Thursday, October 6, 2011

Vanguard Discovers Market Timing is Hard - Duh!?

Vanguard Mutual Funds is merging its Vanguard Asset Allocation Fund (VAAPX) with its Vanguard Balanced Index Fund (VBINX).  The Asset Allocation Fund (VAAPX) utilized "tactical" asset allocation moves which is Wall Street code for "trying to time the market." The Vanguard Asset Allocation fund tried to increase its allocation to stocks when the manager thought stocks would go up, and increase its allocation to bonds when it thought stocks would do poorly.  The VAAPX fund is currently allocated 90% stocks and just 10% bonds.
Conversely, the Vanguard Balanced Index Fund (VBINX) simply uses a static allocation of 60% stocks and 40% bonds and periodically re-balances the portfolio to keep this static 60/40 mix.  Below are the performance results of the two funds at the end of last month.  You can easily see why Vanguard is merging the Asset Allocation Fund into the Balanced Index Fund.  Simply put, Vanguard has discovered that they are no good at getting in and out of the stock market in an attempt to "time the market." Duh!  No one can do this.  Not even Vanguard.
VAAPX                      VBINX
3-year             -1.6%                          +4.1%
5-year             -0.4%                          +3.9%
10-year           +2.9%                         +4.8%

I think the VAAPX investors ($8 billion) will be better served in the VBINX fund going forward. Here is the link to the Vanguard announcement

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