Vanguard CEO: Don't Tweak Your Portfolio in a Downturn

Look further out than one business cycle, says Brennan.

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Vanguard's chief executive, Jack Brennan, who's stepping down within the year, advises investors not to fiddle with their portfolios during a downturn, recession, or in anticipation of a market bottom. On the other hand, rebalancing is a "fine thing," says Brennan in this Q&A:

Should investors alter their portfolios or their investment strategies during a downturn?
We feel that investment portfolios should be managed strategically, with a long-term view, and not tactically, with short-term tweaking. The only "tactic" we advocate is rebalancing a portfolio.... If you want to rebalance your asset mix by buying stocks and selling bonds, within the context of your strategic investment allocation, that's a fine thing. But portfolio changes should not be done in anticipation of a downturn, or a recession, or because the stock market is down. Nor should you change your allocations because you think the bottom has arrived. Your plan should be structured around time frames that are longer than a business cycle and around the core principles of being balanced and diversified.

What about investors nearing retirement?
It sounds repetitive, but the answer is pretty much the same. Don't think just about the next three or four years. Your money doesn't retire. Your money will keep working for 25, or 30, or even 40 years.... So for most people, a retirement portfolio isn't a short-term investment.

One caution for retired investors: We're in a declining interest rate environment, except for some sectors of the bond market. One danger for people nearing retirement is to put too much focus on short-term investments—CDs and money market funds. The danger is that as yields decrease for Treasuries, money markets, CDs, and other high-quality areas, the temptation is to stretch for higher yields by taking on additional credit risk. The yield on a high-yield bond fund comes with a much higher risk than the yield on a Treasury fund. Selecting bond investments based solely on the level of current income you're seeking can be a critical mistake.