Vanguard: Investors Doing Right Things in Volatile Market

July 11, 2018 — 11:15 AM EDT

Despite volatility that is back with a vengeance, trade tensions and geopolitical issues that have been rocking the world, investors have been doing a good job of keeping their emotions in check and staying the course on their investment plans.

That's according to Vanguard, one of the world's largest fund companies. The fund giant noted that, despite changes in the stock market this year, it is seeing no warning lights going off that investors are making a dramatic shift in either direction, nor have they done so in recent years as the stock market enjoys a protracted bull run. "Cash flows have been very balanced, which is very unusual in other strong momentum bull markets," said Fran Kinniry, a principal at Vanguard Investment Strategy Group, in an interview with Investopedia. "In other bull markets, we saw investors chasing returns, piling into the stock market near the top. Now they are doing exactly what a consultant or a financial advisor would advise them to do."

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Passive Investments Keep Emotions in Check

Investors' newfound discipline – which includes not reacting to daily movements in the market and rebalancing when their portfolio gets out of whack with their risk tolerance and investment strategy – could be driven by investment products that are more passive in nature and follow asset allocations rather than individual stocks. That's different than the situation 10 to 15 years ago, when investors picked mutual funds based on past performance, said Kinniry.

The Vanguard executive pointed to the rise in target date funds and a push by financial advisors to make their value proposition about asset allocation, rebalancing and behavioral coaching as reasons that investors aren't reacting like they did in the past. "Sophisticated professional investment strategies can act as a stabilizer to other investors who are more inclined to chase returns," said Kinniry. "We see this as a very positive development. Whether it holds if we get a big sell-off, we shall see."

If the mid-February stock market correction is any evidence, investors may be okay. While many panicked and sold off shares, stocks have rebounded. At the time, Fidelity Investments reported that customers remained calm during the plummet, with some clients using the downturn as a buying opportunity, while Robinhood, the mobile trading company, noted that customers also viewed the sell-off as an opportunity to  buy.

Target-Date Funds Provide Better Returns

But it's not just advisors that are keeping investors in line. Kinniry said that the increase in target-date retirement funds in 401(k) plans has had a positive impact on investors' behavior. Rewind 15 years, and employees would get a handout about the funds they could use in their 401(k) plan. The average worker would choose the fund based on five-year or ten-year performance, even though there's no guarantee that history will repeat itself when it comes to investing.

In the current retirement investing environment, target-date funds, which automatically become more conservative as a person nears retirement, take a lot of the guesswork out of the equation and help investors achieve better returns, Kinniry said. What's more, the Vanguard executive added that financial advisors have been adopting index funds as they move away from making money off of transactions, which removes a lot of the emotion from investing. As for the do-it-yourself investors, Kinniry said that their move toward a one balance fund solution has also helped keep the emotions at bay. "A lot of people were critical of investors in the late 1990s and in 2007 for chasing returns," said Kinniry. "Interestingly, now there is no criticism."