- The Washington Times - Monday, June 15, 2009

CHICAGO | Jack Bogle is still holding court, and his message has not changed. Buy and hold domestic stocks and bonds, cheaply, in an asset allocation that’s appropriate for your age. Then let it play out, over time, so that it ultimately works in your favor.

The founder of the Vanguard Group, the man behind the first retail index fund and a longtime champion of the small investor, Mr. Bogle is now 80, and his health has been poor. He had a heart transplant 13 years ago and has spent “the extra time I’ve been given” as something of the people’s champion, taking on the investment community’s flawed thinking and bad behavior, and calling out individual investors for making the entire process too hard by shooting for the moon rather than going for steadier returns over time.

Before speaking at the Morningstar Investor Conference here recently, Mr. Bogle warmed up with an interview that covered a wide range of topics. Here are the highlights:

On what he has heard from investors:

“It depends on whether they simply heard ‘Buy an index fund’ or if they got it right and listened to the whole story. I have been saying for more years than I care to count not to forget bonds. And start to think about it as a rule of thumb, having your bond holdings equal your age.

“I followed my own advice,” Mr. Bogle noted. “I did that a little bit late in my own life, because when I was 50, I was probably 75 percent in stocks, instead of 50-50, but when I got to 65, I was 65 percent in bonds. Since then, with the bond market rising and the stock market down, I am now very close to 80 percent bonds and 20 percent stocks, and I’m 80. … Now I had the benefit of nearly perfect timing in my life. Had I turned 80 in 1982, it would have been much different. There are certainly times when the formula will not work as well, but for me it has worked nearly to perfection.

“So investors come to me and generally say one of two things, either ‘Thank God I followed your advice,’ or ‘I really feel stupid for not having followed your advice.’”

On the economy:

“We can’t fix our economy now, today. We can move in a direction of fixing it, but when you think about what is happening, it’s very obvious: We have to save more. When you see the savings rate going from zero percent a year-and-a-half or two years ago to 4 percent or 5 percent today, well we’re not actually saving that much more money today. We’re un-dis-saving — paying off credit cards and mortgages. That’s not the same thing as adding to the amount you have to spend.

“It counts as savings and should count as savings, but the economy is crying out for us as consumers to spend more collectively, and we’re not about to do that individually because we don’t know where our job is going to be in the next year. It is what [economist John Maynard] Keynes called the paradox of thrift. It is good for us to do what we are doing, saving money, but it’s bad for the economy.

“… I’m not saying the economy won’t grow, starting maybe in a year from now. I’m no expert, but as far as I can tell, the economy is leveling off right now and may have a little further to go down, but when it comes back, the old 3 percent real growth which is the rate the economy has grown at, well I think that is too aggressive. We’re looking at much slower economic times.”

On what a slower economy means for investors:

“The first thing they must realize is that the stock market tends to anticipate things. We have had a stock market crash of the largest proportions probably of the last century, with the possible exception of 1929 to 1933. We have had a big stock market crash. Do we have to have another one? I don’t think so.

“The market has either exactly got it right — and is therefore valued in the proper levels — has overestimated the dangers that lie ahead and is, therefore, cheap, or has underestimated the dangers that lie ahead and is therefore expensive. Those are the three options. And I would guess the market probably has it about right. I would guess that we have seen the low for the year and maybe the low for this cycle.”

On how the fund industry responded to financial crisis:

“I’d say we did a bad job. Embarrassment is right. Annoyance, even anger, that the industry turned out not to be this wonderful stewardship business, but a great big salesmanship business of new products.

“We had absolute return funds — heaven help us all — and then a choice of funds that offer 1 percent, 3 percent, 5 percent or 7 percent above the Treasury bill, and all kinds of things that just cannot work.

“We are confined as a group to whatever returns the stock and bonds market will give us. … a combined return of 5 percent for bonds and 8 percent for stocks, so about 6.5 percent for your portfolio. There are people saying ‘That’s not enough to reach my retirement goals, I have to do something to earn more.’ That’s like saying, ‘I lost the first seven races, so I am betting everything I have on a longshot in the eighth.’ Feel free to do it, but know that there’s about one chance in 40 of it doing what you want and paying out. That leaves the 39 other chances to worry about.”

On the reported death of asset allocation and buy-and-hold investing:

“It’s all about asset allocation. Before you decide you want a certain amount in bonds and a certain amount in stocks — and I happen to believe still that those are the alternatives — decide where you want to put your money. I would say U.S. stocks, because international will do well and then it will do badly, and the same thing for emerging markets, which will do well for a while and then do badly and then do well again. I just think you don’t need to go beyond U.S. stocks. You have the country with the greatest securities markets, the greatest protection of ownership rights, it’s your own currency, your assets are valued the same way you earn your income. We are a very technologically advanced society, probably the world’s technology leaders still.

“… Let’s face it, the financial markets are a great arbitrageur between the present and the future, so if international stocks are going to do a lot better, you will be paying a 20 percent p/e premium and a 20 percent dividend discount. The markets sooner or later revert to the mean, and you can see that.

“And finally, the dollar can add a lot to your returns, or it can take a lot away. What we know about mutual fund investors is that they don’t seem to realize this; they think that international stocks were hot performers in 2007. They weren’t. The dollar was just so weak that they looked like they were. It’s a gamble on the value of the dollar, and I don’t know how to do that, but if someone else does, more power to them.

“… I am really concerned when I hear people say buy-and-hold is over. Investors, as a group, are buy-and-holders. We own the stock market, all of us together, we buy and hold it. As a group, we all have the same asset allocation. So when you hear someone say ‘It’s a stock picker’s market,’ well if you picked well, then I picked ill, and as a group it’s the same.’

“Fund managers are speculating, not investing. Turning over 100 percent — and don’t believe the ICI numbers on turnover which are about 60 percent but which I can easily show you should be at least 75 percent — it just makes no sense. … So if you have a billion-dollar fund, you are turning over $750 million, which means $1.5 billion in trades per year on a billion-dollar fund. It’s not going to work out in the favor of the investor.

“We trade 10 billion shares a day, with each other. And we lose. It’s lunacy. The croupier wins. The day the market has no volume — when we can say ‘There were no trades on the New York Stock Exchange today as all investors were satisfied with their positions’ — that’s the day I want to see before I go.”

Chuck Jaffe is senior columnist for MarketWatch. You can reach him at [email protected] or at Box 70, Cohasset, MA 02025-0070.

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