Jack Bogle: The Undisputed Champion of the Long Run - WSJ - 0 views
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Jack Bogle is ready to declare victory. Four decades ago, a mutual-fund industry graybeard warned him that he would “destroy the industry.” Mr. Bogle’s plan was to create a new mutual-fund company owned not by the founding entrepreneur and his partners but by the shareholders of the funds themselves. This would keep overhead low for investors, as would a second part of his plan: an index fund that would mimic the performance of the overall stock market rather than pay genius managers to guess which stocks might go up or down.
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Not even Warren Buffett has minted more millionaires than Jack Bogle has—and he did so not by helping them get lucky, but by teaching them how to earn the market’s long-run, average return without paying big fees to Wall Street.
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“When the climate really gets bad, I’m not some statue out there. But when I get knots in my stomach, I say to myself, ‘Reread your books,’ ” he says. Mr. Bogle has written numerous advice books on investing, including 2007’s “The Little Book of Common Sense Investing,” which remains a perennial Amazon best seller—and all of them emphasize not trying to outguess the markets.
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Mr. Bogle has some hard news for investors. The basic appeal of index funds—their ability to deliver the market return without shifting an arm and leg to Wall Street’s army of helpers—will only become more important given the decade of depressed returns he sees ahead.
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Don’t imagine a revisitation of the ’80s or ’90s, when stocks returned 18% a year and investors, after the industry’s rake-off, imagined they “had the greatest manager in the world” because they got 14%. Those planning on a comfy retirement or putting a kid through college will have to save more, work to keep costs low, and—above all—stick to the plan.
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The mutual-fund industry is slowly liquidating itself—except for Vanguard. Mr. Bogle happily supplies the numbers: During the 12 months that ended May 31, “the fund industry took in $87 billion . . . of which $224 billion came into Vanguard.” In other words, “in the aggregate, our competitors experienced capital outflows of $137 billion.”
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That said, Mr. Bogle finds today’s stock scene puzzling. Shares are highly priced in historical terms; earnings and economic growth he expects to disappoint for at least the next decade (he sees no point in trying to forecast further). And yet he advises investors to stay invested and weather the storm: “If we’re going to have lower returns, well, the worst thing you can do is reach for more yield. You just have to save more.”
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He also knows the heartache of having just about everything he has saved tied up in volatile, sometimes irrational markets, especially now. “We’re in a difficult place,” he says. “We live in an extremely risky world—probably more risky than I can recall.”
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Then why invest at all? Maybe it would be better to sell and stick the cash in a bank or a mattress. “I know of no better way to guarantee you’ll have nothing at the end of the trail,” he responds. “So we know we have to invest. And there’s no better way to invest than a diversified list of stocks and bonds at very low cost.”
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Mr. Bogle’s own portfolio consists of 50% stocks and 50% bonds, the latter tilted toward short- and medium-term. Keep an eagle eye on costs, he says, in a world where pre-cost returns may be as low as 3% or 4%. Inattentive investors can expect to lose as much as 70% of their profits to “hidden” fund management costs in addition to the “expense ratios” touted in mutual-fund prospectuses. (These hidden costs include things like sales load, transaction costs, idle cash and inefficient taxes.)
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Mr. Bogle relies on a forecasting model he published 25 years ago, which tells him that investors over the next decade, thanks largely to a reversion to the mean in valuations, will be lucky to clear 2% annually after costs. Yuck.
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Investing, he says, always is “an act of trust—in the ability of civilization and the U.S. to continue to flourish; in the ability of corporations to continue, through efficiency and entrepreneurship and innovation, to provide substantial returns.” But nothing, not even American greatness, is guaranteed, he adds
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what he calls the financial buccaneer type, an entrepreneur more interested in milking what’s left of the active-management-fee gravy train than in providing low-cost competition for Vanguard—which means Vanguard’s best days as guardian of America’s nest egg may still lie ahead.
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the growth of indexing is obviously unwelcome writing on the wall for Wall Street professionals and Vanguard’s profit-making competitors like Fidelity, which have never been able to give heart and soul to low-churn indexing because indexing doesn’t generate large fees for executives and shareholders of management companies.