# Opinion: Millions of Americans, it turns out, are making the right investing moves, according to studies

But now, it turns out that many Americans actually are doing the right thing. Several huge studies of Vanguard account holders — retail and defined contribution, with taxable and retirement accounts — show millions of investors are allocating their funds appropriately to stocks while keeping a decent cushion in bonds and cash; trade rarely; own low-cost index funds, some exchange traded funds (ETFs) and target date retirement funds (TDFs); and barely changed their holdings during the recent coronavirus sell-off.

It may be a “dog bites man” story, but it’s comforting that millions of
people have paid attention to what some of us and especially the late investing
giant John
Bogle have been saying for years: Own stocks, diversify, keep costs
down, rebalance and reinvest dividends, and don’t panic. If they keep following
this advice, they’ll live long and prosper. (Apologies, Mr. Spock.)

The findings come from two reports published by Vanguard and from an academic study by Olivia S. Mitchell of The Wharton School of the University of Pennsylvania, along with Stephen P. Utkus of Vanguard.

One of the Vanguard reports is the annual “How America Saves,” which was published in June and covers five million participants in defined contribution plans administered by the firm.

Studies’ findings

The other, “How America Invests 2020,” examines five million accounts of Vanguard retail investors investing close to $2 trillion over the five years from 2015 through 2019. Mitchell and Utkus’s paper uses a research sample of 1.2 million investors from 880 defined contribution plans to study TDFs offered through Vanguard between January 2003 and June 2015. Altogether, these three studies cover millions of Vanguard investors. They found:

• Generally, people are sensibly allocated, averaging 63% equities, 16% bonds and 21% cash. Stock allocations decline with age, although many younger investors hold a lot of cash. There is, however, a “wide range of risk taking within any given age,” so 29% of Vanguard retail investors have more than 90% of their holdings in stock, and they all aren’t 22.

• U.S. investors have a home bias, with smaller-than-recommended allocations (about 19%) to international stocks and bonds. My MarketWatch colleague Brett Arends calls this the “No. 1 investment mistake” retirement savers are making, but from Jan. 1, 2008, through Dec. 8, 2020, the U.S.-only Vanguard Total Stock Market Index ETF
  VTI,
  +0.43%
  had surged 164%, while the iShares MSCI ACWI ex-U.S. ETF
  ACWX,
  +0.29%
  rose 26%. That’s a lot of catching up to do.

• Retail and 401(k) investors alike trade very infrequently, and when they do, it’s likely because they want to rebalance. “Less than a quarter of households traded each year between 2015 and 2019,” the report said. “Of those households that did trade, the typical household traded on only two days a year.”

• Although trading activity increased sharply during the COVID-19 selloff, stock allocations barely changed from last Dec. 31 through March 31, as the average household-weighted equity allocation remained between 61% and 63%.

• 401(k) investors are invested in default target date retirement funds (TDFs) by large margins — 78% of participants in Vanguard-administered 401(k) plans held TDFs. Nearly two-thirds of them have all their funds invested in a TDF.

Mitchell and Utkus’s study found that for TDF investors, “participants’ equity share rose an average of 24 percentage points for pure investors, and by 13 percentage points for mixed investors” (those who owned investments other than TDFs), they wrote. “Holdings in cash and company stock fell … in our sample of indexed target date funds.”

Power of target-date funds

TDFs are an ideal investment for many, because participants invest
automatically with each paycheck, and the funds reinvest dividends and
rebalance regularly, reducing stock exposure with age. It thus eliminates
emotional decision making and lets inertia work in investors’ favor.

“Our study concluded that adopting low-cost target date funds could enhance retirement wealth by as much as 50% over a 30-year horizon” for people 100% invested in TDFs, Mitchell wrote me in an email, and by up to 30% for people who own TDFs and other investments. Who’s going to argue with that?

Because these are Vanguard clients, the sample may be skewed toward people who believe in its low-cost, passive investing philosophy. But Fidelity Investments said its clients have stayed the course, too.

The reports tell us that millions of people are quietly doing the right thing, building their wealth over time, rather than speculate in bitcoin
BTCUSD,
-2.49%
or trade 17 times a day on Robinhood. In other words, American investors may have better judgment than we think.

Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold1. He owns Vanguard Total Stock Market Index ETF.