomenon is known as the mathematics of diversification, it will probably result in higher overall compounding returns on a risk-adjusted basis.
One thing you want to watch for is correlation. Specifically, you want to look for uncorrelated risks so that your holdings are constantly offsetting each other to even out economic and business cycles. When I first wrote the predecessor to this piece almost fifteen years ago, I warned that it wasn't enough to own thirty different stocks if half of them consisted of Bank of America, JP Morgan Chase, Wells Fargo, U.S. Bank, Fifth Third Bancorp, et cetera, because you may have owned a lot of shares in several different companies but you were not diversified; that a "systematic shock such as massive real estate loan failure could send shockwaves through the banking system, effectively hurting all of your positions", which is precisely what happened during the 2007-2009 collapse. Of course, the stronger firms such as U.S. Bancorp and Wells Fargo & Company did just fine despite a period when they had declined 80% on paper peak-to-trough, especially if you reinvested your dividends and were dollar cost averaging into them; a reminder that it's often better to focus on strength first and foremost. Behavioral economics, on the other hand, has proven most people are emotionally incapable of focusing on the underlying business, instead of panicking and liquidating at the least opportune moment.
Investing Tip #10: Know Financial History Because It Can Save You a Lot of Pain
It has been said that a bull market is like love. When you're in it, you don’t think there has ever been anything like it before. Billionaire Bill Gross, considered by most on the street to be the best bond investor in the world, has said that if he could only have one textbook out of which to teach new investors, it would be a financial history book, not accounting or management theory.
Think back to the South Sea Bubble, the Roaring 20’s, Computers in the 1960’s, and the Internet in the 1990’s. There is a marvelous book called Manias, Panics, and Crashes: A History of Financial Crises that I highly recommend. Had many investors read it, it is doubtful that so many would have lost substantial portions of their net worth in the dot-com meltdown or the real estate collapse.
As Santayana remarked, “Those who don't know history are doomed to repeat it”. I couldn't have said it better myself.
Investing Tip #11: Unless You Need the Passive Income, Reinvest Your Dividends
Whether or not you reinvest your dividends is one of the biggest influences on the size of your ultimate portfolio. So much so that I felt it necessary to expand this into its own stand-alone article you should read, using The Coca-Cola Company as an illustration.
Investing Tip #12: A Great Business Isn't a Great Investment at the Wrong Price or Wrong Terms
We spend a lot of time talking about the various traits of a good business - high returns on equity, little or no debt, franchise value, a shareholder friendly management, etc. Although Charlie Munger's dictum, "it's far better to buy a good business at a fair price rather than a fair business a great price" is true, it is important for you to realize that good results are not likely to be had by those that buy such stocks regardless of price. It's a fine distinction, but one that can mean the difference between good results and disastrous losses. At least, not within a short period of time.
Back in the late 1960's, Wall Street became enthralled with a group of stocks dubbed The Nifty Fifty. Perhaps the online encyclopedia Wikipedia sums it up best, "[These stocks] had everything going for them - brand names, patents, top management, spectacular sales, and solid profits. They were thought to be best stocks to buy them and hold them for the long run, and that was all you needed to do.
These were the stocks 'dreams' were made of ...for the long haul to retire with."
Here's a list of those stocks. You probably recognize most of them.
- American Express
- American Home Products
- Avon Products
- Baxter Labs
- Black & Decker
- American Hospital Supply Corp.
- The Coca-Cola Company
- Digital Equipment Corporation
- Dow Chemical
- Eastman Kodak
- Eli Lilly and Company
- Emery Air Freight
- First National City Bank
- General Electric
- Heublein Brewing Company
- International Flavors and Fragrances
- International Telephone and Telegraph
- J.C. Penney
- Johnson & Johnson
- Louisiana Home and Exploration
- Minnesota Mining and Manufacturing (3M)
- Merck & Co.
- M.G.I.C. Investment Corporation
- Philip Morris Cos.
- Procter & Gamble
- Schering Plough
- Joe Schlitz Brewing
- Sears Roebuck & Co.
- Simplicity Patterns
- S.S. Kresge
- Texas Instruments
- The Walt Disney Company
The fatal flaw in this logic is that investors believed that these companies - enterprises such as Eastman Kodak and Xerox - were so inherently good that they could (and should) be bought at any price. Of course, this is simply not the case. Although a stock trading at a high p/e ratio isn't always overpriced, more often than not, a stock trading at a price-to-earnings ratio of 60x is almost assuredly going to generate a rate of return less than that of a so-called "risk-free" U.S. Treasury bond. To learn more about this topic, read Earnings Yields vs. Treasury Bond Yields as a Stock Market Valuation Technique and How to Tell When a Stock Is Overvalued.
What makes this discussion complicated, and far beyond the scope of this list of investing tips, is:
- Many inexperienced investors fail to realize that, even though companies like Eastman Kodak went bankrupt, long-term investors still should have walked away with a lot more wealth than they had prior to their investment. This can be difficult to grasp if you aren't aware of how dividends, spin-offs, split-off, and even tax loss credits work but it is, nevertheless, the case.
- For 20 to 30 years after the Nifty Fifty peaked, the basket of stocks, as a whole, underperformed the market. However, by the time you started getting into the 30 to 40-year range, the underlying businesses were, in fact, so good that they ultimately ended up beating the market as the core economic engines were so superior they burned off the excess valuation. Not only that, but the Nifty Fifty would have had better tax efficiency than an index fund. When dealing with excellent businesses, the ghost ship approach, historically, has won in the long-run but how many investors are willing to stick with 30 or 40 years of near total passivity in a lifetime that, for most people, will last only 80 years or so? Again, it's an issue for behavioral economics.
All else equal, though, try and avoid investments that are priced to perfection with no margin of safety because a mere blip in operating performance could cause a long-term, catastrophic loss in principal as fickle speculators flee to hotter securities. Even then, if you are going to consider it, stick solely to the bluest of the blue chips. You can probably get away with overpaying for a company like Johnson & Johnson if you're going to hold it for the next 50 years - nobody knows the future but the odds seem to favor it - whereas I wouldn't be so keen on doing it for a firm like Facebook.
Investing Tip #13: Go Low-Cost Index Funds or Something That Encourages Passivity
Index funds are a godsend for smaller investors without a lot of money or in lower tax brackets. Despite the structural risks inherent in them and the methodology changes that have cost investors a lot of money, they allow individuals and families with little to no capital to achieve widespread diversification at almost no cost. If you are trapped in a company-sponsored 401(k), going with a low-cost index fund is almost always going to be the most intelligent choice. They can also be useful in other contexts. For example, if you read my personal blog, you might know that I use a couple of index funds for my family's charitable foundation, which is hidden within a Donor Advised Fund so I can avoid the 990 disclosures that would be required had we set up a stand-alone institution.
It is for those reasons I've lavished so much praise on index funds over the years. However, index funds are not perfect. Far from it. For example, despite the protests of people in the asset management business who have gotten very rich from then, index funds are a sort of parasitic extraction from society in that they do not seek the efficient allocation of capital to productive ends but, rather, piggyback off the activity of others. In theory, they should work great as long as too many people don't adapt it. On the other hand, if the current trends continue and indexing takes larger and larger shares of the total asset pool, there could come a day when the money flows into index funds could create a significant disconnect between the intrinsic value of the firms held in the index and the market prices of those firms. It is simply a function of math.
Index funds have also taken on a unique form of secular religion in certain circles, little different from the blind faith many experienced investors have witnessed from past market innovations. These people do not understand that index funds are merely a mechanism to take advantage of a handful of forces that tend to lead to good results: low turnover, tax efficiency, and low costs. For wealthy investors, in nearly every set of circumstances once you start looking at measurement periods spanning several decades, you'd have likely ended up with more wealth on an after-tax basis had you, instead, bought the underlying shares of the index directly in a global custody account of your own, weighted them on an equal basis, and paid an asset management firm 0.50% to 0.75% to manage it for you, taking care of all of the details. There is a myriad of reasons for this including the ability of the asset manager to engage in tax harvesting techniques should you need to raise funds and to negotiate free trades or institutional-priced trades for your account. I'd go so far as to say, absent circumstances that are comparably rare, it is patently dumb to index through pooled structures such as mutual funds and exchange traded funds once you cross the $500,000 mark as you can just as easily achieve the same objective with likely better outcomes owning the index components outright.
Comparably, index funds are a poor solution for some investors who have unique needs. If you're a widow with, say, $250,000 in assets, you may want to divide your portfolio 50% into tax-free municipal bonds and 50% into blue chip stocks with much higher-than-average dividend yields. The increased passive income has more utility to you (especially if a stock market crash occurs) than some theoretically higher compounding rate you might get from holding an all-capitalization index fund, especially in the context of your projected life expectancy if you are already near retirement. In other words, your lived experience could be superior even if it risked underperforming the market. The mathematics on all of this are crystal clear but there is now an entire marketing complex, backed by trillions in assets under management, incentivized in a very real way to focus not on economic reality or the academic data, but on what expands the empire of those who benefit from this greedy reductionism.
Complicating the matter further is that people like me are not particularly keen on pointing this out very often (look at the ratio of articles I've written that are overly favorable to index funds compared to those that mention things like this) because there is a real danger that investors who in no way qualify for the exceptions - who are best served by a low-cost index fund - somehow think they are the exception when they aren't. You look at a company like Vanguard, which is absolutely wonderful in a lot of respects, and see that its median retirement account value (half of account owners have less, half have more) was $29,603 in 2014, $31,396 in 2013, and $23,140 in 2009. While that represents real money the owners of which should be proud, in terms of account size, that's small potatoes. People like that couldn't get a private bank or asset manager to even look at them, let alone help them and if they try to buy individual securities on their own, they are probably going to do poorly. Vanguard is doing them such an enormous favor, they should be sending the firm's leaders Christmas cards filled with heartfelt thanks. To even begin to consider the better alternatives, even if you still wish to passively track an index, you probably need at least 10x, 20x, or 50x that amount.
In 2015, no less an authority than billionaire Charlie Munger began to warn of the dangers this index fund obsession was causing, echoing his early warnings about collateralized debt obligations prior to 2007-2009 collapse, which was largely derided until they came to pass. With the capital markets reaching a point that nearly $1 out of every $5 is now parked in an index fund, you have a handful of people on committees and at institutions holding power over the lives of tens of millions of people, most of them working class or middle class as the rich tend to avoid indexing through pooled structures compared to other groups for some of the reasons already explained. It isn't going to end well. It's bad for society. It's bad for businesses. There will come a point when the chickens come home to roost.
Nevertheless, I'll repeat what I've said hundreds of times in the past: If you aren't affluent or rich, indexing is probably your best bet if you want simple, straight-forward, mostly passive investments. Just don't drink the proverbial Kool-Aid like so many others have done. Be aware of the risks in what you are doing and know that there are dangers despite everything telling you it will all be alright. Be intellectually brave enough to recognize reality, even if it isn't pleasant.