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Taking stock: Wrapping up our conversation with Bill McNabb

August 12, 2014 recently sat down with Vanguard Chairman and CEO Bill McNabb for a wide-ranging conversation on the financial markets, the economy, and the investment management business.

This is the second of our two-part interview. Read part one »

What do you see as the biggest threat right now to people saving for retirement?

Bill McNabbBy and large, Americans are not saving enough for retirement. That means individuals need to consider either working longer or increasing their savings rate in their 401(k) plans and IRAs in order to give themselves a better chance for a financially secure retirement.

Across the mutual fund industry, the average savings rate is at about 10%. We recommend investors save 12% to 15% of their annual income, including any matching contributions they get from their employers. In fact, given the expectations for lower returns over the next decade and the fact that life expectancy rates are on the rise, a savings rate closer to 15% is probably more appropriate.

Of course, I realize saving that much isn't possible for everyone—especially those who are just starting out. With bills to pay, student loan debt, and other near-term financial goals, the idea of putting money aside for retirement may seem like something that can be put on the back burner. It needs to be moved to the front burner. Starting a savings program early is really important. Even if you can't save the full 12%–15% right now, save what you can and gradually build up. If your 401(k) offers automatic yearly increases, take advantage of that, as it can boost your chance of accumulating a sufficient nest egg for retirement.

You might also consider a traditional IRA or Roth IRA. They are two tax-friendly ways to save, and both can help you take advantage of the power of compounding. The earlier you start, the better. In the end, a dollar saved when you're 20 years old can amount to ten times as much as a dollar you contribute at age 55.

We're a little past the midyear mark. Is this a good point for investors to make changes to their portfolios?

Given the strong performance in the stock market this year, you might find that your allocation to stocks is above your target. If that's the case, it may be a good time to rebalance. While we say that a good rule of thumb is to rebalance at least once a year, it's really most important when your portfolio has moved about five percentage points away from your target allocation.

The idea is to make sure your portfolio is aligned with your tolerance for risk. You want to avoid taking on more risk than you intend—for example, by having too high an allocation to stocks just as the equity market has a sudden downturn.

It can be a difficult notion to accept—the idea that you should sell stocks and buy bonds when the stock market is doing well. But the concept of rebalancing is about maintaining the risk exposure you're comfortable with, not about trying to time the market. We believe that rebalancing is a key practice to achieving long-term investment success.

Investors are more cost-conscious than ever, and price competition in the mutual fund industry is fierce. Do you worry about Vanguard's position as the leading low-cost provider?

Vanguard is a low-cost provider, and we will remain a low-cost provider. But low costs are only part of what we deliver to our clients.

We take just as much pride in the quality of the service and the investments we provide. Internally, we spend considerable time talking about the importance of accepting paradox, because it's fundamental to understanding who we are as a company. In order to accomplish our mission, to give investors the best chance for investment success, we must be both the lowest-cost and the highest-quality provider. It takes both. Otherwise, we'd just be a discount shop.

Let's give consumers some credit too. As you noted, they understand the importance of low costs, and they have gravitated to low-cost funds. And the really discerning consumer recognizes that Vanguard is an all-the-time, across-the-board cost leader. In other words, we are not offering low costs on a subset of offerings or trying to lure investors with loss-leader products. But if we "inspire" other companies to follow our low-cost example—even selectively—that's fine too. Lower prices are good for investors.

Can you speak about some of the ways Vanguard is improving the services it offers?

Sure. We are investing a great deal to improve the overall level of our service and what we call the "client experience." A couple of big examples come to mind.

We just started to roll out a new platform that lets clients upgrade their accounts to an all-in-one brokerage account. This provides much greater flexibility and simplicity. In a single account, clients can hold Vanguard mutual funds and ETFs, as well as stocks, bonds, options, CDs, and even non-Vanguard funds. They can sell securities and use the proceeds to immediately purchase a mutual fund. Additionally, tax filing will be much simpler because all of the account statements will be consolidated into a single form.

We're also working on a new offering called Vanguard Personal Advisor Services®. Over the years, clients have told us they would like more help with financial planning and investment decisions. Personal Advisor will provide an affordable, personalized financial plan and ongoing portfolio management. Clients will have a relationship with a Vanguard advisor to monitor their plan and address any concerns. We expect this service to be available broadly to all clients in the next 12 to 18 months.


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