The latest good advice from Vanguard’s Jack Bogle
Reprinted courtesy of MarketWatch.com
Published: Nov. 3, 2017
To read the original article click here
International investments, which I have recommended for both stock and bond investors for more than 20 years, are finally getting at least some of their due from John Bogle, founder of The Vanguard Group and essentially the inventor of the index fund as we know it.
Bogle’s hot-off-the-presses latest edition of “The Little Book of Common Sense Investing” contains new chapters on asset allocation.
In these pages, Bogle — apparently with some reluctance — accepts the value of holding international stocks and bonds as part of a balanced portfolio.
Right out of the gate, I want to emphasize that I greatly admire Jack Bogle (as he likes to be called), and I agree with him in many ways. I think this book, first published in 2007, is terrific and deserves a place on your bookshelf.
In fact, you might even want to keep an extra copy on hand to loan to friends who want to be as savvy as you are at investing.
Bogle and I agree that asset allocation is perhaps the most crucial issue facing investors, and I’d like to review and discuss some of his “new” advice from the book.
Let’s start with seven key points on which Bogle and I agree.
1.More than 90% of portfolio returns (Bogle says 94%; some academics say 99%) can be explained by asset allocation.
2.Investors’ time and energy is much better spent choosing asset classes than in choosing individual stocks and financial sectors.
3.Investment writers and advisers are “captives of the eras that we have experienced,” meaning we have lived through 35 years of stock and bond returns that are extraordinarily high by the standards of history
4. The choice of how much of a portfolio to hold in equities and how much in bonds is tricky and should in most cases evolve over time as an investor grows older.
5.Although investment volatility can be measured mathematically, using standard deviation, the far more meaningful risk is that investors may liquidate part or all of their portfolio unexpectedly, either because of a need for cash or because of an emotional reaction to market performance.
6.The evidence is clear and convincing that index funds are more productive than actively managed funds.
7.Investors who minimize their costs, other things being equal, will fare much better than those who don’t.
Those all seem like no-brainers to me.
Bogle built his company on following the S&P 500 index SPX, -1.01% , and long-term investors who put (and kept) their money in the Vanguard 500 Index Fund VFINX, -1.04% have done very well.
However, I believe that approach can shortchange investors.
Last summer, after I had the pleasure of spending an hour and a half with Bogle in his office, I wrote a couple of articles on what I had learned and observed.
As I wrote then:
“Jack reminds me of many investors who find strategies that have been successful and who are not much interested in doing something else, even in the face of … many exhaustive studies that show even better long-term results from investing heavily in value stocks, small-cap stocks and international stocks.”
Vanguard offers low-cost access, through ETFs as well as mutual funds, to these asset classes. But Bogle himself doesn’t show much interest … except for international investing, as I discovered in the new edition of his book.
Bogle writes that over the past decade, since the first edition of “The Little Book of Common Sense Investing” was published, investors have come to accept that half of an equity portfolio can be invested in international stocks (something I’ve been recommending since the mid-1990s).
“My view that a U.S.-only equity portfolio will serve the needs of most investors was (and still is) challenged by, well, everyone,” he writes.
He defends that view by citing currency risk, the strong institutions of the U.S. and the large proportion of revenue and profit that U.S. corporations receive from international business.
However, Bogle admits that “perhaps the relative advantage achieved in the U.S. stock market over the past quarter-century has now been arbitraged away” and that international stocks may be relative bargains.
“Who really knows? So you will have to consider the probabilities and make your own judgment,” he writes.
Fortunately for investors who want international exposure, Vanguard offers a viable option: Its four “LifeStrategy” funds.
Each of those funds, he says in his revised book, has 40% of its equity holdings in non-U.S. stocks and 30% of its fixed-income allocation in international bonds.
Hooray!
The final chapter in “The Little Book of Common Sense Investing” is called Investment Advice That Meets the Test of Time.
He starts by repeating his belief that the majority of American families don’t need more than an S&P 500 fund or a total stock market index fund as well as a total bond market index fund.
“To repeat, while such an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite.”
Agreed.
He admits (and I certainly agree) that thing that matters most to investors — the future — cannot be known.
But he lists some things that we do know:
•Investing early, and saving regularly, pays big returns in the long run.
•Though investing involves risk, NOT investing “dooms us to financial failure.”
•It’s easy to eliminate stock-selection risk by investing in index funds, thus leaving only market risk.
•Costs matter. A lot.
•Ditto for taxes.
I like quotes, and Bogle does too.
In his final chapter he quotes Benjamin Franklin to make several points, a few of which I have paraphrased:
•Time is an investor’s best friend, especially LOTS of time.
•An investment in knowledge always pays worthwhile dividends.
•Nobody knows how to outfox the market, because that requires outfoxing virtually all other investors.
Finally, as Bogle writes: “No matter what happens, stick to your program. Think long term. Patience and consistency are the most valuable assets for the intelligent investor.”
To that, I can add one simple word: Amen.
So I hope you will pick up a copy of Bogle’s new book. If you take its message to heart, I’m very confident that it will be a good investment.
If you’re nearing retirement, check out my podcast “How to avoid the 20 most common investment mistakes retirees make.”
Richard Buck contributed to this article.
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