Index funds are growing increasingly popular. Yet Carl Richards tweets that over the last 15 years, the actual investor return for the popular Vanguard S&P 500 index fund (VFINX) lags nearly 2% a year behind the fund’s official return. That works out to a final balance that is 24% less. This means that if you account for the timing of actual dollar inflows and outflows, the average investor in the fund actually earned a lot less than they might think. (More explanation on investor returns vs. advertised returns here.)

Here’s the data taken straight from Morningstar. The longer the time period, the worse the relative performance:

As Abnormal Returns put it, “indexing is no panacea“. I think part of the problem is that people use the S&P 500 as a proxy for the overall stock market and thus trade it much more frequently… and poorly. If you were really afraid during the 2008 financial crisis, it was really tempting to sell your stock shares and keep it in something “safe” instead like bonds or cash. You may still be in cash today after missing out on the rebound.

But what about the Vanguard Target Retirement 20XX Funds, which are basically just a mix of different index funds? Specifically, let’s take the Vanguard Target Retirement 2045 Fund (VTIVX). It’s mostly stocks, and mostly US stocks at that, so it should behave similarly to VFINX. Check out the 10-year growth chart comparison with the S&P 500 fund:

However, the average investor returns for the Vanguard Target Retirement 2045 Fund are much closer to the fund returns. The investor return over the 10-year period is actually better than the fund return, although some of that may have to do with the small asset base in 2004.

Why is this? My opinion is that people who own the Vanguard Target Retirement fund trade a lot less frequently. Part of this is self-selection. If you buy this fund, you desire simplicity. Also, if you own an all-in-one fund that holds both stocks and bonds together, you don’t have the problem of seeing one investment drop while the other rises. This is the benefit of buying a “balanced” fund.

You won’t see Vanguard Target Retirement funds being touted very much in the financial media. Their returns are rarely at the top since they are index-based, so magazines and newsletters won’t write about them. Most advisors are supposedly charging you for their “expert” advice, so they will of course recommend something more complicated. Even index fund enthusiasts like myself often don’t invest in them because we like to fine-tune and tinker (sometimes to our detriment).

Despite their boring nature and lack of publicity, I have long recommended Vanguard Target Retirement funds to members of my family. They are simple yet diversified, have very low expenses, and designed to be left alone. You don’t even have to rebalance your holdings; it is done for you automatically. Could you do better? Maybe. Could you do worse? Definitely.