We recently completed the latest round of expense ratio changes for our U.S.-based funds. We’re proud to report the total estimated savings for our investors during the six-month period (that ended May 2017) was more than $300 million—another Vanguard record.1
That’s a remarkable amount, but it’s also business as usual at Vanguard. One of the benefits of our unique client-owned structure is that it allows us to return profits to our fund shareholders in the form of lower expense ratios, and we’ve been doing just that for more than 40 years.2 I’m humbled to say that we’ve become so synonymous with driving down costs that when other investment companies lower their fees, the financial press often refers to it as the “Vanguard Effect®.”
High costs still persist in some areas of the industry. But the good news is that our 40-year campaign to lower costs has been so successful, it has inspired other investment companies to follow suit. Some fund expenses are now near zero—not just at Vanguard, but at other investment companies as well.
Low costs are only the beginning
Minimizing cost is crucial to achieving investment success, but it’s not our only linchpin investment principle. We encourage you to focus on what you can control:
- Goals. Create clear, appropriate investment goals.
- Balance. Develop a suitable asset allocation using broadly diversified funds.
- Discipline. Maintain perspective and long-term discipline.
Adopting a low-cost portfolio, focusing on your goals, developing balance, and maintaining discipline could be the difference between achieving your financial objectives and falling short.
Our philosophy is based on simple principles that have been around as long as we have. It’s a solid plan for achieving long-term success, but unfortunately, even the best-laid plans can be hard to stick to. We might, for example, allow natural inertia to keep us from rebalancing our portfolios to control risk, or we may become too attached to an opinion or approach.
It’s not different this time
It’s not always easy to follow a disciplined investment approach, but it’s not impossible either. And if any investor can resist the urge to run for the hills during a financial crisis, I’m convinced it’s a Vanguard investor.
During the financial crisis of 2008–2009, Vanguard clients were understandably nervous, and they contacted us more often. But for the most part, they didn’t engage in excessive, panicked trading. They stayed the course.
Today, nearly a decade after the global financial crisis, the world seems very different. Market indexes recently hit a series of all-time highs. With the wind at your back and the increasing availability of low-cost funds, you 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 versus high-cost funds.
Whether markets are sunny or stormy, the keys to achieving success endure: Stick to your investment plan, maintain a balanced and diversified portfolio, and think long-term. We strive to help investors follow these principles and reach their goals. I’d like to think that will be the real Vanguard Effect.
1 This figure represents cumulative net savings from expense ratio changes for all Vanguard fund share classes announced from December 2016 through May 2017. The estimated savings is the difference between prior and current expense ratios multiplied by average assets under management (AUM). Average AUM is based on averaging one month’s daily average assets over the 12 months of each fund’s fiscal year.
2 Vanguard is client-owned. As a client-owner, you own the funds that own Vanguard.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.