Vanguard CIO Discusses Index Fund Safety After Lehman Brothers Bankruptcy.

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With smoke from the Lehman Brothers bankruptcy still lingering, most everyday investors like you and I are in a state of hypersensitivity regarding their investments and retirement accounts.

Rightly so, because anyone who held an index fund, or any other investment for that matter, probably took a nasty hit after yesterdays 500 point drop in the Dow Jones Industrial average. I know mine did.

While trying to find an all encompassing way of answering the incoming emails from friends and recent blog subscribers (keep them coming by the way), I decided to post a CNBC interview with Vanguard’s Chief Investment Officer, Gus Sauter. Mainly because every single investor I know has an account at Vanguard and the majority of the emails posed the same question:

Matt – Is my money safe?

During the interview, Mr. Sauter actually made me breathe a little easier regarding the long term stability of my Vanguard accounts, and my other trading accounts as well. Mainly because Vanguard is the cream of the crop when it comes to mutual fund investing, and when everyday investors get scared, they would likely run to Vanguard for help instead of pulling money off the table like a madman.

Here are the shortened, paraphrased answers to the questions posed to Vanguard’s CIO during the interview:

With regard to the Lehman Brothers bankruptcy, is our money safe at Vanguard? Yes, we only had 1 tenth of 1% exposure in 1 of our equity funds to Lehman Brothers thanks to high diversification. We had zero exposure in our money market fund.
If anyone had a brokerage account at Lehman Brothers, or something happens to the company who holds my brokerage account, what happens to me? This answer was less direct, but here is my interpretation of the answer. Essentially, you would be protected under the auspices of the Securities Investor Protection Company (SIPC), which would allow you to regain control of your stocks after a new brokerage account has been created for you at a new brokerage firm.
What happens if my mutual fund company goes bankrupt? Nothing changes. You own the assets in the respective mutual fund itself which are separate from the assets owned by the mutual fund company. The value of those assets (i.e. stocks, bonds, etc.) will be worth the current price the stock exchange sets for that individual collection of stocks, bonds, etc.

The questions posed to Mr. Sauter during the interview were answered very well, and will obviously hold more weight than anyone with a blog like mine could hope to accomplish, which is why I chose to paraphrase.

[see video below]

Questions / Comments / Concerns ?