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More Common Sense from Jack Bogle

Some timeless lessons from a recently revised investing classic.

Dan Culloton, 02/05/2010

Vanguard founder John C. "Jack" Bogle recently published an updated, 10th anniversary edition of his mutual fund investing manifesto, Common Sense on Mutual Funds.

The tome holds up well. Bogle hasn't altered the original text; he just added data and text boxes to show where he was on or off the mark.

Guess what? The combative father of the first index mutual fund doesn't offer many mea culpas. When he does, he hardly dons sackcloth. Indeed, Bogle often leaves you with the impression that the first edition's faults lie less with what he originally wrote than with an industry that misunderstood him or failed to heed his recommendations. For instance, when surveying the state of mutual fund marketing, Bogle says, "During the past decade, the fund industry has moved in precisely the opposite direction from the direction I urged."

The book is still essential reading for investors, though. Whether you're an indexer or not, it's filled with simple, powerful advice that can help improve your odds of long-term financial success. Here are some of its more important lessons, as well as a couple of points where you might dare to differ from St. Jack.

Set Reasonable Expectations
Too many investors assume past trends will continue. Bogle stresses portfolio decisions should be based on not the market's historic returns, but rather the sources of those results. For bonds, their current yield gives you a good idea of future returns. With stocks, returns can be broken down into investment return, or the dividend yield plus earnings growth rate, and speculative return, or changes in what investors are willing to pay for $1 of earnings.

These aren't perfect indicators, but heeding them in the midst of the late 1990s' euphoria may have at least sobered you up enough to keep from doubling down on Pets.com. Bogle's models predicted stock returns in the 5% to 8% range were still too high, but far lower than the double-digit expectations that were common back then.

Bogle predicted bond returns of 5% "give or take a percentage point or so, during the coming decade" based on the yield of long-term Treasuries when he was writing. That wasn't too far off the mark. Vanguard Total Bond Market Index VBMFX had gained 6% in the 10 years ended Dec. 31, 2009.

Bogle's revised expectations indicate stocks may be a better deal. With the 10-year Treasury yielding around 3.5%, people flocking to fixed income are bound to be disappointed. Meanwhile, Bogle guesses, "that from our current levels some combination of slightly higher earnings growth and/or slightly higher P/Es and/or a swift recovery of corporate dividends could bring the nominal return on equities--to between 7% and 10% during the decade ending in 2019."

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