Retiring Vanguard CIO Gus Sauter Looks Back

December 21, 2012

IU: Shifting gears just a bit here, Gus, can you kind of give us your core investment philosophy?

Sauter: There are three cornerstones to my beliefs, and I think Vanguard’s beliefs as well. The first is to think long-term, to establish a strategic plan and then stick with it. And particularly stick with it when it’s most difficult to do so, because that’s when it matters most. In 1999 people had a tendency to become overly aggressive, to abandon a long-term plan and throw caution to the wind, just at the point in time where you shouldn’t be throwing caution to the wind.

And then, again, in 2009, too many people abandoned their long-term plan and reduced their exposure to risky assets. And, just at a point in time where you wanted that exposure. So what we’ve observed is that investors that don’t stick with their plan invariably hurt themselves. They get out of the market just at or near the bottom and they get in at or near the peak. You have to break that cycle of behavioral mistake. The way to do that is just ignore the noise, think long-term, and establish your plan based on long-term expectations.

The second principle is to maintain broad diversification. Too frequently, investors try to focus on the segment of the market that they think will outperform. But the attempt to outperform also provides ways to underperform. That’s a difficult game. If you're on the right side, you can outperform, but most investors are on the wrong side, and therefore underperform.

The third principle is maintaining exposure to low cost investments. That may sound a little self-serving coming from Vanguard. But, you know, quite obviously, all else being equal; the lower cost investment will outperform the higher cost investment.

IU: Where do you stand regarding John Bogle’s vehement views about promiscuous and deleterious trading that ETFs will tempt people into?

Sauter: Well, Jack and I have opposing views on this. And I think we’ve agreed to disagree. Our investment strategy group has done some research on our investors that by ETFs through our brokerage service to determine if they are higher turnover investors. We’ve found that essentially, they're not, and that they're still predominantly long-term investors. I will confess that all of my recent investments over the last probably five or six years have gone into our ETF share class. I don’t think that makes me a market timer just because I've gone into that share class. It’s just an easy way for me to invest in our funds.


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