10 Questions for John Bogle

[Bylo Selhi]

Q&A with John Bogle from Fortune's readers (and more yet in the extended edition.)

What's the best investing advice you've ever received?
It was the best advice and the earliest advice. I was working at a brokerage house one summer while in college, and one of the guys who was another runner at the firm delivering securities said, "Let me tell you all you need to know about the investment business." I said, "What's that?" He said, "Nobody knows nuthin'." That sounds cynical, but we don't know what the markets hold, certainly not in the short run. We have no idea.

[aerosmith]

I would put the odds of a recession at 75 percent

so, for the rest of us does it mean we should be pumping more money into the equity index funds?

[Bylo Selhi]

Why Do I Bother to Battle? [PDF] “Courageous Champions of Conscience and Controversy”
Remarks by John C. Bogle, Founder and Former Chief Executive Vanguard Group at the Yale CEO Leadership Summit, New York, NY December 13, 2007

With the television writers still on strike, I’ll try to ease your ache for the David Letterman Show by giving you my ten reasons for “Why do I bother to battle?” (The strike matters not to me; I’ve always been my own writer.)

[Bylo Selhi]

When Does Innovation Go Too Far? [PDF]

Our institutions have a large incentive to favor the complex and costly over the simple and, well, cheap; quite the opposite of what most investors want and need. Given recent events in the financial markets in which some of our nation’s — and the world’s — mightiest financial institutions have collectively already taken some $47 billion (estimated to total $77 billion when all’s said and done) of write-downs from their forays into relatively new, untested and complex financial instruments, there can hardly be a more fitting time to consider whether innovation has again gone too far...

While financial innovations nearly always create value for those who devise, construct, promote, and market them, far too many of these innovations have subtracted value from investors who have trusted their creators and sponsors and invested in them, with damage that has now gone even further, into our society at large. It is time to face up to these realities.

[randomwalker]

Strategies
Can You Beat the Market? It’s a $100 Billion Question

By MARK HULBERT
nytimes.com March 9, 2008

"INVESTORS collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult."

http://www.nytimes.com/2008/03/09/busin ... ref=slogin

[hocus]

One is that a typical investor can increase his annual return by just shifting to an index fund and eliminating the expenses involved in trying to beat the market.

The phrase "typical investor" is marketing talk. By definition, 50 percent of investors possess the skills needed to do better than the "typical investor." I wouldn't advise someone who is better skilled than only 51 percent of his fellow investors to take on the risks of picking individual stocks. But someone who is better than two-thirds should give the idea serious consideration.

I don't mean picking mutual funds. An informed investor can do as well as most mutual funds without incurring the huge fees. If you're informed enough to pick a good mutual fund, you're informed enough to pick a good group of diversified stocks. Why not cut out the middle man?

On a board like this, my guess is that 80 percent are better informed than the "typical investor." Most people invest because they have no choice, not because they possess any particular skill. It shouldn't take years of study to move to the front half of the class.

That doesn't mean that I don't think that indexing is a good choice for most of us. Most of us don't want to engage in the effort it would take to pick individual stocks effectively. If you're not willing to do the work, you're not going to see a financial reward. Accepting your limitations is critical.

When valuations are where they are today, though, I don't see much alternative to the idea of seeking to "beat the market" in some way. You can do it by moving some money to safer places. Or you can do it by leaving it in stocks, but moving it to individual stocks likely to do better than the market as a whole. Settling for a market return makes a lot more sense when the likely market return is 6 percent real than it does when the likely market return is 2 percent real.

Rob

[Bylo Selhi]

Financial Sector a 'Drag,' Says Vanguard Founder

"I think this is an issue of greed on Wall Street," the man who created one of the world's leading mutual fund companies said on CNBC's "Squawk Box." "I think it's an issue of the financial system overwhelming the rest of our U.S. economy. The financial services business made more money in 2006, around $250 billion profits, more than health care and technology put together...it's really dragging money out of the system, rather than adding value to the system."

And in cases like Bear Stearns , there's a personal cost, he noted. "The employees at Bear owned something like 30 percent of the stock, so we're dealing with a cataclysmic kind of a personal event for an awful lot of people."

And there may be more to come, he cautioned. "I'm not breathing any easier yet. After all, one has to begin by looking at the Fed's balance sheet, and they've got about $860 billion there, and they've committed $400 billion. So, as it's been observed, the tank is about half-full now. They're limited. They can't do everything."

[Bylo Selhi]

Investing During Market Turbulence

These are turbulent days in the financial markets. Investors are looking for answers about what they should do. The answers, however, depend upon just who is asking the questions. If the questioner is a speculator, buying and selling stocks with the focus on their momentary prices, I'm not sure that I have the credentials to provide advice. If, on the other hand, the questioner is an investor, holding a highly diversified portfolio of both U.S. and global stocks, I'd say: "Don't do something. Just stand there." Investors should stay the course, because successful market timing is near impossible. More importantly, ten years from now, earnings in the S&P 500 will be much higher than they are today...

The inherent risk in our financial markets - enhanced by truncated time horizons, the dominance of speculation over investment, excessive financial innovation, easy credit, burgeoning credit risk, and a concentration of assets in banking conglomerates - has increased in recent years. These problems may well carry over to the performance of our economy, now approaching - if not already in - recession. If that is the case, we will see the leveling off of corporate earnings growth, perhaps followed by significant earnings declines.

Yet we'll likely muddle through. Throughout our 230-year history, America has always done exactly that. Our society and our economy will almost certainly continue to reflect the resilience that they have demonstrated in the past.

To do more than muddle through, we must all develop the courage to take up arms against this sea of troubles that I've described today. If we do, the stock market will undoubtedly resume an upward course based on the intrinsic economic value of business growth.

Of course, our markets need "financial entrepreneurs," traders, and short-term speculators, "risk-takers restlessly searching to exploit anomalies and imperfections in the market for profitable advantage." Equally certain, our markets need "financial conservatives," long-term investors who "hold in high esteem the traditional values of prudence, stability, safety, and soundness."

Together, we must work together to restore that balance, and return financial conservatism to its rightful pre-eminence. For as Lord Keynes wrote many years ago, "When investment becomes a mere bubble on a whirlpool of speculation, the job of capitalism will be ill-done."

[George$]

A short video interview with Bogle and his next book:
“Enough: True Measures of Money, Business, and Life” by John C. Bogle

[Arby]

A short video interview with Bogle ...

I can't recall seeing so many panicked posters on FWR, and I'll admit I was getting nervous with staying the course with my current asset allocation. That Bogle interview was very refreshing. He provides some sage advice for long term buy-and-hold investors.

[Small Investor Activist]

Bogle is like Buffett, both lure small investors into the market. The investment industry loves these two clowns.

[Bylo Selhi]

It's the economy, Charlie Brown

Six ways to heal the markets
In an online discussion this week, U.S. investing guru Jack Bogle outlined a series of steps he would like to see to help heal financial markets:
1. Apologize
2. Embrace regulation
3. Fix the Wall Street model
4. Fix the mutual fund model
5. Enforce fiduciary duty standards
6. Tax speculative trading

[Bylo Selhi]

Market Moralist

His wife had tried to dissuade him. He was 79 years old, and lately his health had been shaky, complications involving his heart transplant of a dozen years ago. Why subject himself to the stress? At the airport the day before, while waiting for the 7:30 a.m. flight from Philadelphia to the West Coast, even he had exclaimed, "This is madness!"

But John Clifton Bogle - "Please, just call me Jack" - doesn't trifle with commitments. The founder and former chairman of Vanguard Group Inc., the mutual-fund giant headquartered in Malvern, had attended every reunion of the Boglehead Diehards, disciples brought together by the Internet, since their first gathering in Miami in 2000, and he wasn't about to miss this one, even if it meant traveling to San Diego...

"Investment bankers caused this mess, and apparently they're not going to pay anything to get out of it! Any time you have a system that privatizes the rewards of an enterprise and socializes the risks, you're going to be in trouble!"

[Bylo Selhi]

Extolling the Value of the Long View [NY Times, 25Oct08]

He says that despite “an orgy of speculation” that has hurt the global economy, he remains convinced that if long-term investors stick to the basics, “put blinders on” and try to have “strong stomachs,” they can ride out the rough patches and ultimately prosper. “If you were to put your money away and not look at it for many years, until you were ready for retirement,” he said, “when you finally looked at it, you’d probably faint with amazement at how much money is in there.”

[Shakespeare]

when you finally looked at it, you’d probably faint with amazement at how much money is in there.

Especially, say, October 10, 2008.

[Bylo Selhi]

Mr. Bogle eats his own cooking. His own holdings are invested entirely in Vanguard funds, in what he says is “probably” a 75 percent bond, 25 percent stock allocation — roughly in keeping with his age-based formula.

“I don’t really know the exact allocation,” he said last week in another interview. “I don’t check the portfolio more than once a year. It had been 70-30 bond to stock, but the stock market has been so bad lately, and the bond market has been pretty good, so the markets have rebalanced the portfolio for me.

Ask him again in early 2009

[Clock Watcher]

"Don't do something. Just stand there." Investors should stay the course ...

I am a newbie, but I am also at the stage of my life where I have the money to start investing. For the past 6 months I had been doing lots of reading and research. If the above advise is the best that we can do, then I am not interested in stocks. To diversify stocks across lots of sectors and countries, and 10 years later to see no net gains even after dividends, at my age, is unacceptable. In fact, it is unacceptable at any age.

If there isn't a way for me to do better with stocks than just buying and holding and using low-cost index funds, then I may as well just spend my money, at least I will get some degree of satisfaction.

[Bylo Selhi]

I am a newbie, but I am also at the stage of my life where I have the money to start investing.

Sounds like (a) you're young and (b) you don't have a very large portfolio.

(a) means that you've got an investment horizon that's measured in decades. By the time you retire (assuming that's what you're investing for) the current crisis will be a small blip on the charts. You've got the luxury of time to let compounding do its thing that recent retirees lack.

(b) means that compared to older investors the amount you have at risk is a tiny fraction of what you'll ultimately have to invest. Even if you lose it all in this cycle -- a highly unlikely outcome, to be sure -- you'll still have decades to start over and recover. That means that you can afford to take risks that older folks can't.

That puts you in an enviable position compared to most of the people on this forum. If I were in your shoes I'd be plowing as much spare cash into broad indexes (or low-cost, actively-managed funds that have broad mandates) as I could. But as always, it's your money and your decision.

For the past 6 months I had been doing lots of reading and research. If the above advise is the best that we can do, then I am not interested in stocks.

The advice you're getting from Bogle (and Buffett, et al) is based on 6 decades (each) of experience, not just 6 months.

To diversify stocks across lots of sectors and countries, and 10 years later to see no net gains even after dividends, at my age, is unacceptable. In fact, it is unacceptable at any age.

What is you age?

If there isn't a way for me to do better with stocks than just buying and holding and using low-cost index funds...

There are lots of ways to do better. There are also lots of ways to do worse -- much worse. And for most people the probability of the latter is much greater than the former.

[drejmd]

If there isn't a way for me to do better with stocks than just buying and holding and using low-cost index funds, then I may as well just spend my money, at least I will get some degree of satisfaction.

Keep reading. Hopefully you will realize that doing as well as the market return will put you way above "average".

And besides, if you "just spend" your money, what will you live on when you don't feel like working anymore?

[Clock Watcher]

I am a newbie, but I am also at the stage of my life where I have the money to start investing.

Sounds like (a) you're young and (b) you don't have a very large portfolio.

(a) means that you've got an investment horizon that's measured in decades. By the time you retire (assuming that's what you're investing for) the current crisis will be a small blip on the charts. You've got the luxury of time to let compounding do its thing that recent retirees lack.

(b) means that compared to older investors the amount you have at risk is a tiny fraction of what you'll ultimately have to invest. Even if you lose it all in this cycle -- a highly unlikely outcome, to be sure -- you'll still have decades to start over and recover. That means that you can afford to take risks that older folks can't.

That puts you in an enviable position compared to most of the people on this forum. If I were in your shoes I'd be plowing as much spare cash into broad indexes (or low-cost, actively-managed funds that have broad mandates) as I could. But as always, it's your money and your decision.

For the past 6 months I had been doing lots of reading and research. If the above advise is the best that we can do, then I am not interested in stocks.

The advice you're getting from Bogle (and Buffett, et al) is based on 6 decades (each) of experience, not just 6 months.

To diversify stocks across lots of sectors and countries, and 10 years later to see no net gains even after dividends, at my age, is unacceptable. In fact, it is unacceptable at any age.

What is you age?

If there isn't a way for me to do better with stocks than just buying and holding and using low-cost index funds...

There are lots of ways to do better. There are also lots of ways to do worse -- much worse. And for most people the probability of the latter is much greater than the former.

Sorry I should have provided more details. I am in my early 50s. I have paid off my mortgage and all debts. I have a DB plan that is worth approximately $1.5M (eg. I would need that amount at 4% a year to generate the reduced income if I am to retire today, ignoring the "85" penalty). I also just finished saving up an emergency fund 3 months of expenses. Other than that, I have no other assets.

After a realistic assessment I save 25% of my take home pay, all of which can go into investments. However, since I know little about investing, but I am very successful in my career, I am going to apply those skills and knowledge to investing. One of them is the concept of milestones - knowing with a high degree of certainty that I am making progress, that I am taking 2 steps forward even if I take one step back. But looking at this market, I realize that people can take 1 step forward and take 10 steps back in the blink of an eye.

Recent market action has convinced me that within my investment time horizon (approximately 10 years before I starting drawing), I can have no certainty that I will make progress using buy-and-hold. In fact no certainty that I won't be worse off, that this is not the Japanese Nikkei repeated. I cannot work in such an environment (of buying-holding-and- "praying").

I know many of you have repeated that timing is not possible, but I want to research this further. I want to limit things to one step back and not 10 steps. Even assuming that I am very young, I cannot accept that 10 years is not enough, that I have to accept on faith that in 20 years everything will be OK. If I come to the conclusion that timing is not realistic, then I will probably not bother with stocks.

[Bylo Selhi]

I am in my early 50s. I have paid off my mortgage and all debts. I have a DB plan that is worth approximately $1M (eg. I would need that amount at 4% a year to generate equivalent income if I am to retire today, ignoring the early retirement penalty). I also just finished saving up an emergency fund 3 months of expenses. Other than that, I have no other assets. After a realistic assessment I save 25% of my take home pay, all of which can go into investments.

So you've got 10 years (or maybe more if you want to keep working) to retirement. If you're in good health then you can expect to live another 20 to 25 years after you reach 65. That's with 50/50 probability so you could last a lot longer. If you're married then the likelihood is that either you or your spouse or both will live even longer. So you still have 2 or 3 or more decades in which to invest.

If you have confidence that your employer can make good on the DB plan then between it and CPP/OAS alone you should be able to enjoy a comfortable retirement. (If you can save 25% of your take-home now then I infer you live relatively modestly so "comfortable" may well be more comfortable than you're used to now.)

Consider also that a secure DB plan, as well as CPP/OAS, can be viewed as risk-free fixed income. Unlike a stock portfolio it will pay out a predefined amount each year, partly indexed for inflation, regardless of what financial markets are doing. We should all be so fortunate

So the money you want to invest doesn't sound like it will be essential to fulfill your retirement plans. You already have a lot of "fixed income" that you can depend on. While you can afford to take on stock market risk the real issue is whether you need to and/or want to. In your situation, as I understand it, there's nothing wrong with concluding "no" to both.

I doubt that markets will recover very quickly from the current turmoil. They may well continue to decline or stay relatively flat for several years. If I'm right then this presents you with the opportunity to learn more about stock market investing without much chance of missing out on the inevitable recovery and next bull.

As for buy-and-hold-(and pray), as I suggested to Nemo2 in another thread, you'll never stick with the program until you first understand viscerally why you should.

[drejmd]

If I come to the conclusion that timing is not realistic, then I will probably not bother with stocks.

ISTM that the evidence against timing is pretty solid. Which in fact is a huge relief to most DIYers I would think. You can feel comfortable coming up with a plan the suits your time-horizon and forget about it, other than to occasionally re-balance if/when needed.

You will probably also find that most of the advice out there is to have at least 25% of your assets in a diversified low cost stock portfolio even if it seems that stocks just aren't for you. (I'm sorry I don't have a reference at the tip of my fingers)

[Clock Watcher]

I am in my early 50s. I have paid off my mortgage and all debts. I have a DB plan that is worth approximately $1M (eg. I would need that amount at 4% a year to generate equivalent income if I am to retire today, ignoring the early retirement penalty). I also just finished saving up an emergency fund 3 months of expenses. Other than that, I have no other assets. After a realistic assessment I save 25% of my take home pay, all of which can go into investments.

So you've got 10 years (or maybe more if you want to keep working) to retirement. If you're in good health then you can expect to live another 20 to 25 years after you reach 65. That's with 50/50 probability so you could last a lot longer. If you're married then the likelihood is that either you or your spouse or both will live even longer. So you still have 2 or 3 or more decades in which to invest.

If you have confidence that your employer can make good on the DB plan then between it and CPP/OAS alone you should be able to enjoy a comfortable retirement. (If you can save 25% of your take-home now then I infer you live relatively modestly so "comfortable" may well be more comfortable than you're used to now.)

Consider also that a secure DB plan, as well as CPP/OAS, can be viewed as risk-free fixed income. Unlike a stock portfolio it will pay out a predefined amount each year, partly indexed for inflation, regardless of what financial markets are doing. We should all be so fortunate

So the money you want to invest doesn't sound like it will be essential to fulfill your retirement plans. You already have a lot of "fixed income" that you can depend on. While you can afford to take on stock market risk the real issue is whether you need to and/or want to. In your situation, as I understand it, there's nothing wrong with concluding "no" to both.

I doubt that markets will recover very quickly from the current turmoil. They may well continue to decline or stay relatively flat for several years. If I'm right then this presents you with the opportunity to learn more about stock market investing without much chance of missing out on the inevitable recovery and next bull.

As for buy-and-hold-(and pray), as I suggested to Nemo2 in another thread, you'll never stick with the program until you first understand viscerally why you should.

Some more info that I should have provided. My DB plan is worth approximately $1.5M instead of $1M as I originally said. It is probably solid (Federal Superannuation), fully indexed. I am single. As to living frugally I definitely do not - how else can you explain that in my early 50s and with no dependents I have so little to show. I can probably increase my take home savings to 40%.

The bottom line really is that I want certainty of progress (part of my temperament). Will timing work, I don't know. Will hedging work, I don't know. But it seems obvious to me that buy-and-hold won't. More research needed ...

I doubt that markets will recover very quickly from the current turmoil. They may well continue to decline or stay relatively flat for several years. If I'm right then this presents you with the opportunity to learn more about stock market investing without much chance of missing out on the inevitable recovery and next bull.

Thank you, I never thought of that.

[Shakespeare]

ISTM that the question that needs to be asked is whether the DB pension is sufficient. If it is not, then additional savings would be needed, although not necessarily in equities. If it is, then the extra funds can be deployed as desired.

[WishingWealth]

RE: Market Timing.

Nothing prevents you from keeping a certain amount of 'play money' and play with it.
After a few months/years you would find out the kind of person you are i.e. fundamental investor who does research till his head hurts like Mike or someone who invests on a hunch or a tip.
This you must find for yourself.
After a certain time, you'll see if the time you spend trying to outdo the index is worth your time.
There sure is the exhilaration of victory and the agony of defeat when the babies of your own choosing go up 2,3 or 4 times or go crashing down.

WW (I do not own a yacht)