Does ‘Vanguarding’ Really Work?

Vanguard’s new marketing push, including trademarking made-up vocabulary word “Vanguarding,” is a major branding exercise for the mutual fund and investment company. The bigwigs at Vanguard say it will “educate investors about our way of investing.”

Really? Well does Vanguard’s way of investing include making apples-to-bananas performance comparisons? Because that’s precisely what Vanguard has done in its recent press release explaining the “Vanguarding” phenomenon.

Here’s the pitch my office received about how Vanguard’s strategy worked during the lost decade ending Dec. 31, 2009. The comparison involves an investor who puts $10,000 into the stock market and, presumably, heads to a desert island for the interim. This is stacked against an investor who starts with $10,000 and adds $200 monthly (a total of $200 x 12 months x 10 years, or $24,000) into a balanced account.

Is it any wonder that the desert island investor ends up with $9,053 and the “Vanguarder” ends up with $40,891 under this formula?

The first flaw with this argument is that an investor who put $10,000 into the Vanguard Total Stock Market Index (VTSMX) fund on 12/31/1999 would have had $9,733 on 12/31/2009. But that same investor putting an additional $200 per month into the fund would have had $36,429. As you can see, with continuous contributions, the disparity isn’t nearly so bad. Like I said, this is comparing apples and bananas.

Now let’s look at a practical comparison between funds. Unfortunately, Vanguard didn’t offer a fund based on the Vanguard Global Equity (VHGEX) fund or an MSCI All Country World indexed fund 10 years ago. So, let’s use Vanguard Total International (VGTSX), which they did offer. An investor who put $10,000 into Vanguard’s mix of 60% Total Stock Market Index (VTSMX), 15% Total International (VGTSX) and 25% Total Bond Market (VBMFX) would have had a terminal value after 10 years of $12,183. Additional contributions of $200 per month would boost this to $41,283.

Simply put, we’re looking at an 11% difference — but since there weren’t comparable funds available, who knows for sure what the real difference is.

The final flaw is that picking the period ending Dec. 31, 2009, is very convenient for Vanguard’s example. Had they chosen a 10-year period five years earlier (running 12/31/1994 through 12/31/2004), the numbers would look a bit different, with the Total Stock investor adding $200 per year ending with $65,186 and the Vanguarding investor ending with $60,499. But then again, that’s hardly a good ad pitch.

It seems in this case, “Vanguarding” is just a fancy word for dollar cost averaging.

As a Vanguard expert who spends all his time poring over this investment company’s offerings, it’s easy for me to poke holes in their press release. But let me state for the record that I’m a big believer in some of their top talent and support these individual fund managers. I wouldn’t craft reports like The Top Vanguard Funds to Buy if I didn’t believe they were good investments. But there are also plenty of toxic funds for your 401(k) in Vanguard’s offerings. As an independent Vanguard advisor, I know when the company is selling me a bunch of malarkey — whether it’s a bad fund or a bad ad campaign. In my opinion, the “Vanguarding” pitch just doesn’t hold water.

Tell us what you think here.

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