Wouldn’t it be nice to be fairly sure you were going to win every time you went out on the tennis court or hockey rink? Based on recently released performance stats, I guess Vanguard must know that feeling. Its funds had a good year in 2012, which has been the pattern for quite some time now.
They make it look easy
Every year thousands of fund managers toil over decisions of what to buy and when to sell. Some get it right and some make a mess. In 2012, with all the major markets doing well, making a nice return should have been pretty easy. It clearly was for Vanguard, based on its results, summarized by this chart.
For the year, 73 percent of Vanguard funds beat their Lipper group averages. And if you look back 3, 5 or 10 years, the outperformance is even stronger at up to 90 percent of funds outperforming their asset classes. (See results in more detail)
Vanguard must have the best forecasters and stock pickers in the business, right? No, to the contrary. As an index fund provider, Vanguard doesn’t pick stocks, it simply creates funds that track different kinds of stocks…and does the same with its bond funds too, with similar results.
The company’s biggest advantage is generally agreed to be its low management costs, consistently among the lowest in the business. With less of the pie going to management expenses, more return stays in the funds and flows through to shareholders.
I’ve singled out Vanguard because they reported their results so clearly and graphically, but I expect we’d see similar numbers for State Street and BlackRock, two other giant providers of index funds.
This is not meant as an endorsement for any specific fund or provider, but the numbers tell a strong story about the index approach. By simply seeking to match the performance of various asset classes, indexers have consistently beat group averages.
Yes, some active managers also beat the averages in any given year, but doing so year after year is very rare. And I’m not sure how anyone could accurately predict – before the fact – which active manager was going to outperform over a five- or ten-year period. There are no guarantees in investing, but in my view, sticking with well managed indexes provides the most reliable chance of beating benchmarks over the long term.
A first step only
Of course performance game is only one element of your long-term investment success. As we described in a previous article, we see index ETFs as great building blocks for low-cost, tax-efficient, diversified portfolios. When you build your portfolio with strong materials, you can then focus on your goals instead of being distracted by the active management performance derby.
John Osbon – email@example.com
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.