Vanguard Study Boosts TDFs, Plugs Financial Advisors

"The average investors who made even one exchange over the entire five-year period trailed the Vanguard asset allocation benchmark by 104 basis points annually …and trailed the Vanguard Target Retirement Fund benchmark by 150 basis points," Weber writes. "On the other hand, investors who refrained from such activity beat the Vanguard asset allocation benchmark by 33 basis points annually and only lagged the Target Retirement benchmark by 19 points."

Further, Weber found that "the majority of investors in our sample who chose to make [portfolio changes] would most likely have been better off in the Vanguard Target Retirement Fund hypothetical alternative during this period."

That is because even disciplined investors who strayed from their equity allocation in their mixed stock-bond portfolio might lack "the willpower to rebalance back into stocks at the bottom of the market," something that a sophisticated target-date fund does automatically regardless of market conditions.

Vanguard's study reinforces the notion made famous by Charles Ellis that investing is a loser's game that is won by not committing errors. It backs the idea that trading is a dangerous business.

But since a large number of investors don't use target-date funds, or might pull the plug on their investments if they're scared enough, attention should be given to the report's two concluding sentences—almost an afterthought it seemed:

"Alternatively, self-directed IRA investors not invested in all-in-one portfolios who are convinced that their asset allocation is appropriate for their investing goals and time horizon might seek the services of an investment advisor. Such advisors 'can act as emotional circuit breakers in bull or bear markets by circumventing their clients' tendencies to chase returns or run for cover in emotionally charged markets' (Bennyhoff and Kinniry, 2013)."

Behavioral finance experts have often noted the effectiveness of having advisors act as gatekeepers between an investor and his portfolio. As Meir Statman put it in a Research Magazine interview last year:

"Clients are their own worst enemies. They come to advisors to tell them when to buy and when to sell, and what to buy and what to sell. But that's not what advisors can do–period.  Advisors cannot beat the market. But they can prevent clients from doing really stupid things. If advisors have that kind of conversation with clients, both would benefit."