Analyzing How America Invests
Published On: April 27, 2021
Written by: Ben Atwater and Matt Malick
This year, The Vanguard Group, the country’s largest mutual fund manager, released a study of how their affluent clients invest. The study looked at 800,000 affluent retail investor households. It examined five years of data, 2015 through 2019, a period of generally robust market returns.
It is exciting to see “under the hood” at Vanguard and get a sense for how others are investing their savings. We think this study is a worthwhile benchmark for us to reference and incorporate in our decision-making. The good news is there are few surprises in the data, and it generally reinforces what we consider to be best practices.
The study has several limitations. The first is that many of the households Vanguard studied likely have assets outside Vanguard like workplace retirement plans, bank accounts, other advisors and providers, etc. Therefore, we are probably looking at an incomplete picture of many households.
Second, the study cannot know the “goals” of the households and, therefore, we are dealing in medians and averages. We do not know, for example, if someone is holding excess cash to buy a house or an older household is investing more aggressively for the next generation because they have met all their lifetime financial goals, etc.
The median portfolio balance of the households Vanguard studied is $1,034,000 and the median household size is two. The median number of accounts is 3 and the median number of investments is 9, while the median account tenure is 21 years and median client age is 66 years. Clearly, these are well established relationships.
Across the board, the asset mix is 64% stocks, 23% fixed income and 13% cash. This balanced result is remarkable, yet predictable. It is remarkable in that it is so unremarkable; hard to believe just how pedestrian and predictable it is. The idea of a balanced “60 / 40 portfolio” is certainly tried and true and continues to endure, largely because it works. (We wrote about balanced portfolios in an essay last fall.)
As they should be, allocations are more aggressive for younger investors. At the median age of 25, the median allocation to stocks is 90%. At age 45, the allocation is 82%. And at age 70 the allocation is 60%.
Interestingly, the “glide path” lower for equity allocations stops at age 70 at around 60% stocks and does not drift lower. We think there are two reasons for this.
One, low interest rates discourage an aggressive allocation to bonds beyond a balanced mix. Two, we believe many of the more affluent households in the sample are older households that are not overly reliant on their investments and are likely investing for the next generation as much as they are investing for themselves.
As you may know, Vanguard is best known for index funds. After all, they effectively invented them, and certainly, without argument, popularized them. This led us to assume that Vanguard accounts would be overwhelmingly invested in index funds.
Surprisingly, 43% of the examined portfolios have an active strategy, with 7% being all active. Notably, investors incorporating active and passive investing had significantly higher balances than index-only investors.
Correspondingly, the index share is highest among younger investors and declines as investors age. In other words, older investors tend to incorporate more active management and likely also have more money simply because they are older.
18% of portfolios are invested internationally, while 5% of portfolios are allocated to individual securities. Only one in four households utilizes exchange traded funds (ETFs).
In the study, Vanguard takes a close look at what they call “extreme portfolios.” They define extreme portfolios as those with more than 98% equities or those with no equities.
3% of clients hold no equities, while 10% hold more than 98% in stocks.
Vanguard, of course, has its own advisory practice. Only 1% of clients under advisement have extreme portfolios, while 14% of self-directed portfolios register as extreme.
This, again, makes sense. We know individual investors tend to get more severe, while longer tenured advisors tend toward the more sober based on lived experience and modern portfolio theory.
Vanguard found the highest incidences of extreme allocations occurred when households had only taxable accounts, in other words, did not have IRAs. In these households 9% did not invest in equities and 17% held equity-only portfolios.
This may be because of incomplete information. These investors likely have IRAs and / or workplace retirement plans outside of Vanguard and the taxable accounts at Vanguard are only part of their total allocation.
Households with taxable accounts and IRAs had higher balances and multiple investment types. This includes investments in individual equities, which correlated with the highest balance households. Not only did individual equities correlate with the highest balances, but also with a greater overall percentage allocated to equity.
For now, target date funds are less prevalent among affluent households, only one in five utilize them. As a matter of fact, well over half of affluent households have “complex portfolios,” meaning six to ten investments across three or more accounts. About one-third have more than three accounts and more than eleven investments.
Although the data Vanguard studied encompassed 2015 through 2019, Vanguard did a special examination of the COVID-19 crisis. From February 19, 2020 to March 23, 2020 U.S. markets fell 34%. However, by August, a mere five months later, markets were already making new highs.
During the downturn, Vanguard found that only 1% of households abandoned equities entirely (oops). And, even more impressively, between December of 2019 (pre-crisis) to June of 2020 (with much of the rebound in) equity allocations fell only about 3%.
This is impressive given the initial stress of COVID-19. By and large, it seems folks are well programmed to stay the course. Overall, it also appears that high net worth Vanguard investors are prudent.
We doubt it would ever happen, but if Robinhood Financial does a study like this in ten years . . . that sure would be interesting . . .