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'The Importance of Being Long-term': Vanguard's William McNabb on What's Ahead for Investors

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Courtesy of Knowledge@ Wharton


William McNabb became chief executive officer of The Vanguard Group on August 31, 2008 -- two weeks before the financial world went into free fall. On the evening of Sunday, September 14, the day Lehman Bros. declared bankruptcy, he was in Washington, D.C., welcoming institutional investors to the mutual fund company's bi-annual conference. The next morning, as world ticker tapes bled and "all hell was breaking loose," McNabb found himself in front of the company's 300 largest pension fund clients, "talking to them about the importance of being long-term, balanced and diversified, and taking a very long-term perspective on the markets." As he spoke, he recalled, a "soundtrack" looped in his head: "The world is melting down. What are we going to do?"

"It's been an interesting adventure," McNabb told an audience gathered for a recent Wharton Leadership Lecture. "We have come a long way in these past few years."

McNabb, too, has come a long way since he joined the Malvern, Pa.-based firm in 1986. At the time, Vanguard managed under $20 billion and employed less than 1,000 people. "I didn't know what a mutual fund was," he remembered. John J. "Jack" Brennan, who became the company's CEO in 1996, told McNabb during his job interview that he wanted to build a firm with "the intellectual rigor of Wall Street but with Midwestern values," a phrase that stuck with NcNabb on his way home. "That really resonated with me. I wanted something that was intellectually stimulating but values-based," he stated. "I remember saying to my wife, 'I'm going to do this.' [Yet] all the advice I was getting from my parents and my friends was, 'This is a little firm. Who knows if it's going to make it?' But I really liked the values." Since then, Vanguard has grown to become the nation's largest mutual fund company, with 12,500 employees and $1.6 trillion under management.

Looking at the markets today, McNabb said the future could be interpreted as "a glass half empty or a glass half full." Market confidence is down, doubts about Europe are up and housing remains uncertain. Fears about state and municipal bonds, shifting government regulations and the national debt leave many investors worried. On the flip side, the U.S. economy is recovering, equity markets are fairly valued and investors are recognizing the importance of saving and diversifying their investments, McNabb noted. Perhaps the best hope for America's future lies in its past, he added: History shows that some of America's greatest innovations were made in the midst of tough economic times.

Wharton LogoOriginally published February 16, 2011, in Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Republished with permission.

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