At the Fucking Vanguard

I want to start off by pointing out that Vanguard is an excellent company, and I use it to invest my own money. Nothing in this post is meant as a criticism of Vanguard, except that they do seem to have been mildly aggressive with some of their funds. On the whole, though, Vanguard is a model of responsibility and low-cost investing.

Vanguard has these funds that are designed to shift strategy over time so that they remain appropriate over the investor's life. So each fund starts out aggressive and then gets more conservative as the retirement date approaches. You could roughly replicate this by shifting among Vanguard funds over time, but the target retirement funds are meant to be easier. Also, you can mix and match to reflect your risk preference. Maybe you're retiring in 2020, but you want to invest as if you were retiring in 2015 so as to be on the safe side. Here are the year-to-date returns for some of Vanguard's funds:

retirement date of:

2005: -20.38%
2010: -25.46%
2015: -28.87%
2020: -31.79%
2025: -34.77%
2030: -37.47%
2035: -39.12%

Beyond that they're basically all the same. Of course these numbers change frequently, and I don't want to imply that we can draw hugely confident conclusions from these particular numbers. But I think a few things are clear:

1. If you use these funds, then your money really does seem to be safer as you near retirement. People who are retiring in 2030 have plenty of time for the markets to recover or, if they don't, to adjust their savings and retirement plans. People who retired in 2005 lost a lot less money, which is good because they can afford it less.

2. Still, those 2005 retirees lost 20% of their money so far this year. Now, presumably you wouldn't put all your money in one of these accounts, but it's not clear that a retiree would have a whole lot of money invested elsewhere. I'm not saying this is necessarily too risky an investment strategy - maybe that's the right level of aggressiveness for someone who has, what, maybe 15 years left to live. Maybe you want to take on that much risk so that you can get higher returns on average, and it just happened not to work out this time. But note that most bond funds (with the obvious exception of junk bonds and the less-obvious exceptions of intermediate- and long-term investment grade bonds) are either mildly up or mildly down for the year - which is to say, about 20% better than the Target Retirement 2005 fund.

But this points to the very real dangers of life as a private investor. To get significant returns (on average), you have to take on significant risk. The Target Retirement 2005 fund must have significant holdings in bonds - the whole point is that it's at a low-risk point in its investment cycle. A responsible investor can do everything right and still lose 20% in a very short period of time.

I think this has some bearing on the Social Security debate, but basically that is just an extremely low-risk, low-return, mandatory savings program, and I'm not sure that's justified by the data I've presented. I guess my point is that a lot of people probably take on more risk than they really think they're taking on, and the consequences can be pretty tragic. These people don't have time to adjust, or to work a little longer, or whatever. And Vanguard is a damn good company, so it's not as though these people bought junk bonds or something.