By Dr. James M. Dahle, WCI Founder
Vanguard recently published a study taken from their internal data about how retail investors invest, called How America Invests. They looked at the holdings of 5.1 million households with a total of $2 trillion in their accounts. Since Vanguard is the largest mutual fund company, this data can be somewhat generalized to the overall population. The study covered the years of 2015-2019, but also included some additional information from the March 2020 COVID-related meltdown. There is a ton of data in the study, but I've chosen to pull out a few interesting factoids that I thought would be worth discussing here.
People Don't Invest Much Money
My first can be taken from the median investor in the study, reproduced in this graphic.
Now, this data is limited by the fact that it only looks at money invested at Vanguard. Obviously, there are many households that also have money invested in 401(k)s or elsewhere that is not at Vanguard. But even so, this is a bit appalling. The median investor is 54 years old, has been at it for 14 years, has one account, has two investments, and has a grand total of $61K. $61K in 14 years, the last 11 of which were mostly a big bull market. If we assume an 8% rate of return, this would suggest the median investor only put
=PMT(8%,14,0,60900) = $2,515 per year
into the account. And half of investors put in even less!
Dave Ramsey likes to say that the main problem people have with investing is that they simply don't invest enough. He uses that fact to justify sending people to commissioned salesmen who sell them loaded, actively managed mutual funds, but it's pretty clear that the fact is true. If these median investors continue to invest $2,515 per year for the next decade before they retire and continue to earn 8% on their money, they'll end up with
=FV(8%,10,-2515,-60900) = $167,912
Per the 4% Rule Guideline this nest egg will now support a retirement income of something like $560 per month. Sounds like a pretty plush retirement, eh? Part of the reason the balances are so low, of course, is that these investors have only been investing for 14 years.
So while $61K doesn't seem like much, remember the median net worth in the country, not counting home equity, is $29K. So at least the median investor who invests at Vanguard has twice that much!
Lesson #1: Start earlier and invest more money.
Investors Take a Lot of Equity Risk
This graph demonstrates the actual asset allocation of self-directed investors (or at least those who are not using Vanguard Advisory Services). I found it pretty interesting, but the most interesting part of it was that the median investor takes significantly more risk than the experts who design the Target Retirement funds would recommend. In fact, 3/4 of retiree investors are taking more than the “recommended” amount of risk.
The other interesting aspect of this graph is the huge range of asset allocations among the very youngest investors. It is hard to tell why these folks are not taking on more risk. It may be due to inertia, inattention, low-risk tolerance, or perhaps saving for short-term goals like down payments. That range tightens up significantly for investors using an advisor:
Lesson #2: Pick a reasonable asset allocation and stick with it.
Young People Know the Benefits of Index Funds
Another interesting fact is shown by this graph:
To really get the message here you need to ignore the top part of the graph, which just shows you how many people have a money market fund. Instead, notice how 80% of the non-cash holdings of 25-year-old investors are index funds but only 15% of non-cash holdings for 90-year-olds. The older you are the less likely you seem to be aware of the benefits of index funds. Perhaps some of this effect can be explained by the presence of “legacy holdings” in a taxable account (those with a low basis where the tax cost is too high to justify switching), but it seems too dramatic a difference for that to be the only explanation.
Lesson #3: Teach your grandpa about index funds.
Investors Chase Performance
Another interesting lesson can be seen by comparing advised clients and self-directed clients when it comes to international equity holdings.
Self-directed clients had a domestic equity allocation of 82%, but advised clients put twice as much money into international equities. This is highly likely to be due to performance chasing, although an alternate explanation is that self-directed investors are just afraid of investing overseas. Of course, the self-directed investors had the last laugh, since US stocks dramatically outperformed international stocks over the time period of the study.
Lesson #4: Don't chase performance, even if it works for a while.
Few Vanguard Investors Are Picking Stocks
Check out this chart.
Less than 1/4 of investors are picking stocks. Among investors who only have an IRA, only 7% hold any individual stocks. I find that reassuring, but honestly, if you're a stock picker you probably aren't at Vanguard to start with. Not convinced by that chart? How about this one:
I got a real chuckle out of it. The more money you have in individual stocks, the less money you have. I think there's a lesson there.
Lesson #5: Don't be one of the losers picking stocks.
Vanguard Investors Are Buy and Holders
Perhaps one of the biggest takes from the study was how seldom Vanguard investors trade from one investment to another. Only 22% of investors made even a single trade during 2019.
And even that 22% includes a whole lot of investors (like you and me) that most of us would call buy and holders.
Even the “heaviest trading” category is only 7+ trades a year (4% or so of investors). I figure just rebalancing accounts and normal multi-account asset management accounts for a handful of trades a year. For instance, my household would have been in the heaviest trading category just from tax-loss harvesting in March 2020. It is also interesting that, at least by volume, most trades (99%) are not large market-timing kind of trades.
If you measure by number of trades, only about half significantly change the asset allocation. Only about 2% a year “go to cash”. That's hardly an indicator of “panic selling” at those sorts of percentages. But perhaps the best measure of panic selling can be had by looking at the COVID bear market.
As you can see by comparing the blue line and the red line, there was minimal COVID panic selling.
There was a little more trading in March 2020, but I think a lot of that can be attributed to activities like rebalancing and tax-loss harvesting. If you look at how many people went to cash during the first six months of 2020, it was only 3% (against a baseline level of 2%). Only 12% made their asset allocation less risky (against a baseline of 10%).
Lesson #6: If you are really trading, you are in a tiny minority of Vanguard investors.
Overall, I thought the study was pretty interesting in that it reveals that most investors not only aren't doing much with their investments, but have a lot less trouble staying the course with those investments than one might think. Whether that is due to steely nerves or simple inertia, of course, is anybody's guess.
What do you think? Have you read the study? What stood out to you? Comment below!
Regarding the “Investors chase performance” paragraph: it seems that Vanguard is also doing some market timing. Over the years, the % of international has gradually increased in both their Target Date and Lifestrategy funds.
Interesting data point. I do think it’s not so straightforward to generalize from vanguard to the rest of the country though.
Vanguard as a brokerage tends to encourage more of a buy and hold, passive index strategy. I don’t think it’s a coincidence that that’s the picture their data shows. It would be very interesting to see how things like active trades and the demographics more generally compare across brokerages.
I have we been a vanguard customer for almost 20 years, I have never been encouraged to buy and hold.
They did have some penalties for frequent trading for a while, but you’re right that you have to dig pretty deep to get any sort of recommendations from Vanguard.
Very interesting, I wonder how the six, seven or higher figure accounts at Vanguard compare to this smaller median amount group. I suspect the subset of high net worth investors would show more disciplined and more time proved allocation strategies and even less churn.
Very interesting, but I can’t help but think that they are working with very incomplete information. For example, take me and my wife: we have well over 1M in assets. But of that, a) my 403(b) won’t be captured, because it’s at Fidelity; my wife’s 401(k) probably won’t be captures, because while it’s Vanguard funds, it’s managed through a third party; and c) it’s not at all clear if we’ll be considered one “retail household” or two. What’s left is our IRAs and taxable (joint), which sure, is a heck of a lot more than the average, but a heck of a lot less than what we actually have, and if we’re regarded and two households for the purposes of the data, then it’s really a heck of a lot less.
So while I think you can probably safely make general statements from this data (“people don’t invest enough”), I doubt you can make specific ones (“the average investor has $60,000 saved).
Yes, there are limitations to the data and thus any conclusions that can be drawn. No reason not to look at what we have though; we just need to be careful what we do with it.
The data might be effected by the age group and many having their retirement funds at another company. For example I had money in my company program at fidelity when I was that age, several hundred thousand dollars. It might be that the population is not so representative. In addition averages mean little without the distribution, the average might be lowered by large numbers of small values offset by some very large ones.
Looking at figure 13 I think you are mistaken and the top part of the graph is cash. I think this would mean that all age groups are leaning more towards index funds than you stated but it is hard to tell because Vanguard did not label the vertical axis with more than 0 and 100%.
Thanks for the correction. I said bottom instead of top. But the rest of what I said applies just fine. Younger people are more likely to use index funds than actively managed funds.
Investing has become such a necessity these days. These days, your day job income can be good but it’s certainly not enough. People NEED additional sources of income in order to live and retire comfortably.
Gone are the days of pensions and here are the days of employees having to look for additional income sources to retire well!
Ok this is just vanguard website. The talk about stock trades. Come on vanguard services are subpar for stack trades. They don’t give you all the flashy charts look dumb. I have a stock account and use it to buy only because I’m building a dividend portfolio. I’m going to use the dividends for vacation money when I retire. So I would say this is very misleading article
Would love to see this same data for Robinhood, haha…
That would be interesting.
Vanguard is no longer “Jack’s Place”, and yes most everything changes, especially when lots of money is involved. Vanguard says the company is owned by its’ shareholders. Really? Try to find the salary/compensation of their top management. Vanguard CEO, CFO, etc. compensation is more secretive than members of the US Senate/House salary/compensation. Vanguard never had so many funds/ETF’s, and the number keeps increasing. Vanguard is no different than any of their peers, they are always hunting for and testing new possible revenue streams. Vanguard PFA is a cash cow they push to the maximum. IT took some serious blow back by “members” to stop those irritating popups for PFA. Yes Vanguard holds to the basic message from Jack about low cost index investing, but much else is heavy on marketing and image. I miss the Vanguard of decades past, but life moves on.
Perhaps it’s not the same, but it’s still better than the alternatives so what are you going to do?
At any rate, too much disclosure just aids their competitors and hurts the shareholders in the long run.
It’s all about to be flushed and these “advisors” keep leading the herd to invest invest invest. All the big companies are China backed and are gonna flush it all. It’s criminal