One of the most common critiques of index funds could be much ado about nothing.
Amid concerns that passive index fund investors would sell out of their positions at the first sign of a correction, clients at Valley Forge, Pa.-based Vanguard showed little response to the stock market volatility of the past few weeks.
In an analysis sampled from 8 million U.S. investor households, including both individual investors and 401(k) participants, the index investing powerhouse found that 97 percent of households did not trade at all.
Even on the most volatile days, trading rarely exceeds 1 percent of all households, said Vanguard.
In the past, critics of passive products and do-it-yourself investing have questioned whether market participants like Vanguard's clients would have the behavioral control to stay in the market absent a human advisor who could provide reassurances. Other critics were concerned that the behavior of passive investors could exacerbate market volatility. Remarkably, Vanguard’s clients have controlled their investment behaviors through market volatility despite the company’s hands-off approach.
In 2015, Vanguard launched a hybrid robo-advisor, Personal Advisor Services, which has become the largest digital advice provider in the world with $101 billion in client assets as of December 31, 2017. Vanguard’s approach, which blends an online advice platform with call centers staffed by CFP professionals, has attracted several imitators in recent years and has pushed digital-only advice providers to consider adding a human element to their services.
While Personal Advisor Services clients have access to human support during market turmoil, the firm’s direct discount brokerage clients are not offered any direct behavioral support. Instead, Vanguard has sent clients investor bulletins and research via e-mail discussing volatility and the potential costs of selling during a correction.
“Large market pullbacks aren’t rare,” said a February 7 Vanguard educational bulletin. “Research from Vanguard Investment Strategy Group shows that since 1980, a significant market event—a correction or a bear market, for example—has happened about every two years. So you’ll likely endure many of these events over your lifetime… it’s important to put these losses into context. Making investment decisions to try to insulate yourself from turmoil can lead to costly mistakes.”
Earlier this week, Vanguard announced that it had passed $1 trillion in defined contribution plan assets as of the end of 2017, the first asset manager to cross the trillion dollar threshold in the retirement plan space.
It doesn’t hurt that Vanguard’s mostly passive products tend to outperform all but a handful of traditional actively managed mutual funds over three-, five- and 10-year periods and tend to carry expense ratios well below industry averages. The firm’s passive, low-cost approach first championed by founder Jack Bogle has attracted a devoted following of individual investors who call themselves “Bogleheads.”