Billy Beane was a baseball scout’s dream.  He was fast.  He was strong.  He had every physical tool to smash home runs to China.  But his playing career in the Big League fizzled.  

Beane was sent from team to team.  None of his coaches, it seemed, could help him reach his full potential. Beane was temperamental.  He smashed baseball bats in anger.

After retiring from active play, he became manager of the Oakland A’s.  His story was immortalized in Michael Lewis’s excellent book, Moneyball. In many ways, Billy Beane was like a stock market index.  Investors have a tough time handling them.  In fact, most people could make more money by taking less risk.

Vanguard’s S&P 500 index averaged a compounding return of 8.2 percent per year during the ten years ending April 30th, 2015. But it’s a fly ball that most investors drop. According to Morningstar, its average investor compounded just 6.37 percent over the past ten years. They tried to guess the best times to buy and the best times to sell.  As is usual, most guessed wrong.

Vanguard’s Target Retirement Funds don’t encourage such guessing. Each fund combines domestic and international stock and bond market index funds.  They’re complete portfolios rolled into a single fund.  Once a year, they get rebalanced.

Sure they sound boring. But their investors don’t fumble.  They make double plays instead.  Take Vanguard’s Target Retirement 2035 fund.  Over the past decade, it averaged 7.04 percent per year.  Its investors, however, drove in plenty more runs.  They averaged 8.65 percent per year.  As a result, they dusted the typical S&P 500 investor by 2.28 percent per year.

But how did the fund’s average investor beat the fund itself? More of them likely practiced dollar cost averaging because they were participating in 401(k) plans.  This means they added equal amounts to their investments each month.  By doing so, they automatically bought more units when markets fell, and fewer units when markets rose.  

Some of the target funds are very conservative. The 2015 fund, for example, contains more bonds than stocks.  Among the target funds, it was Vanguard’s worst performer.  That makes sense.  During the past ten years, stocks  crushed bonds. Investors in Vanguard’s Target Retirement 2015 fund, however, performed the impossible. By averaging 6.54 percent, they beat the typical S&P 500 investor by 0.19 percent per year. 

Vanguard’s target funds are easy to like.  First of all, they’re cheap.  They cost about 0.17 percent per year.  Vanguard also ensures that its target funds become more conservative as investors age. For example, Vanguard’s Target Retirement 2035 fund is made up of roughly 16 percent bonds, with the rest in stocks.  Five years from now, that bond component will be higher. 

The funds’ names, however, are part of my only beef.  The one size fits all bond to equity ratio won't suit everyone retiring in a given year. Investors retiring in 2015, for example, might prefer Vanguard’s Target Retirement 2030 fund if they have a defined benefit pension, a desire for greater risk or income from a real estate portfolio.  A fund as conservative as Target 2015 might not fit their needs.

That’s why investors should ignore the funds’ dates.  Choose a fund, instead, based on its bond allocation and your tolerance for risk. 

Will investors in Vanguard’s target retirement funds beat the typical stock investor over the next decade? I think so—unless fear and greed go the way of the dinosaur.

Ten Year Fund Returns Versus Investors’ Returns

Fund Symbol 10 Year Fund Return 10 Year Investors’ Return
Vanguard S&P 500 Index VFINX +8.0% +6.37%
Vanguard Target Retirement 2015 Fund VTXVX +6.18% +6.54%
Vanguard Target Retirement 2025 Fund VTTVX +6.58% +7.70%
Vanguard Target Retirement 2035 Fund VTTHX +7.04% +8.65%
Vanguard Target Retirement 2045 Fund VTIVX +7.39% +9.32%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.