Bogle: Not Only Stay the Course, Stay the Straight Course

Christine Benz recently sat down with Vanguard founder Jack Bogle to get his take on the state of the industry. The following is an excerpt of that conversation. Please see the related links for more of the interview.

Christine Benz: Would you accord higher return potential to smaller-company stocks or perhaps international stocks? I mean, we're looking at the total equity market, but if investors put a tilt in place in their portfolios, could they potentially come home with higher returns?

Jack Bogle: Well, the big important one is not the international or small company it's value--value stocks. I have looked at these numbers. I gave a talk at Morningstar probably a decade ago, called the Tell-Tale Chart, and the way I analyze these things, I put $1 in small-cap funds at the beginning of period X, say, as far back as we can go, and $1 in the S&P 500, and then I just compound over the years, and then I divide one into the other. And that line, if small-cap funds always did better, that line would keep going up and up and up, but it doesn't.

And there may be periods as long as 20 years when small-cap funds do worse than large-cap funds or the S&P 500. And there may be 10 years when they do better. And it comes and it goes, it's called reversion to the mean. So I don't hold to any of these businesses, here's a way to improve your return on large-cap stocks. I mean everybody tells me I'm wrong, and unfortunately, in my experience the more people tell me I'm wrong, the more I'm confident that I am right. But I could easily be wrong in all this.

But nothing is forever in the market in terms of those kind of trends, nothing. And value stocks had a terrible time for probably 18 years, in the early '80s to the late '90s, but overall they are better. Or the value stocks the way they are calculated before costs in all cases, before turnover costs, by the University of Chicago have quite an impressive long-term record. There is no question about that. I would not argue that. The data are the data. But if you look at those numbers, everybody--that's one way of looking at value stocks, look at the value stock index, the S&P is divided into growth and value, and it hasn't done nearly that well.

Benz: Right.

Bogle: And if you look into the average growth fund versus the average value mutual fund, you get completely different conclusions. The numbers are very close to the same. So, I say, not only stay the course, but stay the straight course. Once you start guessing, you are tempted to say, well, I was wrong. I bought value and I was wrong. So I'll get out of it and go to growth. That's probably the worst thing you can do.

Benz: To capitulate at the worst possible time.

Bogle: You capitulate just before the darkness turns to dawn.