September 19, 2008
Vanguard CEO offers perspective on challenging times
Over the last few days, we've seen rapid and profound changes to the financial system, with several major firms facing a financial crisis that's led to extraordinary intervention by the federal government. These historic developments have been accompanied by large swings in the market. In an interview, Vanguard Chief Executive Officer Bill McNabb discusses the recent volatility and how Vanguard investors have responded. He also explains how Vanguard is well-positioned to meet the challenges of the current environment.
We've seen a lot of volatility in the markets. What should investors be doing?
If you're an investor with a long-term time horizon and a balanced and diversified portfolio, the smartest "move" to make right now is probably to do nothing. It's important to have an investment plan—and just as important to be able to stick to that plan during good times and bad. If your goals, circumstances, or reasons for buying a fund haven't changed, then you probably shouldn't make changes to your portfolio.
There's no question—from an emotional standpoint, "doing nothing" can be difficult. Lately, it seems like the major indexes rise or fall a few percentage points—or more—almost every day. And we've seen some large and long-standing financial institutions collapse, get sold, or get rescued by the federal government.
But historically our system is remarkably resilient, and the regulators and policy-makers are very much involved in finding ways to address issues such as liquidity as the markets adjust. I'm confident that the financial system will stabilize at some point, and that process may well be under way now.
But history teaches us that selling in a panic—or letting your emotions drive your investment decisions—is often a recipe for disappointment.
Can you put the recent market turbulence in historical context?
While this subprime downturn has been a sort of protracted decline over the course of the past year or so, periods like the past couple of weeks still conjure some memories for me of the way people felt during and after the stock market crash of October 1987, when the market fell about 23% in a single day.
I was at Vanguard on that day and the days that followed. And so were many of my colleagues. We were on the phones, talking to clients about their concerns, answering questions. To many people, it felt like the financial markets would never recover.
It's important to remember that that crash—the largest single-day drop in stock market history—now barely even registers on the stock charts when you look at it 21 years later.
It's easier said than done, but right now, that's the kind of long-term perspective that can help investors get through this rocky period.
What's your take on the response from regulators and policy-makers?
Just this morning, the regulators released a number of initiatives to help stabilize and improve the markets. The details are very sketchy right now so it's hard to say for certain, but we're encouraged. We are studying these new initiatives and hopefully we'll have something to report back to all of our investors fairly shortly.
When will things start looking up?
That's a hard question to answer. Let's be frank: Investors are nervous. The stock market is jittery. And the economy is in a fragile state. The resolution to the situation probably won't happen overnight. But we will get through it.
The financial markets have hit rough patches before. We're in a rough patch right now. And we'll see rough patches in the future.
We get through them. We move on. The markets adjust.
And remember, if you're a regular investor during this choppy period, through your 401(k) plan or your IRA, you might find a little bit of solace in knowing that at least some of the shares you're buying when the market is down are at a lower price.
How are Vanguard investors reacting?
What we see is that most of our clients really are investors. What I mean by that is that they've got a long-term outlook and they know that markets fluctuate. By and large, they believe, as we do, that you want to have diversified portfolios. By far the vast majority of clients have not reacted to the market turbulence. It hasn't been totally quiet. People are concerned, and that's understandable. We certainly have been having more conversations in recent days, helping clients think through their decisions. But by and large, Vanguard investors tend to be very levelheaded.
Should investors be concerned about their money market funds?
Vanguard money market funds remain among the most conservative, and their quality is very, very high. We know that when you invest in a money market fund, your primary focus is safeguarding your money while allowing it to earn some interest. Simply put, Vanguard funds don't take unnecessary risks—or hidden risks— with our shareholders' money.
Our very low expense ratios mean that we don't have to invest in riskier securities to offer a competitive yield. And our portfolio managers understand the importance of liquidity. As of August 31, our Prime Money Market Fund, the largest in our lineup, had half of its assets in U.S. Treasury or federal agency securities.
We believe that the steps we've taken since the beginning of the subprime mortgage crisis a year-and-a-half ago to protect shareholders' assets continue to pay off. We are highly confident that the portfolios are well-positioned to withstand the current crisis of confidence.
What about other types of funds?
Vanguard stock and bond fund managers remain highly vigilant. We're monitoring market developments closely. But we haven't changed our approach to investing.
Our index funds still seek to track the same indexes. The managers of our actively managed stock and bond funds have not changed their strategies.
Of course, all investments carry some level of risk. When the broad stock and bond markets experience declines, you can expect funds that invest in those markets to experience declines.
Some shareholders have asked how the recent high-profile bankruptcies and collapses have affected their funds. Well, most of our stock and bond funds are broadly diversified, holding hundreds or even thousands of different securities. So problems with one company—or even a handful of companies—would represent a very small percentage of overall fund assets. But clearly the failures of these companies have had a modestly negative effect on several stock portfolios—at least for the short term—just as they've had a negative effect on the overall stock market. I don't want to suggest there's been no pain.
Should investors be concerned about the health of Vanguard or Vanguard funds?
Vanguard is in great shape. We're different in many ways from the financial firms that have been experiencing trouble.
First of all—as a firm, our business is balanced and diversified. About half of our business comes from retirement plan sponsors and financial advisors, and the other half from individual investors.
And those clients are invested in a broad mix of stocks, bonds, and money market holdings. That means Vanguard's success is not pegged to the success—or struggles—of any one segment of the financial markets.
Secondly, our business is solely focused on providing investments—primarily mutual funds—to our clients. It does not involve making risky or highly leveraged loans. It is not dependent on the health of the subprime mortgage market, nor is it dependent on the health of bond insurers. Vanguard as a firm is not dependent on the health of any one other firm or industry. Nor does Vanguard use borrowed money to "lever up" its stock or bond or money market portfolios.
And it's important to note that the financial results for each fund stem from each fund's holdings—the fund's assets are the securities it holds.
We are all investors in the markets. And of course it's painful to watch firms struggle, and for our investments to struggle along with them. But at Vanguard, we don't let the near-term bumps in the road throw us off our long-term path, and neither should you.
Thank you for your continued trust, and thank you for investing with Vanguard.
Notes
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- Mutual funds are subject to market risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.
- Past performance is no guarantee of future returns.
- Diversification does not ensure a profit or protect against a loss in a declining market.
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