You may have heard the chatter even from bullish investors: we are not going to see another year like 2019 in stocks for a while. 2019 was the second best return in a 10 year rally that began in 2009 and we aren’t likely to see that repeated in 2020.

Despite this, there’s still of a lot of places where there is potential for growth. US rates will likely either be steady or falling and valuations on both equities in emerging countries and developed ones outside the US are attractive. There is a case for shifting there, even if the threat of a US slowdown if not full on recession looms.

If that slowdown happens, look for bonds to rally further as investors think the crisis is happening all over again and they rush back into the safety of government bonds in developed countries, especially the US. Which is why it may be worth allocating some of your investments towards bonds this year to account for that scenario.

With all that is going on, you would think I have 5 different funds to recommend you invest in, with the same characteristics I always stress: low cost, diversified and liquid. However, there happens to be one fund that has everything which accounts for all the scenarios above whether they be growth, recession, international outperformance or a falling dollar.

The Vanguard Conservative Growth Fund (VSCGX) is prepared for all these scenarios.

First, a Disclaimer

Before I get into why, I want to be clear for one thing for my readers. This post will be about where I invest my medium term savings for moderate growth. Those are the post tax savings that I have built up apart from my Roth IRA, traditional IRA and 401(k). Those funds I keep in separate buckets that I never touch. All I do is keep my savings for those funds on automatic from my paycheck. The lions share of that is in a Vanguard target date retirement fund like VFIFX. Smaller portions of those retirement savings are also in small cap funds like Vanguard International Growth Fund (VWIGX) or the Vanguard Small Cap Index ETF (VB). The first reason I invest in these funds and never touch them is because they are low cost and diversified. The other reason is that I am aware of behavioral biases that people have when tinkering with their investments. The more you touch them, the more likely to are to underperform. As I have mentioned in previous posts, Fidelity found out many years ago that those accounts that performed the best were those of people who forgot they had them. The target date funds solve the problem of having to rebalance my retirement funds by adjusting automatically as you move closer to retirement. Every few years, the fund will automatically tilt more conservative towards bonds from the 10% bonds and 90% stocks that it starts with. I hold the small cap funds because I like to take a bit more risk over the long term than the target date fund.

These also aren’t my emergency funds. I try to keep 6 months of living expenses in cash or money market funds in case anything goes wrong so that I don’t have to touch my medium term or long term investments. This is the first saving most people should be doing after they contribute to their retirement accounts of course.

Why I Like the Conservative Growth Fund

1. No Adjusting – As I mentioned in the disclaimer above, I don’t like anything I have to adjust. This is because if you have to tinker with your investments to rebalance them, you are more likely to get distracted and try the “hot” investment. I stay away from what’s hot, and for good reason. One researcher found that those stocks with heavy press coverage underperformed the market 2 years after their coverage died down. The fund keeps a mix of about 60% bonds and 40% stocks and maintains this weighting despite what the market does.
2. It’s International – International stocks have not kept up with the US in recent years but that may change. International bonds however, have managed to keep pace and even outperform US bonds. All of those things may be about to change, but maybe they won’t. Either way, you have exposure to both the US as well as international markets to capture performance wherever it may be. About a third of the fund is split between international bonds and stocks which capture both developed and a merging markets.For the international stock index the breakdown by region is as follows.
3. The Growth Rate Really Isn’t That Bad – For many of us who like high risk and high reward, we hear the term “conservative” and roll our eyes but when you look at the volatility of the fund given its average return of 6.62% over the last 10 years, it isn’t that bad. The fund had a standard deviation which was about 60% less than the S&P 500 which means it didn’t take you on such a bumpy ride to get those returns. It even saw a 15.90% return in 2019 as it got to ride a bit of the wave in US stocks up for the year, even though this ended up being about half of the total return of the S&P 500 ETF, which returned 31.37% on a total return basis.

Some Examples Based on the Past

The Top of the Dot Com Bubble – To illustrate my point above, I wanted to look at a few visual examples of how this fund performed at times like this: the economy is late in the cycle, the markets have been outperforming and investors are expecting a slowdown.

From August 31, 2000 to March 5, 2009, the performance of the fund is shown above. This was probably the worst 10 years to invest ever, since the market was so overvalued in 2000 due to the tech bubble. Despite this, the most the fund ever fell was about 13% in 2002 and was up as much as 44.5% in October of 2007. Even at the very bottom of the market during the financial crisis, it was back about where it started so money was not being lost for sticking with the fund.

On the other hand, if you waited out the crisis and didn’t touch it, you were back up 85% 5 years later. That gives you a 4.5% annual return over one of the worst investing periods in history. Not too bad.

Just Before the Crisis – Now let’s take another worst case scenario, let’s assume you invested at the top of the market in 2007:

In this case, you were down 29% by March of 2009. If you stayed in and (like I did at the time) put more money in, you set yourself up for a 28.76% return when you checked back on your fund in 2012.

Even when the market dropped last year by almost 20% from peak to bottom, the conservative growth fund was down about 5%.

The point of showing you these worst case scenarios is to show you that yes there can still be some volatility in this fund even with the conservative label but it’s a fund built for low volatility and consistent long term return through diversification. If I am totally wrong and international markets don’t do well, the US continues to climb and the dollar remains strong, you will still benefit in this fund. Even in a recession scenario, as long as you don’t need to touch these savings for a few years, you can wait out the volatility and see a return pick back up.

Conclusion

As I pointed out in my Instagram post this morning, investors have been trying to time this market waiting for the shoe to drop. Just look at how funds flowed in and out of the MSCI index with the ups and downs of the market. If they had stayed invested they would have fully benefitted from the unexpected rally.

Source: Refinitiv

They fail to realize that the returns go to those who stay invested, disciplined and keep taking risk. In order to be able to sleep at night for the next few years, consider the Vanguard Life Strategy Conservative Growth Fund for some of your medium term savings and don’t get caught chasing the fads.

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