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Active investing: Another opportunity to personalize your strategy

3 minute read
March 07, 2022

For almost 50 years, Vanguard has been nearly synonymous with index (or “passive”) investing. So many people are surprised to learn that our legacy actually began with active investing. In fact, our first 11 funds were actively managed funds.

Today, Vanguard offers more than 70 active funds that make up about 20% of our total assets under management.

What’s behind our ongoing commitment to active investing? And how do our advisors incorporate active for our clients like you? Let’s take a look.

Striking the right balance

For most investors, index funds offer a great starting point for the core part of their portfolio—they offer broad diversification at a low cost.

But there’s still a place for active investing. In fact, about a quarter of Vanguard Personal Advisor client assets are invested in active funds.

Why? Active has the potential to add value in its own way—by outperforming index funds—when it’s done by skilled managers at a low cost.

This can be a tricky combination. Additional costs come with hiring expert professionals to actively research and trade in the fund, looking for the best opportunities. And these additional costs mean that across the industry, most active funds wind up lagging their benchmark returns. For example, according to Morningstar's most recent Active/Passive Barometer, only 25% of active funds beat their index peers over the past 10 years.*

But at Vanguard, we’ve developed a rigorous, disciplined approach to active investing that has led to success. 86% of Vanguard active funds have outperformed the average returns of their Lipper peer groups over the past 10 years.**

Making active personal

While active funds can benefit many investors, they’re not right for everyone. Active management means the fund manager makes choices that deviate from the benchmark. For example, they may choose to overweight or underweight certain sectors or individual securities.

Of course, these decisions are intended to help the fund outperform the benchmark, but that potential upside is paired with an equivalent potential downside—the fund could underperform the benchmark instead.

And with especially concentrated funds, both the potential risk and reward are elevated, because each individual decision by the fund manager carries greater weight.

These risks mean that active investing—while offering that chance for market outperformance—does require even more patience than index investing. It’s relatively easy for many investors to wait out a downturn in the overall market. It can be harder to maintain a sense of serenity when the market’s doing well but your active funds aren’t.

Because everyone has their own tolerance for these kinds of risk, there’s no one-size-fits-all answer to active investing. So when our advisors are deciding whether to recommend an allocation to active funds, they’ll consider questions like:

  • Do you prefer additional risk (and cost) if it means the chance for additional return?
  • Are you going to be comfortable during times when active funds underperform the market, understanding that patience is a critical component of being a successful active investor?
  • Is active investing a good fit for your specific investing goals?
  • Do you have a strong preference for active management?

In other words, advisors take into account both your preferences and your goals—as fiduciaries, they build portfolios in a way that serves your best interests.

Stay tuned for more

We’ll have more to say about active investing in Vanguard Personal Advisor Services® throughout the coming months, including information about new active funds that will only be available to Vanguard Personal Advisor clients.

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*As of June 30, 2021.

**For the 10-year period ended December 31, 2021, 7 of 7 Vanguard money market funds, 39 of 44 Vanguard bond funds, 6 of 6 Vanguard balanced funds, and 29 of 37 Vanguard stock funds―for a total of 81 of 94 Vanguard funds―outperformed their Lipper peer-group averages. Results will vary for other time periods. Only actively managed funds with a minimum 10-year history were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results. View fund performance

For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.