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The real 'Vanguard effect' goes beyond lower costs

10 July 2017 | Topical insights

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Commentary by Vanguard Chairman and CEO Bill McNabb.

Bill McNabbAt the end of May, Vanguard clients in the United States received good news: Our latest round of expense changes for US-based funds resulted in a total estimated savings of more than £230 million for investors over the preceding six months.

That's a remarkable amount, but it represented business as usual here at Vanguard. After all, we've kept close watch on costs for investors for more than 40 years. Indeed, we're so known for focusing on costs that when other investment companies lower their fees, the financial press often refers to it as "the Vanguard effect”.

To be sure, high costs persist in many areas of the financial industry around the world. But the good news is, our 40-year effort to control costs seems to be approaching its mathematical limits, with some fund expenses approaching zero not just at Vanguard but at other investment companies as well.

What makes investors successful?

While we'll continue our drive for cost efficiency, we'll also keep vigorously promoting our three other pivotal investment principles

  • Goals. Create clear, appropriate investment goals.
  • Balance. Develop a suitable asset allocation using broadly diversified funds.
  • Discipline. Maintain perspective and long-term discipline.

Today, these tenets are more relevant than ever. We're convinced that as investors increasingly adopt low-cost portfolios, focusing on goals, balance and discipline could make the difference between achieving financial objectives and falling short.

Of course, there's nothing new about our philosophy. And it seems simple enough. But unfortunately we all have built-in behavioural biases that can make it hard to stick to a plan. We might, for example, allow natural inertia to keep us from rebalancing our portfolios to manage risk, or we may become too wedded to an opinion or approach.

Lessons from the last crisis

Although it can be difficult at times to follow proven investing principles, it's not impossible, even under the most challenging circumstances.

During the global financial crisis of 2008–2009, various media outlets asked me whether our investors were pulling out of the market and running for the hills. The reality was, we didn't see that at Vanguard. Our clients were certainly nervous, and they contacted us more often. But for the most part, they didn't engage in the excessive, panicked trading that can be so destructive to building wealth. Those who relied on financial advisers who follow our philosophy were wisely counselled to stay the course.

It's not different this time

Today, nearly a decade after the crisis, the world seems different. Market indices in many countries recently hit all-time highs. With the wind at their backs and the increasing availability of low-cost funds, investors may be tempted to ask, "What could go wrong?"

The answer is "a lot”. Performance-chasing and market-timing won't be any more effective with low-cost funds than they are with high-cost funds.

Whether markets are sunny or stormy, investors need to stick to their investment plans, maintain balanced and diversified portfolios and think long-term.

We strive to help investors follow the principles that lead to enduring success. I'd like to think that will be the real "Vanguard effect”.

Further reading:

Solving the cost and quality paradox

Why Vanguard?

Important information:

This article is designed for use by, and is directed only at, persons resident in the UK.

This article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. This article does not constitute legal, tax, or investment advice. You must not, therefore, rely on this article when making investment decisions.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The opinions expressed in this article are those of the individual author and may not be representative of Vanguard Asset Management, Ltd.

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