Vanguard Update: Making the Most of a Tough Market
While the stock market
has improved of late, most of us would clearly like to see better, more
consistent returns. Instead, we've become used to brief rallies,
followed by sudden sell-offs, and are generally left wondering what's
next.
All in all, it's a sharp contrast with the steadily rising markets of just a few years ago.
At the same time, we know
that saving for retirement is a must, and recognize that the CGC
Employees' Savings Plan is one of the best deals around. We should also
recognize that investing with Vanguard offers a number of major
advantages. These include some of the lowest fund expenses in the
industry--especially helpful in periods of low return--and a strong
emphasis on customer service and education.
Most importantly, Vanguard funds have achieved strong results--relative to their competitors--in both good markets and bad.
Morningstar research notes
that of the 71 Vanguard funds in existence for at least five years, 59
have achieved above-average returns over this period within their
respective fund categories. Similarly, of the 9 Vanguard funds in the
CGC plan tracked by Morningstar, 7 have achieved above average
annualized returns over this same five-year period.
Barbara Fallon-Walsh,
Principal in Vanguard's Participant Education Department, concedes that
for many funds, good performance over the past year has often meant
"losing less" than the competition.
"We're not celebrating, but
we are pleased with what we've achieved in a difficult market," she
says, noting that Vanguard saw a 3% increase in assets under management
and a 17% rise in the number of employer-sponsored retirement accounts
in 2001. In addition, total cash inflows from both employer-sponsored
and independent accounts increased from $40 billion to $60 billion.
Performance of ContiGroup Employee Savings Plan funds, as rated by Morningstar.
One-, three-, and five-year annualized returns and percentile rank in category. (1 = highest-ranking, 100 = lowest ranking). A percentile rank of 27, for example, indicates that a fund ranked in the top 27% of its category during the period in question. Data are through March 15, 2002.
Most Vanguard account
holders, Barbara notes, have taken the past year's volatility in
stride, and have not increased the frequency of their trades between
funds. At the same time, according to Vanguard's January 2002 Participant Monitor
survey, most people have lowered their expectations about stock market
performance, at least in the near term, to just 6%--far lower than the
double-digit expectations reported in previous surveys.
Participation and Performance at ContiGroup
As a group, participants in the
CGC plan have generally maintained their past contribution levels, and
seem to choose the same investments over time. Nevertheless, total
asset allocation for the plan has shifted slightly over the last three
years, with relatively more money held in some funds, such as STAR and
Primecap, and relatively less in others, such as the S&P 500 Index.
Jessie Barsin, Assistant Vice
President of Employee Benefits, notes that the STAR fund--a mix of
stocks, bonds, and fixed-income securities--is the ContiGroup default
fund, and says that this may be one reason for the increase. She adds
that people with large investments in STAR should be sure they're there
by choice, because the fund meets their needs, and not because they're
relying on the default option. In the case of the 500 Index, the
decline (from about 35% of total assets in 1999 to about 26% today) is
probably due to falling share prices. Still, the index remains a
popular choice, held at some level by nearly 46% of CGC plan
participants.
The largest fund,
representing more than 38% of the current $52 million in total assets,
is the ContiGroup Fixed Income Fund. This fund received about one
quarter of total plan contributions in 2001 and is currently owned by
about 48% of participants.
In all, the plan offers 10
different funds covering a range of investment styles, and allows most
employees to contribute up to 15% of their salaries, including 6% on a
pretax basis. Investing with pretax dollars is especially important
since pretax contributions result in a relatively smaller decrease--not
a dollar-for-dollar cut--in take-home pay. For example, if you're
earning $40,000 a year and investing 6% on a pretax basis, you end up
contributing $2,400 to your account while sacrificing only $2,040 in
direct, out-of-pocket dollars.*
In addition, the plan offers
a company match that can increase total compensation by up to 4%--a
major benefit for most people. Currently, about 80% of salaried
employees participate in the savings plan, a rate that should be higher
given the significant advantages of participation.
Getting More from Your Investments
When it comes to smart
investing,Vanguard stresses a few basic, commonly recognized
principles. These include managing risk through diversification, taking
full advantage of company matching funds, and investing for the long
term through automatic payroll contributions.
The latter lets you benefit
from "dollar cost averaging," i.e., buying a fixed dollar amount of a
fund at regular intervals (say, $100 a month) and in this way acquiring
more shares when the fund price is lower and fewer shares when the
price is higher. This helps reduce average share costs over time, since
a higher percentage of your total shares may be purchased at lower
prices.
In addition, investors
should evaluate their tolerance for risk--an easy matter with
Vanguard's online investor questionnaire. They can then develop an
investment plan--a selected mix of different types of funds--in line
with their personal risk profile and time horizon.
People further from
retirement have a longer horizon and can be more aggressive in their
investments. They can look at long-term historical returns and be more
weighted toward stocks. However, those closer to retirement should not
be focused entirely on conservative, low-risk investments, since it is
likely that they will need to draw on these resources over a period of
many years.
"In most cases, you don't
want to be a retiree or near-retiree with just bonds," says Barbara
Fallon-Walsh, noting that bonds and fixed-income securities make it
difficult to keep up with inflation over time. "People tend to be very
aware of the risk of losing money in a given year, but less aware of
the risk of seeing their investments lose value through inflation. This
is important whether you're early in your career or close to
retirement."
She stresses, however, that
there's "no absolute rule" for determining the right allocation of
current assets or future paycheck contributions. In particular,
investors close to retirement need to consider their entire income
stream, including Social Security, pensions, and spousal income. People
with steady income from other sources may be able to be more aggressive
in their selection of investments.
It's also important that
your planned allocation and your actual allocation match up. "If you
made money in bonds last year and lost money in stocks, you may now
have more money in bonds than you would like," says Jessie Barsin. "And
this probably means you should rebalance your funds. For most people,
it makes sense to do this once a year." (This rebalancing can be done
quickly and simply--in about five minutes--on the new Vanguard
website.)
Save Early and Often
The main goal for most people,
says Barbara Fallon-Walsh, should be to start early to benefit from the
effects of compounding, and to develop and follow a reasonable plan.
While conceding that retirement planning can be scary for some people,
she notes that Vanguard provides a range of tools for this purpose and
that "ignorance is not bliss" when it comes to investing. "If people
get a bit nervous about this, and it spurs them to better decisions,
that's good."
She adds that most people
are still not saving to the degree they should. "The typical
recommendation is that you should put aside about 10% of your salary.
However, in our surveys, most people say they save about 8% and what they actually save is probably lower."
In this respect, Barbara
notes that we tend to procrastinate and often don't realize how much we
can afford. "We have competing priorities and when retirement seems far
away, it's easy to say, 'OK, I'll think about that next year.'" This
eliminates both the tax advantages and the effects of compounding, and
makes it that much harder to catch up. For most people, it's simply
easier--and smarter--to begin contributing early.
"When you look at the
bottom line of your paycheck," says Barbara, "the impact isn't as great
as what many people fear, and the benefit is much much greater than
what they anticipate."
* Assuming a joint return and 15% federal tax bracket.