If The Best Investors Do Nothing, Are the Next Best on Target Fund Auto-Pilot?

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tdfautoThis is becoming a recurring theme around here, but I came across an interesting tidbit in this ProPublica article on how your brain plays tricks on you. Emphasis mine:

Fidelity did a study of all their accounts to see what types of investors performed the best. They found that the best investors were the people who had either forgotten they had an account in the first place — or were dead! In other words, most investors succeed in doing the exact opposite of what they set out to do with their money (presumably, make more of it).

In other words, the best investment performance came from doing nothing. That means no buying what looks obviously good, no selling what looks obviously bad, no “taking profits”, no “taking money off the table”.

If doing nothing is best, then you should probably invest in something that encourages inactivity. That’s exactly what a Target Date Fund (TDF) does, manage your asset allocation in an emotionless manner as you age. Auto-pilot.

This Morningstar article appears to confirm this idea: Target-Date Funds: Good Behavior Leads to Better Results. Emphasis mine:

Investor returns, a dollar-weighted return that takes into account cash inflows and outflows to estimate the returns that investors actually experience, gives clues to how target-date investors have fared according to these concerns. The news is good. Whereas most other broad categories show the effects of poor timing–investors tend to buy high and sell low–target-date investors largely avoid that fate.

Investors of target-date funds tend to invest part of every paycheck into employer plans like 401(k)s, and are either (1) lazy and put there by default, which suggests future laziness, or (2) actively chose to be invested in an auto-pilot fund, which suggests they accept that inactivity on their part is a good idea. (I should admit that I did neither and use the self-directed brokerage option… but only to buy TIPS. Honest!)

There is nothing wrong with focusing on your savings rate and using the auto-pilot!

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  1. The article might hold a lot of truth. So many of us think or want to believe that we are the next Warren Buffet when there are so called experts with years of education and experience that get it wrong a lot of times. It probably serves you best most of the time to just to set it and forget it.

  2. Is third then robo-advisor?

  3. I’m heading down to my Assisted Suicide Center this morning.

  4. I’ve been slowly moving money to VSMGX and VASGX which are “do nothing funds”.
    -automatically keeps allocation
    -extremely low expenses
    -easy to sleep at night
    Since I’m essentially retired, I use VSMGX for Non-IRA money and VASGX for my Roth.

  5. Absolutely love this! No post about investing has ever made me actually laugh out loud before. I will remember this every time some investment advisor wants me to listen to their spiel. Thank you!

  6. Unfortunately, I have been unable to find the link to the actual Fidelity Study.

    I wonder to what extent this is an urban legend that has been perpetuated online – when something that sounds appealing to you is repeated so many times, it starts sounding as truth.

    You may like this article from Morningstar: http://www.morningstar.com/advisor/t/109824518/in-praise-of-the-dead-investors.htm

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