Chuck Jaffe
You have to wonder if Jack Bogle sees a reflection when he looks in the mirror because, after all, there’s only one Jack Bogle.
The venerable founder of the Vanguard Group, the world’s largest mutual fund company, and the man directly responsible for providing the thinking that is the cornerstone to a giant share of the investing public overseeing trillions of dollars in assets is a one-of-a-kind resource who has been in the news lately for reminding investors that when the going gets tough — as he sees happening — they need to stay the course.
Bogle, 86, did a two-part interview on my radio show, «MoneyLife with Chuck Jaffe,» breaking new ground with his take on «smart-beta» and other newfangled indexes, but staying true to his course and suggesting investors do the same.
Here are some highlights:
Bogle recently made comments that he expects significantly lower returns — stock returns as low as 4% before inflation — over the next decade. Immediately people started acting on his prediction; here’s why he felt that might have been an over-reaction:
Bogle: «It’s not bet the farm; it’s not short term. It’s minor adjustments in your asset allocation, if any.
«Short-term market timing is a loser’s game. None of us know what tomorrow holds, not Bogle nor anybody else. And that’s why I have never done anything other than a 10-year reasonable-expectations perspective.
«Any day, any week, any month, any year can do what it wishes, but 10 years it comes down to how corporations do, and that’s more important than how the stock market does.»
On changing allocations without falling prey to timing the market:
Bogle: «Certainly it should be done gradually if it’s done at all, and I caution people that maybe staying the course exactly where you are is all right to do, but you want to make sure you have saved enough for retirement. If you think market returns are going to be low, you’re going to save more and if at the end of the decade it turns out that you underestimated the returns on the balanced portfolio, well, you have this catastrophe [of] a larger retirement fund than you otherwise would have.
«I definitely lean to the low side, though I use this system: roughly 3% for bonds and roughly 6% for stocks. And that’s where the 4.5% comes from.»
On how hard it is for investors to succeed in the market today, given the news cycle and analysis and the heightened ability to move money around:
Bogle: «The best way to do that is to tell people to stop paying so much darned attention to the stock market. … The stock market is a giant distraction to the business of investing. It gets you thinking short-term. It can be over-valued or lower-valued, but in the long run the returns in the stock market are created by corporations, dividend yields and earnings growth. They earn money, pay the dividend out and reinvest the rest in the business. That’s the way value is created.
«We know how to control costs. We know how to control our time perspective. We do not know — none of us know — how to control the market. So the best thing to do is to not let the market dominate your thinking.»
On the new market indexes and tools that have been created, and whether those products are better mousetraps, or whether the legacy indexes, like the S&P 500, are still superior:
Bogle: «Legacy indexes are superior unequivocally. You own the stock market and you get a fair share of market returns.
«When you get to the so-called smart beta — which I think, honestly to be blunt about, it is a marketing ruse of the mutual fund industry, a trick — certain investors are claiming that if you emphasize value stocks or small-caps stocks or various sector allocations, that you will do better.
«Look, we know the reality of the market, which is that if smart-beta managers as a group can win — and I have to quickly say I think that is inconceivable — there will be a group of dumb-beta investors who lose by exactly the same amount.
«We all share the market return. I have seen these claims of expertise, of good performance. They’re backward-looking and the past is not prologue in the mutual fund industry. They are marketing gimmicks, and I think people are very, very unwise to try to get a larger share of the market’s returns … than just get the market returns and be satisfied with that and enjoy the low cost. In the long run, the odds are 95% or 98% over an investment lifetime that you will do better owning an index fund and not changing it.»
On alternative index constructions like equal-weighting that might be considered less-gimmicky than «smart-beta» indexes:
Bogle: «The great thing about owning the stock market on a market-cap-weighted basis — the largest companies constituting the biggest shares — is that everyone can do it. There’s no contradiction there.
«The equal-weighted S&P 500 has an internal contradiction, and that is that it cannot be done by everybody because everybody owns the market weight.
«So there will be years when equal-weighted does better — it’s a little more volatile — and years when it does worse. … In the long run, I don’t believe it works. When you are doing equal-weighted investing, a lot of adjustments are made as stocks go up and down, and there are tax effects from that. I wouldn’t say it’s inconceivable that it could do a little better in the long run; it may do that. But once everyone does it, then it doesn’t work anymore.
«The idea in the market … is to own the entire stock market, do better than your neighbors — by definition because they will be paying higher costs — and sleep well at night.»
On whether he’s glad not to be running Vanguard today, now that it’s the largest fund firm, working in an environment that calls for so many different investment products:
Bogle: «I don’t know if I would be a very good person to run Vanguard today. I never looked at myself as a big businessman. In fact, I’ve never looked at myself as a businessman, period.
«I have some sound investment ideas. The mathematics are inarguable. … There’s a lot of marketing pressure in this business, and I think we [Vanguard] cave into it less than anybody else in the business. Still.»
On his current investment allocation:
Bogle: «Currently, I’m 53% invested in bonds, 47% invested in stocks, almost entirely indexed or in funds heavily correlated to the market. … I have reduced my equities a little bit this year, largely in view of the fact that I’m at a time in life when I am a little more interested in preservation than growth.»