A recently released Vanguard study goes some distance to rehabilitate the image of target-date funds, all-in-one portfolios with an age-based allocation between stocks and bonds that are often seen as lacking in sophistication.
The study, by Vanguard’s Stephen Weber, is based impressively on an analysis of more than 58,000 Vanguard IRA account holders and reinforces classic themes of responsible investing—such as the value of sticking with an investment plan rather than succumbing to the temptation to trade.
But the study’s greatest significance may lie in its last two lines (occurring long after the conclusion has been stated): namely, that having a financial advisor may be the critical element in the success of the investment strategy.
First, a bit about the study: Vanguard needed to do something about the fact that the portfolios they looked at—both in terms of their composition but importantly in terms of how their owners ran their accounts (e.g., keeping steady or actively trading them) were all over the map.
Vanguard acknowledged the impossibility of accurately comparing these portfolios to meaningful benchmarks. Which benchmark, after all, matches John Doe’s personal rate of return, taking into account his original balance and cash-flow patterns? Even John might not know what his rate of return is supposed to be.
So Vanguard measured its customers’ IRAs against two “benchmarks” that are relevant comparisons only in the sense of being “something to measure against.” Those measures were a hypothetical mix of three stock and bond index funds and a target-date fund matching each account’s age cohort.
Vanguard compared actual returns with returns that would have resulted had the investors been invested in these two benchmarks (with the same starting balance and cash flow patterns).
The study period—the five years from 2008 to 2012— included the wild swoons of the 2008-2009 economic crisis.
What Vanguard found was that “hands off” investors did well, but those who switched their portfolios’ investments did not.