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By Christine Benz | 06-13-2013 12:00 PM

Bogle: Yield Seekers Shouldn't Go Out on a Limb

Investors may need to stretch for a bit more yield, but to get entirely out of a very safe bond index fund and into riskier fare should be unacceptable, says the Vanguard founder.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Investment Conference.

Investors have been gravitating to income-producing securities for the past several years. Joining me to share his perspective on this topic is John C. Bogle. He's the founder of the Vanguard Group.

Jack, thanks for being here.

John C. Bogle: Good to with you Christine, always.

Benz: Jack, I know that you are an observer of investor behavior, and what we've seen for the past several years, really since the market crash in 2008, has been a strong preference for income-producing securities. This comes at a time when yields seem to be going lower and lower.

I'd like to get your take on whether you think that is rational behavior. And let's start with fixed income, because it does appear that investors are edging out on the risk spectrum in search of yield within their fixed-income stakes.

Bogle: Well, one of my prime investment rules is, accept the market return as it is, accept market yields as they are. Reaching for more yield is like going further out the limb, and no one knows where the breaking point is, but at some point that limb will snap, and you'll be out there, and you'll be devastated in your losses.

So yes, you may reach out on a limb a little bit, but just be very careful not to take on risks that you don't fully understand. I think a reasonable thing to do, for example, on the fixed-income side would be to have a corporate bond index fund in your portfolio, as well as a total bond market index fund in your portfolio. The total bond market index fund is 70% government guaranteed, U.S. Treasury, etc. And that's just too high, in my opinion, with those yields where they are now, which are not an awful lot above 1.25%. The corporate yield is probably 2.7%-2.8%. So there ought to be, for people that need the yield--and just about everybody that's in those funds does, that's why they invest in them--they ought to be able to go out there and … bring their yield up on that.

When you get into global bonds, emerging-market bonds, bond futures, junk bonds…

Benz: Junk funds have been big sellers.

Bogle: Yes, I'd say, look out.

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