Download The Vanguard Principles for Investing Success

The Vanguard Philosophy and its Principles for Investing Success
Jim Cosgrove
San Jose Bogleheads
May 28, 2015
The Vanguard Principles for Investing Success
https://personal.vanguard.com/us/insights/investingprinciples
All investment management companies have a core philosophy. Vanguard is no different. The
overarching theme at Vanguard is to focus on those things within your control.
In "The Vanguard Experiment: John Bogle's Quest to Transform the Mutual Fund Industry"
(1996), biographer Robert Slater describes Bogle's life as "evolutionary, iconoclastic and
uncompromisingly committed to his founding principles of putting the interests of the investor
first and constructively criticizing the fund industry for practices that run counter to low-cost,
client-oriented mutual fund investing."
Investment Style
In simple terms, Jack Bogle's investing philosophy advocates capturing market returns by
investing in broad-based index mutual funds that are characterized as no-load, low-cost, lowturnover and passively managed.
He has consistently recommended that individual investors focus on the following themes:
 Keeping it simple.
 Minimizing expenses
 Having a long-term investment horizon
 Avoiding emotion-based decisions
 Index investing as an appropriate strategy for individual investors
Ref: http://www.investopedia.com/university/greatest/johnbogle.asp#ixzz3bHYfyRk5
These four principles have been intrinsic to Vanguard since its inception; they define its culture.
As such, they are enduring principles that shape and guide the investment decisions we help our
clients make.
1. Goals:
Create clear, appropriate investment goals
An appropriate investment goal should be measureable and attainable. Success should not
depend upon outsize investment returns, nor upon impractical saving or spending
requirements.
Q: Do you have a written financial plan?
2. Balance:
Develop a suitable asset allocation
A sound investment strategy starts with an asset allocation suitable for the portfolio's
objective. The allocation should be built upon reasonable expectations for risk and returns,
and should use diversified investments to avoid exposure to unnecessary risks.
Q: Do you have a written asset allocation policy that includes (or not) a rebalancing process?
3. Cost:
Minimize cost
Markets are unpredictable. Costs are forever. The lower your costs, the greater your share of
an investment's return. Lower-cost investments have tended to outperform higher-costalternatives. Manage for tax efficiency. You can't control the markets, but you can control
the bite of costs and taxes.
Q: What are your investment costs? How do you manage them?
Q: How do you manage investment related taxes?
4. Discipline:
Maintain perspective and long-term discipline
Investing can provoke strong emotions. In the face of market turmoil, some investors may
find themselves making impulsive decisions or becoming paralyzed and unable to implement
an investment strategy or rebalance a portfolio. Discipline and perspective help investors stay
committed to their long-term investment goals through periods of market uncertainty.
Q: What do you do to minimize the effect of emotions in your financial life and “stay the
course?
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Principles for Investing Success Pre-Test
Mark each item T (true) or F (false).
_____ 1. Most investment companies have a core philosophy.
_____ 2. Vanguard’s single core philosophy is to be the low-cost provider of investments.
_____ 3. Vanguard’s philosophy is rooted in three core principles-- the Bogle Trinity.
_____ 4. An appropriate investment goal is measurable, attainable and unchanging.
_____ 5. Somewhere along the way, investors need to hit a home run.
_____ 6. A person’s asset allocation policy should change when markets go off the rails, like in
2007-09.
_____ 7. Rebalancing is a flawed concept because it reduces portfolio returns.
_____ 8. A portfolio’s investments should be concentrated in the most promising asset classes.
_____ 9. Lower cost investments are not very good; you get what you pay for.
_____ 10. Investment costs are uncontrollable.
_____ 11. Market timing is a reliable long-run strategy to earn above average returns.
_____ 12. Taxes are controllable and can be eliminated.
_____ 13. Investing can easily be done without interfering emotions.
_____ 14. In down markets, Vanguard’s index funds will fall even farther than their benchmark
indexes.
_____ 15. The Fed controls the stock market.
_____ 16. An investment firm’s business form (public, private, mutual, partnership) has a
material influence on its product and service pricing.
_____ 17. Most people sitting in this room probably own Apple, Exxon, Microsoft, Google, and
Johnson & Johnson.
_____ 18. Engaging with a financial planner can be helpful.
_____ 19. There are some really good actively managed investments.
_____ 20. Bogleheads is a cult.
Key Research
Incredible Shrinking Alpha
https://www.kitces.com/blog/the-incredible-shrinking-alpha-what-was-once-alpha-is-now-five-factorbeta/
In his now-famous 1991 paper, “The Arithmetic of Active Management”, Bill Sharpe noted that active
management in the aggregate is a zero-sum game.
1992 paper “The Cross-Section of Expected Stock Returns” by Fama and French, who found that their
three-factor model
Mark Carhart’s 1997 study “On Persistence in Mutual Fund Performance” found a fourth factor of
momentum (measured as the average return of the top 30% of [positive] momentum stocks minus the
average return of the bottom 30% of [negative] momentum stocks), which in turn reveals that some
outperforming managers were taking advantage of a momentum effect that, again, could have been
replicated and invested passively.
Alpha is the outperformance an investor seeks over what could have been achieved by simply owning
the underlying market. After costs, alpha is exceedingly rare, and even when realized in one time frame,
is rarely duplicated in another. Further, expecting it a priori is also rare.
Selected Investment Company Philosophies
Our goal is to make financial expertise broadly accessible and effective in helping people live the lives
they want.
Fidelity (private)
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"All of us come to work every day focused on our purpose: to help everyone be financially fit.”
Schwab (Public)
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We work one-on-one with clients to help them put more within reach.
Ameriprise (Public)
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Our overarching theme is to focus on those things within your control.
Vanguard (Mutual)
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We think differently about investing and push the frontiers of innovation. We see markets as an ally and
seek the ways they compensate investors.
DFA (Private)
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We focus on you – the long-term individual investor.
Our investment philosophy emphasizes quality and diversification.
We want to understand why you're investing.
Edward Jones
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We seek to inspire confidence with thoughtful, disciplined decision-making by principled associates who
are committed to helping clients achieve long-term growth.
T Rowe Price