Trader Talk

Vanguard's Key Investment Themes for 2012


Investment themes for 2012: Vanguard weighs in. Vanguard, the largest mutual fund company in the country by assets under management, has a large research department to help its investors. They aren't shy about weighing on issues important to those investors.

Here's a brief roundup of issues that Vanguard has weighed in on in the past few months:

1) Dividend-paying stocks. Everyone is searching for yield, but buying dividend-paying stocks as a substitute for bonds exposes you to far more risk.

2) Will bond yields stay low forever? Not necessarily. Here's why.

3) Who's responsible for all the market volatility? I know, a lot of people have come on our air and argued it was high frequency traders, or leveraged or inverse ETFs. Please: I've argued that it was the global macro environment (duh!). This paper comes to the same conclusion.

4) Speaking of volatility: The growth of ETFs has corresponded with a rise in volatility — a coincidence? A lot of people don't think so. I think they're all wrong. This presentation also argues that macro factors are to blame, rather than the structure of ETFs.

5) Should I invest in international bonds? It was one of the questions I was most frequently asked in 2011. Vanguard will be offering a new international bond portfolio shortly. The problem I've had: how to hedge currency risk. But there are more ways to protect yourself now. This paper discusses how to do it.

6) How much is America saving? This is the depressing part. In a report, "How America Saves 2011," Vanguard reports the average and median account balances for its investors. It's a good indicator of how much Americans are saving as part of their direct contribution plans to supplement Social Security and any pensions they might have.

Ready? The average Vanguard account has $79,077 in it. The median (50 percent above, 50 percent below) has $26,926.

The good news: it's the highest levels since Vanguard began keeping track in 1999.

The bad news: $76,000 is not much for a retirement account. In fact, it's pitiful. Admittedly, this would include accounts for those who are younger. Note to Vanguard: give us a breakdown where the holder is over 55 would be more helpful.

One other point: low volume really does mean less participation from retail investors. Trading activity at Vanguard in 2010 was at the lowest level since they began tracking data in 1999. Only 12 percent of plan participants traded in their accounts; 88 percent made no trades at all!

Even more remarkable: in the rock period from December 2007 through December 2010, only 27 percent of participants traded.

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