Enemies of Investment Sucess

The following was authored by Fran Kinniry, head of portfolio construction in Vanguard’s Investment Strategy Group.

I will not make you wait for my thesis: Intuition and nostalgia are enemies of your investment success.

For your benefit, you should shun investment choices based on intuition and nostalgia and look for opportunities to replace them with sound investment habits.

The trouble with intuition

Intuitively, we believe we get better products and services when we pay more for them. This perception may be accurate in most facets of life, but the relationship breaks down when it comes to investing. In fact, lower-cost investment funds consistently outperform higher-cost alternatives.¹ The former leave more money in our portfolios, to grow when financial markets gain value.

We also believe, intuitively, that fund ratings and past performance can point to top-performing funds. Research from Vanguard, among others, has found that investors pour money into higher-rated funds and those with strong past performance.² Unfortunately, highly rated and top-performing funds often turn around and fail as soon as we send money their way.

There may be multiple explanations for such disappointments. A few that resonate with me include the tremendous competition among money managers, a large share of whom are highly intelligent and well-informed about economic and financial market developments—circumstances that help to ensure that “staying on top” in the performance derby is a huge challenge.

We also see that when there is strong relative performance of an investment style or category, it often accompanies higher current valuations from the inception period of the investment category, making repeated outperformance or its magnitude of outperformance or both challenging at best.

The trouble with nostalgia

Another threat to successful investing is nostalgia. An investor who’s been hiding out in cash for years, waiting for the return of 5% investment-grade yields or broad-stock-market price/earnings ratios south of, say, 15x, has been caught up in nostalgia. Such an investor probably has done himself or herself a disservice, missing market gains that, as it turned out, were there for the taking in recent years.

“It is what it is.” You may have heard this phrase a time or two in recent years. Perhaps you’ve said it yourself. If the remark has become worn from overuse, it nonetheless makes a useful point about the limits of our abilities.

We cannot control Federal Reserve policy, market interest rates, stock market valuations, or many other factors that influence investment outcomes. It’s responsible, of course, to regularly consider how investment conditions have evolved, but there’s a line somewhere between attempting to soberly assess potential risks and rewards and stubbornly waiting for the return of the “good old days.”

Replace intuition and nostalgia with productive habits

There are things we can control as investors, and you may be surprised at how powerful they can be.

We can make investment plans, establish goals, and diversify portfolios that might help us reach them over time.

We can take into account our tolerance for risk and our time horizons, recognizing that our retirements could last for decades—and that the horizon for some of our money could be even longer if, for example, we intend to leave some of it in a trust for our children, grandchildren, or favored charities.

We can keep our investment costs low, thereby leaving more money in our portfolios to compound into larger sums in the event of market gains.

We can save more.

We can rebalance our portfolios to target weights that have nothing to do with the current consensus on market valuations and everything to do with our risk tolerance and goals.

We can resist the urge to act on economic and market headlines, which seldom have anything to do with us.

And we can learn to expect the unexpected and to get comfortable with the uncomfortableness that comes with the volatility and risks that are the primary reasons risk premiums exist.

When you counter your natural attraction to intuitive or nostalgic approaches to investing and convince yourself of the wisdom of controlling the powerful levers you can control, you’re reframing investor choices. It’s a form of what we call behavioral coaching—one of the best services you can render.

1 The Vanguard Group, 2014. Vanguard’s Principles for Investing Success. Valley Forge, Pa.: The Vanguard Group.
2 Francis M. Kinniry Jr., Colleen M. Jaconetti, Donald G. Bennyhoff, Michael A. DiJoseph, and Stephen P. Utkus, 2016. Reframing investor choices: Right mindset, wrong market. Valley Forge, Pa.: The Vanguard Group. 


  • All investing is subject to risk, including the possible loss of the money you invest.