Losses. According to the Vanguard study (which covered 3 million investors), Vanguard 401(k) participants had a median account balance decline of about 14 percent in 2008. Now, this calculation includes cash from ongoing contributions, but even including the new cash, the declines appear smaller than the losses reported from many large institutional managers.
Why did the individuals seem to do better?
- Well, they tended to follow a simpler investment strategy that included balancing their holdings between stocks and bonds.
- Compare that to many large pension and endowment managers who didn't use much balance, but instead relied on their superior stock and alternative investment picking abilities, which didn't turn out to be all that superior.
- Individual investors apparently understood their limitations, whereas institutional managers didn't.
- Yet many institutional managers had massive turnover last year. They appear to have panicked while the amateurs remained calm. Isn't it supposed to work the other way around?
- Whereas individuals tend to think for themselves because they're on their own. The result of millions of 401(k) investors making independent choices is that you don't concentrate the decision making with a small group of people. This actually tends to work better for investors and the markets as a whole.
- While chasing Wall Street may lead to big bonuses and fees for institutional managers, it may not be in your long-term best interest. You're more likely to meet your goals over the long run if you focus on executing on the fundamentals, which include saving adequately, saving consistently and balancing your investment holdings.
As with all financial matters, consult your individual advisor prior to making any decisions.