Webcast replay: A look ahead to 2020

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TRANSCRIPT

Rebecca Katz: Hi, I’m Rebecca Katz, and you’re watching a replay of our recent webcast, “A look ahead to 2020.” We hope you enjoy it.

Well good evening, Happy New Year, and welcome to this live Vanguard webcast. I’m Rebecca Katz. If you’re a new member of the Vanguard community and our webcasts, we’re so glad to have you here. And for you webcast regulars, welcome back, and a special welcome to those of you joining us on Facebook. Lots of love to you.

It’s that time of year when we get to hear what’s on the minds of Vanguard’s CEO, Tim Buckley, and our Chief Investment Officer, Greg Davis. So tonight I’m going to talk with Tim and Greg about their overall outlook for the markets and the economy, and we’ll discuss some of the things that you, our clients, can expect from Vanguard in the year ahead.

But as always, we want to address what’s on your minds and with nearly 50,000 people registered for this broadcast, we have a lot of questions to cover. So if you hear something you’d like us to clarify or explore a bit further, keep sending questions our way, and we’re going to try to pick as many representative ones as we can.

Now, before we get started, a few quick housekeeping notes. If you need to access technical help, it’s available by selecting that little blue icon on the left of your screen. And you can learn more about Vanguard services by clicking on the green Resource List button on the far right of the player. On there you can download a copy of the Vanguard economic and market outlook for 2020 which was just published a few weeks ago. We’re going to talk about that tonight, and you can also view previous webcast replays.

So with that, let’s turn to our guests tonight, Tim Buckley and Greg Davis. Welcome gentlemen.

Greg Davis: Thank you.

Tim Buckley: Our pleasure to be here.

Rebecca Katz: Great. And since we are talking about outlooks tonight, you know I always like to start taking the pulse of our viewing audience and find out what their outlook is.

So on your screen you should see our first poll question. It’s really just, “Which describes your outlook for the financial markets in 2020?” Are you optimistic, pessimistic, or a bit uncertain? So vote now, and we will just come back in a few moments with your responses.

But while we’re waiting for that, I think we’re going to just jump right in and get to as many questions as we can tonight. Okay?

Greg Davis: Sounds good.

Tim Buckley: Let’s do it. 50,000 questions, we better start soon.

Rebecca Katz: There are a lot. Hopefully no one gets offended if we don’t answer their question. We’re trying our best to represent everyone.

But the first question is really obvious. It’s from Brian in Seattle, and Brian said he’d love to understand Vanguard’s outlooks on equity and the bond markets for 2020.

So, Greg, as CIO, why don’t we start with you.

Greg Davis: Awesome. So, thank you, Brian, for the question. You know, when we think about the equity markets and the bond markets in 2020, the way we would describe it is, look, we’ve been in an environment where volatility’s been relatively low in the grand scheme of things. We’ve been in an environment where the equity market returns have been outsize, is a good way to describe it, and that also has some impact in terms of valuation.

So when we think about where valuations are in the equity markets, we view them as being stretched, relative to what we see in the international equity markets where they have a more moderate level of valuations. When it comes to bonds, we’ve seen a pretty significant rally over the last couple of years when it comes to the bond market. So when we think about the returns in bonds over the next couple years, we’re expecting returns in the overall bond market to be somewhere around 2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} to 2.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} over the next decade. When we look at U.S. equities, we’re expecting returns in that space to be somewhere slightly under 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, but we do think there’s more value in the international equity space where we’re expecting returns on an annualized basis to be closer to 7.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} or so.

Rebecca Katz: Okay, great.

Tim Buckley: So, Greg, I’m going to jump in here. Typically our clients, while they hold a nice percent international, they tend to be lighter than what we would like.

Greg Davis: Absolutely.

Tim Buckley: This is an added call to not forget about international, international equities. So as they’re looking at their portfolios and they’re trying to rebalance it, hey, maybe it’s time to really look hard at those international equities.

Greg Davis: That’s very true, and just to add to that point, Tim, when you look at what’s happened over the last 5 years, if you happen to have had an allocation of 50/50, domestic versus international, because of the outsize returns in the domestic equity market, that allocation would be now up to 55{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} to45{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}. So you’re offsides a bit, so the importance of rebalancing actually comes through.

Tim Buckley: Yes, that’s for sure.

Rebecca Katz: That’s important. I will say 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} returns in the equity market is going to feel a lot different for people than what we’ve been experiencing over recent years.

Tim Buckley: Yes, it’s nice to get a 30{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} under your belt that we had the past year.

Greg Davis: But it’s not realistic to expect that going forward.

Tim Buckley: Yes.

Rebecca Katz: Okay, we’ll have to reset our expectations a little bit. Well, we asked whether people were glass half-full, glass half-empty. As I suspected, it’s mostly uncertain. So about 52{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of our viewing audience said that they were uncertain. The other third, about 38{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} optimistic, so that’s good. And just a few pessimists watching tonight.

But Andrea in Mechanicsburg, Pennsylvania, asked, “Are we close to recession or will we just see a correction?” So in thinking about, that’s a little bit of both an economic question and a financial markets question, but how do we get to that 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}? Is it through something rocky or …?

Tim Buckley: Yes. Greg, feel free to jump in. I’ll take this one, and I’ll play off that uncertainty. If you actually look at our economic outlook, it talks about an age of uncertainty. And the question of are we headed towards a recession, look, we would say that our base case isn’t recession, it’s for slower growth. Now we haven’t actually had blistering economic growth over the past decade. It’s been slow and steady. It’s been 2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} growth each and every year, a little bit better last year, Greg. But we expect to slow down below that, to say 1{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} growth. And that would be consistent of developed markets in Europe, the like, and for China to slow down, to dip below that 6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} growth, to dip below 5.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}.

And why are we seeing this slowdown in growth? It is because of the uncertainty. When we saw uncertainty in the past, we’re talking about an uncertainty tax. What that simply means is when policy uncertainty is high, and, Greg, it’s probably as high as it’s been in the past decade, when people are uncertain about which way is everything going, what’s going to happen with Brexit, what’s going to happen with trade wars, what about tensions in Iran, what happens is businesses don’t invest. And if they don’t invest going forward, it’s tough to grow, and so you get slower growth. And that’s where we get, we come back in saying, “We expect slower growth than we’ve had in the past.” Now just because you’re not having a recession, that doesn’t mean you can’t have a pullback in the markets.

Greg Davis: Absolutely.

Tim Buckley: Right, and pullback in the markets, we talk about this all the time. It has a lot to do with where valuations are. And Greg described them as stretched. So when you’re at high valuations, you have to worry that there could be a pullback in the market. In other words, as prices continue to go up, but earnings of the underlying companies are not following, they’re actually being revised downward, you get a little bit of a disconnect and you can get a pullback and a reset of market expectations and the markets can tumble down a little bit.

In fact, Greg, I think your team has the odds of that about 50/50, which in my book’s a pretty useless stat. Right, it’s a coin flip of the market. “Hey, it could go up; it could go down.”

Rebecca Katz: For a bear market?

Tim Buckley: For a pullback, say a 10{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} pullback in the market, a 50/50 chance. Now what we don’t want people to do is, don’t go and act on that. Right, that is not good information to act on. The whole reason you have a diversified portfolio is because of the chance of a pullback in the market, and that’s why you want to keep a long-term view. Don’t start market-timing. Most people that do that, they live to regret it.

Greg Davis: Absolutely, and the other thing, just to add on to Tim’s point there, is that the importance of a balanced portfolio, it gives you dry powder so when you do have a market downturn, it gives you an opportunity to rebalance into an asset class that has gotten cheaper over time. So that’s a really important portion of having a balanced portfolio.

Rebecca Katz: Yes, I know a lot of us during the financial crisis were buying like crazy because stocks were on sale, and so you were able to rebalance.

Greg Davis: But if you’re 100{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} in stocks, it’s hard to rebalance because you rode it all the way down, right?

Rebecca Katz: That’s true.

Tim Buckley: Are you speaking from experience?

Greg Davis: I am.

Rebecca Katz: So, you know, obviously, a lot of this uncertainty is driven by geopolitical risks, other things that are on the horizon. So Steven in Colorado Springs said, “First of all, one of the big question marks is the elections coming up here in the U.S. in 2020. So what’s your opinion on how the 2020 elections may affect the markets?”

We’ve done a little bit of work over time on how elections affect markets. So, Greg, do you want to address that because your team’s looked at it?

Greg Davis: Sure, sure. So the best way to describe that is a pivotal election year like this definitely increases the level of uncertainty that we see when it comes to businesses, when it comes to consumers, and households. So that’s just another dimension that’s being added to this uncertainty tax that Tim was referencing.

But the data that our team has looked at, that if you go back over the last 150 years, it doesn’t really matter who’s actually in office. The returns are not statistically significant, whether or not it’s a Democrat or a Republican that’s actually in the Oval Office.

So for most investors, yes, there’s a lot of headlines. There’s news that happens and some uncertainty. You might see an increase in volatility, but people still need to be focused on what their long-term objectives and goals are and invest accordingly.

Rebecca Katz: I mean we talked a little bit about businesses’ spending and uncertainty and causing business to perhaps not build factories and things like that. Are we seeing the same in the consumer space? Are consumers, because of this uncertainty that our investors are reflecting, not spending as much?

Greg Davis: Well consumers are still spending, so that’s the good news. The challenge you’re running into is the fact that they’re spending less than they were just a year ago because the uncertainty continues to rise. So they’re spending but not at the same level they were just a year ago, and that doesn’t look good for the economy overall.

Tim Buckley: I’ll put one thing on the consumer, Greg. I’ve talked with your team extensively on this, that the household balance sheet though, so even if we were to get in tough times, the consumer’s in much better shape than they were in ’07.

Rebecca Katz: ’07.

Greg Davis: Absolutely, from a leverage standpoint.

Tim Buckley: From a leverage standpoint. So we don’t have the fears that we would have had back a decade ago.

Rebecca Katz: That’s good. And we’re going to come back to talking about leverage a little bit when we talk about the domestic economy and the debt ceilings and things like that.

So our next question is from David, and it’s really building on some of this uncertainty. And David’s in Potomac, Maryland, and says, “Should investors consider making adjustments to portfolios based around this uncertainty?” And not just on the elections but some of the trade issues with China, maybe some of what’s going on in Iran? Obviously, it sounds like you’re saying, “Not necessarily.”

Greg Davis: You know, I think it’s a good time, if you have greater concerns about what’s happening in the markets, really taking a look at the overall amount of risk that you want to take in your portfolio and your comfort level in looking at your long-term investment goals. And is your portfolio structured in the right way that if there is uncertainty, if there’s greater volatility, that you’re comfortable with how the portfolio’s going to perform during that period of time. And again, if you’ve been investing primarily in the U.S. equity markets and you’re offsides relative to international, again, this is a good time to rebalance that exposure and get it more in line with your long-term investment risk tolerance and goals.

Tim Buckley: And, Greg, if I can’t handle it, I’m too stressed out about it, I want to change my portfolio. I’m not saying that I am, right? You typically say only change it by a percent or two. Don’t do huge changes in your asset allocation. You will regret those. So even if you feel like you have to get more conservative, don’t do wholesale shifts. When people do that, they get burned.

Rebecca Katz: Right.

Greg Davis: It’s very difficult to make a shift like that, a major shift and get the timing right. You have to get the timing right on the way out as you’re becoming more conservative and then as you’re trying to ramp the risk back up, getting the timing right on the other side.

Rebecca Katz: Haven’t we looked at that before where we saw that really if you miss just a few days in the market, because you were a little off on your timing, you lost most of the gains?

Greg Davis: That’s correct.

Tim Buckley: You do.

Rebecca Katz: So a good forewarning.

Our next question is from Kimberly in Oakland, California. Again, another risk. We have a lot of questions on some of these risks that are in the headlines, and that’s only natural. “What affect will Brexit have on the world economy?” And I think you both have some opinions on Brexit.

Greg Davis: Look, with the Conservative party winning the election in the U.K., at least in the short run, it looks as though the risk of a hard Brexit has actually alleviated to some degree. The challenge I think we’re going to run into and the markets are going to run into is the fact that there’s still a lot of negotiations that need to happen with the EU in terms of what that agreement’s going to look like and how the policies are going to play out. So we still see there being risk in terms of lower spending, lower growth in the U.K. market. And in terms of the broader impacts, clearly, depending upon what happens there, the EU would be another region that would be more closely affected. But we need to start talking about the U.S. marketplace and the global economy. We don’t think there’s going to be a significant transfer from Europe to the broader economies.

Tim Buckley: And, Rebecca, I would say one thing about Brexit or the trade wars that we’ve gone through. They’re a reminder that everything doesn’t happen like a science experiment. It doesn’t happen as we were taught in the classroom. So when we were going through in classic economics training, you learned that global trade, well with that, the pie gets bigger for the world, for everyone. You get comparative advantage, and everything is going to grow, and people and the world will be better off.

And in theory that’s true. But what we often miss is that there are relative winners. There are even local losers along the way, and those people actually vote in many of these countries. And when they vote, the politicians will act accordingly. And that’s what you see with Brexit. That’s what you see with some of the trade tensions. And we have to recognize that markets can be emotional, both economic markets and the financial markets. There’s an element of emotion there, and they’re not predictable.

Rebecca Katz: Well, so let’s talk about that. So there’s emotion, and you’ll see volatility, but there’s also math. And we had a question that just came in from Daniel who said, “Can you explain reversion to the mean?” So there’s this idea that there may be ups and downs, we may have 30{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} stock market returns, but eventually it all comes back to the average mean. Can you talk about what does that mean, and do you expect to see that happen?

Tim Buckley: Feel free to jump in, Greg. At the end of the day when we talk about valuations, we’re talking about how much is someone willing to pay for forward earnings. And so think about that. Right now people are willing to pay a lot more for forward earnings than they have historically. The idea then is that earnings have to catch up. You’re not going to just permanently pay more for earnings going forward. The idea is those earnings have to catch up.

So reversion of the mean basically says that eventually either earnings have to catch up or the price has to come down to where earnings growth has brought those earnings. And that’s the reversion to the mean is the idea that valuation, people through time will basically pay the same price for earnings when you smooth it out over time. And you can’t get return, you shouldn’t get a long-term return just from people being willing to pay more for something. You actually want to see the underlying earnings of the companies go up.

Rebecca Katz: Okay.

Greg Davis: Exactly. And the one thing I would add is, when you look at the difference between our expectations around U.S. equity markets and the international equity markets, the biggest difference is the fact that we’re expecting multiple contraction in the U.S. market over time because they’ve been stretched relative to the other markets. And that is somewhat a reversion to the long-term mean in averages that you see in the financial markets, to Tim’s point.

Rebecca Katz: Okay, great. I mean there has been talk of, “Well, it’s different this time.” But I feel like every few years we say it’s different this time.

Tim Buckley: Yes, we’ve been at this a few decades, and we’ve heard that many times.

Rebecca Katz: All right, actually, we’re getting a lot of questions in. Because I mentioned Iran, this question just came in from Jeffrey. He said, “Cybersecurity is becoming very important in light of recent issues with Iran.” Honestly for us, it’s always been very important. What are we doing to ensure that Vanguard’s assets, our clients’ assets are protected? So, Tim, will you take that one?

Tim Buckley: Yes, sure. Cybersecurity is our biggest investment each and every year, and it’s one of those even, so there are times where everyone thinks that, well, you’ve got to have heightened awareness of cybersecurity. We always have to have that awareness. Unfortunately, we’re always under attack, so you actually have to make sure that you’re following best practices—and then some—around it. And I’ve talked about it before on this webcast, so defense and depth. The idea that you always assume that, well, whatever you’re doing, that’s been penetrated, so what’s the next barrier?

So you want to keep your firewalls, you want to keep the hygiene right there. Make sure that you’ve got them patched immediately. And if they’re breached, you want to make sure people can’t wander on your network, and so you’ve segmented that. And if they can wander on your network, make sure applications are secured. Make sure your data is encrypted, and you keep going and going, and you add measures, and add measures, and add measures. This is our largest investment each and every year, is cybersecurity, and it will remain that way. And you can never think you’re done. If you think you’re done, you’ll find out the hard way that you’re not. So we continue to invest there.

Rebecca Katz: I don’t know if some of our viewers know, but you were head of our IT group previous to becoming CEO and CIO. So I think it shows how important that is today for all companies to have their arms around.

Tim Buckley: It is. It helps me kind of think through those investments. I’ve always had a bias towards investing on the cybersecurity side.

Look, I’ve got a bias towards investing in IT period, as people will tell you.

Rebecca Katz: That’s great.

All right, another investment question. This one is from Stan in Kentucky, and it’s for you, Greg. “Should rational investors purchase bonds for their portfolio if interest rates drop to zero or go negative?” So some of this is also a little bit of a timing thing too. It’s really hard with the markets, where they are, to know when to get in.

Greg Davis: Yes, I mean just think about, why do you invest in bonds? A big part of it is to provide balance and diversification in a portfolio. And even in an environment that we’ve seen in some of the international markets where bond yields have been negative and continue to be negative, they still provide diversifying properties.

So for a local investor in those markets, when there’s a big downturn in the equity markets, you can, in many cases, still see a negative-yielding bond that can go from negative 10 basis points to be being even more negative. So it provides you some total return, even though it started off with a negative yield associated with it.

When we think about it from a U.S. investor’s perspective, when investors are buying international bonds, we, in our portfolios, they’re 100{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} hedged back to the U.S. dollar, so that return is being translated through that hedging mechanism to actually have a positive yield, even though the underlying security actually has a negative yield associated with it.

But, again, the reason to invest in the bonds is really to provide that balance and diversification to be able to ride out a downturn that might happen in the equity market from time to time.

Rebecca Katz: Right, as we discussed before. Great. Well let’s stick with you, and let’s stick with bonds sort of as a theme a little bit. This question is from Janet, and it’s about the Fed. “The Fed’s been injecting a lot of liquidity in the market in recent months. Should investors be concerned?”

Greg Davis: Look, if you think about what the Fed is trying to do, the Fed is ultimately trying to make sure there’s the right amount of liquidity. There was a short-term disruption that happened back in, I believe it was, September, where the overnight repo market or the repurchase agreement market ultimately spiked above what the Fed is trying to target their overnight lending rate.

And so by the Fed providing more liquidity into the marketplace, it’s helping to avoid those situations where there’s short-term spikes. But it is having a very positive impact because over year-end, many of the concerns that institutional investors were having that there would be a significant spike did not occur because of the liquidity that the Fed was providing.

Rebecca Katz: Right, so this is institutional investors and banks lending money back and forth because they need cash for short-term purchases.

Greg Davis: That is correct. It’s a way for a lot of banks and other institutions to fund themselves by borrowing money by providing security that’s collateral.

Rebecca Katz: Our next question is from Jim, and Jim said, “As investment instruments are becoming more correlated, or are they becoming more correlated and, if so, how does that affect diversification strategies?” It’s interesting because during the financial crisis, we saw a lot of correlation across all different asset classes. We still seeing that and does that change our point of view on what kind of portfolios you should hold?

Greg Davis: I think, look, there’s still the significant benefits of having a portfolio that is well constructed with equities, high-quality bonds, and cash. And so, you know, again, at the end of the day, those values of diversification and the benefits of that, unless you’re talking about high-yield or very low credit quality corporate bonds, they tend to be a bit more correlated with the equity markets. But if you’re talking about U.S. Treasuries, you’re talking about money markets and cash-type instruments, that is a nice way to have a diversified portfolio that’s not going to correlate with a downturn in the equity market.

Tim Buckley: So let’s pause there for a second. Greg said something important. As long as we’re not talking about high-yield or lower-grade bonds, but a lot of investors, as rates have gotten lower, have cheated. “Oh, I still hold bonds.” Yes, they’re high-yield bonds. You’ve got junk in your portfolio. That’s going to behave more like an equity when things get rough than it will than the Treasuries you want to hold in your portfolio which will actually hold value. Actually, in time of crisis, appreciate.

Greg Davis: Appreciate in value.

Tim Buckley: And so don’t think a bond is a bond, and people will often do that. “Well, I’ll just take a little bit more risk.” No, you can be buying something wholly different.

Rebecca Katz: Are we seeing that? People reaching, trying to get more yield?

Tim Buckley: Well, in the market, yes. At Vanguard, no. So, those people watching, look, they’re the educated investors if you ask me. But we actually see institutional, like professional investors do this, where they cheat just to get a little bit more, get a little bit more return. And it’s in the market that way.

Greg Davis: Absolutely.

Rebecca Katz: Okay, it’s a concern.

Our next question is not so much, well, a little bit about the markets, but it’s from Jagdish in California who wants to know, “What is going to be new for Vanguard clients in 2020?” So, Tim, I think this one definitely falls to you.

Tim Buckley: Yes, he’s got to execute some of it too though.

Rebecca Katz: Yes, that’s true. Don’t we all?

Greg Davis: We all do, that’s absolutely true.

Tim Buckley: Look, we’ve got an exciting year planned for our clients. Right off the bat, they’ll benefit from lower expenses. You’d expect that from Vanguard. They’ll see new capabilities and new offers around advice. They’ll see a billion dollars invested in existing service and new services around improvements.

Let’s back up a little bit though, Rebecca. When we think about why are we here, what do we do? We’re here to make sure that our clients achieve financial success. Like our clients are owners, and we have one goal—to make sure that they can put their kids through college or they can achieve a great retirement. That’s what we’re here to do.

We have a nice formula for doing it, pretty simple.

Greg’s got to make sure we have the talent. He’s done this consistently, the talent, to actually deliver those returns. Fair enough?

Greg Davis: Yes.

Tim Buckley: The other thing we do is we make sure we lower our expenses year after year so that clients can keep more of their return. That’s the whole idea of a low-cost strategy. Clients keep more of their return.

Last year, I think we lowered expenses by about $150 million. I would expect to be able to do the same this year. That would be our hope, to continue to lower those expenses.

On the advice side of things, we have an advice offer out there, our (Vanguard) Personal Advisor Services®. It stands at about $150 billion, growing at 30{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} a year. For those of you that don’t really know Personal Advisor Services, it’s a full financial advice. So you’re talking about your portfolio management, your financial planning with a Certified Financial Planner™ (CFP®) professional. It’s a virtual relationship, which if you’re watching this online, you’re already comfortable with. And it costs you 0.3{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, 30 basis points, which is about a 70{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} discount from what’s out there in the marketplace.

We’re adding more and more capabilities to that, enhancing it more. We’ll also have an all-digital offer this year, called (Vanguard) Digital Advisor™. It’s in pilot now, and you’ll probably tell me I’m not supposed to talk about that yet.

Rebecca Katz: That’s okay. That’s okay.

Tim Buckley: But we’re committed to rolling it out this year, that Digital Advisor.

And our goal is that the advice here, that we lower the cost of the advice, we make it easier, more accessible, so easy to use and so affordable that even Greg starts to use it. That’s going to be our goal, actually when Greg, when our CIO’s actually signed up to do it.

Rebecca Katz: Well, I mean, you laugh about that, but we’re all around the same age, so we’re still in the accumulation mode that’s in some ways a little bit easier. But as we get closer and closer to retirement, I definitely want an advisor to help me figure that out because it has to last a long time.

Tim Buckley: Well, and they do things like, okay, what’s your tax-efficient drawdown? Simple things like, we don’t do tax loss harvesting. You have to do that. You have to look at your portfolio all the time. We’ve got jobs to worry about. And to do tax loss harvesting, well, you’ve got to look at it all the time. When you’re in retirement, you have to know, what do I draw? What vehicle do I drawdown first, in what order? You’re right, Rebecca, there’s a point where it’s like …

Rebecca Katz: Yes, IRAs and Roth IRAs and 401(k) and retail accounts and gosh.

Greg Davis: Better to outsource it to somebody who’s a professional, yes.

Tim Buckley: You’re better outsourcing it as long as you’re not paying too much. Hey, last one, and I’ll be quick on this. A billion dollars towards new services, improving our services. That could be a new mobile experience, a new 401(k) experience. Streamline transactions and experiences on the web. And, of course, we’ll continue to invest in cybersecurity as we had mentioned earlier around privacy and protecting our clients’ data.

So exciting agenda planned, and we have all intention on delivering on it, right?

Greg Davis: Yes, absolutely.

Rebecca Katz: Fantastic. You know, Greg, we’ve had questions, and since Tim alluded to it, can you talk a little bit about your team because you have made big investments, and it is really a global team, which is maybe different than when we started these webcasts a decade ago.

Greg Davis: Absolutely. So, the Investment Management Group is a team of about 460 investment professionals. We’re also complemented with a Risk Management team of about 100 professionals. And our primary trading locations are the U.S. So we have two locations, Malvern, Pennsylvania, and Scottsdale, Arizona. We also have a relatively large operation that’s based in London and another large operation that’s based in Melbourne, Australia. So it allows us to cover all the major time zones so when that we’re transacting in the equity markets, the fixed income markets, and we are buying across all these asset classes in all these markets, we have local expertise there that’s able to execute and make sure we’re getting the very best execution for our clients. And so it’s been exciting to see the growth of the team.

The other thing that I would say is just our capabilities have continued to expand, specifically on the active fixed income side where we’ve added depth and resources when it comes to emerging markets, high yield, and even global rates capabilities where we have some resources that are in London and are helping us examine those markets as well. So there’s been a lot of growth to the team over the last several years.

Rebecca Katz: Fantastic. Well, speaking of active, we have a question in from Dennis, thanks, Dennis, who says, “Is now the time to move from index funds to active fund management?” That’s a tough question to answer. It’s not really this or that, right?

Greg Davis: No, it’s really, it’s really not active versus index. It’s really about high-cost versus low-cost. And so in the end of the day, one of the things that investors have to keep in mind is the one thing they can control is cost. And the challenge that many active firms and active funds run into is the fact that when they’re trying to add value in the marketplace to their portfolios, they’re able to identify alpha, but they’re destroying the majority of it, if not all of it, by having high fees. And so we absolutely believe …

Tim Buckley: And when you say alpha for most people, that’s excess return.

Greg Davis: Excess return, exactly, the ability to outperform a benchmark. The challenge many active managers run into is they charge too much for that delivery, and ultimately that erodes any of the gain and actually puts you in a situation where you’re underperforming just an index fund because those costs are so much lower.

Tim Buckley: Yes, and maybe I’ll add onto this a little bit because it is high-cost versus low-cost, but it’s not active versus best. It’s active versus active. It’s a zero-sum game. For Greg to have his so-called alpha, his excess return, he’s got to take it from somebody else. Somebody has to underperform by that or a group has to underperform by that same amount.

And it’s really tough these days to get that. You know, if you were doing this in the ‘80s, most of the money was managed by amateurs. All you had to do was beat an amateur, someone who did this at night. Now 80{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of assets are professionally managed. That means that when you’re going to a money manager, they’re up against other professionals, which means they’re not going to have as much excess return. They better keep those fees low.

Rebecca Katz: Well and computers too you can move like this, much faster than a human being.

Greg Davis: Yes, the technology, absolutely.

Tim Buckley: So the question is, it’s always a great time for low-cost active. There’s no good time or bad time. This is a great time for low-cost active, and I would say there’s never a good time for high-cost active.

Greg Davis: Agreed.

Rebecca Katz: Or high-cost indexing to the extent …

Tim Buckley: That’s just foolish, but it does exist.

Rebecca Katz: Well, actually, I love that our viewers are moving right along with the conversation. George said, “Will artificial intelligence, AI, play a role in fund investments in the future with Vanguard?” And, Greg, I know we’re looking at that.

Tim Buckley: It already does, right

Rebecca Katz: You already are using that. You’re also using blockchain a bit. So can you talk a little bit about some of the new technologies that are helping influence investments.

Greg Davis: Yes, I’d say, you know, there’s a number of technologies that we’re looking at between machine learning, artificial intelligence. Natural language processing is also something where you have a machine that’s basically able to interpret and synthesize data that comes from earnings transcripts, other publications that happen so you can go and very concisely get to what the meaning of those reports are very, very efficiently. And then the machines can process that information and make buy and sell decisions around the holdings that we have in different industries, different sectors. Also, the Quantitative Equity team is spending time looking at the implications of suppliers and getting a good sense for what’s happening from a supply chain standpoint by looking at these earnings transcripts and that helps inform them about what’s happening in those specific industries and for some of those companies that are upstream as well.

Rebecca Katz: And just to clarify, so we have Active Fixed Income and we also have the Quantitative Equity Group which is active that they’re using these tools and techniques.

Greg Davis: The Quantitative Equity Group, yes. Correct. Yes.

Tim Buckley: Yes. I would add with AIML, what you’re typically talking about is the technologies complementing the person. That it’s not off running by itself.

Greg Davis: Correct.

Tim Buckley: We’re not in that age where that fundamental analysis is done, and it goes right through to portfolio execution. It complements the mind of the portfolio manager.

Greg Davis: Absolutely. Makes them much more efficient.

Tim Buckley: Yes.

Rebecca Katz: Sure.

Greg Davis: Because you get the volumes of information much more effectively.

Rebecca Katz: And there’s just so much more information than there ever was before.

Greg Davis: That is correct.

Tim Buckley: And we’re leveraging and doing cool things with advice with it too. I mean we’re able to risk-profile people better using AI and machine learning, and (for example) what did people that look like Greg and had his—well, not many people actually kind of were CIO of Vanguard, so there aren’t many people in that job—but if you had people with similar jobs, similar income, similar risk profiles, what would their retirement needs be? You’ve seen that before. We can use AIML to actually give better advice, and that’s what we’re already doing today.

Rebecca Katz: Great. Well, let’s shift back to Vanguard itself with a quick question. This one is from Gilbran in Georgia who says, “Do you anticipate that other financial corporations would incorporate a low-cost investment model of Vanguard as we move into the future?” Now we hear a lot of people talking about low cost, but actually adopting our model. “And if yes, does Vanguard have any ideas for adaptability to stay ahead of the curve?” And, likewise, we just got a question in from Brent asking, “How do you reduce expenses while adding more services?” So I think these things are all kind of tied together. So, Tim, I’ll let you take that one.

Tim Buckley: Yes. What’s the old saying, Rebecca? “Imitation is the sincerest form of flattery.”

Greg Davis: Form of flattery, yes.

Tim Buckley: I would like to say that people, they’re copying what we’re doing, but they’re truly not. We have a low-cost investment philosophy. People look at the success of Vanguard over the past decade and they’ll say, “It’s all because of low-cost index funds.” And so the response is, “We’ll offer a low-cost index fund.” What they don’t get is, no, it’s our philosophy—the idea of we’re actually going to allow our clients to keep more of their return. That means the costs have to be low on the index funds, they have to be low on the advice. That means when you’re in a money market, costs should be low. You should get a high-yielding money market, not a low-yielding bank account for your sweep account. Your advice, active, all those things have to be low-cost.

When you invest at Vanguard, it costs you about 9 basis points, 0.09{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, and there aren’t any other firms out there that can say that. So when you go other places, you have to think about, okay, well, this may be low-cost, but how are they making their 40{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} margin somewhere else? With our structure, you don’t have to worry about that. We operate as close to at-cost as possible because we’re owned by our clients. Our sole goal is to maximize their return.

Rebecca Katz: Right. We’re all about making money for the clients, not off the clients.

Tim Buckley: Yes. And then so the second part of it, how do we actually lower costs and offer new services? That’s scale. So as you go from 5 trillion to 6 trillion. So what we do is we make a decision every year. We have, consider it net income like other companies, for lack of a better term. And at the end of the year, what do we decide to do with that? Greg, you know this—we decide either to invest in new services that will benefit our clients, new products that they will need, or we give it back to them in the form of lower expenses. Would love to give it to them in the form of a dividend. Not allowed to do that, so we give it to them in the form of lower expenses. So it’s just how we return kind of success to our clients, our owners.

Rebecca Katz: That’s fantastic. So I have a question that I think both of you could probably answer because we all have young ones in this age group. But Ian in Sacramento, California, says, “Do we have any advice for young millennials or Gen Zers?” So I have a 15-year-old; I think that’s Gen Z. And I think you guys have young ones too.

Greg Davis: We do.

Tim Buckley: Yes.

Rebecca Katz: What are you telling them?

Greg Davis: Save early and often, right? I mean, I think, Albert Einstein had a quote that said, the idea of compound interest, it’s basically the eighth wonder of the world. Those who understand it, earn it; those who don’t, pay it. And it’s really important from the standpoint that as a young investor you have time on your side, and that compounding of those gains over time are one of the greatest things when it comes to investing. So the sooner that you can invest, start putting money aside, that’s just going to compound and compound over time and you’re going to earn returns on the returns that you’ve accumulated. And it’s a phenomenal thing for investors to take hold of when they’re young.

Tim Buckley: Yes. Look, I’ve got from 18 down to 12. Not fully in the workforce at this point. Twelve-year-old’s got some great savings habits. But, look, I’ve got nephews, nieces and two nephews that are new to the workforce. And I’m pretty sure one’s watching right now, so I’ll give Ty some advice. Like one thing when you’re out there in the workforce the tempting thing that we always see is credit cards. Credit cards are evil.

Rebecca Katz: They are.

Tim Buckley: Okay, they’re evil. Credit card debt is evil. It is a black hole. It will suck up all your earnings. I think the average rate people pay now is 17{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}.

Rebecca Katz: Is it back up to that high already?

Greg Davis: Yes.

Tim Buckley: Yes. Avoid credit card debt like the plague.

Rebecca Katz: You walk into the bookstore at college and they hand you the credit card. It got me in big trouble.

Tim Buckley: Yes, that’s the worst thing.

Greg Davis: That’s the compounding interest on the bad side.

Tim Buckley: On the bad side. That’s what you’re paying. So you want to avoid that, number one. The second thing is I got great advice when I first joined the workforce, which was pay yourself first. And the idea is when you get a raise, put some of it away. Don’t change your standard of living right away. Put some of it away, and you won’t notice, but you’ll be happy later. It gets to that magic of compounding.

The last one I’ll throw in there because we know the retirement business well. If you’re offered a 401(k) plan, some sort of defined contribution plan, there’s probably a company match. You’d be crazy not to contribute up to that match because with a match what happens is I put in a dollar, they match that dollar. It’s free money. There aren’t many things in life where you actually get something truly for free. That is one of them.

Greg Davis: Absolutely.

Tim Buckley: So, hopefully, people take that advice. They’ll be happy if they do.

Rebecca Katz: Great tips. I’m going to make my daughter, Maya, watch this replay. I’m going to tell her to listen to you guys.

Our next question is from Craig Witt. Now we get a lot of these questions on different asset classes. “Is there a place for precious metals or other commodities in a typical portfolio?” Greg?

Greg Davis: You know, there is …

Tim Buckley: Did you like how I just looked at him?

Rebecca Katz: I know. Well, for years we’ve talked about gold, gold, gold, gold.

Greg Davis: Yes. I mean, when you think about the diversification properties of commodities, there are some diversification benefits. We do have (Vanguard) Commodity Strategy fund that’s open to investors. It’s also a small portion of (Vanguard) Managed Payout Fund, which is an actively managed balanced portfolio. So we definitely believe there’s some diversification properties to it, but there’s also a lot of volatility that’s associated with commodities. So it’s one thing when investors look at it for that diversification standpoint. The bad rub on commodities is a lot of folks have used that as a way to speculate on markets, and we would never recommend investors doing that. But the small sliver of a diversified portfolio we do believe there’s value to be added by having commodities in there.

Rebecca Katz: Okay, well, I’m going to ask you a similar question that we got from Craig who asked where we stand on cryptocurrency. It’s not really a commodity, but it’s something different. And we always get questions on cannabis, cryptocurrency, and gold. Those seem to be the 3 popular questions. So we won’t talk about cannabis.

Tim Buckley: Well, one of those things is not like the others.

Rebecca Katz: In any case, cryptocurrency, how do we think about that as an investment option?

Greg Davis: You know, we don’t look at it as an investment. We look at it as a speculative tool that-

Tim Buckley: Fear asset.

Greg Davis: -yes, a lot of investors or folks have speculated with. It’s hard for it to be a store of value because there’s no true underlying intrinsic value associated with like a bitcoin. There’s been a lot of speculation. You’ve seen it hit record highs and then see it plummet shortly thereafter. And the challenge that you run into with cryptocurrency is the fact that you have actually central banks around the world that are exploring the idea of digital currencies that would basically make the use of a bitcoin virtually useless other than for, like, illegal activities. So the real value of a bitcoin, if you’re trying to transfer and transact on a digital basis, a lot of that value could be immediately lost if you start to see a mainstream central bank that ultimately rolls something like that out. So we don’t look at it as an investment vehicle. It’s more for speculation.

Tim Buckley: And we have these cryptocurrencies versus gold. Why we talk about these things is, Greg said there’s no intrinsic kind of—it doesn’t generate a cash flow. So it’s only worth what people are willing to pay for it.

Greg Davis: Pay for it.

Tim Buckley: And that’s tough. That’s tough because what if they’re not willing to pay for it? There’s no expected return from it. And the only expected return is that people are worried, and they’re going to bid it up.

Greg Davis: That’s correct.

Tim Buckley: And then, so if it’s $1,500, then it goes down to $1,200, and it’s just people aren’t as worried anymore. And that is really tough in an investment portfolio to say, “Was that a really good diversifier when I could do much better with just a widely diversified portfolio, a well-diversified portfolio?”

Greg Davis: Portfolio. It reminds me a lot of like tulips from many, many years ago.

Rebecca Katz: I was going to say!

Tim Buckley: Man, like you were alive …

Rebecca Katz: And at least with gold, you could wear it at the end of the day.

Well, a different question about what to invest in. This one is from Leonard Cohen, and, Tim, I’ll ask you this question, “Are ETFs a better way to invest a diversified portfolio than mutual funds? And explain the benefits of each product or the downsides.”

Tim Buckley: And in some cases, in our case, they actually are one and the same. So the ETF and the fund are basically, they are both funds. They’re both pool products. So in one, you can hold our total stock. Greg you have the fund version, the fund share version, or the ETF version where you’re holding the entire U.S. stock market. So that bit is the same. It’s how you buy it and what you can do with it.

Now, the ETF has some advantages. The ETF has some advantages simply that you’re buying it on an exchange, and when you’re buying that, when we think about if you want to then gift it or you want to do tax-loss harvesting, you want to transact with that, you don’t have to worry. With the fund, we’re going to say, “If you just bought in, you can’t sell out of it.” Like we don’t want you moving in and out on a frequent basis, which limits things like tax-loss harvesting on your portfolio because those are frequent exchanges where you’re selling it and then getting back in or using like securities.

So the ETF on the margin allows you to do a little bit more. Whether it’s gifting shares or it’s doing tax-loss harvesting, it’ll have some benefits over a fund. But the underlying vehicle is essentially the same. And I would say if you look at most of our ETFs, they’re becoming lower-priced than the equivalent fund share, so that’s the other one which would be a price advantage.

Rebecca Katz: As we’ve always …

Tim Buckley: Would you throw in anything else?

Greg Davis: No. The other difference would be just the ability to transact throughout the day if for some reason that was really important to an investor. With the fund, you’re only going to get one price and that’s the close at the end of the day.

Tim Buckley: But that would imply that they’re market-timing; we don’t want that!

Greg Davis: No, again, not the market timing, but, you know, ultimately, it just gives you more flexibility from that perspective.

Rebecca Katz: Great. Now we’ve always said, “The F in ETF stands for fund because they are so similar.”

Greg Davis: Yes.

Rebecca Katz: Our next question is—we have a lot of really good questions coming in. Let’s talk about inflation. We haven’t talked about that yet. So Eric says, “What is the underlying reason for the very low reported levels of inflation and how can an investor preserve that inflation protection over the long term?” So, yes, I know the Fed’s concerned, we haven’t seen levels of inflation. I used to think that that was a good thing, that inflation is bad. Joe Davis, our chief economist, tells me to think otherwise. So maybe talk a little bit about that.

Greg Davis: Sure. I mean I think there’s a number of things that are contributing to the low levels of inflation. We’ve seen the central banks around the globe with very easy monetary policy trying to stoke levels of inflation to get us further away from a deflationary environment, which we can go into. But they really struggle because of a number of things: demographics, technology, a digital economy. These are all things that are contributing to maintaining low levels of inflation.

And so in the next couple years, next decade, our team is expecting that inflation in the developed markets will continue to remain relatively low. So the days of having inflation north of 2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} in the U.S. market, we see the Federal Reserve and other central banks really struggling because of some of these headwinds to achieving those goals. And so as a result, we’d expect that interest rates will also remain low for a long period of time. Low inflation, you don’t need high interest rates. So that’s something to keep in mind.

Rebecca Katz: Speaking of economic outlook and economic growth, Lynn in Southampton has said we haven’t talked much about China—kind of did talk about it a little bit in an earlier question—and wants to better understand what is sort of the long-term outlook for China, and how will that have an impact on our economy?

Greg Davis: Yes. So our team, the expectation is that, you are starting to see a slowdown in economic growth in China, but a slowdown in a market that’s been growing at north of 6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} to something that’s growing at the high 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, and still more rapid than what we’re seeing in the other developed economies around the world. And if you were to look at global economic growth, that’s expected to be somewhere between 3{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} to 3.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} or so. So China’s still growing much more rapidly than the rest of the world. But a slowdown in that market that has a lot of debt, a lot of leverage can have negative consequences to the functioning of their markets, the functioning of their economy. So something that our team is spending a lot of time continuing to evaluate and examine to see if there is a more significant slowdown, what the implications would be to the broader markets outside of just China.

Rebecca Katz: Okay. But not quite clear yet.

Greg Davis: No.

Rebecca Katz: Okay. Another kind of change in terms of focus in the markets, Robert from Alexandria, Virginia, said, “There’s been considerable discussion of late regarding return to a real value focus versus a focus on growth in the markets. What is our position on that?” And there’s long been academic research to show maybe value stocks outperforming growth stocks over the long term.

Greg Davis: Yes.

Rebecca Katz: You’re laughing.

Tim Buckley: Well, we sit with our outside managers. Some are growth managers; some are value managers.

Rebecca Katz: Yes

Tim Buckley: The value manager meetings aren’t as fun these days.

Greg Davis: Yes, I mean you’ve had an extended period of time where value has underperformed growth by over the last 10 years. If you look at the S&P 500 value versus S&P 500 growth, I think it was approximately 2.7{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} or so that growth has outperformed.

Now, the valuations on growth are also much more elevated relative to what you see in the value space. So if we go back to the earlier conversation around reversion to the mean, long-term averages, it’s unlikely in the long term that this relationship will persist the way it does today. And we’ve been in the extreme sense that those valuations, those differences are very comparable to what we saw back during the dot-com era in the late ‘90s, early 2000s where there’s a big disconnect between the two from an earnings yield perspective.

Tim Buckley: Yes. Look, I’ll just add one thing. My first job at Vanguard was working for our founder, Jack Bogle. And one of the first slides, studies I had to put together for him was growth versus value and learned early on that growth can outperform value and value can outperform growth and that extends for long periods of time and the period of time is unpredictable.

Greg Davis: That’s right.

Tim Buckley: And so, look, it could go on longer. It could go on longer. There’s no kind of set rule that you have to revert back at a certain point in time. Eventually it will, but it’s tough to say when.

Greg Davis: Yes. The timing is uncertain.

Rebecca Katz: Long-term holding of diversified portfolio is the way to go. Well, you know, building on this question, Myron in Ohio said, “With equity valuations high… ” or stretched, as you’ve said, “… do we have feelings about alternative or hedged investments and do we have any plans to offer alternative investments?” So, Greg?

Greg Davis: So, you know, at the end of the day, we still think for the majority of investors, a high-quality, highly diversified portfolio of low-cost investments across stocks, bonds, and cash will serve most investors well. For those that have a desire because of their risk tolerance, their investment needs to expand into alternatives, the key challenge you run into there is the additional fees, the high-cost nature of some of those investments. But even a bigger factor is really the access. So there are a number of managers out there that have put up really compelling returns in the alternative space. The challenge that many investors face though is having access to those top-notch managers. And that’s really one of the challenges that you run into when it comes to investing in the alternative space.

Tim Buckley: And I should point out, we do have a few alternative funds.

Rebecca Katz: Alternate strategies, right.

Tim Buckley: So we have your (Vanguard) Market Neutral Fund and your (Vanguard) Alternate Strategy Fund.

Greg Davis: Neutral, yes. And alternative strategies.

Tim Buckley: So we do have them. They’re much more liquid than what Greg was talking about. And now, look, our clients whoever’s asking that question probably read that we have looked at private equity. So there was a story out there that Vanguard was looking at private equity.

And just to take our viewers through, before we offer something, we basically have some basic tests. Number one, there has to be investment rationale. There has to be a good investment thesis behind it. It has to be an enduring one. So it can’t be some fad way of investing. There has to be a real reason why there’ll be return there. And if you look at the strategies we offer where there’s private equity, there is a logic behind it, and it will stand the test of time. There has to be a client need. So in the case of something like private equity, does it help diversify a portfolio? I think if you look at the endowments and the foundations who use, it has been a great diversifier.

The next 2 tests are tough. Feasibility, is really tough to offer  some of these alternatives in a traditional fund, what we call a ‘40 Act fund. And it’s difficult to do that. And the last one, Greg, you were getting at, which is we have to be able to add some value from a Vanguard perspective. We like to be the best in the world, and we don’t want to offer “me too” products. So if we’re going to offer you access to whether it’s private equity or it’s another alternative, we’ve got to make sure that we can give you better pricing than you would get otherwise. We have to make sure that we’re going to give you access to those managers that will or have the better chance of outperforming over time. And it’s not until we can pass all those tests that we actually will offer something in the marketplace.

Rebecca Katz: Great. That’s a thoughtful and disciplined approach to product management. It’s great.

Greg Davis: She has to say that, by the way. She came out of that group, right?

Rebecca Katz: I did actually. Early days as a fund analyst. So we’re running really short on time. This hour always flies by, so I’m going to try to pick some questions and we can go through them kind of quickly.

You know, Natalie is asking a question which I think if a lot of people had sat on the sidelines always waiting for the best time to get in, “If you’re not in the market is it crazy to get in now when it’s so hot?” What do you do if you haven’t been in the markets or if you suddenly got a windfall of money and you want to invest with the markets being up 30{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} and us saying, “Maybe they’ll be some volatility going forward”?

Tim Buckley: I think whether it was last year or the year before, we’ve had this question before.

Greg Davis: Uh-huh.

Rebecca Katz: Yes.

Tim Buckley: And we’ll always talk about, “Be prepared for volatility.” But we’ll tell you, you need to start getting invested. If you earn cash, you have to start. You don’t have to do it all in one lump sum. But dollar-cost average just do periodic investment, get back in the market. And if you didn’t do that, you missed out on over the past three years 50{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of a return or you missed that, you’ll miss out. And so like you’re investing for 20 years, like 30 years just start now. There’s no time like the present.

Rebecca Katz: Well, so, Greg, what about those who aren’t necessarily—well, they might still be investing in 20 or 30 years but are really switching from accumulation to retirement? So Bruce in Cleveland Heights said, “When someone’s starting getting ready to retire, when should they shift from equities to more conservative investments?”

Greg Davis: It’s a great question, Bruce. It’s not as though a switch should go on when you enter retirement. It should be all the way leading up to retirement and then through retirement. And I guess the best way to describe it is take a look at some of our target-date funds and what they have is a glide path that over time becomes more conservative. And if you look at our retirement income product, that is for those folks that are actually already in retirement and that still has a 30{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} weight to equities. So many people think that they go into retirement they shouldn’t have any equity exposure, but there’s still value in having equities. You still want a portion of your portfolio that has the ability to grow to offset any signs of inflation and rise in costs and things of that nature, so it’s really important that equities are still a significant portion of a retiree’s portfolio. But you also have to look at what are the other income sources that the person might have as well.

Rebecca Katz: Our next question is—we have quite a variety of questions here. This one goes back to indexing. This is from Dave. He says, “Do you recommend using sector-specific index funds based on market phase or just stick with broader-based index funds?” And personally I have my own question about broader-based index funds. There’s been a lot of stories lately about concentration and things like the S&P 500 because tech is such a big part of that. So I think either one of you could take this.

Tim Buckley: Well, it was Dave with the question, I would say for Dave, good luck trying to time sector rotation. We’ve yet to meet the guy who can actually rotate sectors and do it well.

Greg Davis: Who could do that well. And we see a lot of good managers.

Tim Buckley: Those funds are more intended to help people who are heavy in like they come from the telecom, sorry, they come from the technology industry or they’re coming-

Rebecca Katz: From energy.

Tim Buckley: Yes, energy, health care. They can rebalance their portfolio and not necessarily just say, “Well, I’m going to rotate between these sectors.” Or you have a belief like health care. Our (Vanguard) Health Care Fund, managed by Jean Hynes, has been phenomenal. She’s an incredible active manager. Her team’s incredible and it’s also a huge part of the U.S. economy. And you can have a belief in that, but it shouldn’t be your only holding and never try to rotate.

Greg Davis: That’s exactly right. That’s one way to pretty surely lock in underperformance in the long run.

Rebecca Katz: That’s the one thing you can be certain, you’re going to do it wrong.

Greg Davis: Yes.

Rebecca Katz: All right. Tim, I’m going to address this question to you. Although, actually, you both have different points of view on this or different aspects of points of view. This is from Michelle, and I think she’s been reading the newspaper. “There are articles about the overwhelming power of index funds and of index providers in ‘controlling’ the market.” So what is our take on that?

Tim Buckley: So a lot of this is around governance, and it’s that with the success of Vanguard and everyone investing in our index funds that we own about, Greg, your team probably owns about 8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of every company in the U.S.

Greg Davis: Yes. Company.

Tim Buckley: That makes us one of the larger shareholders. It also means that we have a fiduciary duty and to make sure that we vote proxies in order to maximize the return of our clients. So we take that duty of governing, making sure those companies are well governed, we take that very seriously. So we have a team of people that pour through those proxies and the different issues to try to identify, are these companies being run in the best interest of shareholders. So there’s different issues we’ll look at. We’ll look at the board, the composition of the board. We’ll look at the diversity of the board. We’ll look at how the pay is set up. And we publish our views on each one of these things.

Where the controversy usually comes up is, how are you dealing with things that are, well, if a company is a polluter? Or maybe they’re a fossil fuel company, or maybe they’re a big pharmaceutical company and they’ve been selling opioids, where people want to just say, “Hey, you should be telling these companies to stop doing what they’re doing.”

Now in our active business, on the active side, the active manager can go into a company and tell them what they view their strategy should be. The whole idea of indexing is that you’re not looking to pick the winners and losers or influence the strategy. You want to own the whole market. But what we do want them to do is to address the underlying risks and not to ignore them. So if you’re a big pharmaceutical company and you’re selling opioids, we want to know that the board and the management, that they have addressed that risk. They know that there is a liability to that. There may be a litigation against them. We want to know that there is a strategy that they’re following to address it. What we won’t tell them is whether that strategy is right or wrong. Like we may not know if it’s right or wrong, but we do know if you’re addressing it or not. We have a duty to make sure that happens so that we maximize that, that return is not put in jeopardy, and there’s better information out there in the market.

Rebecca Katz: And, Greg, I would just say to you, you know, there are always headlines saying, “Oh, indexing is too big.” But actually in the grand scheme of things, indexing is still a pretty small part of the overall market.

Greg Davis: That gets published all the time and spoken about all the time in the marketplace, but when you look at actually daily trading volume, the majority of indexing when you roll it all up in the grand scheme of things, number one, indexing represents less than 20{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of the overall market, equity market. But when you look at daily trading volumes, it’s less than 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}. So you have active funds that are primarily doing the price setting day-to-day, high frequency trading firms, other banks and things of that nature that are transacting and setting the prices in the markets. And index funds, for the most part, are price takers. They’re not setting the price. It’s these active participants in the market that are setting the fair value of these securities on a day-to-day basis. So those stories, in our view, are vastly overblown.

Rebecca Katz: Great. Well, we’ve talked about active, we talked about indexing, we talked about the economy, we’ve talked about advice. I think we covered an awful lot of ground over the last hour. And I want to make sure that you guys have the final say. So, Tim, I want to leave you with final thoughts for our clients, things they should be thinking about in 2020.

Tim Buckley: Great. Well, I guess what I want to say is thank you. Thank you for tuning in tonight. And, most importantly, thank you for the trust you’ve put in Vanguard. You’ve entrusted us with your financial future, whether that be paying for your kids’ college education or making sure that you have a good retirement. We’ll never take that duty lightly. And you can rest assured that because of our structure, because you own us, we only have one objective. That’s to maximize your return and to work every day so that you have financial success.

Well, we look forward to a great 2020 with you. Greg and I hope that the markets hold up.

Greg Davis: Agreed.

Tim Buckley: But if they don’t, we’re here for you either way. Thank you for investing and thank you for tuning in. Rebecca, back to you.

Rebecca Katz: Well, thank you, Tim, and thank you, Greg, for spending this time with us. And we only do this once a year, but I think we should maybe do this a few times a year because it’s always great insights.

And thanks to all of you, all of our great members of the Vanguard community for joining us tonight. And thanks for those of you on Facebook watching.

If you’d share just a moment of your time, we’d be grateful if you would select the little red widget button at the bottom of your screen and give us some feedback. Tell us what you liked about tonight’s webcast, what you would like to see in the future, anything that’s on top of your mind or questions we didn’t get to. And in a few weeks, we’ll send you an email with a replay of tonight’s webcast and also a transcript so that you can read through it quickly.

But we are thrilled that you spent your evening with us and hope you benefited from the discussion. And you can keep that discussion going. Join us on Facebook. Join us on LinkedIn. Talk to us. We’d really like to hear from you. You can join us on Facebook using facebook.com/vanguard or on Twitter using the handle @Vanguard_Group. So let us hear from you.

And from here in Valley Forge, on behalf of Tim, Greg, and all the 18,000 crew members at Vanguard, thank you so much and we’ll see you next time.