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Our investment policies: Long-term clients' interests come first

February 20, 2014

Can rules be both a bother and a blessing?

As a Vanguard shareholder, it's possible you've found yourself at odds with one of our investment policies. Although we certainly regret any inconvenience this might have caused, we maintain strict rules for a very good reason: "These policies are designed to protect the interests of long-term shareholders," said Martin Kleppe, a senior manager in Vanguard's Portfolio Review Department.

Martin KleppeHere's a look at some of our key policies and how they benefit our long-term clients.

Closing time

Vanguard's history of temporarily closing actively managed funds to new investments goes back to the 1980s. We've done this for two basic reasons: to stay within capacity limits and to avoid "hot" money.

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All actively managed funds have capacity limits, meaning they can reach a size at which it is difficult for the advisor to invest new money in productive ways while still adhering to the fund's mandate. "Hot money" is a common, and undesirable, source of pressure on fund capacity.

In a typical scenario, a fund delivers outstanding performance over a short time, attracting torrents of cash from investors who anticipate that unrealistically high returns will persist. History shows that money arriving shortly after a sharp rise in returns is just as likely to depart once returns cool down.

A fund closure can frustrate prospective investors, and it's not a step we take lightly, but it can be the most effective way to protect the interests of existing shareholders.

Focus on decades, not days

Vanguard advocates a long-term investing approach. We prefer to safeguard our long-term shareholders from subsidizing frequent transaction activity by others.

Our frequent-trading policy restricts fund investors from making rapid out-and-back round trips. It prohibits shareholders who redeem or exchange any amount out of a Vanguard mutual fund from purchasing or exchanging, by telephone or online, back into the same fund for 60 calendar days. The rule is designed to ensure that investors think long-term while still allowing them to effectively manage their assets.

Money market funds and most short-term bond funds are excluded from the policy, and redemptions are always allowed. (Exchange-traded fund shares, or ETFs, are unaffected as these are traded through brokerages.)

A handful of our more than 180 funds—those that operate in markets with high transaction costs—also have purchase or redemption fees or both. These fees are paid into the funds, not to Vanguard, and are generally intended to protect the majority of shareholders from absorbing the costs of a few.

Thanks, but no thanks

Even for funds that aren't closed, Vanguard sometimes declines investments.

Each fund has transaction limits. If a purchase request exceeds a limit, it will be reviewed by either the fund manager or the Portfolio Review Department. The investment's timeframe determines its acceptance.

"The shareholders we have on board are more important than those who have not yet invested with us," Mr. Kleppe said.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • 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.
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