Do more with less: Buying and holding a broad-market index fund is a profitable investing strategy

We investors tend to be smitten with complex portfolio strategies and are quick to dismiss the straightforward options - even when they're more promising.

Consider recent research from investment giant Vanguard about the asset allocations of rollover IRAs. These accounts come into play when investors want to transfer funds out of their 401(k)s at their previous places of employment. In most cases, a rollover IRA's default allocation will be cash.

The Vanguard researchers in June 2024 surveyed more than 500 investors who completed a rollover during 2023. This timing meant that the investors had at least six months, and as much as 18 months, to move their rollover IRAs from an all-cash allocation.

The researchers found that many nevertheless remained in cash, and they wondered why. They discovered that it was due far more often to ignorance than intent: 68% of those in cash had no idea of a rollover IRA's default cash allocation - as you can see from the accompanying chart.

Vanguard calculates that for investors under age 55, their retirement portfolios could be worth at least $130,000 more at age 65 if they invested in an appropriate target-date fund at rollover.

You might expect a financial adviser to educate clients about this. But advisers often prefer to analyze complex and sophisticated strategies rather than simple and mundane ones - even when the simple and mundane can have a bigger impact.

This preference for the complex over the simple traces to a fundamental trait of human nature, according to Ted Lamade, managing director of the endowment team at the Carnegie Institution for Science.

"In an attempt to improve or upgrade [their clients' portfolios, advisers] almost always look to layer on new investments, commitments, asset classes and securities, often shooting well past an appropriate level of complexity," Lamade wrote in a recent essay entitled "Take Something Away."

"Worried about a market crash? Layer on expensive hedges. Concerned about volatility? Buy complicated options. Want to generate higher returns in a low-interest-rate environment? Add leverage. Trying to keep up with other investors? Chase a hot buyout or venture capital fund," he continued.

"The trouble is that when [investors] do this, the more vulnerable their portfolios become. It causes them to lose track of what they own, reduces their portfolio's liquidity and transparency, and forces them to pay higher fees in the process," Lamade added. "It also often leads to investors being forced to make decisions they swore they never would, typically at the worst possible moments."

Doing more with less

The solution, Lamade believes, is that instead of adding more complexity to your portfolio, you take something away - hence the name of his essay.

"We live in an era of too much. Too much information ... too many choices and too many distractions," he wrote. "As a result, there is a good chance that the path to ... better portfolio performance might start by taking things away."

Though Lamade doesn't say what exactly this advice entails, the conclusion I draw is that, for the bulk of your portfolio, you should buy and hold an index fund over the long term. Nothing could be simpler, and odds are overwhelming that you will do better than the vast majority of those who try to beat the market.

I recently had the experience of speaking to an investment group I had also spoken to 40 years ago. Since I had saved the notes of what I said then, I could reflect on the predictions I made in 1984. I had told the audience that if they left the meeting, invested their entire equity portfolio in a broad stock-market index fund and did nothing else for the next 40 years, they would outperform 80% of active managers over that four-decade period.

Turns out I was being generous, at least based on the investment newsletters my auditing firm has tracked. Just 8% of those my firm was tracking in 1984 have beaten an index fund since then; an additional 8% were ahead of the market when their editors ceased publication. The other 84% either failed to beat the market or ceased publication when they were behind the market. (Similar percentages emerge from the mutual-fund arena.)

So let's hear it for simplicity. As I asked the audience at my talk 40 years ago, where else can you beat at least 80% of your competitors without even trying?

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].

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-Mark Hulbert

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