Let’s face it. The talking heads of market media can’t let the idea go.
Even though a simple 60 (stocks) /40 (bonds) mixture has redeemed itself, they’re currently jabbering about any of the following:
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a “stock picker’s market”, time to (add/reduce) stocks, time to (add/reduce) bonds, time for “quality earnings”, or time for “dividends.”
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They gotta do what they gotta do.
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In case you haven’t already learned, what they gotta do is convince you and me that today is a good time to make a change and buy (or sell) this, or buy (or sell) that. Even better if we sell one thing to buy another.
You don’t have to take my word about the resurrection of balanced funds. As always, I’ve brought actual evidence.
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Let’s start with the performance of the earliest balanced index fund. Vanguard Balanced Index Fund ( VBINX ) was established back in truly ancient, breathless media times – 1992 to be exact .
The fund now has over $57 billion in assets under management. It is so old that its first performance figures were filed before the first exchange-traded fund was introduced in 1993. The addicts of what’s new would call it long-in-the-tooth, tiresome, boring, unchanging, unresponsive, behind the times, etc.
But as a promulgator of unrelenting investment sloth, I’m OK with that. You should be too, unless you’re happy to accept meaningless excitement in lieu of cash for food and shelter.
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The outlier year
The 60/40 portfolio fell from grace in a single year: 2022. That’s when both stock and bond prices fell. That isn’t supposed to happen, but it did. According to investment writer Allan Roth , the bond crash was worse than the stock market crash of the Great Depression.
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You can see the impact by visiting the Morningstar.com website, and checking the year-by-year performance figures over the last 10 years.
The record shows that VBINX did better than most managed balanced funds in each year from 2015 to 2021. Even in its worst years, 2017 and 2021, it did better than half of its professionally managed competition.
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But it tanked in 2022, returning a loss of 16.97 percent, while the average managed fund returned a smaller loss, 13.64 percent. Vanguard Balanced Index mutual fund had been outdone by 81 percent of the balanced funds in operation that year.
It doesn’t get a lot worse than that.
Fortunately, that miserable year quickly disappears as you examine the longer-term record. Now that 2023 and 2024 are over, the three-year record shows a percentile ranking in the 29th percentile, a five-year ranking in the 21st percentile, a 10-year ranking in the 16th percentile and a 15-year ranking in the 13th percentile.
Enter the Vanguard Index
More importantly, these figures understate the ranking. They measure surviving funds, ignoring the multitudes of managed funds that are quietly put to sleep every year. The actual performance of a Vanguard Balanced Index mutual fund is much better, because more funds start each period than finish. But you and I make our choices from all the starting funds, not just the ones destined to finish.
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You can understand this by scoring a tough marathon. Imagine a run with 1,000 entrants and only 300 finishers. What do we know about the runner who finished 20th?
No medals. No trophies. No recognition. But that runner was in the top 2 percent of all entrants.
That’s rather impressive. Since being “top quintile” (top 20 percent) is the long-term Holy Grail of investment managers, let’s see how survivorship affects the scoring of Vanguard Balanced Index mutual fund.
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I called Morningstar and asked their researchers for performance figures beyond the 15 years shown on their website, going out to 30 years.
Morningstar data shows that VFINX kept chugging along, beating a healthy majority of surviving funds in every period. It was always an index fund so the only tool it had to create this record was low expenses. They are now down to 0.18 percent a year.
The fund maintained a steady 60/40 balance of domestic stocks and bonds. It never varied. It didn’t zig while others zagged. It didn’t go to cash at imagined market tops. It didn’t load up on The Next Big Thing.
Do we know how many comparable funds started each period? The Standard and Poor’s SPIVA reports , which I’ve mentioned in many columns, don’t provide survivorship figures for balanced funds. But their survivorship reports on domestic equity and domestic bond funds show that staying alive in the fund business isn’t easy.
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Over a 20-year period, for instance, survivorship ranges are about 25 percent for major domestic equity fund categories. Domestic fixed-income funds do a bit better with 15-year survivorship of nearly 50 percent. The other thing we know is that fund survivorship doesn’t improve with age.
It’s not a reach to say that the long-term performance of this simple, low-cost index fund has been well inside the goal of top quintile performance.
If, for instance, the 25-year survivorship performance is adjusted by using the 50 percent survivorship figure for fixed-income funds, the actual performance of the fund against all starting funds would be in the top 17.5 percent.
If the 30-year performance is adjusted by assuming the survivorship of domestic equity funds, the actual performance of the fund against all starting funds would be in the top 7.5 percent.
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Is there a message here? Of course there is. And it’s the same message the data has reinforced year after year and decade after decade.
Low-cost index investing in an unchanging and simple asset allocation is the way to get superior performance, not average performance. Just invest and do nothing.
It also leaves you free to exercise your time and talent in how you spend your money, an activity that is more likely to be rewarding.
Traditional investors, you can take your victory lap now
