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How staying the course helped investors shoot par

July 22, 2013

At Vanguard, we've often urged investors to "stay the course" during turbulent times. A new research paper helps explain why.

Looking back at the five-year period ended December 31, 2012, our analysts examined personal performance track records for more than 58,000 individuals invested in a Vanguard IRA®. We concluded that during one of the most tumultuous eras in market history, those who stuck with predetermined stock/bond asset allocations fared better than frequent traders.

It doesn't surprise us that those who "stayed" had better results than those who "strayed," but it's gratifying to know that so many clients benefited from practicing what we preach.

You can read a high-level summary of our findings here, or download the full report for an in-depth look.

Shooting par on a challenging course

The study compared personal rates of return for Vanguard IRA investors from 2008 through 2012 against two benchmarks we created. One benchmark was a hypothetical blend of three broad-based Vanguard funds (Total Stock Market Index Fund, Total Bond Market Index Fund, and Total International Stock Index Fund); the other was a Vanguard Target Retirement Fund consistent with each investor's projected retirement date.

In essence, we measured each investor's actual performance against what it would have been had he or she invested according to Vanguard's recommended "best practices" for asset allocation. We then went a step further by analyzing the impact of exchanging money between funds during the same period.

We found that virtually all of the negative performance outcomes corresponded to investors who took a "hands on" approach with their portfolios. The average investor who made even one exchange over the entire five-year period lagged behind both benchmarks, trailing the hypothetical three-fund benchmark by 1.04% annually and the Target Retirement Fund benchmark by 1.50% annually. On the other hand, investors who refrained from exchange activity beat the asset allocation benchmark by 0.33% annually and only lagged the Target Retirement benchmark by 0.19%.

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.

It's important to note that these results are dependent on the market conditions that prevailed during the time period in question—a period that included the dramatic downturn of 2008–2009. Results for other periods can be expected to differ; this particular period’s underperformance relative to the benchmarks used could easily turn into another period’s outperformance.

Still, we believe the overall lesson is neatly summed up in the research paper's title: "Most Vanguard IRA investors shot par by staying the course."

Winning by losing (losing less, that is)

Legendary investment strategist and former Vanguard board member Dr. Charles D. Ellis memorably described investing as a "loser's game," insisting that the way to win is "by losing less."

We believe our research for the 2008–2012 period helps underscore Dr. Ellis's assessment. During this time of breathtaking market volatility, accounts with frequent exchanges consistently underperformed both the benchmark and the Target Retirement Fund allocations—by both earning less and losing more.

Our findings also help explain why Vanguard's philosophy has served investors well during good and bad times alike. One of our core beliefs is that discipline is a key component of success. And although a careful program of periodic asset rebalancing can be beneficial—by bringing an investor's portfolio back in line with an asset mix that's appropriate for his or her age and risk tolerance—making impulsive, emotional decisions in the face of market turmoil can be destructive.

The study also demonstrates the potential value of target-date funds, whose automatic rebalancing features are based on an investor's age and time frame rather than market-based activity. When properly used and understood, these funds can help protect investors from one of the biggest risks of all: their own behavior. After all, as our data show, the majority of investors in our sample who chose to "fine tune" their portfolios would most likely have been better off in the Target Retirement Fund alternative.

Indeed, even disciplined investors who wisely engage in periodic rebalancing can find their resolve tested by extreme market conditions. (How many investors who strayed far from their stock allocations during the global equity downturn of 2008 had the willpower to rebalance back into stocks at the bottom of the market in early 2009?) The implication seems clear: target-date funds can help investors avoid the temptation to chase returns or run for cover in emotionally charged markets.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Past performance does not guarantee future results.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • For more information about Vanguard funds, visit or call 877-662-2739 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
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