I’m a little tired of reading about how “buy and hold” is dead, and diversification doesn’t work, and how “target-date funds don’t work,” and that there was too much risk, especially for pre-retirees, in these balanced funds. These stories seem to continue regardless of what’s going on in the real world.

So I won’t discuss much. Instead, here’s some math.

Suppose you were 54 at the end of 1999. You had $50,000 in your 401(k). You planned to retire in 2010, when you turn 65. You were a big fan of diversification and balance, and wholeheartedly believed the buy-and-hold story, and so you used Vanguard Balanced Index Fund (view standardized performance) in your 401(k). Then, in June 2006, when Vanguard introduced the Target Retirement 2010 Fund (view standardized performance), you switched everything to that. You dutifully put $500 a month into your k-plan at the end of each month, every month, starting January 2000. What would your balance have been in September 2009?

401(k) balance 1999-2009

This chart assumes funds were held in Investor Shares of Vanguard Balanced Index Fund (view standardized performance) from 12/31/1999 to 6/30/2006, then in Vanguard Target Retirement 2010 Fund (view standardized performance) from 7/1/2006 to 9/30/2009. The chart also assumes $500 deposits were made monthly at the end of each month beginning in January 2000, and that all fund distributions were reinvested. All returns are net of fees.

Two observations:

1. Your ending balance would have been a little less than $135,000, and your overall annualized internal rate of return (IRR) over this period would have been 3.07%. Nothing to write home about, but certainly not the end of the world. If you made regular deposits, you would have built a decent nest egg, in spite of two major bear markets. And you still have a year to go before you plan on retiring.

2. Even at the low point—the end of February 2009—your balance would have been roughly $101,000 (before your monthly contribution), and your annualized IRR would have been –0.50%. So, yes, you lost money—but, again, it’s not the end of the world.

I suppose things could have gotten a lot worse in February. And maybe they could get much worse from here. But even with little more than a single year’s time in between us and the beginning of the financial crisis, I can’t see what supports the notion that balanced investing “doesn’t work” or that the 401(k) system is dangerously broken …


• Investments in bond funds are subject to interest rate, credit, and inflation risk.

• Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.

The performance data shown above represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit Vanguard.com.