It's no wonder over 90 percent of individual investors pursue an investing strategy that has historically underperformed a globally diversified portfolio of low management fee stock and bond index funds. You are inundated with misinformation generated by the financial media, and sponsored by the securities industry. They have a vested interest in leading you astray. The consequences have been devastating.
Assuming the asset allocation is appropriate for you, most investors would be better off putting all their assets in the Vanguard Target Retirement Fund appropriate for them. I prefer Vanguard's Target Retirement Funds because the underlying funds are all index funds and the expense ratio of the funds is very low at 0.18 percent, compared to the average expense ratio of 0.49 percent for similar funds, according to Vanguard's website. These funds automatically adjust their asset mix over time to become more conservative. Once you purchase the fund, there is no maintenance. Just leave it alone. Since inception in October, 2003 to September 30, 2012, the Vanguard 2025 Fund (VTTVX) returned 5.79 percent before taxes and 5.26 percent after taxes on distributions. At present, it has 71 percent of its portfolio invested in stocks and the balance in bonds.
Note that Vanguard reports its returns both pre-tax and after-tax. Most actively managed funds (where the fund manager attempts to beat a designated benchmark) engage in significantly more trading than index funds, generating higher taxes for their investors. Higher taxes reduce your after-tax returns. As the saying goes, it's not what you make, it's what you keep that matters. If you hold an actively managed fund, ask your broker or adviser to provide you with after-tax returns of that fund.
It's unfortunate that most investors succumb to the sales pitch of brokers and advisers who tell them they can "beat the markets." If your broker falls into this category (and almost all of them do), ask her to describe her methodology. If it is based on past performance, is she able to predict tomorrow's news? Since tomorrow's news is what will affect stock and bond prices, why does looking backward have any predictive value?
If there was a reliable way to "beat the market," you can be sure it would be uncovered by the millions of investors and thousands of academics focused on the market every day. It would also be published in a peer-review journal. I have yet to find any credible evidence of investment expertise permitting anyone to consistently "beat the market."
I issue the same challenge to brokers every day. Tell me your methodology for beating the market. Demonstrate that it works. I will check it out and will publish the results. I am still waiting for takers.
While I am waiting, you don't have to engage in market beating behavior that historically has rewarded your broker and punished your returns. You have many options for breaking the cycle of below market returns. One of the easiest ones is to consider whether Target Retirement Funds are appropriate for you.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.