Some Investors May Beat Their Funds
Key take-aways:
- In some Vanguard Target Date Funds, some investors may beat their funds on their own, from April 2022 to April 2025
- The role of dollar-cost averaging and consistent contributions during market downturns helps some investors may beat their funds
- How automation in workplace retirement accounts helps investors stay the course
- The impact of time horizon and asset allocation across target dates from 2025 to 2065
- The staggering $23 billion in aggregate outperformance which was achieved by staying invested
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Some Investors May Beat Their Funds – Transcript
Today we’re going to be talking about a piece of research from Jeff Ptak over at Morningstar. And usually when we reference stuff that Jeff writes and it’s unfortunately about how investors usually underperform the funds that they own.
It’s their “Mind The Gap,” study that they do. It’s basically a study that Jeff does that looks at, how investors make poor timing choices based on emotions and they end up underperforming the funds that they own.
We want to say, for the record, that is what happens – a lot.
Yep. They get worried. Investors get worried and sell when the investments, when the market goes down. And then they’re hesitant to reinvest when the investments go back up. And it creates this gap in performance between the funds and what the average investor actually gets.
But. Hold the phone — a new piece of research from Jeff!
And we’ll link this up… some investors may beat their funds.
He found that a particular group of investors actually overperformed the funds that they are invested in.
And this was due to investors contributing their dollars during up, down, sideways markets.
Uh, specifically he wanted to highlight the importance of contributing in down markets, contributing to send money into your investments when the market goes down, which is message that we often talk about here with clients.
And it’s something that we all know intuitively.
But, a lot of people just don’t do it.
They get nervous, they get scared.
They think they’re throwing good money after bad.
We get it.
We get it.
And we have, I’m happy to see that Jeff has put together these numbers for us. Because as Casey just said, intuitively we know, and we’ve been telling clients for years continue to invest, especially in your retirement account at work, as that comes out automatically.
You know, if we had to get people to sit down and, and write out a check …or push money from their bank to their brokerage account or to an investment account, they wouldn’t do it, when the markets were down or sloppy. They just won’t. It’s human nature.
Yes. And that automation is, serving investors well. Because, you know, Jeff’s research looked at Vanguard target date investors specifically. Between April 30th, 2022 and April 30th of this year, 2025.
So we had, a couple different market cycles in there.
2022 was a tough year.
2023 and 2024 were, you know, we rebounded from 22. They were both good years.
And, uh, the first few months of 2025 the markets were down significantly,
So, Jeff found that the average, Vanguard target date fund between those dates earned 7.9% annualized per year.
But the dollar weighted return, or the average investor return, during that time period was 8% per year.
Now that doesn’t look like much on the record. But let’s break this down a little bit.
Case, first of all, it’s, it’s a small period of time.
And it’s also in a target date fund.
So a little different than what Mr. Jones may own.
Maybe they own it in their retirement account, but maybe they own something else instead.
Yeah, and it was interesting to see the, the breakdown of where the outperformance came from.
He looked at the target date fund starting in 2025 and going out all the way to 2065.
Remember, the way target date fund works is the closer the target year gets, the more the fund itself gets more conservative.
So we’re probably owning things like bonds, uh, or, you know, just less stocks, less volatile stocks.
The further out we go to 2065, the more stocks, the more risk we’re going to be taking in those funds.
And they’re making all those changes, under the hood.
But the outperformance really started to hit with these funds in 2045.
It increased to, just under 0.75% in 2065.
So, you know, three quarters of a percent over each year going out to 2065.
That’s better than the 0.1% that we’re, that, you know, the whole average together. And it just goes to show the more, the longer your time horizon is, the more risk you can take and the more, contributing these dollars to your retirement account in down markets will pay off over the long haul.
Sure. And, I think the number that Jeff cited was that, in the Vanguard target date funds, these investors earned something like $23 billion more. So they may be small percentage points on paper, but when you look at the aggregate, the total dollar amount, it’s ginormous.
I just made that a word.
Ginormous.
Yeah, I mean, he, he added up all of the outperformance in dollar terms. But to kind of, you know, individualize that for your specific retirement, uh, if you’re earning, you know, 1% or a half a percent each year over a 20, 30, 40 year time horizon, those extra amounts – it’s going to add up.
This is what we’re talking about.
Interest. And, and that’s just the way it works.
It really pays to continue to add money, especially when the funds that you own in a, say, a retirement account where you’re not paying any tax anyway. Where, you want to own these investments, because you like them and they’re doing well. The markets just down.
The more you can stick with it and continue to add money while the share price is down, it’s going to pay off for you.
In the long run when the market rebounds, that is really the underlying message for all of this.
Thank you for tuning into “Some Investors May Beat Their Funds.”
