Mon, 19 May 2014
As the Vanguard founder recently turned 85, we scoured our many interviews with him for some words of wisdom.
Jason Stipp: I'm Jason Stipp for Morningstar.
Jack Bogle recently had his 85th birthday, and we learned that the crew at Vanguard threw him an informal surprise party. Jack addressed that crowd with some remarks about the good work of serving individual investors.
To mark the occasion here at Morningstar, Christine Benz and I went through some of our own interviews with Jack Bogle over the years to pick out some of our favorite quotes. She's here with me to share some of those today.
Christine, thanks for joining me.
Christine Benz: Jason, it's great to be here.
Stipp: We've both interviewed Bogle. You've interviewed him several times; I've interviewed him a couple of times. Just about any interview with him usually has something very quotable, at least one or two good nuggets in there.
The first one that you brought to share came at an interesting time, in 2008.
Benz: It did. This was in the fall of 2008. I attended one of the annual Bogleheads events. This particular one was in San Diego, and the market volatility was really cresting at that time during the financial crisis. I sat down with Jack, and my first question to him was what counsel do you have for investors given all of the volatility--these seemingly daily market shocks that we were having at that time.
Jack Bogle: And importantly, if I'm trying to accumulate money for retirement or to buy a home or to educate my children, what you want to do is keep investing. You may say, how can I keep investing the day that the market goes down 600 points? Well, that's the greatest time in the world to invest. It's certainly better than doing it the day before it goes down 600 points. And I think people have lost sight of the fact that a short market decline is, of course, it's bad for sellers, but it's good for buyers. And since the stock market is the interaction of sellers and buyers, it's always good for somebody. Click to watch more >>
Benz: A couple of things stand out for me, Jason, in watching that clip. One is Bogle's restraint. There was a lot of fear-mongering going on at that time. It wasn't hard to turn on the TV and see people saying, "Move to cash! Run for the hills!" Things were pretty scary.
So to hear from someone who was saying that it was actually a decent time to be adding to stocks--especially if you had many years and you were in accumulation mode--I think that was refreshing.
And that's always been Bogle's style. He's not been a believer in tactical asset allocation. He thinks that people should stick with sensible strategic asset allocation frameworks, and just gradually get a bit more conservative as you get closer to your retirement date.
One other thing that we saw corroborated at that particular Bogleheads conference was that the Bogleheads were very much minding Jack's wisdom. We talked to some attendees to hear how they were positioning their portfolios and reacting to the volatility, and their responses were very, very similar. One person after another said, "I'm staying the course. I'm sticking with my plan." A few people said they were adding. But most people were very much minding the wisdom that they got from Jack, so that was refreshing, too.
Stipp: We checked in with Jack a few years later in 2011, and this is really one of my favorite quotes that sticks out in my mind. It can be a good time to buy in downturns, and on the flipside, it's good to trim in a really strong market and rebalance. That's great advice, but it's really easier said than done, and I think investor behavior starts to creep in here. And that's what Jack is addressing in this next clip.
Bogle: And the focus is always on what's done well that we investors have. Our neighbor is doing better. He owned gold, or he owned growth stocks, or value stocks did nothing--that was true at the end of the '90s. And the moment the temptation gets to its highest level, that's the moment when people start to think, "I've got to change now." And that's the worst time to do it. So I'm still a "stay the course" person. Own the stock market, own the bond market, as modified to meet your needs, and don't peek. One of the greatest rules for investing ever made.
Benz: Don't peek at what your neighbor is doing or saying he's doing.
Bogle: Don't even peek at your account; don't open those 401(k) statements. If you don't look at your 401(k) statement--this sounds outrageous, but it's true--for 45 years … you start when you're 20 and you don't open a single statement for the next 45 years, when you open that statement the day you retire, you are going to go into a dead faint of amazement about how much money you've accumulated. Click to watch more >>
Stipp: OK, I can't honestly recommend that you don't check your retirement portfolio for 45 years. But I think the real point that Bogle was making here is about our behavior, and the times that we are most likely, the times that we are most itching, to check that portfolio--usually when the market has done really well or the market has done really poorly--are also the times that we're most prone to make a big mistake, to buy or sell at the wrong time. So I think keeping those behavioral instincts in mind and setting up whatever short-circuits you need, whatever guardrails you need, to keep yourself from making these bad decisions at these times of market inflection points is really critical to your overall success.
Benz: We definitely see that behavioral issue in our investor return statistics, Jason.
One other area where Bogle has not earned himself any friends on Wall Street is in the area of fund fees and fund stewardship. He has been a vocal critic of a lot of other fund shops, saying that they haven't served investors well. I talked to him about that issue in relation to his book, The Clash of the Cultures, and he delved into stewardship and the role of fund fees.
Bogle: And by stewardship, just to be clear, I mean to what extent is the firm putting the interests of its mutual fund shareholders ahead of the interest of its managers. And that comes down to, in many respects, issues of cost. So you start off with expense ratios. If they are very high, the directors aren't doing their job. They should be competitive or low, maybe much lower. Nobody can reach Vanguard, alas, but they should at least be [competitively low]… and we're starting to drive that a little bit ourselves anyway. That's number one.
Number two, they should be focused on long-term investment strategies, not short-term speculative strategies. They should be investing prudently. You can measure that somewhat by the rate of portfolio turnover. The average turnover of a mutual fund portfolio in this business today is almost 100%, and that means they hold the average stock for one year. That is unequivocally speculation, and it costs money. It's hidden money--they never tell you, nobody tells you--and you basically don't really know with any firm numbers. But the cost of that is kind of undisclosed. Click to watch more >>
Benz: Morningstar's research really corroborates the points that Jack makes here. We see time and again when we run studies looking at the predictiveness of various data points that fund expense ratios are one of the most predictive, if not the most predictive, of which funds will have better or worse returns in the future. So all things being equal, you're better off looking for very low expense ratios.
His point about transaction costs, some of the hidden costs that funds incur, is also an important one. I think people often look at fund expense ratios and believe that they are a complete summation of a fund's total cost. That's not true, and it's a really important point. The fund expense ratio doesn't include brokerage commissions that that fund may pay to buy and sell. It doesn't include bid-ask spreads. It doesn't include market-impact costs, for example. And those costs can really be quite high, especially in the case of a high-turnover fund that is trafficking in illiquid securities. So people need to pay attention to all-in costs. They need to look at turnover as well as the fund's stated expense ratio to see what they might be paying.
And I think the broader point about speculation is important for investors who are managing their own portfolios, too. If you are trading a lot, you too will be subject to some of these high transaction costs, which can be a drag on your take-home returns. You can also be subject to higher tax costs. All of these costs are very much worth keeping in mind when you manage your own portfolio.
Stipp: Beyond discussing stewardship issues at fund companies themselves, Jack has also had some discussions about the shortcomings of the 401(k) plan. We talked to him in 2013 about some of his thoughts on 401(k)s. It's an area that's received a lot of critical attention from the press over the last couple of years, and he explained some of the issues that he has with those plans and the current role that they're playing in investors' retirements.
Bogle: Now the problem with the 401(k) are a couple: The big one for me is, it's a thrift plan that we've tried to redesign into a retirement plan. It was never created, the 401(k), to be a retirement plan. So you have all kinds of things that you would not put in a retirement plan, like the ability to take out money when you want to by borrowing. And the ability to make capital withdrawals under certain reasonably extreme circumstances. The ability to take all your money when you move from one job to another, as so many people in America do today. And all that flexibility and letting you have access to your accumulated capital is a terrible way to build up a lifetime retirement plan. It can't be done if you exercise those things. The fact of the matter is, if needy people could go to their Social Security account and withdraw money whenever they needed it, you wouldn't have any retirement capital at all. So that's what needs to be fixed--number one, to fix it to make it a little more, should we say, rigid, less flexible. Click to watch more >>
Stipp: Whether or not you might agree with some of the policy implications of what Bogle was talking about are a good idea, I think the bigger point here is the shift that we are seeing in how retirement is funded for Americans. As we move from the defined benefit plan to the defined contribution plan, what that means is, more power is in the hands of the individual, for better or for worse. And I think Bogle is pointing out some of the ways that it can be for worse, because with more decision-making means more opportunity to make a mistake.
All the more important for you, as an investor, to educate yourself on what your options are, what the plans are, and at the very least, try to avoid some of the big mistakes that could cause you trouble later on, because it really is in your hands increasingly now, given the way that we are seeing the whole retirement system shift.
Benz: Of course, no retrospective on Bogle would be complete without discussing his role in indexing. Jack talked to us in a 2011 interview about how there was some controversy over who had the first idea of an index fund, but he really plants a stake in the ground in terms of who actually executed that idea first.
Bogle: I know there was a little controversy about the source of the idea of indexing, which either goes back to my Princeton thesis in 1951 or back to Jeremy Grantham in 1971 or back to the guys at Wells Fargo in, I guess, the early '70s or late '60s, I've describe that 100 times. The ideas were all over the place. But as I keep telling people, there is one fact that emerges from all this. I did start the first index fund; that's incontrovertible. Click to watch more >>
Stipp: In the same video, Bogle is making the case that if all 401(k) investors were considered as one big pool of money, they're essentially invested in a giant index fund. All the active and passive funds that they're invested in are essentially invested in the market overall.
But he says, if they actually were invested in a giant index fund, odds are the overall cost for the management of that money would be much lower than the aggregate costs for all of those investors, which is a really interesting point.
So, whether you're in an active fund or whether you're in passive fund, I think the point is that costs are the thing that really matters. And if you're paying more for active management, more than you would for an index fund, you want to make sure, at the very least, that you're getting your money's worth.
Benz: I love that comment from Bogle, Jason. He says he's not so much an efficient-markets adherent as he is a costs-matter adherent. He thinks that's really the thing that investors ought to keep in mind.
Stipp: There's certainly no shortage of clips we could show today, but Christine, thanks for bringing some of your favorites to share.
Benz: Thank you, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.