WEEKLY BRIEF | The Cost of Flinching

Hello, and welcome to the IVA Weekly Brief for Wednesday, August 19.

There are no changes recommended for any of our Portfolios.

The Price of Admission

Compounding does the heavy lifting in a portfolio, but it only works if you stay in your seat. And staying in your seat is harder than it sounds.

We’ve gotten two good examples so far in 2026.

Take U.S. Momentum Factor ETF (VFMO). One of Vanguard's best performers, it’s up 23.5% for the year and well ahead of "the market"—500 Index (VFIAX) has gained 13.1%.

But its shareholders haven’t had it easy—they’ve been tested twice.

In March, the momentum ETF fell 5.5%, then snapped back with a 13.6% gain in April. In July, it dropped 10.3%—Vanguard's worst-performing fund, in a month when 500 Index slipped just 0.1%. So far in August, it's up 5.2% and back among Vanguard's leaders.

If you’d sold during either decline, you missed the recovery that followed.

Capital Opportunity (VHCOX) tells a similar story. The PRIMECAP Management-run fund is up 25.7% this year—but it fell 7.3% in March and 7.9% in July on the way here. Anyone who pulled the plug in either month missed the rebound.

I’ve used actively managed portfolios as my examples, but the same message applies to index fund investors as well.

500 Index fell 5.0% in March, before rebounding 10.5% in April. Say March's 5.0% drop spooked you into stepping aside for April, then you bought back in and held through today. You'd be up just 2.4% this year. An investor who never flinched is up 13.1%. Missing a single month cost nearly 11 percentage points.

This bumpy ride isn't a flaw in the funds or the stock market—it's the price of admission for the chance to compound your wealth over time. If you want the long-term return, you have to be willing to hold through a drawdown, or several.

And make no mistake: 5% to 10% declines that reverse within a month are the easy test. A bear market will come again—just don't ask me when—and it will ask considerably more of your patience and grit than March and July did. The time to figure out how much of a decline you can stomach is now, while things are calm, not in the middle of the next drop.

A Milestone, Not a Meltdown

Headlines this week told of a rout in the bond market. And I get it: the yield on the 30-year Treasury bond closed at 5.31%, its highest close since 2007. That's news.

Falling prices go hand in hand with rising yields, so you'd expect real damage. Yet Long-Term Treasury ETF (VGLT) is down just 0.1% in August. In fact, most bond investors are in the black this month, as Total Bond Market Index (VBTLX) is up 0.3%.

That's the yield doing its job. When bonds pay you north of 4%, it takes a much bigger price decline to put you in the red.

And this morning, the U.S. Treasury announced it will step up purchases of long-maturity Treasurys. Long bonds rallied on the news. So much for the rout.

To be clear, bond investors are not having a great year. Total Bond Market Index is down 0.3% for the year and Long-Term Treasury ETF is off 3.4%. But that’s a long way from a meltdown.

Nothing says you have to own long-maturity bonds—I’ve suggested steering clear of them for years. And in the IVA Portfolios I favor cash over bonds two-to-one. But there are still a few good reasons to own some bonds—and I’ll discuss those with Premium Members in next week’s IVA Research article.

Changing Seats at Vanguard’s Muni Desk

Speaking of bonds, Paul Malloy, who ran Vanguard’s municipal bond group, left the firm last week. His departure set off a chain of moves down the org chart.

Justin Schwartz, who had led Vanguard’s municipal bond indexing and money market efforts, now leads the overall muni group. To take the bigger job, he stepped down as a portfolio manager on six index funds and Municipal Money Market (VMSXX).

John Grimes slides into Schwartz’s old seat running the municipal indexing and money market teams.

And Stephen Lombardelli and Michael Davis picked up their first portfolio management assignments.

If those two last names are new to you, the funds aren’t new to them. Both have been part of Vanguard’s investment team for more than a decade.

The bottom line: I’m not concerned.

First, these are index funds (and a money market fund)—not actively managed portfolios where a single manager’s judgment drives returns. Managing an index fund well takes real skill, but at Vanguard it’s a team sport, and the team hasn’t changed. 

Second, Vanguard’s bond group is deep and has absorbed departures before without a hitch. I expect the same result here.

Our Portfolios

Our Portfolios are showing solid returns for the year through Tuesday. The Aggressive Portfolio is up 16.1%, the Aggressive ETF Portfolio is up 13.6%, the Growth Portfolio is up 14.4%, the Moderate Portfolio is up 13.5% and the Conservative Portfolio is up 8.0%.

This compares to a 13.7% gain for Total Stock Market Index (VTSAX), a 15.2% return for Total International Stock Index (VTIAX), and a 0.3% decline for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 12.9% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 2.8%.

IVA Research

Yesterday, I sorted through the nine different ways to hold cash at Vanguard—the gap between the best and worst is nearly two percentage points of yield.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.